1
Draft 05/10/00
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
0-23270
Commission File Number
DOMINION HOMES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1393233
---------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5501 Frantz Road, Dublin, Ohio
------------------------------
(Address of principal executive offices)
43017-0766
----------
(Zip Code)
----------
(614) 761-6000
--------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of common shares outstanding as of May 12, 2000: 6,368,470
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOMINION HOMES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
March 31, December 31,
2000 1999
(unaudited)
--------- ---------
ASSETS
Cash and cash equivalents $ 2,932 $ 2,862
Notes and accounts receivable, net:
Trade 100 212
Due from financial institutions for residential closings 1,252 544
Real estate inventories:
Land and land development costs 99,386 95,657
Homes under construction 70,366 60,272
Other 3,813 3,251
--------- ---------
Total real estate inventories 173,565 159,180
--------- ---------
Prepaid expenses and other 4,548 3,891
Deferred income taxes 2,048 1,904
Property and equipment, at cost 9,557 9,055
Less accumulated depreciation (3,792) (3,589)
--------- ---------
Net property and equipment 5,765 5,466
--------- ---------
Total assets $ 190,210 $ 174,059
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade $ 5,453 $ 5,273
Deposits on homes under contract 1,951 1,634
Accrued liabilities 12,619 11,364
Note payable, banks 106,425 92,308
Term debt 4,294 4,750
--------- ---------
Total liabilities 130,742 115,329
--------- ---------
Commitments and contingencies
Shareholders' equity
Common shares, without stated value, 12,000,000 shares authorized,
6,393,520 shares issued and 6,368,520 shares outstanding on March 31,
2000 and 6,382,480 shares issued and 6,357,480 shares outstanding
on December 31, 1999 31,439 31,388
Deferred compensation (322) (252)
Retained earnings 28,523 27,766
Treasury stock (172) (172)
--------- ---------
Total shareholders' equity 59,468 58,730
--------- ---------
Total liabilities and shareholders' equity $ 190,210 $ 174,059
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
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DOMINION HOMES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
March 31,
2000 1999
---------- ----------
Revenues $ 62,218 $ 52,774
Cost of real estate sold 50,219 42,786
---------- ----------
Gross profit 11,999 9,988
Selling, general and administrative 8,968 7,573
---------- ----------
Income from operations 3,031 2,415
Interest expense 1,756 1,163
---------- ----------
Income before income taxes 1,275 1,252
Provision for income taxes 518 529
---------- ----------
Net income $ 757 $ 723
========== ==========
Earning per share
Basic $ 0.12 $ 0.12
========== ==========
Diluted $ 0.12 $ 0.11
========== ==========
Weighted average shares outstanding
Basic 6,361,349 6,287,162
========== ==========
Diluted 6,466,313 6,546,032
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
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DOMINION HOMES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
Common Shares Deferred Compensation
Shares Amount Liability Trust Retained Treasury
Shares Earnings Stock Total
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 6,357,480 $31,388 $1,007 $(1,259) $27,766 $(172) $58,730
Net income 757 757
Shares awarded and redeemed 11,040 51 (61) (10)
Treasury shares:
Held for deferred compensation (72) (72)
Deferred compensation 63 63
- --------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 6,368,520 $31,439 $1,009 $(1,331) $28,523 $(172) $59,468
- --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
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DOMINION HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
2000 1999
-------- --------
Cash flows from operating activities:
Net income $ 757 $ 723
Adjustments to reconcile net income to cash
used in operating activities:
Depreciation and amortization 453 380
Issuance of common shares for compensation 51 162
Reserve for real estate inventories 18
Deferred income taxes (144)
Changes in assets and liabilities:
Notes and accounts receivable (596) (403)
Real estate inventories (14,403) (16,687)
Prepaid expenses and other (735) (220)
Accounts payable 180 (1,854)
Deposits on homes under contract 317 143
Accrued liabilities 1,295 (1,050)
-------- --------
Net cash used in operating activities (12,807) (18,806)
-------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment 43
Purchase of property and equipment (695) (283)
-------- --------
Net cash used in investing activities (652) (283)
-------- --------
Cash flows from financing activities:
Payments on note payable banks (51,659) (49,085)
Proceeds from note payable banks 65,776 67,179
Payments on term debt (361) (485)
Proceeds from term debt 1,572
Payments on capital lease obligations (95) (66)
Common shares purchased or redeemed (132) (10)
-------- --------
Net cash provided by financing activities 13,529 19,105
-------- --------
Net change in cash and cash equivalents 70 16
Cash and cash equivalents, beginning of period 2,862 261
-------- --------
Cash and cash equivalents, end of period $ 2,932 $ 277
======== ========
Supplemental disclosures of cash flow information:
Interest paid (net of amounts capitalized) $ (219) $ 301
======== ========
Income taxes paid $ 900 $ 934
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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DOMINION HOMES, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all information and
footnotes required by accounting principles generally accepted in the
United States for complete financial statements. The December 31, 1999
balance sheet data were derived from audited financial statements but do
not include all disclosures required by accounting principles generally
accepted in the United States. These financial statements should be read in
conjunction with the December 31, 1999 audited annual financial statements
of Dominion Homes, Inc. contained in its Annual Report or in the December
31, 1999 Form 10-K.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for interim
periods. The results of operations for the three months ended March 31,
2000 are not necessarily indicative of the results to be expected for the
full year.
2. RECLASSIFICATION
----------------
Certain prior period information has been reclassified to conform to
the current period presentation.
3. CAPITALIZED INTEREST
--------------------
Interest is capitalized on land during the development period and on
housing construction costs during the construction period. As lots are
transferred to homes under construction, the interest capitalized on the
lot during the land development period is included as a cost of the land
and is expensed through cost of sales when the home is closed. Capitalized
interest related to housing construction costs is included in interest
expense in the period in which the home is closed. Capitalized interest
related to land under development and construction in progress was $3.9
million and $2.7 million at March 31, 2000 and March 31, 1999,
respectively. The following table summarizes the activity with respect to
capitalized interest:
Three Months Ended
March 31,
2000 1999
-------------- --------------
Interest incurred $ 2,291,000 $ 1,505,000
Interest capitalized (1,533,000) (1,144,000)
-------------- --------------
Interest expensed directly 758,000 361,000
Previously capitalized interest charged to interest expense 998,000 802,000
------------- -------------
Total interest expense $ 1,756,000 $ 1,163,000
============= =============
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4. NOTE PAYABLE, BANKS
-------------------
The Company is currently operating under a $125 million Senior
Unsecured Revolving Credit Facility ("the Facility") that was executed on
May 29, 1998 and is described in the Company's Annual Report and Form 10-K
for the year ended December 31, 1999. The Facility provides for a variable
rate of interest on borrowings. In order to reduce exposure to increasing
interest rates, the Company has entered into interest rate swap contracts
that fix the interest rate on $30 million of borrowings under the Facility.
The interest rate swap contracts mature between October 16, 2000 and May 6,
2003 and fix interest rates between 5.48% and 6.13%, plus a variable margin
based on the Company's Interest Coverage Ratio. The variable margin may
range from 1.75% to 2.50% and is determined quarterly.
As of March 31, 2000, the Company was in compliance with Facility
covenants and had $16.8 million available under its Facility, after
adjustment for borrowing base limitations. Borrowing availability under the
Facility could increase, depending on the Company's utilization of the
proceeds.
5. EARNINGS PER SHARE
------------------
A reconciliation of the weighted average shares used in basic and
diluted earnings per share is as follows:
Three Months Ended
March 31,
2000 1999
--------- ---------
Weighted average shares outstanding
during the period 6,361,349 6,287,162
Assuming exercise of options 104,964 258,870
--------- ---------
Weighted average shares outstanding
adjusted for common share equivalents 6,466,313 6,546,032
========= =========
6. LEGAL PROCEEDINGS
-----------------
The Company is involved in various legal proceedings, most of which
arise in the ordinary course of business and some of which are covered by
insurance. In the opinion of the Company's management, none of the claims
relating to such proceedings will have a material adverse effect on the
financial condition or results of operations of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Net income for the three months ended March 31, 2000 increased 4.7% to
$757,000, or $.12 per diluted share, from $723,000, or $.11 per diluted share,
during the same period a year ago. Revenues for first quarter 2000 increased to
$62.2 million, based on 359 closings, compared to revenues of $52.8 million,
based on 331 closings, during first quarter 1999, a 17.8% increase. First
quarter 2000 revenues included the closing of 19 homes, with a sales value of
$3.2 million, that were leased back by the Company for use as model homes. The
increase in revenues is principally due to the increase in the average price of
homes closed during first quarter 2000, which increased to $173,000 from
$159,300 in first quarter 1999. The gross profit margin for first quarter 2000
improved to 19.3% or $12.0 million, compared to 18.9% or $10.0 million for first
quarter 1999, reflecting the Company's ability to increase prices and control
construction costs. The sale and leaseback of 19 model homes by the Company
during first quarter 2000 reduced the gross profit margin by approximately 1.0%.
Increased first quarter 2000 revenues and gross profits were partially offset by
a $1.4 million increase in selling, general and administrative expense and a
$600,000 increase in interest expense. The $1.4 million increase in selling,
general and administrative expense was the result of variable selling expenses,
the expansion into Louisville, Kentucky, the start-up of the mortgage company
and the Company's efforts to expand its overall building and sales capacity. The
increase in interest expense was due to growth in the Company's landholdings in
Central Ohio and Louisville, Kentucky and the increase in home building
inventories. As a percentage of revenues, selling, general and administrative
expense increased a nominal 0.1% and interest expense increased 0.6% compared to
a year ago.
New home contracts during the first three months of 2000 increased 34.2% to
608 contracts from 453 contracts during the first three months of 1999. Included
in the 608 contracts during first quarter 2000 are 19 homes sold and leased back
by the Company for use as model homes. The Company had a record 1,039 homes in
backlog at March 31, 2000, with an aggregate sales value of $189,864,000,
compared to 873 homes in backlog, with an aggregate sales value of $154,073,000
at March 31, 1999. The average sales price of homes in backlog at March 31, 2000
increased to $182,700 from $176,500 at March 31, 1999.
The Company's home building operations in Louisville, Kentucky continued to
meet expectations. During first quarter 2000, the Company sold 46 homes and
closed 27 homes, including 3 that were leased back by the Company for use as
model homes. Since its inception in April 1999, the Company has sold 108 homes
and closed 58 homes in Louisville, Kentucky. The Company was selling homes in
four Louisville communities at March 31, 2000.
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COMPANY OUTLOOK
The Company is cautiously optimistic that 2000 net income will exceed 1999
net income based on the record number of homes it had in backlog at March 31,
2000 and the level of sales contracts received during first quarter 2000. The
Company has sales initiatives that it expects will moderate the impact of rising
mortgage rates. These sales initiatives include new home designs, more
communities in which to sell homes, the first full year of operations for its
centralized sales office in Columbus and the maturing homebuilding division in
Louisville, Kentucky. During 2000, the Company also expects to offer its first
age restricted active adult community. This community will be comprised of
approximately 1,800 square foot single-family, detached, upscale homes in a
country club setting. The community will include a clubhouse, exercise facility,
outdoor pool and scenic bike paths. In addition, the Company began placing
mortgages with its newly created mortgage company, Dominion Homes Financial
Services, Ltd., in April 2000. The Company expects both the operations in
Louisville, Kentucky and the mortgage company to be profitable in 2000. The
Company expects to maintain its existing levels of home sales during 2000,
despite increasing interest rates, by competitively pricing its homes. As a
result of this pricing strategy, the Company does not anticipate that the rising
gross profit margin exhibited in first quarter 2000 will continue. However, the
Company expects that the gross profit margin for 2000 will be consistent with
1999 levels. The rising rate of interest continues to be closely monitored by
the Company and homebuilding operations could be adversely impacted if interest
rates continue to increase.
The Company expects to have the highest level of construction activity in
its history during the second half of 2000. The high level of construction is
caused by the large number of homes it is building and the increased average
cost of those homes. Consequently, the Company intends to seek an increase in
the borrowing capacity under its existing bank credit facility. The Company has
entered into discussions with its banks to increase its credit limits and
expects to have final approvals in advance of the time when additional funding
will be required.
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
The statements contained in this report under the captions "Company
Outlook" and other provisions of this report which are not historical facts are
"forward looking statements" that involve various important risks, uncertainties
and other factors which could cause the Company's actual results for 2000 and
beyond to differ materially from those expressed in such forward looking
statements. These important factors include, without limitation, the following
risks and uncertainties: real or perceived adverse economic conditions, an
increase in mortgage interest rates, increases in the cost of acquiring and
developing land, mortgage commitments that expire prior to homes being
delivered, entry into the mortgage financing business, the Company's ability to
install public improvements or build and close homes on a timely basis due to
adverse weather conditions, delays or adverse decisions in the zoning,
permitting or inspection processes, adverse decisions or changes in requirements
by environmental agencies, the effect of changing consumer tastes on the market
acceptance for the Company's products, the impact of competitive products and
pricing, the effect of shortages or increases in the costs of materials,
subcontractors, labor and financing, the continued availability of credit, the
outcome of litigation, the impact of changes in government regulation, problems
that could arise from expansion into the Louisville, Kentucky market and the
other risks described in the Company's December 31, 1999 Form 10-K.
SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS
The Company has experienced, and expects to continue to experience,
significant seasonality and quarter-to-quarter variability in homebuilding
activity levels. Typically, closings and related revenues increase in the second
half of the year. The Company believes that this seasonality reflects the
tendency of homebuyers to shop for a new home in the Spring with the goal of
closing in the Fall or Winter. Weather conditions can also accelerate or delay
the scheduling of closings. The Company attempts to mitigate these seasonal
variations whenever possible.
The following table sets forth certain data for each of the last eight
quarters:
THREE SALES BACKLOG
MONTHS REVENUES CONTRACTS(1) CLOSINGS (AT PERIOD END)
ENDED (IN THOUSANDS) (IN UNITS) (IN UNITS) (IN UNITS)
=========================================================================
June 30, 1998 $68,031 402 461 944
Sept. 30, 1998 $67,769 330 437 837
Dec. 31, 1998 $74,679 381 467 751
Mar. 31, 1999 $52,774 453 331 873
June 30, 1999 $72,795 412 436 849
Sept. 30, 1999 $73,067 404 428 825
Dec. 31, 1999 $78,941 411 446 790
Mar. 31, 2000 $62,218 608 359 1,039
- ----------
(1) net of cancellations
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At March 31, 2000, the aggregate sales value of homes in backlog was
$189.9 million compared to $154.1 million at March 31, 1999. The average sales
value of homes in backlog at March 31, 2000 increased to $183,000 compared to
$176,000 at March 31, 1999.
The Company annually incurs a substantial amount of indirect construction
costs which are essentially fixed in nature. For purposes of financial
reporting, the Company capitalizes these costs to real estate inventories on the
basis of the ratio of estimated annual indirect costs to direct construction
costs to be incurred. Thus, variations in construction activity cause
fluctuations in interim and annual gross profits.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the statements of income expressed as percentages of total revenues:
Three Months Ended
March 31,
2000 1999
----- -----
Revenues ....................................... 100.0% 100.0%
Cost of real estate sold ....................... 80.7 81.1
----- -----
Gross profit ............................... 19.3 18.9
Selling, general and administrative expenses ... 14.4 14.3
----- -----
Income from operations ..................... 4.9 4.6
Interest expense ............................... 2.8 2.2
----- -----
Income before income tax ....................... 2.1 2.4
Income tax provision ........................... .9 1.0
----- -----
Net income ................................. 1.2% 1.4%
===== =====
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FIRST QUARTER 2000 COMPARED TO FIRST QUARTER 1999
REVENUES. Revenues for first quarter 2000 were $62.2 million compared to
$52.8 million for first quarter 1999. The Company closed 359 homes during first
quarter 2000 compared to 331 homes during first quarter 1999. Included in the
359 first quarter 2000 closings were 19 homes sold and leased back by the
Company for use as model homes. The sale of these homes contributed $3.2 million
to first quarter 2000 revenues. The principal reason for the increase in first
quarter 2000 revenues was an increase in the average price of homes delivered in
first quarter 2000 compared to first quarter 1999. During first quarter 2000 the
average price of homes delivered increased to $173,000 compared to $159,300
during first quarter 1999, an increase of 8.6%. The increase in average
delivered home price during first quarter 2000 reflects customer preference for
larger and more expensive homes and the strength of the new home market.
GROSS PROFIT. Gross profit for first quarter 2000 was $12.0 million
compared to $10.0 million for first quarter 1999. The gross profit margin was
19.3% for first quarter 2000 compared to 18.9% for first quarter 1999. The
principal reasons for the higher gross profit margin in 2000 were the Company's
ability to increase prices and control construction costs. The sale and
leaseback of 19 model homes during first quarter 2000 reduced the gross profit
margin by approximately 1.0% because income on the sale of these homes is
deferred and recognized in subsequent periods rather than when closed.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense for first quarter 2000 increased to $9.0 million from $7.6 million for
first quarter 1999. This $1.4 million increase in selling, general and
administrative expense is the result of variable selling expenses, the expansion
into Louisville, Kentucky, the start-up of the mortgage company and the
Company's efforts to expand its overall building and sales capacity. As a
percentage of revenues, selling, general and administrative expense for first
quarter 2000 increased to 14.4% from 14.3% for first quarter 1999.
INTEREST EXPENSE. Interest expense for first quarter 2000 increased to $1.8
million from $1.2 million for first quarter 1999. The primary reasons for the
increase in interest expense were a higher average revolving line of credit and
a slightly higher average interest rate. The Company also capitalized additional
interest in first quarter 2000 compared to first quarter 1999 due to the larger
backlog of homes and increased real estate inventories. The average revolving
line of credit borrowings outstanding were $104.6 million and $71.7 million for
first quarter 2000 and 1999, respectively. The weighted average rate of interest
under the Company's revolving line of credit was 8.4% for the first quarter 2000
compared to 8.1% for first quarter 1999.
PROVISION FOR INCOME TAXES. Income tax expense for first quarter 2000 was
$518,000 compared to $529,000 for first quarter 1999. The Company's estimated
annual effective tax rate was 40.6% for first quarter 2000 and 42.3% for first
quarter 1999.
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SOURCES AND USES OF CASH
FIRST QUARTER 2000 COMPARED TO FIRST QUARTER 1999:
The Company used operating cash of $12.8 million in first quarter 2000,
principally to fund investments in real estate inventories, compared to $18.8
million during first quarter 1999, also used principally to fund real estate
inventories. During first quarter 2000, $10.1 million of the $14.4 million
increase in investment real estate inventories was to fund homes under
construction. During first quarter 1999, the $16.7 million increase in real
estate inventories was split approximately equally between land and land
development inventories and homes under construction. The Company was able to
use less cash in operations during first quarter 2000 than during first quarter
1999 due to the higher investment in land and land development costs that the
Company incurred during 1999 to replace the record number of homes sold during
1998. Net cash used in investing activities during first quarter 2000 was
$652,000 compared to $283,000 during first quarter 1999. The Company increased
its bank debt $14.1 million during first quarter 2000 compared to $18.1 million
during first quarter 1999. The increased use of bank debt was used principally
to fund the Company's increased investment in real estate inventories.
REAL ESTATE INVENTORIES
The Company's practice is to develop most of the lots on which it builds
homes. Generally, the Company attempts to maintain a land inventory that will be
sufficient to meet its anticipated lot needs for the next three to five years.
At March 31, 2000, the Company either owned or was under contract to purchase
lots or land that could be developed into approximately 6,900 lots, including
400 lots in Louisville, Kentucky. The Company controlled through option
agreements an additional 7,100 lots, including 700 lots in Louisville, Kentucky.
During first quarter 2000, the Company exercised options to purchase 1,572 lots,
including 189 lots in Louisville, Kentucky. Option agreements expire at varying
dates through April 2009. The Company's decision to exercise any particular
option or to otherwise acquire additional land is based upon an assessment of a
number of factors, including its existing land inventory at the time and its
evaluation of the future demand for its homes.
Real estate inventories increased to $173.6 million at March 31, 2000 from
$159.2 million at December 31, 1999, a $14.4 million increase during first
quarter 2000. The $14.4 million increase in real estate inventories included
increases in homes under construction inventories of $10.1 million, land and
land development inventories of $3.7 million and lumber and building supply
inventories of $562,000. The Company's increased inventory of homes under
construction is seasonal in nature and will continue through the peak building
months. The growth in homes under construction inventories also reflects the
larger number of homes the Company has under construction and the increased
costs associated with the more expensive homes the Company is selling. Land and
land development inventories also increased as the Company added sales locations
in Central Ohio and Louisville, Kentucky and increased its seasonal development
activities.
On March 31, 2000, the Company had 97 single family inventory homes in
various stages of construction, which represented an aggregate investment of
$6.3 million. At March 31, 1999, the Company had 81 inventory homes, in various
stages of construction, which represented an aggregate investment of $5.5
million. Inventory homes are not reflected in sales or backlog.
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SELLER-PROVIDED DEBT
Seller-provided term debt decreased to $2.4 million at March 31, 2000 from
$2.8 million at December 31, 1999. The Company expects to repay $1.2 million of
the term debt in August 2000 and the balance in August 2001. The interest rate
is 6.5%
LAND PURCHASE COMMITMENTS
At March 31, 2000, the Company had commitments to purchase residential lots
and unimproved land at an aggregate cost of $1.8 million, net of $1.2 million in
good faith deposits. In addition, at March 31, 2000, the Company had $83.8
million of cancelable obligations to purchase residential lots and unimproved
land in which $4.6 million had been invested in good faith deposits. Included in
the purchase commitments of $1.8 million is a commitment in Louisville, Kentucky
for $44,000. Included in the $83.8 million of cancelable commitments are $9.8
million of cancelable commitments for lots and unimproved land in Louisville,
Kentucky. The Company had $779,500 invested in the $9.8 million of cancelable
commitments in Louisville, Kentucky. The majority of the land subject to
cancelable obligations is for post 2000 development activities. The Company
expects to fund its 2000 capital requirements for land acquisition and
development and its obligations under purchase contracts and mortgage notes from
internally generated cash and from the borrowing capacity available under its
bank credit facility.
CREDIT FACILITIES
The Company is currently operating under a $125 million Senior Unsecured
Revolving Credit Facility ("the Facility") that was executed on May 29, 1998 and
is described in the Company's Annual Report and Form 10-K for the year ended
December 31, 1999. The Facility provides for a variable rate of interest on
borrowings. In order to reduce exposure to increasing interest rates, the
Company has entered into interest rate swap contracts that fix the interest rate
on $30 million of borrowings under the Facility. The interest rate swap
contracts mature between October 16, 2000 and May 6, 2003 and fix interest rates
between 5.48% and 6.13%, plus a variable margin based on the Company's Interest
Coverage Ratio. The variable margin may range from 1.75% to 2.50% and is
determined quarterly.
As of March 31, 2000, the Company was in compliance with Facility covenants
and had $16.8 million available under its Facility, after adjustment for
borrowing base limitations. Borrowing availability under the credit Facility
could increase, depending on the Company's utilization of the proceeds.
INFLATION AND OTHER COST INCREASES
The Company is not always able to reflect all of its cost increases in the
prices of its homes because competitive pressures and other factors require it
in many cases to maintain or discount those prices. While the Company attempts
to maintain costs with subcontractors from the date a sales contract with a
customer is accepted until the date construction is completed, unanticipated
additional costs may be incurred which cannot be passed onto the customer. For
example, delays in construction of a home can cause the mortgage commitment to
expire and can require the Company, if mortgage interest rates have increased,
to pay significant amounts to the mortgage lender to extend the original
mortgage interest rate. In addition, during periods of high construction
activities, additional costs may be incurred to obtain
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subcontractor availability when certain trades are not readily available. These
costs can result in lower gross profits.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company has entered into three interest rate swap contracts with
notional amounts of $10,000,000 each, maturing on October 16, 2000, January 14,
2001 and May 6, 2003. These interest rate swap contracts, reflected in aggregate
in the table below, commenced on October 16, 1997, January 14, 1998 and May 6,
1998 and fix the variable interest rate on the Company's revolving credit note
at 6.125%, 5.475% and 5.960%, respectively. The Company enters into interest
rate swap contracts to achieve an appropriate level of variable and fixed-rate
debt as approved by senior management. Interest rate swap contracts allow the
Company to have variable-rate borrowings and to select the level of fixed-rate
debt for the Company as a whole. Under interest rate swap contracts, the Company
agrees with other parties to exchange, at specified intervals, the difference
between fixed rate and floating-rate amounts calculated by reference to an
agreed notional amount. The level of fixed rate debt, after the effect of
interest rate swap contracts have been considered, is maintained at
approximately 30% of total borrowings under the revolving line of credit
facility. The Company does not enter into derivative financial instrument
transactions for speculative purposes.
The following table presents descriptions of the financial instruments
and derivative instruments that are held by the Company at March 31, 2000, and
which are sensitive to changes in interest rates. For the liabilities, the table
presents principal calendar year cash flows that exist by maturity date and the
related average interest rate. For the interest rate derivatives, the table
presents the notional amounts and expected interest rates that exist by
contractual dates. The notional amount is used to calculate the contractual
payments to be exchanged under the contract. The variable rates are estimated
based on the three-month forward LIBOR rate plus a variable margin ranging from
1.75% to 2.25%. All amounts are reflected in U.S. Dollars (thousands).
TOTAL FAIR VALUE
MARCH 31 MARCH 31
-------- --------
2000 2001 2002 2003 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
LIABILITIES
Variable rate $106,425 $106,425 $78,509 $106,425 $78,509
Average interest rate 6.750% 6.750% 6.750%
INTEREST-RATE DERIVATIVES
Notional amount $30,000 $20,000 $10,000 $10,000 $30,000 $30,000 $444 $(340)
Average pay rate 5.853% 5.718% 5.960% 5.960% 5.873% 5.869%
Average receive rate 6.750% 6.750% 6.750% 6.750% 6.750% 6.750%
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in various legal proceedings, most of
which arise in the ordinary course of business and some of which
are covered by insurance. In the opinion of the Company's
management, none of the claims relating to such proceedings will
have a material adverse effect on the financial condition or
results of operations of the Company.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS. Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable.
ITEM 5. OTHER INFORMATION. Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS: See attached index (following the signature page).
(B) REPORTS ON FORM 8-K. Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOMINION HOMES, INC.
(Registrant)
Date: May 12, 2000 By: /s/Douglas G. Borror
--------------------
Douglas G. Borror
Duly Authorized Officer
Date: May 12, 2000 By: /s/Jon M. Donnell
-----------------
Jon M. Donnell
Duly Authorized Officer
Date: May 12, 2000 By: /s/Peter J. O'Hanlon
--------------------
Peter J. O'Hanlon
Principal Financial Officer
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INDEX TO EXHIBITS
Exhibit No. Description Location
- ----------- ----------- --------
2.1 Corporate Exchange and Subscription Agreement, dated January 20, Incorporated by reference to
1994, between Borror Corporation and Borror Realty Company Exhibit 2.1 to the Company's
Registration Statement on Form S-1
(File No. 33-74298) as filed with the
Commission on January 21, 1994 and as
amended on March 2, 1994 (The "Form
S-1").
2.2 Form of First Amendment to Corporate Exchange and Subscription Incorporated by reference to
Agreement Exhibit 2.2 to Form S-1.
3.1 Amended and Restated Articles of Incorporation of Dominion Homes, Incorporated by reference to
Inc., as amended May 7, 1997 Exhibit 4(a)(3) to the Company's
Registration Statement on Form S-8
(File No. 333-26817) filed with the
Commission on May 9, 1997.
3.2 Amended and Restated Code of Regulations of Borror Corporation Incorporated by reference to
Exhibit 3.2 to Form S-1.
4. Specimen of Stock Certificate of Dominion Homes, Inc. Incorporated by reference to Exhibit 4
to the Company's March 31, 1997 Form
10-Q (File No. 0-23270).
27* Financial Data Schedule Filed herewith
* Filed Herewith
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