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, 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.
-------------------------------------------------------
(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
------------------------------
(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 November 12, 2001: 6,407,907
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOMINION HOMES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
September 30, December 31,
2001 2000
(Unaudited)
------------- -------------
ASSETS
Cash and cash equivalents $ 3,303 $ 2,106
Notes and accounts receivable, net:
Trade 301 314
Due from financial institutions for residential closings 305 712
Real estate inventories:
Land and land development costs 122,036 113,186
Homes under construction 98,439 66,669
Other 4,708 4,619
--------- ---------
Total real estate inventories 225,183 184,474
--------- ---------
Prepaid expenses and other 4,047 4,639
Deferred income taxes 4,473 2,967
Property and equipment, at cost 12,005 10,657
Less accumulated depreciation (5,808) (4,676)
--------- ---------
Net property and equipment 6,197 5,981
--------- ---------
Total assets $ 243,809 $ 201,193
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade $ 9,485 $ 5,808
Deposits on homes under contract 2,632 1,804
Accrued liabilities 25,495 16,889
Note payable, banks 125,163 105,701
Term debt 5,025 3,103
--------- ---------
Total liabilities 167,800 133,305
--------- ---------
Commitments and contingencies
Shareholders' equity
Common shares, without stated value, 12,000,000 shares
authorized, 6,432,907 shares issued and 6,407,907 shares
outstanding on September 30, 2001 and 6,407,227 shares
issued and 6,382,227 shares outstanding on December 31, 2000 31,850 31,611
Deferred compensation (520) (376)
Retained earnings 46,743 36,825
Accumulated other comprehensive loss (1,892)
Treasury stock (172) (172)
--------- ---------
Total shareholders' equity 76,009 67,888
--------- ---------
Total liabilities and shareholders' equity $ 243,809 $ 201,193
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
2
DOMINION HOMES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---------- ---------- --------- --------
Revenues $ 121,053 $ 87,547 $ 279,064 $ 226,257
Cost of real estate sold 92,712 69,575 214,925 180,983
---------- ---------- ---------- ----------
Gross profit 28,341 17,972 64,139 45,274
Selling, general and administrative 14,940 9,917 38,479 28,637
---------- ---------- ---------- ----------
Income from operations 13,401 8,055 25,660 16,637
Interest expense 2,970 2,620 8,266 6,354
---------- ---------- ---------- ----------
Income before income taxes 10,431 5,435 17,394 10,283
Provision for income taxes 4,550 2,283 7,476 4,302
---------- ---------- ---------- ----------
Net income $ 5,881 $ 3,152 $ 9,918 $ 5,981
========== ========== ========== ==========
Earnings per share
Basic $ 0.93 $ 0.50 $ 1.56 $ 0.94
========== ========== ========== ==========
Diluted $ 0.89 $ 0.48 $ 1.51 $ 0.92
========== ========== ========== ==========
Weighted average shares outstanding
Basic 6,349,924 6,364,105 6,352,357 6,364,527
========== ========== ========== ==========
Diluted 6,585,335 6,501,552 6,568,799 6,484,667
========== ========== ========== ==========
The accompanying notes are an integral part of the
consolidated financial statements
3
DOMINION HOMES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(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 9,918 9,918
Unrealized hedging loss, net
of deferred taxes (1,986) (1,986)
-----------
Comprehensive income 7,932
-----------
Shares awarded and redeemed 239 (308) (69)
Shares distributed from trust
for deferred compensation (142) 142 --
Deferred compensation 164 164
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2001 $31,850 $642 $(1,162) $46,743 $(1,892) $(172) $76,009
==================================================================================================================================
The accompanying notes are an integral part of the
consolidated financial statements.
4
DOMINION HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
2001 2000
----------- -----------
Cash flows from operating activities:
Net income $ 9,918 $ 5,981
Adjustments to reconcile net income to cash
(used in) operating activities:
Depreciation and amortization 1,647 1,461
Issuance of common shares for compensation 51
Write down of real estate inventories 376
Deferred income taxes (79) (144)
Changes in assets and liabilities:
Notes and accounts receivable 420 (256)
Real estate inventories (36,959) (32,630)
Prepaid expenses and other 373 (2,818)
Accounts payable 3,677 2,293
Deposits on homes under contract 828 677
Accrued liabilities 5,424 4,961
--------- ---------
Net cash used in operating activities (14,751) (20,048)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of property and equipment 38 38
Purchase of property and equipment (1,188) (1,537)
--------- ---------
Net cash used in investing activities (1,150) (1,499)
--------- ---------
Cash flows from financing activities:
Proceeds from note payable, banks 260,205 218,700
Payments on note payable, banks (240,743) (197,340)
Prepaid loan fees (271) (369)
Payments on term debt (1,817) (1,572)
Payments on capital lease obligations (207) (293)
Common shares purchased or redeemed (69) (154)
--------- ---------
Net cash provided by financing activities 17,098 18,972
--------- ---------
Net change in cash and cash equivalents 1,197 (2,575)
Cash and cash equivalents, beginning of period 2,106 2,862
--------- ---------
Cash and cash equivalents, end of period $ 3,303 $ 287
========= =========
Supplemental disclosures of cash flow information:
Interest paid (net of amounts capitalized) $ 2,545 $ 756
========= =========
Income taxes paid $ 8,159 $ 5,448
========= =========
Land acquired by seller financing $ 3,750 $ 321
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
5
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 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 the 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 nine months ended
September 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 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 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 $4.6 million at both September 30, 2001 and September 30, 2000.
The following table summarizes the activity with respect to capitalized
interest:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
----------- ------------ ------------- -------------
Interest incurred $2,697,000 $2,877,000 $8,182,000 $ 7,640,000
Interest capitalized (1,691,000) (1,971,000) (5,154,000) (5,156,000)
----------- ----------- ---------- ------------
Interest expensed directly 1,006,000 906,000 3,028,000 2,484,000
Previously capitalized interest
charged to interest expense 1,964,000 1,714,000 5,238,000 3,870,000
---------- ---------- ---------- -----------
Total interest expense $2,970,000 $2,620,000 $8,266,000 $ 6,354,000
========== ========== ========== =============
6
3. NOTE PAYABLE, BANKS
On May 23, 2001 the Company increased its Senior Unsecured Revolving Credit
Facility ("the Facility") to $175 million from $150 million and modified certain
Facility covenants. The Facility covenants were modified 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. On
October 9, 2001, the Company further modified the Facility to allow creation of
a risk retention entity and to be part of qualified joint ventures on a limited
basis. The original Facility 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 ("Contracts") that fix the interest rate on
$70 million of borrowings under the Facility. The related fair value of these
Contracts at September 30, 2001 was a loss of approximately $3.3 million. The
Contracts mature between May 6, 2003 and January 12, 2005 and fix the interest
rates between 4.54% and 5.98%, 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, 2001, the Company was in compliance with the Facility
covenants and had $30.5 million of borrowing capacity 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 the
Contracts described above under "Note Payable, Banks". The Company seeks to
maintain the notional amount of the Contracts at approximately 50% of its
outstanding debt.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("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 Contracts as cash flow
hedges. The after tax fair value of these Contracts at the date of adoption was
$94,000. The fair value of these Contracts 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 contracts mature or
are terminated. Other comprehensive income or loss is reflected as a component
of shareholders' equity in the accompanying balance sheets. The fair value of
the Contracts is principally impacted by fluctuations in interest rates, which
declined significantly during the nine months ended September 30, 2001. This
decline in interest rates led to an unrealized after tax loss on the Contracts
of approximately $2.0 million. The Company recognized this $2.0 million loss and
a corresponding pre-tax accrued liability of $3.3 million in its September 30,
2001 financial statements. Future fluctuations 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.
7
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
Contracts have been highly 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 Contracts. Hedge effectiveness is measured at
least quarterly based on the relative change in fair value between the Contracts
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 nine months ending September 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 Contract 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 Contract as a hedged instrument is no longer
appropriate. When hedge accounting is discontinued because a Contract qualifying
as a cash flow hedge is liquidated or sold prior to maturity, the gain or loss
on the Contract 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
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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Weighted average shares outstanding
during the period 6,349,924 6,364,105 6,352,357 6,364,527
Assuming exercise of options 235,411 137,447 216,442 120,140
--------- --------- --------- ---------
Weighted average shares outstanding
adjusted for common share equivalents 6,585,335 6,501,552 6,568,799 6,484,667
========= ========= ========= =========
8
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Net income for the three months ended September 30, 2001 increased 86.6% to
$5.9 million, or $.89 per diluted share, from $3.2 million, or $.48 per diluted
share, during the same period a year ago. The increase in net income was largely
due to a 38.3% increase in revenues and a 57.7% increase in gross profit.
Revenues for third quarter 2001 increased to $121.1 million over third quarter
2000 revenues of $87.5 million, a $33.6 million increase. The increase in
revenues was principally due to a larger number, and a higher average sales
price, of homes that closed during third quarter 2001. During third quarter
2001, the Company closed 631 homes with an average sales price of $188,000,
compared to closing 482 homes with an average sales price of $181,400 during
third quarter 2000. Gross profit improved principally due to the larger number
of homes that were closed, the higher average sales price of those homes, higher
mortgage placement revenues, lower customer financing costs paid by the Company
due to declining mortgage rates and improved control of construction costs.
Selling, general and administrative expense during third quarter 2001 increased
to $14.9 million, or 12.3% of sales, from $9.9 million, or 11.3% of sales,
during third quarter 2000. Selling, general and administrative expense increased
principally due to the selling expenses associated with selling a larger number
of homes and more expensive homes and the added general and administrative
expenses of the Company's new mortgage financing services subsidiary. Interest
expense increased to $3.0 million, or 2.5% of sales, during third quarter 2001
from $2.6 million, or 3.0% of sales, during third quarter 2000 due to a higher
average level of debt outstanding, offset by a lower average rate of interest.
The Company incurred higher levels of debt principally to fund a larger backlog
of more expensive homes under construction.
The Company sold 484 homes, with a sales value of $89.7 million, during the
three months ended September 30, 2001, compared to 353 homes, with a sales value
of $67.6 million, sold during the same period the previous year. The aggregate
sales value of the Company's homes in backlog at September 30, 2001 increased to
$214.7 million from $174.0 million at September 30, 2000. The Company had 1,112
homes in backlog with an average selling price of $193,100 at September 30,
2001, compared to 887 homes in backlog with an average selling price of $196,200
at September 30, 2000. The average sales price of the homes in backlog at
September 30, 2001 decreased due the introduction during late 2000 of a more
affordable series of homes, the Independence series, which have sales prices as
low as $100,000.
COMPANY OUTLOOK
The Company expects its fourth quarter 2001 earnings to exceed its previous
year's fourth quarter earnings. However during 2001 the Company successfully
reduced its overall building times, which allowed the Company to close some
homes in earlier quarters than it ordinarily would have closed them. Since the
Company is closing homes sooner and has a very high third quarter comparison of
631 closings, the Company does not expect, unlike in previous years, to close
more homes during the fourth quarter of 2001 than in any of the previous three
quarters.
9
The Company is well positioned for future periods with affordable homes and
attractive mortgage offerings. However, if unemployment rates increase
substantially or consumer confidence continues to erode, the Company's financial
results will be unfavorably impacted and the Company will react accordingly.
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)
=======================================================================================================
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
Sept. 30, 2001 $121,053 484 631 1,112
- -----------------------------
(1) Net of cancellations
10
At September 30, 2001, the aggregate sales value of homes in backlog was
$214.7 million compared to $174.0 million at September 30, 2000. The average
sales value of homes in backlog at September 30, 2001 decreased to $193,100 from
$196,200 at September 30, 2000 due to the more affordable Independence series of
homes that the Company introduced in 2000 and began closing in 2001.
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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
----------- ---------- ----------- --------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of real estate sold 76.6 79.5 77.0 80.0
----- ----- ----- -----
Gross profit 23.4 20.5 23.0 20.0
Selling, general and
administrative expenses 12.3 11.3 13.8 12.7
----- ----- ----- -----
Income from operations 11.1 9.2 9.2 7.3
Interest expense 2.5 3.0 3.0 2.8
----- ----- ----- -----
Income before income taxes 8.6 6.2 6.2 4.5
Provision for income taxes 3.7 2.6 2.7 1.9
----- ----- ----- -----
Net income 4.9% 3.6% 3.5% 2.6 %
===== ===== ===== =====
11
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
REVENUES. Revenues for third quarter 2001 increased 38.3% to $121.1
million, based on 631 closings, from $87.5 million, based on 482 closings, for
third quarter 2000. The increase in revenues is attributable to an increase in
the number of homes closed, an increase in the average price of the homes that
closed and increased revenues from the Company's mortgage financing services
company. The average price of homes that closed during third quarter 2001
increased to $188,000 from $181,400 during third quarter 2000. Included in
revenues were other revenues of $2.5 million, principally from the Company's
mortgage financing services operations
GROSS PROFIT. Gross profit for third quarter 2001 increased 57.7% to $28.3
million from $18.0 million for third quarter 2000. As a percentage of revenues,
gross profit increased to 23.4% for third quarter 2001 from 20.5% for third
quarter 2000. The principal reasons for the increase in third quarter 2001 gross
profit were the larger number of homes closed, the higher average sale price of
those homes, higher mortgage placement revenues, lower customer financing costs
paid by the Company due to declining mortgage rates and improved control of
construction costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for third quarter 2001 increased to $14.9 million from
$9.9 million for third quarter 2000. As a percentage of revenues, selling,
general and administrative expenses increased to 12.3% from 11.3%. 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
added general and administrative expenses of the Company's new mortgage
financing services subsidiary and other variable costs related to the higher
closing volume.
INTEREST EXPENSE. Interest expense for third quarter 2001 was $3.0 million
compared to $2.6 million for third quarter 2000. As a percentage of revenues,
interest expense for third quarter 2001 decreased to 2.5% from 3.0% for third
quarter 2000. Interest expense was slightly higher for third quarter 2001 than
third quarter 2000 because of higher borrowing levels incurred during third
quarter 2001 than 2000. The higher borrowing levels during third quarter 2001
were substantially offset by a lower weighted average interest rate during the
same period. The average revolving line of credit borrowings were $131.2 million
and $115.0 million for third quarter 2001 and 2000, respectively. The weighted
average rate of interest under the Company's revolving line of credit was 7.8%
for third quarter 2001 compared to 9.4% for third quarter 2000.
PROVISION FOR INCOME TAXES. Income tax expense for third quarter 2001 was
$4.6 million compared to $2.3 million for third quarter 2000. The Company's
estimated annual effective tax rate was 43.6% for third quarter 2001 and 42.0%
for third quarter 2000. The increase resulted from certain expected costs not
being deductible for tax purposes.
12
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
REVENUES. Revenues for the nine months ended September 30, 2001 increased
23.3% to $279.1 million, based on 1,444 closings, from $226.3 million, based on
1,284 closings, for the nine months ended September 30, 2000. Closings for the
nine months ended September 30, 2001 included eight model homes with a sales
value of $1.4 million compared to nineteen model homes with a sales value of
$3.2 million closed during the first nine months of 2000. The increase in
revenues is attributable to an increase in the number of homes closed, an
increase in the average price of homes closed and increased revenues from the
Company's new mortgage financing services company. The average price of homes
closed during 2001 increased to $190,100 from $175,900 during the same period in
2000. Included in revenues were other revenues of $4.5 million, principally from
the Company's mortgage financing services operations.
GROSS PROFIT. Gross profit for the first nine months of 2001 increased
41.7% to $64.1 million from $45.3 million for the first nine months of 2000.
Gross profit as a percentage of revenues increased to 23.0% during 2001 compared
to 20.0% during the same period the previous year. The principal reasons for the
increase in the 2001 gross profit were the larger number of homes closed, the
higher average sale price of those homes, higher mortgage placement revenues,
lower customer financing costs paid by the Company due to declining mortgage
rates and better control of construction costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the first nine months of 2001 increased to $38.5
million from $28.6 million for the first nine months of 2000. As a percentage of
revenues, selling, general and administrative expenses for the first nine months
of 2001 increased to 13.8% from 12.7% for the first nine months of 2000. 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 added general and administrative expenses of the Company's new
mortgage financing services subsidiary and other variable costs related to the
higher closing volume.
INTEREST EXPENSE. Interest expense for the first nine months of 2001
increased to $8.3 million from $6.4 million for the first nine months of 2000.
As a percentage of revenues, interest expense for the first nine months of 2001
increased to 3.0% from 2.8% for the first nine months of 2000. Interest expense
for the first nine months of 2001 was higher than the previous year's because of
higher average borrowing levels during the first nine months of 2001 compared to
2000. These higher average borrowing levels were offset by a lower weighted
average rate of interest during 2001. The average revolving line of credit
borrowings outstanding were $126.4 million and $109.1 million for the first nine
months of 2001 and 2000, respectively. The weighted average rate of interest
under the Company's revolving line of credit was 8.3% for the first nine months
of 2001 compared to 9.0% for the first nine months of 2000
PROVISION FOR INCOME TAXES. Income tax expense for the first nine months of
2001 increased to $7.5 million from $4.3 million for the first nine months of
2000. The Company's estimated annual effective tax rate was 43.0% for the first
nine months of 2001 and 41.8% for the first nine months of 2000. The increase
resulted from certain expected costs not being deductible for tax purposes.
13
SOURCES AND USES OF CASH
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
The Company invested $14.8 million in operating activities during the first
nine months 2001 compared to $20.0 million during the first nine months of 2000,
a $5.2 million decrease. The Company increased its investment in real estate
inventories $37.0 million during 2001 compared to $32.6 million during 2000.
However, the increase in real estate inventories was substantially offset by
increased net income of $9.9 million during 2001 compared to $6.0 million during
2000. Of the $37.0 million of new investments in real estate inventories during
2001, $31.8 million was invested in homes under construction, $5.1 million in
land and land development costs and $89,000 in building material inventories.
During the first nine months of 2000, the Company invested $19.0 million in
homes under construction, $12.5 million in land and land development costs and
$1.1 million in building material inventories. Net cash used to purchase
property and equipment during the first nine months of 2001 was $1.2 million
compared to $1.5 million during the first nine months of 2000. The Company used
additional financing of $17.1 million, principally proceeds from its bank
facility, during the first nine months of 2001 compared to $19.0 million during
the first nine 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 September 30, 2001, the Company either owned or was under contract to
purchase lots or land that could be developed into approximately 7,900 lots,
including 650 lots in Louisville, Kentucky. The Company controlled through
option agreements approximately 7,100 additional lots, including 400 lots in
Louisville, Kentucky. The Company typically will not purchase lots until all
zoning approvals have been received. Of the lots under option, approximately
50%, or 3,550 lots, have received zoning approval. 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 September 30, 2001 increased to $225.2 million
from $184.5 million at December 31, 2000. The $40.7 million increase in real
estate inventories included increases in homes under construction of $31.8
million, land and land development inventories of $8.8 million, $3.8 million of
which was seller financed, and lumber and building supply inventories of
$89,000. The increased investment in 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
Central Ohio and Louisville Kentucky. The higher level of land and land
development inventories reflects expanded sales locations in both Central Ohio
and Louisville Kentucky and greater seasonal land development activities.
On September 30, 2001, the Company had 134 inventory homes in various
stages of construction, which represented an aggregate investment of $12.4
million, compared to 128 inventory homes, which represented an aggregate
investment of $9.9 million on September 30, 2000. Inventory homes are not
reflected in sales or backlog.
14
SELLER-PROVIDED DEBT
Seller-provided term debt was $3.9 million at September 30, 2001 compared
to $1.5 million at September 30, 2000. The Company expects to repay $2.3 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%.
LAND PURCHASE COMMITMENTS
At September 30, 2001, the Company had commitments to purchase
approximately 2,200 residential lots at an aggregate cost of $28.1 million, net
of $2.4 million in good faith deposits. In addition, at September 30, 2001, the
Company had $43.4 million of cancelable obligations to purchase residential lots
and unimproved land, net of $2.9 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 extending
through 2009. The Company expects to fund its land acquisition and development
obligations from internally generated cash and from the borrowing capacity under
its bank credit facility. The Company may, with additional cost, delay or
terminate 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 executed.
CREDIT FACILITIES
On May 23, 2001 the Company increased its Senior Unsecured Revolving Credit
Facility ("the Facility") to $175 million from $150 million and modified certain
Facility covenants. The Facility covenants were modified 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. On
October 9, 2001 the Company further modified the Facility to allow creation of a
risk retention entity and to be part of qualified joint ventures on a limited
basis. 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 ("Contracts") that fix the interest rate on
$70 million of borrowings under the Facility. The Contracts mature between May
6, 2003 and January 12, 2005 and fix interest rates between 4.54% 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 Contracts was a loss of $3.3 million at September 30, 2001.
As of September 30, 2001, the Company was in compliance with the
Facility covenants and had $30.5 million of borrowing capacity 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.
15
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.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company has entered into five interest rate swap contracts
("Contracts") with aggregate notional amounts of $70 million, as reflected in
the table below. The Company enters into the contracts to minimize earnings
fluctuations caused by interest rate volatility associated with the Company's
variable rate debt. The 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 the 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 the 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, 2005 5.58%
$10 million Mar. 8, 2001 Mar. 8, 2004 5.16%
$10 million Sept. 12, 2001 Sept. 12, 2004 4.54%
The following table presents descriptions of the financial instruments and
derivative instruments that are held by the Company at September 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 2.50%. The fair value of the derivatives at September 30, 2001 was a
loss of $3.3 million and at September 30, 2000 a gain of $258,000. All amounts
are reflected in U.S. Dollars (thousands).
TOTAL
SEPTEMBER 30,
---------------
2001 2002 2003 2004 2005 2001 2000
---- ---- ---- ---- ---- ---- ----
Liabilities
- -----------
Variable rate $125,163 $125,163 $125,163 $125,163 $125,163 $125,163 $113,668
Average interest rate 7.73% 8.81%
Interest-Rate Derivatives
- -------------------------
Notional amount $70,000 $70,000 $70,000 $60,000 $20,000 $70,000 $30,000
Average pay rate 5.53% 5.53% 5.53% 5.46% 5.58% 5.53% 5.87%
Average receive rate 4.84% 4.84% 4.84% 4.84% 4.84% 4.84% 8.81%
17
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. 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.
18
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 12, 2001 By: /s/DOUGLAS G. BORROR
------------------------------------
Douglas G. Borror
Duly Authorized Officer
Date: November 12, 2001 By: /s/JON M. DONNELL
------------------------------------
Jon M. Donnell
Duly Authorized Officer
Date: November 12, 2001 By /s/PETER J. O'HANLON
-----------------------------------
Peter J. O'Hanlon
Principal Financial Officer
19
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 Incorporated by reference to Exhibit
10 to the Company's June 30, 2001 Form
10-Q (File No. 0-23279)
10.1 Lease dated April 30, 2001 between FGSC, LLC and Dominion Homes of Incorporated by reference to Exhibit
Kentucky, Ltd. for office space in Louisville, Kentucky. 10.1 to the Company's June 30, 2001
Form 10-Q (File No. 0-23279)
10.2* Stock Option Agreement, dated May 3, 2001 between Dominion Homes, Filed herewith
Inc. and Pete A. Klisares (which Agreement is substantially the
same as Stock Option Agreements entered into between the Company
and its other outside independent directors, Gerald Mayo and C.
Ronald Tilley.
10.3 Fifth Amendment to Credit Agreement dated October 9, 2001. Filed herewith
* Indicates management contracts, compensatory plans or other arrangements.
20