1
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 September 30, 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.
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(Exact name of registrant as specified in its charter)
OHIO 31-1393233
---------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
5501 FRANTZ ROAD, DUBLIN, OHIO
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(Address of principal executive offices)
43017-0766
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(Zip Code)
(614) 761-6000
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(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
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(Former Name, Former Address and Formal 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 November 13, 2000: 6,390,227
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOMINION HOMES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
September 30, December 31,
2000 1999
(Unaudited)
------------- ------------
ASSETS
Cash and cash equivalents $ 287 $ 2,862
Notes and accounts receivable, net:
Trade 290 212
Due from financial institutions for residential closings 722 544
Real estate inventories:
Land and land development costs 108,174 95,657
Homes under construction 79,203 60,272
Other 4,378 3,251
--------- ---------
Total real estate inventories 191,755 159,180
--------- ---------
Prepaid expenses and other 6,694 3,891
Deferred income taxes 2,048 1,904
Property and equipment, at cost 10,353 9,055
Less accumulated depreciation (4,362) (3,589)
--------- ---------
Net property and equipment 5,991 5,466
--------- ---------
Total assets $ 207,787 $ 174,059
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade $ 7,566 $ 5,273
Deposits on homes under contract 2,311 1,634
Accrued liabilities 16,262 11,364
Note payable, banks 113,668 92,308
Term debt 3,205 4,750
--------- ---------
Total liabilities 143,012 115,329
--------- ---------
Commitments and contingencies
Shareholders' equity
Common shares, without stated value, 12,000,000
shares authorized, 6,417,149 shares issued and
6,392,149 shares outstanding on September
30, 2000 and 6,382,480 shares issued and 6,357,480 shares
outstanding on December 31, 1999 31,625 31,388
Deferred compensation (425) (252)
Retained earnings 33,747 27,766
Treasury stock (172) (172)
--------- ---------
Total shareholders' equity 64,775 58,730
--------- ---------
Total liabilities and shareholders' equity $ 207,787 $ 174,059
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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DOMINION HOMES, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
Revenues $ 87,547 $ 73,067 $ 226,257 $ 198,636
Cost of real estate sold 69,575 58,852 180,983 160,970
---------- ---------- ---------- ----------
Gross profit 17,972 14,215 45,274 37,666
Selling, general and administrative 9,917 8,475 28,637 24,707
---------- ---------- ---------- ----------
Income from operations 8,055 5,740 16,637 12,959
Interest expense 2,620 1,196 6,354 3,948
---------- ---------- ---------- ----------
Income before income taxes 5,435 4,544 10,283 9,011
Provision for income taxes 2,283 1,861 4,302 3,737
---------- ---------- ---------- ----------
Net income $ 3,152 $ 2,683 $ 5,981 $ 5,274
========== ========== ========== ==========
Earnings per share
Basic $ 0.50 $ 0.43 $ 0.94 $ 0.84
========== ========== ========== ==========
Diluted $ 0.48 $ 0.42 $ 0.92 $ 0.81
========== ========== ========== ==========
Weighted average shares outstanding
Basic 6,364,105 6,312,295 6,364,527 6,306,343
========== ========== ========== ==========
Diluted 6,501,552 6,461,902 6,484,667 6,490,320
========== ========== ========== ==========
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 5,981 5,981
Shares awarded and redeemed 34,669 237 (253) (16)
Treasury shares:
Held for deferred compensation (87) (87)
Deferred compensation 167 167
- ------------------------------------------ ------------- ------------ ----------- ----------- ------------ ----------- -----------
Balance, September 30, 2000 6,392,149 $31,625 $921 $(1,346) $33,747 $(172) $64,775
- ------------------------------------------ ------------- ------------ ----------- ----------- ------------ ----------- -----------
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)
Nine Months Ended
September 30,
2000 1999
-------------------------
Cash flows from operating activities:
Net income $ 5,981 $ 5,274
Adjustments to reconcile net income to cash
used in operating activities:
Depreciation and amortization 1,461 1,112
Disposal of property & equipment (7)
Issuance of common shares for compensation 51 428
Writedown of real estate inventories 376 256
Deferred income taxes (144) (116)
Changes in assets and liabilities:
Notes and accounts receivable (256) 12
Real estate inventories (32,630) (29,746)
Prepaid expenses and other (2,818) (651)
Accounts payable 2,293 1,547
Deposits on homes under contract 677 (380)
Accrued liabilities 4,961 (618)
-------- ---------
Net cash used in operating activities (20,048) (22,889)
-------- ---------
Cash flows from investing activities:
Proceeds from sale of property & equipment 38 8
Purchase of property & equipment (1,537) (1,013)
-------- ---------
Net cash used in investing activities (1,499) (1,005)
-------- ---------
Cash flows from financing activities:
Proceeds from note payable, banks 218,700 220,462
Payments on note payable, banks (197,340) (195,063)
Prepaid loan fees (369) (181)
Payments on term debt (1,572) (485)
Payments on capital lease obligations (293) (199)
Common shares purchased or redeemed (154) (207)
-------- ---------
Net cash provided by financing activities 18,972 24,327
-------- ---------
Net change in cash and cash equivalents (2,575) 433
Cash and cash equivalents, beginning of period 2,862 261
-------- ---------
Cash and cash equivalents, end of period $ 287 $ 694
======== =========
Supplemental disclosures of cash flow information:
Interest paid (net of amounts capitalized) $ 756 $ 1,067
======== =========
Income taxes paid $ 5,448 $ 4,887
======== =========
Land acquired by purchase contract or seller financing $ 321
========
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 for Dominion Homes,
Inc. ("the Company"), 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
generally accepted accounting principles for complete financial statements.
The December 31, 1999 balance sheet data was derived from audited financial
statements but do not include all disclosures required by generally
accepted accounting principles. These financial statements should be read
in conjunction with the December 31, 1999 audited annual financial
statements of the Company contained in its Annual Report and Form 10-K for
the fiscal year ended December 31, 1999.
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 and nine months
ended September 30, 2000 and 1999 are not necessarily indicative of the
results to be expected for the full year.
2. CAPITALIZED INTEREST
Interest is capitalized on land during the development period and on
housing construction costs during the construction period. As a lot is
transferred to homes under construction, the interest capitalized on the
lot during the land development period is included as a cost of the land.
Capitalized interest related to land under development and 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 $4.6 million and $3.3 million at September
30, 2000 and September 30, 1999, respectively. The following table
summarizes the activity with respect to capitalized interest:
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------- ------------ ------------- ---------
Interest incurred $2,877,000 $1,686,000 $7,640,000 $ 4,852,000
Interest capitalized (1,971,000) (1,428,000) (5,156,000) (3,696,000)
----------- ----------- -------------- --------------
Interest expensed directly 906,000 258,000 2,484,000 1,156,000
Previously capitalized interest
charged to interest expense 1,714,000 938,000 3,870,000 2,792,000
------------ ------------ ------------ -------------
Total interest expense $2,620,000 $1,196,000 $6,354,000 $ 3,948,000
========== ========== ========== =============
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3. NOTE PAYABLE, BANKS
The Company increased its Senior Unsecured Revolving Credit Facility
(the "Facility") to $150 million from $125 million on May 26, 2000. On that
date, the Company also modified other covenants to increase the amount of
capital and operating leases allowed under the Facility and to amend the
Leverage Ratio to 2.75 to 1.00 from 2.50 to 1.00 for the period from May 1
to August 31 for 2000 and subsequent years. These changes to the Facility
reflect the increased level of land and home building inventories the
Company is experiencing due to selling more and larger homes and the
increased level of building activity experienced by the Company during its
peak building months. The original Facility was executed on May 29, 1998
and is described in the Company's Annual Report and Form 10-K for the
fiscal year ended December 31, 1999.
The Facility provides for a variable rate of interest on borrowings
and, consequently, the Company has entered into interest rate swap
contracts in order to reduce exposure to increasing interest rates. The
interest rate swap contracts 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 the interest rates between
5.48% and 6.13%, plus a variable margin based on the Company's Interest
Coverage Ratio. The variable margin ranges from 1.75% to 2.50% and is
determined quarterly.
As of September 30, 2000, the Company was in compliance with the
Facility covenants and had $17.0 million available under its Facility,
after adjusting for borrowing base limitations. Borrowing availability
under the Facility could increase, depending on the Company's utilization
of the proceeds.
4. EARNINGS PER SHARE
A reconciliation of the weighted average shares used in basic and
diluted earnings per share is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ---------- -------
Weighted average shares outstanding
during the period 6,364,105 6,312,295 6,364,527 6,306,343
Assuming exercise of options 137,447 149,607 120,140 183,977
---------- ---------- ---------- -----------
Weighted average shares outstanding
adjusted for common share equivalents 6,501,552 6,461,902 6,484,667 6,490,320
========= ========= ========= =========
5. 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 September 30, 2000 increased
17.5% to $3,152,000,or $.48 per diluted share, from $2,683,000, or $.42 per
diluted share, for the same period of the previous year. The increase in net
income was largely due to a 19.8% increase in revenues and an increase in gross
profit margin to 20.5% from 19.5%. Revenues for third quarter 2000 increased to
$87,547,000, based on 482 closings, compared to revenues of $73,067,000, based
on 428 closings, for third quarter 1999. The increase in revenues is principally
due to the larger number and higher average price of homes closed in third
quarter 2000 compared to third quarter 1999. The average price of homes closed
during third quarter 2000 increased to $181,432 compared to $170,030 during
third quarter 1999.
Selling, general and administrative expense decreased as a percentage of
revenues to 11.3% for the three months ended September 30, 2000 from 11.6% for
the same period of the previous year. Interest expense, however, increased to
3.0% of revenues during third quarter 2000 from 1.7% of revenues during third
quarter 1999 due to a higher average level of debt outstanding and a higher
average rate of interest. The Company incurred higher levels of debt due to
increased investment in real estate inventories. Real estate inventories
increased due to a larger backlog of more expensive homes under construction and
increased investment in land and land development inventories in both Central
Ohio and Louisville, Kentucky.
The Company sold 353 homes, with a sales value of $67,624,000, during the
three months ended September 30, 2000 compared to 404 homes, with a sales value
of $66,759,000, sold during the same period of the previous year. Home contracts
in backlog increased to 887 at September 30, 2000 from 825 at September 30,
1999. The aggregate sales value of the Company's homes in backlog at September
30, 2000 increased to $173,993,000 from $146,638,000 at September 30, 1999. The
average sales price of homes in backlog at September 30, 2000 increased to
$196,158 from $177,742 at September 30, 1999.
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COMPANY OUTLOOK
The Company continues to expect that 2000 net income will exceed 1999 net
income. The Company bases this expectation on the strong financial results
experienced through the first nine months of 2000 and the number of homes it
expects to close during the fourth quarter of 2000. Although sales have slowed
during the second half of 2000, the Company has a larger backlog at September
30, 2000 than at September 30, 1999. However, unless the trend of sales
reverses, the Company expects the backlog at year end 2000 to be lower than at
year end 1999. Increased operations in Louisville, Kentucky as well as some
newly designed home offerings will require additional investment that the
Company anticipates funding using internally generated cash and bank lines of
credit. This additional investment will likely lead to increased levels of
interest expense in 2001.
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, mortgage commitments that expire prior to
homes being delivered, increases in the cost of acquiring and developing land,
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 change in
requirements by environmental agencies, the effect of changing consumer tastes
on the market acceptance for the Company's products, factors affecting the
mortgage financing business, 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 continued expansion in the Louisville, Kentucky market and the other
risks described in the Company's December 31, 1999 Form 10-K and other
Securities and Exchange Commission filings.
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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 will 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)
=============================================================================================
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
June 30, 2000 $76,492 420 443 1,016
Sept. 30, 2000 $87,547 353 482 887
- -------------------
(1) Net of cancellations
At September 30, 2000, the aggregate sales value of homes in backlog was
$174.0 million compared to $146.6 million at September 30, 1999. The average
sales value of homes in backlog at September 30, 2000 increased to $196,158 from
$177,742 at September 30, 1999. This increase reflects home sale price increases
and the sale of larger homes.
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.
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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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- --------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of real estate sold 79.5 80.5 80.0 81.0
--------- ---------- --------- ------
Gross profit 20.5 19.5 20.0 19.0
Selling, general and
administrative 11.3 11.6 12.7 12.5
---------- ---------- --------- ------
Income from operations 9.2 7.9 7.3 6.5
Interest expense 3.0 1.7 2.8 2.0
---------- ---------- --------- ------
Income before income taxes 6.2 6.2 4.5 4.5
Provision for income taxes 2.6 2.5 1.9 1.8
---------- ---------- --------- ------
Net income 3.6% 3.7% 2.6% 2.7%
========== ========== ========= =======
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THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1999
REVENUES. Revenues for third quarter 2000 increased to $87.5 million from
$73.1 million for third quarter 1999. The Company closed 482 homes during third
quarter 2000 compared to 428 homes closed during third quarter 1999. The
increase in revenues is attributable to a 12.6% increase in the number of homes
closed and a 6.7% increase in the average price of homes closed during third
quarter 2000 compared to third quarter 1999. The average price of homes closed
during third quarter 2000 increased to $181,432 from $170,030 during third
quarter 1999. The increase in the average price of homes closed during third
quarter 2000 is principally attributed to selling larger homes, homes with more
options and selected price increases. Included in revenues were other revenues,
consisting of the sale of land and building supplies to other builders, which
were $97,000 for third quarter 2000 compared to $290,000 for third quarter 1999.
GROSS PROFIT. Gross profit for third quarter 2000 increased to $18.0
million from $14.2 million for third quarter 1999. As a percentage of revenues,
the gross profit margin increased to 20.5% for third quarter 2000 from 19.5% for
third quarter 1999. The primary reasons for the increase in third quarter 2000
gross profit were the larger number of homes closed, an increase in the average
price of homes closed and improved control of financing and direct construction
costs compared to the previous year's third quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for third quarter 2000 increased to $9.9 million from
$8.5 million for third quarter 1999. As a percentage of revenues, selling,
general and administrative expenses decreased to 11.3% for third quarter 2000
from 11.6% for third quarter 1999. The increase in selling, general and
administrative expenses is a result of higher sales commissions associated with
the sale of more homes and more expensive homes, the cost of opening new sales
models, the start up of the Company's mortgage company, the start up of the
Company's centralized sales office, "The Home Store" and increased sales and
marketing expense in Louisville, Kentucky.
INTEREST EXPENSE. Interest expense for third quarter 2000 was $2.6 million
compared to $1.2 million for third quarter 1999. As a percentage of revenues,
interest expense for third quarter 2000 increased to 3.0% from 1.7% for third
quarter 1999. Interest expense increased between third quarter 2000 and third
quarter 1999 due to higher borrowing levels and a higher average interest rate.
The average revolving line of credit borrowings were $115.0 million and $82.2
million for third quarter 2000 and 1999, respectively. The weighted average rate
of interest under the Company's revolving line of credit was 9.4% for third
quarter 2000 compared to 7.8% for third quarter 1999. The Company capitalized
less net interest during third quarter 2000 than third quarter 1999 due
principally to closing more homes and an increase in land not eligible for
interest capitalization.
PROVISION FOR INCOME TAXES. Income tax expense for third quarter 2000 was
$2.3 million compared to $1.9 million for third quarter 1999. The Company's
estimated annual effective tax rate was 42.0% for third quarter 2000 and 41.0%
for third quarter 1999.
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NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
REVENUES. Revenues for the nine months ended September 30, 2000 increased
to $226.3 million from $198.6 million for the nine months ended September 30,
1999. The number of closings during the first nine months of 2000 increased to
1,284 homes compared to 1,195 homes closed during the same period in 1999.
Closings for the nine months ended September 30, 2000 included nineteen model
homes, with a sales value of $3.2 million, which the Company sold and leased
back for use as sales models. The increase in revenues is attributable to a 7.4%
increase in the number of homes closed and a 6.0% increase in the average price
of homes closed during the first nine months of 2000 compared to the first nine
months of 1999. The average price of homes closed during the first nine months
of 2000 increased to $175,862 from $165,840 during the comparable period a year
ago. The increase in the average home sales price is primarily attributable to
the Company's customers purchasing larger homes, homes with more options and
selected price increases. Included in revenues were other revenues, consisting
of the sales of land and building supplies to other builders, which were
$450,000 for the first nine months of 2000 compared to $460,000 for the first
nine months of 1999.
GROSS PROFIT. Gross profit for the first nine months of 2000 increased to
$45.3 million from $37.7 million for the first nine months of 1999. Gross profit
as a percentage of revenues increased to 20.0% during the first nine months of
2000 compared to 19.0% during the same period of the previous year. Gross profit
improved primarily as a result of closing more homes, closing homes with a
higher average sale price and improved control of financing and direct
construction costs during the first nine months of 2000 compared to the same
period of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the first nine months of 2000 increased to $28.6
million from $24.7 million for the first nine months of 1999. As a percentage of
revenues, selling, general and administrative expenses for the first nine months
of 2000 increased to 12.7% from 12.5% for the first nine months of 1999. The
increase in selling, general and administrative expenses is a result of higher
sales commissions associated with the sale of more homes, the sale of more
expensive homes, the cost of opening new sales models, the start up of the
Company's mortgage company, the start up of the Company's centralized sales
office, "The Home Store" and increased sales and marketing expense in
Louisville, Kentucky.
INTEREST EXPENSE. Interest expense for the first nine months of 2000
increased to $6.4 million from $3.9 million for the first nine months of 1999.
As a percentage of revenues, interest expense for the first nine months of 2000
increased to 2.8% from 2.0% for the first nine months of 1999. Interest expense
increased because of higher average borrowings and a higher average rate of
interest. The average revolving line of credit borrowings outstanding were
$109.1 million and $79.2 million for the first nine months of 2000 and 1999,
respectively. The weighted average rate of interest under the Company's
revolving line of credit was 9.0% for the first nine months of 2000 compared to
7.9% for the first nine months of 1999. The Company capitalized more net
interest in 2000 as a result of having increased land development and home
construction inventories during the first nine months of 2000 compared to the
first nine months of 1999.
PROVISION FOR INCOME TAXES. Income tax expense for the first nine months of
2000 increased to $4.3 million from $3.7 million for the first nine months of
1999. The Company's estimated annual effective tax rate was 41.8% for the first
nine months of 2000 and 41.5% for the first nine months of 1999.
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SOURCES AND USES OF CASH
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Operating activities for the first nine months of 2000 required cash of
$20.0 million compared to $22.9 million during the first nine months of 1999.
Operating cash was required during the first nine months of both 2000 and 1999
in order to fund real estate inventories, which typically increase during the
summer months and decrease later in the year when a larger number of homes are
closed. Although the Company closed a record number of homes during the first
nine months of 2000, the Company also increased its investment in homes under
construction by $19.0 million, land and land development inventories by $12.5
million and lumber and building supplies inventory by $1.1 million. This
represented a total investment of $32.6 million in real estate inventories
during the first nine months of 2000 compared to $29.7 million invested during
the first nine months of 1999. Operating activities provided additional cash
during the first nine months of 2000 as net income increased to $6.0 million
from $5.3 million during the first nine months of 1999. Net cash used in
investing activities during the first nine months of 2000 was $1.5 million
compared to $1.0 million during the first nine months of 1999. The Company
increased its bank and term debt $19.8 million during the first nine months of
2000 compared to $24.3 million during the first nine months of 1999. The Company
increased its bank and term debt principally to fund its increased investment in
real estate inventories, which includes homes under construction.
REAL ESTATE INVENTORIES
The Company's practice is to develop most of the lots on which it builds
its 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 September 30, 2000, the Company either owned or was under contract to
purchase lots or land that could be developed into approximately 8,240 lots,
including 790 lots in Louisville, Kentucky. The Company controlled through
option agreements an additional 7,964 lots, including 254 lots in Louisville,
Kentucky. During third quarter 2000, the Company exercised options to purchase
657 lots, all of which are located in Central Ohio. Option agreements expire at
varying dates through 2003. The Company's decision to exercise any particular
option or 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 at September 30, 2000 increased to $191.8 million
from $159.2 million at December 31, 1999. The $32.6 million increase in real
estate inventories included increases in homes under construction of $19.0
million, land and land development inventories of $12.5 million and lumber and
building supply inventories of $1.1 million. The higher level 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 selling more expensive homes. Land and land development
inventories increased as the Company added sales locations in Central Ohio and
Louisville, Kentucky and increased its seasonal land development inventories.
On September 30, 2000, the Company had 128 inventory homes in various
stages of construction, which represented an aggregate investment of $9.9
million. On September 30, 1999, the Company had 60 inventory homes in various
stages of construction, which represented an aggregate investment of $4.4
million. Inventory homes are not reflected in sales or backlog.
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SELLER-PROVIDED DEBT
Seller-provided term debt was $1.5 million at September 30, 2000 compared
to $4.4 million at September 30, 1999. Seller provided term debt is expected to
be repaid prior to June 2002. Interest rates range from 6.5% to 8%.
LAND PURCHASE COMMITMENTS
At September 30, 2000, the Company had commitments to purchase 100
residential lots at an aggregate cost of $3.0 million, net of $1,500 in good
faith deposits. In addition, at September 30, 2000, the Company had $113.8
million of cancelable obligations to purchase residential lots and unimproved
land, in which $6.2 million in good faith deposits had been invested by the
Company. The majority of the land subject to cancelable obligations is for post
2000 development activities. The Company expects to fund its 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 increased its Senior Unsecured Revolving Credit Facility (the
"Facility") to $150 million from $125 million on May 26, 2000. The Company also
modified other covenants to increase the amount of capital and operating leases
allowed under the Facility and to amend the Leverage Ratio to 2.75 to 1.00 from
2.50 to 1.00 for the period from May 1 to August 31 for 2000 and subsequent
years. These changes to the Facility reflect the increased level of land and
home building inventories the Company is experiencing due to selling more and
larger homes and the increased level of building activity experienced by the
Company during its peak building months. The original Facility was executed on
May 29, 1998 and is described in the Company's Annual Report and Form 10-K for
the fiscal year ended December 31, 1999.
The Facility provides for a variable rate of interest on borrowings and,
consequently, the Company has entered into interest rate swap contracts in order
to reduce exposure to increasing interest rates. The interest rate swap
contracts 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 the interest rates between 5.48% and 6.13%, plus a variable margin based
on the Company's Interest Coverage Ratio. The variable margin ranges from 1.75%
to 2.50% and is determined quarterly.
As of September 30, 2000, the Company was in compliance with Facility
covenants and had $17.0 million available under the Facility, after adjustment
for borrowing base limitations. Borrowing availability under the Facility could
increase, depending on the Company's utilization of the proceeds.
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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 on to 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
subcontractors when certain trades are not readily available. These additional
costs can result in lower gross profits.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards (SFAS) No. 138 Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment to FASB
Statement No. 133, which modifies certain provisions and definitions in
accounting principles used in accounting for derivative instruments and hedging
activities. The Company is in the process of evaluating the effect of SFAS No.
133 Accounting for Derivative Instruments and Hedging Activities and has not yet
determined the impact of this pronouncement, as amended by SFAS No. 138.
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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, respectively, and fix the variable interest rate on $30.0
million of borrowings under the Facility at 6.125%, 5.475% and 5.960%,
respectively. The Company entered 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. The expectation is that the resulting cost of funds is
lower than that available under the variable-rate borrowings. 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 26% of total borrowings under the
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 September 30, 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 2.50%. All dollar amounts are reflected in U.S. Dollars (thousands).
TOTAL FAIR VALUE
SEPTEMBER 30, SEPTEMBER, 30
--------------- --------------------
2000 2001 2002 2003 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
Liabilities
- -----------
Variable rate $113,668 $113,668 $85,814 $113,668 $85,814
Average interest rate 8.811% 8.811% 8.811%
Interest-Rate Derivatives
- -------------------------
Notional amount $30,000 $20,000 $10,000 $ 10,000 $ 30,000 $30,000 $258 $99
Average pay rate 5.853% 5.718% 5.960% 5.960% 5.873% 5.869%
Average receive rate 8.811% 8.811% 8.811% 8.811% 8.811% 8.811%
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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. CHANGES 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: November 13, 2000 By: /s/Douglas G. Borror
------------------------------
Douglas G. Borror
Duly Authorized Officer
Date: November 13, 2000 By: /s/Jon M. Donnell
------------------------------
Jon M. Donnell
Duly Authorized Officer
Date: November 13, 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
Securities and Exchange 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
Securities and Exchange Commission on
May 9, 1997.
3.2 Amended and Restated Code of Regulations of Dominion Homes, Inc. Incorporated by reference to Exhibit
3.2 to the Company's June 30, 2000
Form 10-Q (File No. 0-23270).
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.
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