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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, 2001
( ) 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or 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 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 ____
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Number of common shares outstanding as of May 11, 2001: 6,383,531
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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,
2001 2000
(Unaudited)
------------ -------------
ASSETS
Cash and cash equivalents $ 2,389 $ 2,106
Notes and accounts receivable, net:
Trade 122 314
Due from financial institutions for residential closings 1,403 712
Real estate inventories:
Land and land development costs 114,141 113,186
Homes under construction 88,271 65,562
Other 4,781 4,619
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Total real estate inventories 207,193 183,367
----------- -----------
Prepaid expenses and other 4,326 5,746
Deferred income taxes 3,504 2,967
Property and equipment, at cost 10,927 10,657
Less accumulated depreciation (5,099) (4,676)
------------ ------------
Net property and equipment 5,828 5,981
----------- -----------
Total assets $ 224,765 $ 201,193
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade $ 6,408 $ 5,808
Deposits on homes under contract 2,373 1,804
Accrued liabilities 19,185 16,889
Note payable, banks 125,373 105,701
Term debt 2,999 3,103
----------- -----------
Total liabilities 156,338 133,305
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Commitments and contingencies
Shareholders' equity
Common shares, without stated value, 12,000,000 shares authorized,
6,408,877 shares issued and 6,383,877 shares outstanding on March 31,
2001 and 6,407,227 shares issued
and 6,382,227 shares outstanding on December 31, 2000 31,611 31,611
Deferred compensation (359) (376)
Retained earnings 37,988 36,825
Accumulated other comprehensive loss (641)
Treasury stock (172) (172)
------------ ------------
Total shareholders' equity 68,427 67,888
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Total liabilities and shareholders' equity $ 224,765 $ 201,193
=========== ===========
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,
2001 2000
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Revenues $67,362 $62,218
Cost of real estate sold 52,147 50,219
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Gross profit 15,215 11,999
Selling, general and administrative 10,713 8,968
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Income from operations 4,502 3,031
Interest expense 2,496 1,756
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Income before income taxes 2,006 1,275
Provision for income taxes 843 518
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Net income $ 1,163 $ 757
========== =========
Earning per share
Basic $0.18 $0.12
========== =========
Diluted $0.18 $0.12
========== =========
Weighted average shares outstanding
Basic 6,353,180 6,361,349
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Diluted 6,554,808 6,466,313
========= =========
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)
(UNAUDITED)
Deferred Compensation
---------------------
Accum. Other
Common Trust Retained Comprehensive Treasury
Shares Liability Shares Earnings Income (Loss) Stock Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 31,611 $ 928 $ (1,304) $ 36,825 $ (172) $ 67,888
Cummulative effect of adopting
accounting principle $ 94 94
-------- ----- -------- -------- ------ ------ --------
Balance, January 1, 2001, as
adjusted 31,611 928 (1,304) 36,825 94 (172) 67,982
Net Income 1,163 1,163
Unrealized hedging loss, net
of deferred taxes (735) (735)
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Comprehensive income 428
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Treasury shares:
Deferred compensation (126) 126 -
Deferred compensation 17 17
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 $ 31,611 $ 819 $ (1,178) $ 37,988 $ (641) $ (172) $ 68,427
- ---------------------------------------------------------------------------------------------------------------------------------
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,
2001 2000
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Cash flows from operating activities:
Net income $ 1,163 $ 757
Adjustments to reconcile net income to cash
used in operating activities:
Depreciation and amortization 566 453
Issuance of common shares for compensation 51
Reserve for real estate inventories 18
Deferred income taxes (79) (144)
Changes in assets and liabilities:
Notes and accounts receivable (499) (596)
Real estate inventories (23,826) (14,403)
Prepaid expenses and other 1,249 (735)
Accounts payable 600 180
Deposits on homes under contract 569 317
Accrued liabilities 1,240 1,295
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Net cash used in operating activities (19,017) (12,807)
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Cash flows from investing activities:
Proceeds from sale of property and equipment 39 43
Purchase of property and equipment (307) (695)
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Net cash used in investing activities (268) (652)
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Cash flows from financing activities:
Payments on note payable banks (59,344) (51,659)
Proceeds from note payable banks 79,016 65,776
Payments on term debt (361)
Payments on capital lease obligations (104) (95)
Common shares purchased or redeemed (132)
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Net cash provided by financing activities 19,568 13,529
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Net change in cash and cash equivalents 283 70
Cash and cash equivalents, beginning of period 2,106 2,862
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Cash and cash equivalents, end of period $ 2,389 $ 2,932
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid (net of amounts capitalized) $ 242 $ (219)
=========== ============
Income taxes paid $ 1,000 $ 900
=========== ===========
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, 2000
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, 2000 audited annual financial statements
of Dominion Homes, Inc. (the "Company") contained in its December 31, 2000
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,
2001 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
lots during the land development period is included as a cost of the land.
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
$4.8 million and $3.9 million at March 31, 2001 and March 31, 2000,
respectively. The following table summarizes the activity with respect to
capitalized interest:
Three Months Ended
March 31,
2001 2000
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Interest incurred $ 2,671,000 $ 2,291,000
Interest capitalized (1,688,000) (1,533,000)
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Interest expensed directly 983,000 758,000
Previously capitalized interest charged to interest expense 1,513,000 998,000
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Total interest expense $ 2,496,000 $ 1,756,000
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4. NOTE PAYABLE, BANKS
The Company is currently operating under a $150 million Senior
Unsecured Revolving Credit Facility ("the Facility") that was executed on
May 29, 1998 and is described in the Company's Form 10-K for the year ended
December 31, 2000. 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 $60 million of borrowings under the Facility. The interest rate
swap contracts mature between May 6, 2003 and March 8, 2004 and fix
interest rates between 5.16% and 5.98%, 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, 2001, the Company was in compliance with Facility
covenants and had $16.0 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. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company's interest rate risk management strategy uses derivative
instruments to minimize earnings fluctuations caused by interest rate
volatility associated with the Company's variable rate debt. The
derivative financial instruments used to meet the Company's risk
management objectives are interest rate swaps. The Company seeks to limit
the notional amount of interest rate swap agreements to 50% of its
outstanding debt.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 138, an amendment to SFAS
No. 133, which established new accounting and reporting guidelines for
derivative instruments and hedging activities. SFAS No. 133 and SFAS No.
138 are collectively referred to herein as "SFAS 133."
In adopting SFAS 133, the Company has designated its interest rate
swaps as cash flow hedges. The after tax fair value of the swap contracts
at the date of adoption was $94,000. The fair value of the swaps at the
date of adoption of SFAS 133 together with changes in their fair value in
subsequent periods are recognized in other comprehensive income or loss
until such time as the swap contracts mature or are otherwise disposed.
Other comprehensive income or loss is reflected as a component of
shareholders' equity in the accompanying balance sheets. The fair value of
swap contracts is impacted by the changing interest rate environment among
other factors. During the quarter ended March 31, 2001, interest rates
declined significantly causing an unrealized after tax loss on the swap
contracts of approximately $735,000. Future changes in interest rates will
cause unrealized gains or losses to occur and such amounts will be
adjusted through other comprehensive income or loss as long as the
effectiveness of the hedge is maintained. The Company has recognized a
corresponding accrued liability for the estimated fair value of the
interest rate swap agreements of approximately $1,100,000 at March 31,
2001.
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In accordance with the provisions of FAS 133, the Company recorded the
following adjustments in accumulated other comprehensive loss as of March
31, 2001:
Fair value of hedging instruments upon transition, net of
deferred taxes of $67,000 $ 94,000
Unrealized losses on cash flow hedges during the period, net
of deferred taxes of $525,000 (735,000)
---------
Accumulated other comprehensive loss at March 31, 2001, net of
deferred taxes of $458,000 $(641,000)
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The Company formally documents relationships between hedging instruments
and hedged items, as well as its risk management objectives and strategies
for undertaking the hedging transactions. An assessment is made at the
hedging transaction's inception and on an ongoing basis to determine
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in cash flows of hedged items. The Company
believes the swaps have been effective in achieving the risk management
objectives for which they were intended since inception and will continue
to be effective for the remaining term of the contract. Hedge effectiveness
is measured at least quarterly based on the relative change in fair value
between the derivative contract and the hedged item over time. Any change
in fair value resulting from ineffectiveness, as defined by SFAS 133, is
recognized immediately in earnings. For the period ending March 31, 2001,
no gain or loss has been recognized in earnings as no amount of the cash
flow hedges have been determined to be ineffective.
Should it be determined that a derivative is not highly effective or
that it has ceased to be a highly effective hedge, the Company will
discontinue hedge accounting prospectively. This will occur when (1)
offsetting changes in the fair value or cash flows of the hedged items are
no longer effective; (2) the derivative expires or is sold, terminated, or
exercised; or (3) management determines that designation of the derivative
as a hedged instrument is no longer appropriate. When hedge accounting is
discontinued because an interest rate swap qualifying as a cash flow hedge
is liquidated or sold prior to maturity, the gain or loss on the interest
rate swap at the time of termination remains in accumulated other
comprehensive income and is recognized as an adjustment to interest expense
over the original contract term. In all other situations in which hedge
accounting is discontinued, the derivative will be carried at its fair
value on the balance sheet, with changes in its fair value recognized in
current period earnings.
6. 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,
2001 2000
----------- -------
Weighted average shares outstanding
during the period 6,353,180 6,361,349
Assuming exercise of options 201,628 104,964
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Weighted average shares outstanding
used for diluted earnings per share 6,554,808 6,466,313
========= =========
7. 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, 2001 increased 54% to $1.2
million, or $.18 per diluted share, from $757,000, or $.12 per diluted share,
during the same period a year ago. Revenues for first quarter 2001 increased 8%
to $67.4 million, based on 347 closings, compared to revenues of $62.2 million,
based on 359 closings, during first quarter 2000. First quarter 2000 revenues
included $3.3 million from the closing of 19 homes that were leased back by the
Company for use as model homes. The average price of homes that closed during
first quarter 2001 increased to $191,700 from $173,000 during first quarter
2000.
Net income for first quarter 2001 improved principally due to a $3.2
million increase in gross profit to $15.2 million from $12.0 for first quarter
2000. As a percentage of revenues, gross profit increased to 22.6% during first
quarter 2001 compared to 19.3% for the same period a year ago. The increase in
gross profit was partially offset by a $1.7 million, or 1.5%, increase in
selling, general and administrative expenses and a $740,000, or a .9%, increase
in interest expense. Gross profit increased due to the higher average price of
the homes that closed during the period and lower customer financing costs paid
by the Company due to declining interest rates. During first quarter 2000 the
sale and leaseback of 19 model homes reduced the gross profit margin by
approximately 1.0% because income on the sale was deferred and recognized over
the life of the leases. The $1.7 million increase in selling, general and
administrative expense is the result of the operating costs of the Company's new
mortgage services subsidiary and the Company's recently-introduced Independence
series of homes, the expansion of operations in Louisville, Kentucky and an
increase in variable selling, general and administrative expenses. The $740,000
increase in interest expense during first quarter 2001 was due to higher
borrowings under the Company's revolving line of credit and a higher weighted
average rate of interest. The additional revolving line of credit borrowings
during first quarter 2001 were used principally to fund higher levels of home
construction.
New home contracts during the first three months of 2001 increased 16% to
706 contracts, with a sales value of $133.3 million, from 608 contracts, with a
sales value of $110.3 million, during the first three months of 2000. The
Company had record 1,136 homes in backlog at March 31, 2001, with an aggregate
sales value of $221.0 million, compared to 1,039 homes in backlog, with an
aggregate sales value of $190.0 million, at March 31, 2000. The average sales
price of homes in backlog at March 31, 2001 increased to $195,000 from $183,000
at March 31, 2000.
The Company recently introduced the "Independence" series of homes that is
designed to appeal to first time homebuyers at a price point below its Century
series of homes. The Independence series of homes has been well received by the
Company's customers. The operations in Louisville, Kentucky continued to expand
during first quarter 2001 and continued to meet the Company's expectations. The
mortgage financing services company is currently servicing the majority of the
Company's sales and provided incremental earnings to the Company during first
quarter 2001.
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COMPANY OUTLOOK
The Company anticipates that the year 2001 will be a record year and that
diluted earnings per share for 2001 will exceed the previous annual record of
$1.46 earnings per share. The Company expects improved earnings for 2001 based
on its record first quarter 2001 earnings and its March 31, 2001 backlog of
sales contracts that includes over 1,100 homes with a sales value of over $220
million. This expectation could change if the local economy suffers a
significant decline during the year, causing a higher than historical rate of
sales contract cancellations.
The Company expects to have the highest level of construction activity in
its history during the second half of 2001. This high level of construction
activity is caused by the large number of homes it is building and the increased
average cost of those homes. Consequently, the Company has applied for an
increase in the borrowing capacity under its existing bank credit facility,
which it expects to be approved by the banks prior to the end of May 2001.
The increased credit facility will have a capacity of $175 million, an increase
of $25 million over the existing capacity.
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 2001 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, changes in mortgage finance programs,
increases in the cost of acquiring and developing land, mortgage commitments
that expire prior to homes being delivered, entry into the mortgage financing
services 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 subdivision platting 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 on favorable terms,
the commencement or outcome of litigation, the impact of changes in government
regulation, and the other risks described in the Company's December 31, 2000
Form 10-K.
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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 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, 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
Dec. 31, 2000 $100,158 404 514 777
Mar. 31, 2001 $67,362 706 347 1,136
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(1) net of cancellations
At March 31, 2001, the aggregate sales value of homes in backlog was
$221.0 million compared to $189.9 million at March 31, 2000. The average sales
value of homes in backlog at March 31, 2001 increased to $195,000 compared to
$183,000 at March 31, 2000.
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
March 31,
2001 2000
----------- ---------
Revenues................................................................ 100.0% 100.0%
Cost of real estate sold................................................ 77.4 80.7
--------- --------
Gross profit........................................................ 22.6 19.3
Selling, general and administrative expenses............................ 15.9 14.4
--------- --------
Income from operations.............................................. 6.7 4.9
Interest expense........................................................ 3.7 2.8
--------- --------
Income before income tax ............................................... 3.0 2.1
Income tax provision ................................................... 1.3 .9
--------- -----
Net income ......................................................... 1.7% 1.2%
========= ========
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FIRST QUARTER 2001 COMPARED TO FIRST QUARTER 2000
REVENUES. Revenues for first quarter 2001 were $67.4 million compared to
$62.2 million for first quarter 2000. The Company closed 347 homes during first
quarter 2001 compared to 359 homes during first quarter 2000. Included in the
359 first quarter 2000 closings were 19 homes, with a sales value of $3.3
million, sold and leased back by the Company for use as model homes. The
principal reason for the increase in first quarter 2001 revenues was an increase
in the average price of homes delivered in first quarter 2001 compared to first
quarter 2000. During first quarter 2001 the average price of homes delivered
increased to $191,700 compared to $173,000 during first quarter 2000, an
increase of 10.8%. The increase in average delivered home price during first
quarter 2001 reflects the higher FHA lending limits, customer preference for
larger and more expensive homes and the higher cost of home building components,
particularly land costs.
GROSS PROFIT. Gross profit for first quarter 2001 was $15.2 million
compared to $12.0 million for first quarter 2000. The gross profit margin was
22.6% for first quarter 2001 compared to 19.3% for first quarter 2000. The
principal reasons for the improvement in gross profit during first quarter 2001
were the higher average price of homes that closed during the quarter and lower
mortgage contributions paid by the Company due to declining interest rates.
Also, the sale and leaseback of 19 model homes reduced the gross profit margin
by approximately 1.0% during first quarter 2000 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 2001 increased to $10.7 million from $9.0 million for
first quarter 2000. This $1.7 million increase in selling, general and
administrative expense is the result of the operating costs of the Company's new
mortgage services subsidiary and the Company's recently-introduced Independence
series of homes, the expansion of operations in Louisville, Kentucky and an
increase in variable selling, general and administrative expenses. As a
percentage of revenues, selling, general and administrative expense for first
quarter 2001 increased to 15.9% from 14.4% for first quarter 2000.
INTEREST EXPENSE. Interest expense for first quarter 2001 increased to $2.5
million from $1.8 million for first quarter 2000. Interest expense was higher in
first quarter 2001 than first quarter 2000 due to higher average borrowings on
the revolving line of credit and a higher weighted average interest rate. Net
interest capitalized during first quarter 2001 was $360,000 less than during
first quarter 2000. The average revolving line of credit borrowings outstanding
were $116.4 million and $104.6 million for first quarter 2001 and 2000,
respectively. The weighted average rate of interest under the Company's
revolving line of credit was 8.2% for first quarter 2001 compared to 8.0% for
first quarter 2000. As a percentage of revenues, interest expense for first
quarter 2001 increased to 3.7% from 2.8% for first quarter 2000.
PROVISION FOR INCOME TAXES. Income tax expense for first quarter 2001 was
$843,000 compared to $518,000 for first quarter 2000. The Company's estimated
annual effective tax rate was 42.0% for first quarter 2001 and 40.6% for first
quarter 2000.
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SOURCES AND USES OF CASH
FIRST QUARTER 2001 COMPARED TO FIRST QUARTER 2000:
The Company invested $19.0 million of additional cash in operations during
first quarter 2001 compared to $12.8 million invested during first quarter 2000.
The principal reason for the additional investment was to fund growth in real
estate inventories. During first quarter 2001, $22.7 million of the $23.8
million increase in investment real estate inventories was to fund homes under
construction. During first quarter 2000, $10.1 million of the $14.4 million
increase in real estate inventories was used to fund homes under construction.
Net cash used in investing activities during first quarter 2001 was $268,000
compared to $652,000 during first quarter 2000. The Company used additional
financing of $19.6 million during first quarter 2001 compared to $13.5 million
during first quarter 2000, principally to fund 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, 2001, the Company either owned or was under contract to purchase
lots or land that could be developed into approximately 8,000 lots, including
600 lots in Louisville, Kentucky. The Company controlled through option
agreements 7,300 additional lots, including 500 lots in Louisville, Kentucky.
During first quarter 2001, the Company exercised options to purchase 1,076 lots,
including 183 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 $207.2 million at March 31, 2001 from
$183.4 million at December 31, 2000, a $23.8 million increase during first
quarter 2001. The $23.8 million increase in real estate inventories included
increases in homes under construction inventories of $22.7 million, land and
land development inventories of $955,000 and lumber and building supply
inventories of $162,000. 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.
On March 31, 2001, the Company had 150 single family inventory homes in
various stages of construction, which represented an aggregate investment of
$11.7 million. At March 31, 2000, the Company had 97 inventory homes, in various
stages of construction, which represented an aggregate investment of $6.3
million. Inventory homes are not reflected in sales or backlog.
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SELLER-PROVIDED DEBT
The Company reduced seller-provided term debt to $1.5 million at March 31,
2001 from $2.4 million at March 31, 2000. Interest rates on the seller-provided
term debt range from 6.5% to 8.0%.
LAND PURCHASE COMMITMENTS
On March 31, 2001, the Company had commitments to purchase residential lots
and unimproved land at an aggregate cost of $38.4 million, net of $2.9 million
in good faith deposits. The purchase of this land will take place over several
years or may not happen at all due to circumstances such as an inability to
obtain adequate zoning or as a result of voter opposition to land development.
On March 31, 2001, the Company also had $46.7 million of cancelable obligations
to purchase residential lots and unimproved land, net of $2.4 million in good
faith deposits. The Company expects to fund its land acquisition and development
obligations from internally generated cash and from the borrowing capacity it
expects to have available under its bank credit facility. The Company has the
ability to delay or terminate with minimal cost many of its purchase
obligations. In addition, many of the purchase contracts contain contingencies
that delay the completion of the contracts or prevent the contracts from being
completed.
CREDIT FACILITIES
The Company is currently operating under a $150 million Senior Unsecured
Revolving Credit Facility ("the Facility") that was executed on May 29, 1998 and
is described in the Form 10-K for the year ended December 31, 2000. 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 $60 million of borrowings
under the Facility. The interest rate swap contracts mature between May 6, 2003
and March 8, 2004 and fix interest rates between 5.16% and 5.98%, 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. The fair value
of the interest rate swaps was a negative $1.1 million at March 31, 2001.
As of March 31, 2001, the Company was in compliance with Facility covenants
and had $16.0 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 subcontractor
availability when certain trades are not readily available. These costs can
result in lower gross profits.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company has entered into four interest rate swap contracts with
aggregate notional amounts of $60 million, as reflected in the table below.
The Company enters into interest rate swap contracts to minimize earnings
fluctuations caused by interest rate volatility associated with the Company's
variable rate debt. 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 has been considered, is maintained at approximately 50% of total
borrowings under the revolving line of credit facility. The Company does not
enter into derivative financial instrument transactions for speculative
purposes. The interest rate swaps are more fully described below:
AMOUNT DEBT START DATE MATURITY DATE FIXED RATE
----------- ---------- ------------- ----------
$10 million May 6, 1998 May 6, 2003 5.96%
$20 million Dec. 14, 2001 Jan. 12, 2004 5.98%
$20 million Jan. 12, 2001 Jan. 12, 2004 5.62%
$10 million Mar. 8, 2001 Mar. 8, 2004 5.16%
The following table presents descriptions of the financial instruments
and derivative instruments that are held by the Company at March 31, 2001, 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
-------- --------
2001 2002 2003 2004 2001 2000 2001 2000
---- ---- ---- ---- ---- ---- ---- ----
LIABILITIES
Variable rate $126,522 $126,522 $126,522 $126,522 $126,522 $106,425 $126,522 $106,425
Average interest rate 6.75% 6.75% 6.75%
INTEREST-RATE DERIVATIVES
Notional amount $60,000 $60,000 $60,000 $50,000 $60,000 $30,000 ($1,100) $444
Average pay rate 5.72% 5.72% 5.72% 5.67% 5.72% 5.87%
Average receive rate 7.13% 7.13% 7.13% 7.13% 7.13% 6.75%
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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 11, 2001 By: /s/Douglas G. Borror
--------------------
Douglas G. Borror
Duly Authorized Officer
Date: May 11, 2001 By: /s/Jon M. Donnell
-----------------
Jon M. Donnell
Duly Authorized Officer
Date: May 11, 2001 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(a) Amended and Restated Articles of Incorporation of Dominion Homes, Incorporated by reference to
Inc., as filed with the Ohio Secretary of State on March 4, 1994 Exhibit 4(a)(1) to the Company's
Registration Statement on Form S-8
(File No. 333-26817) as filed with the
Commission on May 9, 1997 (the 1997
"Form S-8").
3.1(b) Certificate of Amendment to Amended and Restated Articles of Incorporated by reference to Exhibit
Incorporation of Dominion Homes, Inc., as filed with the Ohio 4(a)2 of the 1997 Form S-8.
Secretary of State on May 7, 1997
3.1(c) Amended and Restated Articles of Incorporation of Dominion Homes, Incorporated by reference to Exhibit
Inc., reflecting amendments through May 7, 1997 (for purposes of 4(a)(3) of the 1997 Form S-8.
Commission reporting compliance only).
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).
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