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 June 30, 2001
or
( ) 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
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(Zip Code)
(614) 761-6000
--------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
--------------
(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 August 13, 2001: 6,407,907
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOMINION HOMES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
June 30, December 31,
2001 2000
(unaudited)
------------- -------------
ASSETS
Cash and cash equivalents $ 2,665 $ 2,106
Notes and accounts receivable, net:
Trade 326 314
Due from financial institutions for residential closings 1,163 712
Real estate inventories:
Land and land development costs 123,633 113,186
Homes under construction 97,290 66,669
Other 4,938 4,619
----------- -----------
Total real estate inventories 225,861 184,474
----------- -----------
Prepaid expenses and other 5,082 4,639
Deferred income taxes 3,686 2,967
Property and equipment, at cost 12,003 10,657
Less accumulated depreciation (5,530) (4,676)
------------ -------------
Net property and equipment 6,473 5,981
----------- -----------
Total assets $ 245,256 $ 201,193
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade $ 7,527 $ 5,808
Deposits on homes under contract 2,851 1,804
Accrued liabilities 20,581 16,889
Note payable, banks 136,246 105,701
Term debt 6,708 3,103
----------- -----------
Total liabilities 173,913 133,305
----------- -----------
Commitments and contingencies
Shareholders' equity
Common shares, without stated value, 12,000,000 shares authorized,
6,438,531 shares issued and 6,413,531 shares outstanding on June 30,
2001 and 6,407,227 shares issued and 6,382,227 shares outstanding on
December 31, 2000 31,905 31,611
Deferred compensation (621) (376)
Retained earnings 40,862 36,825
Accumulated other comprehensive loss (631)
Treasury stock (172) (172)
------------ ------------
Total shareholders' equity 71,343 67,888
----------- -----------
Total liabilities and shareholders' equity $ 245,256 $ 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 INFORMATION)
================================================================================
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues $ 90,649 $ 76,492 $ 158,011 $ 138,710
Cost of real estate sold 70,066 61,189 122,213 111,408
---------- ---------- ---------- ----------
Gross profit 20,583 15,303 35,798 27,302
Selling, general and administrative 12,826 9,752 23,539 18,720
---------- ---------- ---------- ----------
Income from operations 7,757 5,551 12,259 8,582
Interest expense 2,800 1,978 5,296 3,734
---------- ---------- ---------- ----------
Income before income taxes 4,957 3,573 6,963 4,848
Provision for income taxes 2,083 1,501 2,926 2,019
---------- ---------- ---------- ----------
Net income $ 2,874 $ 2,072 $ 4,037 $ 2,829
========== ========== ========== ==========
Earnings per share
Basic $ 0.45 $ 0.33 $ 0.64 $ 0.44
========== ========== ========== ==========
Diluted $ 0.44 $ 0.32 $ 0.62 $ 0.44
========== ========== ========== ==========
Weighted average shares outstanding
Basic 6,354,001 6,367,789 6,353,593 6,364,797
========== ========== ========== ==========
Diluted 6,563,561 6,480,897 6,559,306 6,474,012
========== ========== ========== ==========
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 4,037 4,037
Unrealized hedging loss, net
of deferred taxes (725) (725)
-------
Comprehensive income 3,312
-------
Shares awarded and redeemed 294 (308) (14)
Shares distributed from trust
for deferred compensation (149) 149 -
Deferred compensation 63 63
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 $31,905 $534 $(1,155) $40,862 $(631) $(172) $71,343
==================================================================================================================================
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)
================================================================================
Six Months Ended
June 30,
2001 2000
------------- -------------
Cash flows from operating activities:
Net income $ 4,037 $ 2,829
Adjustments to reconcile net income to cash
used in operating activities:
Depreciation and amortization 1,012 997
Issuance of common shares for compensation 46
Reserve for real estate inventories 210
Deferred income taxes (193) (144)
Changes in assets and liabilities:
Notes and accounts receivable (463) (977)
Real estate inventories (37,637) (20,872)
Prepaid expenses and other (343) (3,133)
Accounts payable 1,719 (614)
Deposits on homes under contract 1,047 794
Accrued liabilities 2,606 2,156
----------- -----------
Net cash used in operating activities (28,215) (18,708)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 38 43
Purchase of property and equipment (1,183) (800)
------------ ------------
Net cash used in investing activities (1,145) (757)
------------ ------------
Cash flows from financing activities:
Proceeds from note payable, banks 168,211 140,464
Payments on note payable banks (137,666) (120,359)
Prepaid loan fees (271) (275)
Payments on term debt (167) (361)
Payments on capital lease obligations (174) (193)
Common shares purchased or redeemed (14) (132)
----------- ------------
Net cash provided by financing activities 29,919 19,144
----------- -----------
Net change in cash and cash equivalents 559 (321)
Cash and cash equivalents, beginning of period 2,106 2,862
----------- -----------
Cash and cash equivalents, end of period $ 2,665 $ 2,541
----------- -----------
Supplemental disclosures of cash flow information:
Interest paid (net of amounts capitalized) $ 336 $ 320
----------- -----------
Income taxes paid $ 3,549 $ 2,511
=========== ===========
Land acquired by seller financing $ 3,750 $ 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 have been prepared in
accordance with accounting principles generally accepted in the United
States of America 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 of America 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
of America. 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 and the six months
ended June 30, 2001 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 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.
Capitalized interest related to housing construction costs are 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 $4.3 million at June 30, 2001 and June 30, 2000,
respectively. The following table summarizes the activity with respect to
capitalized interest:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Interest incurred $ 2,814,000 $ 2,471,000 $ 5,485,000 $ 4,763,000
Interest capitalized (1,775,000) (1,651,000) (3,463,000) (3,184,000)
----------- ----------- ----------- -----------
Interest expensed directly 1,039,000 820,000 2,022,000 1,579,000
Previously capitalized interest
charged to interest expense 1,761,000 1,158,000 3,274,000 2,155,000
----------- ----------- ----------- -----------
Total interest expense $ 2,800,000 $ 1,978,000 $ 5,296,000 $ 3,734,000
=========== =========== =========== ===========
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3. NOTE PAYABLE, BANKS
-------------------
The Company increased its Senior Unsecured Revolving Credit Facility
("the Facility") to $175 million from $150 million on May 23, 2001. The
Company also modified certain Facility covenants to eliminate a reduction
in the uncommitted land to tangible net worth ratio that was scheduled to
go into effect January 1, 2002 and to eliminate a restriction on the amount
of investment the Company was allowed to make in Louisville, Kentucky. The
original Facility 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 $1.2 million at June 30, 2001.
As of June 30, 2001, the Company was in compliance with the Facility
covenants and had $18.0 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. 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 maintain the notional amount
of interest rate swap agreements at approximately 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 of.
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, among other factors, the changing interest
rate environment. During the six months ended June 30, 2001, interest rates
declined significantly causing an unrealized after tax loss on the swap
contracts of approximately $725,000. 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 $1.2 million at June 30, 2001.
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In accordance with the provisions of SFAS 133, the Company recorded the
following adjustments in accumulated other comprehensive loss as of June
30, 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 $593,000 (725,000)
----------
Accumulated other comprehensive loss at June 30, 2001, net of
Deferred taxes of $526,000 $ (631,000)
----------
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 three and six months ending
June 30, 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 or loss 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.
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 Six Months Ended
June 30, June 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Weighted average shares outstanding
during the period 6,354,001 6,367,789 6,353,593 6,364,797
Assuming exercise of options 209,560 113,108 205,713 109,215
--------- --------- --------- ---------
Weighted average shares outstanding
adjusted for common share equivalents 6,563,561 6,480,897 6,559,306 6,474,012
========= ========= ========= =========
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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 June 30, 2001 increased 38% to $2.9
million, or $.44 per diluted share, from $2.1 million, or $.32 per diluted
share, for the previous year. Revenues for second quarter 2001 increased 18% to
$90.6 million, based on 466 closings, compared to revenues of $76.5 million,
based on 443 closings, for second quarter 2000. The improved revenues in the
most recent quarter were due to the larger number of homes that closed and an
increase in the average price of those homes. The average price of homes closed
in second quarter 2001 rose to approximately $195,000 from $172,000 in second
quarter 2000. Gross profit for second quarter 2001 rose to $20.6 million, or
22.7% of revenues, from $15.3 million, or 20.0% of revenues, for second quarter
2000. Gross profit increased principally due to the higher average price of
homes that closed during the period, increased mortgage placement revenues and
lower customer financing costs paid by the Company due to declining mortgage
rates. Second quarter revenues and gross profit were partially offset by a $3.1
million increase in selling, general and administrative expenses and a $822,000
increase in interest expense. Selling, general and administrative expenses
increased principally due to the variable cost associated with selling a larger
number of homes, as well as more expensive homes and the general and
administrative expenses of the Company's new mortgage financing services
subsidiary. Interest expense for second quarter 2001 increased over the previous
year due to higher levels of borrowing caused by increased investment in homes
under construction of $30.6 million and land and land development costs of $10.5
million.
The Company sold 589 homes in second quarter 2001, representing a sales
value of $109.6 million, compared to 420 homes, representing a sales value of
$76.9 million, sold in the same period of the previous year. Home contracts in
backlog increased 23.9% to 1,259 at June 30, 2001 from 1,016 at June 30, 2000.
The aggregate sales value of the Company's homes in backlog at June 30, 2001
increased to $242.7 million from $192.2 million at June 30, 2000. The average
sales price of homes in backlog at June 30, 2001 increased to $192,766 from
$189,168 at June 30, 2000.
COMPANY OUTLOOK
The Company believes that annual financial results for 2001 will be the
best in its history and will result in record revenues and net income. The
Company is well positioned in the second half of the year to close a record
number of homes, with both revenues and gross profit expected to remain strong.
Gross profit as a percentage of revenues however is not expected to remain at
its current level due to stabilizing mortgage rates for its customers and the
Company's recently-introduced lower priced series of homes. Falling mortgage
rates positively impact the Company because interest rates locked at the time of
contract are less expensive at the time of home delivery. Stabilized mortgage
rates do not provide this savings opportunity. The Company's recently-introduced
Independence series of homes, which the Company offers at prices starting at
$99,800, is selling well because of its affordability but does not provide the
Company with as much gross profit as its other series of homes. The Company
believes the introduction of the Independence series allows it to sell to
customers that could not otherwise afford its homes and it does not expect the
Independence series to materially impact sales of its larger or more expensive
homes.
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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 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.
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)
====================================================================================================================
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
June 30, 2001 $90,649 589 466 1,259
- ----------
(1) net of cancellations
At June 30, 2001, the aggregate sales price of homes in backlog was
$242.7 million compared to $192.2 million at June 30, 2000. The average sales
price of homes in backlog at June 30, 2001 increased to $192,766 from $189,168
at June 30, 2000.
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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 Six Months Ended
June 30, June 30,
2001 2000 2001 2000
------ ------ ------ ------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of real estate sold 77.3 80.0 77.3 80.3
------ ------ ------ ------
Gross profit 22.7 20.0 22.7 19.7
Selling, general and
administrative expenses 14.1 12.7 14.9 13.5
------ ------ ------ ------
Income from operations 8.6 7.3 7.8 6.2
Interest expense 3.1 2.6 3.4 2.7
------ ------ ------ ------
Income before income taxes 5.5 4.7 4.4 3.5
Provision for income taxes 2.3 2.0 1.8 1.5
------ ------ ------ ------
Net income 3.2% 2.7% 2.6% 2.0%
====== ====== ====== ======
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THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO
THREE MONTHS ENDED JUNE 30, 2000
REVENUES. Revenues for second quarter 2001 increased 18% to $90.6
million, based on 466 closings, compared to revenues of $76.5 million, based
on 443 closings, during second quarter 2000. Included in second quarter 2001
revenues were eight homes with a sales value of $1.4 million that the
Company sold and leased back for use as sales models. The increase in
revenues is principally due to a 13% increase in the average price of homes
that closed during second quarter 2001, which rose to $195,000 from $172,000
during second quarter 2000. The increase in the average price of homes that
closed during second quarter 2001 reflects higher FHA lending limits,
customer preference for larger and more expensive homes and the higher cost
of home building components, particularly land costs. Included in revenues
were the sale of land and building supplies to other builders of $17,000 and
$230,000 for second quarter 2001 and 2000, respectively.
GROSS PROFIT. Gross profit for second quarter 2001 rose 35% to $20.6
million, or 22.7% of revenues, from $15.3 million, or 20.0% of revenues, for
second quarter 2000. Gross profit improved principally due to the higher
average price of homes that closed, higher mortgage placement revenues and
lower customer financing costs paid by the Company due to declining mortgage
rates.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for second quarter 2001 increased 32% to $12.8
million, or 14.1% of revenues, from $9.8 million, or 12.7% of revenues, for
second quarter 2000. The increase in selling, general and administrative
expenses is a result of variable selling expenses associated with the sale
of a larger number of homes, as well as more expensive homes and the
general and administrative expenses of the Company's new mortgage financing
services subsidiary.
INTEREST Expense. Interest expense for second quarter 2001 increased
42% to $2.8 million, or 3.1% of revenues, from $2.0 million, or 2.6% of
revenues, for second quarter 2000. Interest expense increased due to higher
average revolving line of credit borrowings, which increased to $131.5
million during second quarter 2001 from $107.6 million during second quarter
2000. The higher average revolving line of credit borrowings in second
quarter 2001 were used to finance higher levels of real estate inventories.
The weighted average rate of interest under the Company's revolving line of
credit was 7.7% for second quarter 2001 compared to 8.3% for second quarter
2000
PROVISION FOR INCOME TAXES. Income tax expense for second quarter 2001
increased to $2.1 million from $1.5 million for second quarter 2000. The
Company's estimated annual effective tax rate was 42.0% for second quarter
2001 and 2000, respectively.
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SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO
SIX MONTHS ENDED JUNE 30, 2000
REVENUES. Revenues for the six months ended June 30, 2001 increased 14%
to $158.0 million, based on 813 closings, from $138.7 million, based on 802
closings, for the six months ended June 30, 2000. Included in 2001 revenues
are eight homes with a sales value of $1.4 million that the Company sold and
leased back for use as sales models compared to nineteen homes in 2000 with
a sales value of $3.2 million. The increase in revenues is attributable to a
12% higher average sale price, which increased to $194,000 during the first
six months of 2001 from $173,000 during the first six months of 2000. The
increase in the average sale price during the first six months of 2001
reflects higher FHA lending limits, customer preference for larger and more
expensive homes and the higher cost of home building components,
particularly land costs. Included in revenues were other revenues,
consisting of the sales of land and building supplies to other builders,
which were $50,000 for the first six months of 2001 compared to $350,000 for
the first six months of 2000.
GROSS PROFIT. Gross profit for the first six months of 2001 increased
31% to $35.8 million, or 22.7% of revenues, from $27.3 million, or 19.7% of
revenues, for the first six months of 2000. The gross profit increase
resulted principally from the higher average price of homes that closed,
higher mortgage placement revenues and lower customer financing costs paid
by the Company due to declining mortgage rates.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 26% to $23.5 million, or 14.9% of
revenues, for the first six months of 2001 from $18.7 million, or 13.5% of
revenues, for the first six months of 2000. The increase in selling, general
and administrative expenses is a result of variable selling expenses
associated with the sale of a larger number of homes, as well as more
expensive homes and the general and administrative expenses of the Company's
new mortgage financing services subsidiary.
INTEREST Expense. Interest expense for the first six months of 2001
increased 42% to $5.3 million, or 3.4% of revenues, from $3.7 million, or
2.7% of revenues, for the first six months of 2000. Interest expense
increased due to higher average revolving line of credit borrowings, which
increased to $124.0 million during the first six months of 2001 from $106.1
million during the first six months of 2000. The higher average revolving
line of credit borrowings in the first six months of 2001 were used to
finance increased real estate inventories. The weighted average rate of
interest under the Company's revolving line of credit was 8.0% for the first
six months of 2001 compared to 8.3% for the first six months of 2000.
PROVISION FOR INCOME TAXES. Income tax expense for the first six months
of 2001 increased to $2.9 million from $2.0 million for the first six months
of 2000. The Company's estimated annual effective tax rate was 42.0% for the
first six months of 2001 and 2000, respectively.
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SOURCES AND USES OF CASH
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
The Company invested $28.2 million of additional cash in operations during
the six months ended June 30, 2001 compared to $18.7 million invested during the
six months ended June 30, 2000. The principal reason for the additional
investment in both years was to fund growth in real estate inventories. Funding
of real estate inventories during the first six months of 2001 increased $37.6
million, of which $30.9 was used to fund homes under construction and $6.7
million was used to fund additional land and land development inventories.
Operating cash required to fund the growth in real estate inventories during the
first six months of 2001 was partially offset by gains in net income of $4.0
million, depreciation of $1.0 million and changes in other assets and
liabilities of $4.4 million. During the first six months of 2000, the Company
invested $20.9 million in real estate inventories, of which $16.3 million was
used to fund homes under construction, and $4.6 million was used to fund land
and land development inventories. The Company also invested $1.1 million, net of
proceeds from the disposal of assets, to purchase property and equipment during
the first six months of 2001 compared to a net investment of $757,000 during the
first six months of 2000. The Company used additional financing of $29.9
million, principally proceeds from its bank Facility, during the first six
months of 2001 compared to $19.1 million during the first six months of 2000.
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 June 30, 2001, the Company either owned or was under contract to purchase
lots or land that could be developed into approximately 8,700 lots, including
650 lots in Louisville, Kentucky. The Company controlled through option
agreements approximately 6,400 additional lots, including 450 lots in
Louisville, Kentucky. During second quarter 2001, the Company exercised options
to purchase approximately 900 lots, including 200 lots in Louisville, Kentucky.
Option agreements expire at varying dates through April 2009. 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 June 30, 2001 increased to $225.9 million from
$184.5 million at December 31, 2000. The $41.4 million increase in real estate
inventories included increases in homes under construction of $30.6 million,
land and land development inventories of $10.5 million and lumber and building
supply inventories of $319,000. The higher level of homes under construction
reflects the larger number of homes the Company is building, the increased costs
associated with building more expensive homes and the seasonal nature of
building in the Company's geographic locations. The higher level of land and
land development inventories reflects expanded sales locations in both Ohio and
Kentucky and greater seasonal land development activities.
On June 30, 2001, the Company had 147 inventory homes in various stages of
construction, which represented an aggregate investment of $10.3 million,
compared to 103 inventory homes, which represented an aggregate investment of
$8.4 million on June 30, 2000. Inventory homes are not reflected in sales or
backlog.
SELLER-PROVIDED DEBT
Seller-provided term debt was $5.1 million at June 30, 2001 compared to
$2.7 million at June 30, 2000. The Company expects to repay $3.7 million of the
term debt prior to the end of 2001 and the remaining balance during 2002.
Interest rates range from 6.5% to 8.0%.
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LAND PURCHASE COMMITMENTS
At June 30, 2001, the Company had commitments to purchase approximately
2,800 residential lots at an aggregate cost of $35.2 million, net of $1.8
million in good faith deposits. In addition, at June 30, 2001, the Company had
$38.4 million of cancelable obligations to purchase residential lots and
unimproved land, net of $2.8 million in good faith deposits. The majority of
commitments and cancelable obligations are for post 2001 development activity,
with the commitments extending through 2005 and cancelable obligations through
2009. 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 implementation of the contracts or prevent the contracts from
being implemented.
CREDIT FACILITIES
The Company increased its Senior Unsecured Revolving Credit Facility ("the
Facility") to $175 million from $150 million on May 23, 2001. The Company also
modified certain Facility covenants to eliminate a reduction in the uncommitted
land to tangible net worth ratio that was scheduled to go into effect January 1,
2002 and to eliminate a restriction on the amount of investment the Company was
allowed to make in Louisville, Kentucky. The original Facility 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 $1.2 million at June 30,
2001.
As of June 30, 2001, the Company was in compliance with the Facility
covenants and had $18.0 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.
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 subcontractor
availability when certain trades are not readily available. These costs can
result in lower gross profit.
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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 June 30, 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
JUNE 30, JUNE 30,
-------- --------
2001 2002 2003 2004 2001 2000 2001 2000
---- ---- ---- ---- ---- ---- ---- ----
Liabilities
- -----------
Variable rate $136,246 $136,246 $136,246 $136,246 $136,246 $112,413 $136,246 $112,413
Average interest rate 6.09% 6.09% 8.53%
Interest-Rate Derivatives
- -------------------------
Notional amount $ 60,000 $ 60,000 $ 60,000 $ 50,000 $ 60,000 $ 30,000 ($ 1,157) $ 401
Average pay rate 5.72% 5.72% 5.72% 5.67% 5.72% 5.87%
Average receive rate 6.09% 6.09% 6.09% 6.09% 6.09% 8.53%
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DOMINION HOMES, INC.
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.
(a) On May 2, 2001, the Company held its Annual Meeting of
Shareholders.:
(b) See paragraph C below.
(c) At the Annual Meeting, the shareholders ratified the
selection of PricewaterhouseCoopers LLP as independent public
accountants for the Company in 2001 by the following vote:
Shares For Shares Against Shares Abstaining
---------- -------------- -----------------
5,470,390 43,822 688,910
The shareholders elected as Class I Directors the three nominees
of the Board of Directors by the following vote:
Shares For Shares Withheld
---------- ---------------
Douglas G. Borror 6,193,602 9,520
Jon M. Donnell 6,193,702 9,420
C. Ronald Tilley 6,193,702 9,420
The term of office of the Class II Directors, David S. Borror,
Peter A. Klisares and Gerald E. Mayo continued after the meeting.
(d) Not Applicable
Item 5. Other Information. Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: See attached Index to Exhibits (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: August 13, 2001 By: /s/Douglas G. Borror
------------------------------
Douglas G. Borror
Duly Authorized Officer
Date: August 13, 2001 By: /s/Jon M. Donnell
------------------------------
Jon M. Donnell
Duly Authorized Officer
Date: August 13, 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 (Registration
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
(Registration 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).
10. Fourth Amendment to Credit Agreement Dated May 23, 2001 Filed herewith
10.1 Lease dated April 30, 2001 between FGSC, LLC and Dominion Homes of
Kentucky, Ltd. for office space in Louisville, Kentucky. Filed herewith
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