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, 2002
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
0-23270
Commission File Number
DOMINION HOMES, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1393233
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5501 Frantz Road, Dublin, Ohio
(Address of principal executive offices)
43017-0766
(Zip Code)
(614) 761-6000
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
Number of common shares outstanding as of August 14, 2002: 8,128,691
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOMINION HOMES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
JUNE 30,
2002 DECEMBER 31,
(UNAUDITED) 2001
----------- ------------
ASSETS
Cash and cash equivalents $ 2,836 $ 5,619
Accounts receivable, net:
Trade 433 18
Due from financial institutions for residential closings 2,318 2,864
Real estate inventories:
Land and land development costs 130,189 134,293
Homes under construction 104,571 91,734
Other 4,173 3,997
--------- ---------
Total real estate inventories 238,933 230,024
--------- ---------
Prepaid expenses and other 4,735 3,963
Deferred income taxes 7,016 5,865
Property and equipment, at cost 12,701 12,422
Less accumulated depreciation (6,872) (6,229)
--------- ---------
Net property and equipment 5,829 6,193
--------- ---------
Total assets $ 262,100 $ 254,546
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade $ 12,197 $ 9,483
Deposits on homes under contract 2,711 2,684
Accrued liabilities 28,600 26,943
Note payable, banks 99,362 131,511
Term debt 1,131 2,358
--------- ---------
Total liabilities 144,001 172,979
--------- ---------
Commitments and contingencies
Shareholders' equity
Common shares, without stated value, 12,000,000 shares
authorized, 8,120,751 shares issued and 8,050,231 shares
outstanding on June 30, 2002 and 6,433,057 shares issued
and 6,408,057 shares outstanding on December 31, 2001 59,102 31,850
Deferred compensation (354) (332)
Retained earnings 62,317 51,951
Accumulated other comprehensive loss (1,975) (1,730)
Treasury stock, at cost (70,520 shares at June 30, 2002 and
25,000 shares at December 31, 2001) (991) (172)
--------- ---------
Total shareholders' equity 118,099 81,567
--------- ---------
Total liabilities and shareholders' equity $ 262,100 $ 254,546
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
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DOMINION HOMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues $ 133,162 $ 90,649 $ 231,540 $ 158,011
Cost of real estate sold 103,865 70,066 179,307 122,213
---------- ---------- ---------- ----------
Gross profit 29,297 20,583 52,233 35,798
Selling, general and administrative 15,790 12,826 29,632 23,539
---------- ---------- ---------- ----------
Income from operations 13,507 7,757 22,601 12,259
Interest expense 2,766 2,800 4,865 5,296
---------- ---------- ---------- ----------
Income before income taxes 10,741 4,957 17,736 6,963
Provision for income taxes 4,446 2,083 7,370 2,926
---------- ---------- ---------- ----------
Net income $ 6,295 $ 2,874 $ 10,366 $ 4,037
========== ========== ========== ==========
Earnings per share
Basic $ .96 $ .45 $ 1.59 $ .64
========== ========== ========== ==========
Diluted $ .94 $ .44 $ 1.56 $ .62
========== ========== ========== ==========
Weighted average shares outstanding
Basic 6,572,576 6,354,001 6,519,471 6,353,593
========== ========== ========== ==========
Diluted 6,695,781 6,563,561 6,638,189 6,559,306
========== ========== ========== ==========
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)
(UNAUDITED)
DEFERRED COMPENSATION ACCUMULATED
--------------------- OTHER
COMMON TRUST RETAINED COMPREHENSIVE TREASURY
SHARES LIABILITY SHARES EARNINGS LOSS STOCK TOTAL
------- --------- ------- -------- ------------- -------- ---------
Balance, December 31, 2001 $31,850 $ 834 $(1,166) $51,951 $(1,730) $(172) $ 81,567
Net income -- -- -- 10,366 -- -- 10,366
Unrealized hedging loss, net
of deferred taxes of $164 -- -- -- -- (245) -- (245)
---------
Comprehensive income -- -- -- -- -- -- 10,121
---------
Shares awarded and redeemed 1,042 -- -- -- -- (819) 223
Issuance of common shares 26,210 -- -- -- -- -- 26,210
Shares distributed from trust for
deferred compensation -- (327) 327 -- -- -- --
Deferred compensation -- 140 (162) -- -- -- (22)
------- ----- ------- ------- ------- ----- ---------
Balance June 30, 2002 $59,102 $ 647 $(1,001) $62,317 $(1,975) $(991) $ 118,099
======= ===== ======= ======= ======= ===== =========
The accompanying notes are an integral part of the
consolidated financial statements.
- 4 -
DOMINION HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,366 $ 4,037
Adjustments to reconcile net income to cash provided by
(used in) operating activities
Depreciation and amortization 910 1,012
Issuance of common shares for compensation 30 --
Reserve for real estate inventories 1,380 --
Deferred income taxes (987) (193)
Changes in assets and liabilities:
Accounts receivable 131 (463)
Real estate inventories (10,289) (37,637)
Prepaid expenses and other (462) (343)
Accounts payable 2,714 1,719
Deposits on homes under contract 27 1,047
Accrued liabilities 1,379 2,606
--------- ---------
Net cash provided by (used in) operating activities 5,199 (28,215)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (296) (1,145)
--------- ---------
Net cash used in investing activities (296) (1,145)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on note payable banks (202,248) (137,666)
Proceeds from note payable banks 170,099 168,211
Prepaid loan fees (713) (271)
Payments on term debt (1,031) (167)
Payments on capital lease obligations (196) (174)
Proceeds from issuance of common shares 26,210 --
Common shares purchased or redeemed 193 (14)
--------- ---------
Net cash (used in) provided by financing activities (7,686) 29,919
--------- ---------
Net change in cash and cash equivalents (2,783) 559
Cash and cash equivalents, beginning of period 5,619 2,106
--------- ---------
Cash and cash equivalents, end of period $ 2,836 $ 2,665
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid (net of amounts capitalized) $ 3,868 $ 578
========= =========
Income taxes paid $ 7,905 $ 3,549
========= =========
Land acquired by seller financing $ -- $ 3,750
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
- 5 -
DOMINION HOMES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Dominion
Homes, Inc. and its subsidiaries 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, 2001
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 our December 31, 2001 audited annual financial statements
contained in our December 31, 2001 Annual Report on 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 six months ended June 30, 2002 are
not necessarily indicative of the results of operations to be expected for the
full year.
2. REAL ESTATE INVENTORIES
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS No.144), which addresses accounting and reporting
standards for the impairment or disposal of long-lived assets. In accordance
with SFAS No. 144, the Company evaluates the recoverability of real estate
inventories in accordance with its existing accounting policies. During 2001,
the Company decided to sell certain raw land that was not consistent with
current land development strategies. The carrying value of land held for sale
was approximately $3.7 million at December 31, 2001 and the land was
subsequently sold on April 30, 2002 for approximately $3.8 million. The cost of
this land had been reduced to net realizable value prior to the adoption of SFAS
No. 144.
3. CAPITALIZED INTEREST
The Company capitalizes the cost of interest related to construction costs
during the construction period of homes and land development costs incurred
while development activities on undeveloped land are in process. Capitalized
interest related to housing construction costs is included in interest expense
in the period in which the home is closed. Capitalized interest related to land
under development and construction in progress was $3.1 million and $4.8 million
at June 30, 2002 and 2001, respectively. The summary of total interest is as
follows:
- 6 -
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Interest incurred $ 2,240,000 $ 2,814,000 $ 4,515,000 $ 5,485,000
Interest capitalized (1,131,000) (1,775,000) (2,670,000) (3,463,000)
----------- ----------- ----------- -----------
Interest expensed directly 1,109,000 1,039,000 1,845,000 2,022,000
Previously capitalized interest
charged to interest expense 1,657,000 1,761,000 3,020,000 3,274,000
----------- ----------- ----------- -----------
Total interest expense $ 2,766,000 $ 2,800,000 $ 4,865,000 $ 5,296,000
=========== =========== =========== ===========
4. NOTE PAYABLE, BANKS
The Company is currently operating under a $175.0 million Senior Unsecured
Revolving Credit Facility ("the Facility") that was executed on December 31,
2001 and is described in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001. The Facility was amended on June 10, 2002 to permit the
Company to complete the public offering of its common shares, as described
below. The amendment reduced the minimum ownership interest the Borror Family is
required to hold in the Company under the Facility from 50% to 30%. 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 $70 million of borrowings
under the Facility. The related fair value of these interest rate swaps at June
30, 2002 was a loss of approximately $3.4 million. The interest rate swap
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 an interest coverage
ratio. The variable margin may range from 1.75% to 2.50% and is determined
quarterly.
On June 28, 2002 the Company sold 1,450,000 of its common shares at a
public offering price of $20.00 per share. After expenses the net proceeds added
approximately $26.2 million of additional capital, which has been used to reduce
debt under the Facility. On July 29, 2002, the underwriters exercised their
over-allotment option to purchase 53,900 common shares for additional proceeds
of approximately $1.0 million.
As of June 30, 2002, the Company was in compliance with the Facility
covenants and had $68.3 million available under the Facility, after adjustment
for borrowing base limitations. Borrowing availability under the Facility could
increase, depending on the Company's utilization of the proceeds of borrowings
under the Facility.
- 7 -
5. EARNINGS PER SHARE
A reconciliation of the weighted average common shares used in basic and
diluted earnings per share calculations are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Weighted average shares outstanding
during the period $6,572,576 $6,354,001 $6,519,471 $6,353,593
Assuming exercise of options 123,205 209,560 118,718 205,713
---------- ---------- ---------- ----------
Weighted average shares outstanding
adjusted for common share equivalents $6,695,781 $6,563,561 $6,638,189 $6,559,306
========== ========== ========== ==========
6. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings that arise in the
ordinary course of business, some of which are covered by insurance. In the
opinion of the Company's management, there are no currently pending proceedings
that will have a material adverse effect on the Company's financial condition or
results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading builder of high-quality, single family homes in Central
Ohio (primarily the Columbus Metropolitan Statistical Area) and Louisville,
Kentucky. Our customer-driven focus targets entry-level and move-up buyers. We
offer three distinct series of homes that are differentiated by price, size,
standard features and available options. Our homes range in price from
approximately $100,000 to $300,000 and in size from approximately 1,000 to 3,000
square feet.
We experienced record results during the second quarter of 2002. Net
income for second quarter 2002 increased by 119% to $6.3 million from $2.9
million in second quarter 2001. Fully diluted earnings per share increased to
$0.94 per share for second quarter 2002 compared to $0.44 per share for the same
period the previous year. Net income for the first half of 2002 increased by
157% to $10.4 million from $4.0 million in the first half of 2001. Fully diluted
earnings per share increased to $1.56 per share for the first six months of 2002
compared to $0.62 per share for the same period the previous year.
We believe our success has resulted from our ability to provide a
wide-range of communities and home designs that entry-level and move-up buyers
can afford. In December 2000 we introduced our new Independence Series with
lower prices ranging from approximately $100,000 to $150,000. This new series
has expanded the potential customer base that can afford our homes.
The success of our Independence Series led us in 2001 to reexamine our
mid-priced Century and Celebrity series of homes. We simplified and value
engineered these homes in the creation of the Celebration Series. This series,
which was launched in December 2001, incorporates many popular
- 8 -
home features that are typically offered as options by our competitors. By
decreasing the number of options available to our customers, we have
significantly increased the efficiency of our homebuilding process and lowered
the cost of building our Celebration Series homes. We intend this year to
complete the redesign of our Tradition Series homes to similarly increase
standardization and building efficiencies.
On June 28, 2002 we completed a public offering of 1,450,000 of our common
shares at a public offering price of $20.00 a share. After expenses this added
$26.2 million of additional capital, which has been used to reduce debt under
the Facility. Shareholders' equity at June 30, 2002 was $118.1 million. At June
30, 2002 there were 8,120,751 common shares issued and 8,050,231 common shares
outstanding. In conjunction with the 1,450,000 common shares that we sold, our
Company's majority shareholder, BRC Properties Inc., also sold 300,000 common
shares that it owned.
Following the end of the recent quarter, the underwriters exercised a
portion of the over-allotment option granted in conjunction with the public
offering. On July 29, 2002, the underwriters purchased a total of 107,800
additional common shares, 53,900 of which were purchased from the Company and
53,900 of which were purchased from BRC Properties Inc. The proceeds from the
additional shares purchased from the Company, after expenses, added capital of
$1.0 million, which initially has been used to reduce debt under the Facility.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
This Report contains various "forward-looking statements" within the
meaning of applicable securities laws. Such statements can be identified by the
use of the forward-looking words "anticipate," "estimate," "project," "believe,"
"intend," "expect," "hope" or similar words. These statements discuss future
expectations, contain projections regarding future developments, operations or
financial conditions, or state other forward-looking information. These forward
looking statements involve various important risks, uncertainties and other
factors which could cause our actual results for 2002 and beyond to differ
materially from those expressed in the forward looking statements. These
important factors include the following risks and uncertainties:
- National and local general economic, business and other conditions
- Availability and affordability of residential mortgage financing
- Our significant leverage and dependence on the availability of
financing
- Bank covenants that restrict our operations
- Impact of in-house land acquisition and development and our position
in land and inventory homes
- Impact of governmental regulation and environmental considerations
- Geographic concentration in two markets
- Problems associated with expansion
- Problems associated with introducing new product lines
- Dependency on key personnel
- Fluctuation in the market price of our common shares
- Quarterly variability in operating results
- Unanticipated warranty claims
- Commencement and outcome of litigation
- Development and construction delays
- Impact of competitive products and pricing
- Material and labor shortages
- Impact on contractual provisions of a change in control
- Potential conflicts of interest with, and transactions involving,
our largest shareholder
- 9 -
- Critical accounting policies that are dependent on management
estimates and assumptions
- Impact of our charter documents on takeover proposals
- Other risks described in our Securities and Exchange Commission
filings.
SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS
We experience significant seasonality and quarter-to-quarter variability
in our homebuilding activity. Typically, closings and related revenues increase
in the second half of the year. We believe this seasonality reflects the
tendency of home buyers 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 following table sets forth certain data for each
of the last eight quarters:
SALES BACKLOG
THREE REVENUES CONTRACTS CLOSINGS (AT PERIOD END)
MONTHS ENDED (IN THOUSANDS) (IN UNITS)(1) (IN UNITS) (IN UNITS)
------------ -------------- ------------- ---------- ---------------
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
Dec. 31, 2001 $ 116,637 530 610 1,032
Mar. 31, 2002 $ 98,378 717 518 1,231
June 30, 2002 $ 133,162 625 702 1,154
----------
(1) Net of cancellations.
- 10 -
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
our Consolidated Statements of Operations expressed as percentages of total
revenues, as well as certain operating data:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Financial Data
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of real estate sold 78.0 77.3 77.4 77.3
---------- ---------- ---------- ----------
Gross profit 22.0 22.7 22.6 22.7
Selling, general and administrative 11.9 14.1 12.8 14.9
---------- ---------- ---------- ----------
Income from operations 10.1 8.6 9.8 7.8
Interest expense 2.1 3.1 2.1 3.4
---------- ---------- ---------- ----------
Income before income taxes 8.0 5.5 7.7 4.4
Provision for income taxes 3.3 2.3 3.2 1.8
---------- ---------- ---------- ----------
Net income 4.7% 3.2% 4.5% 2.6%
========== ========== ========== ==========
Operating Data
Homes:
Sales contracts net of cancellations 625 589 1,342 1,295
Closings 702 466 1,220 813
Backlog at period end 1,154 1,259 1,154 1,259
Average sales price of homes closed
during the period (in thousands) $ 185 $ 192 $ 185 $ 192
Average sales value of homes in
backlog at period end (in thousands) $ 194 $ 193 $ 194 $ 193
Aggregate sales value of homes in
backlog at period end (in thousands) $ 223,716 $ 242,693 $ 223,716 $ 242,693
We include a home in "sales contracts" when a home buyer signs our
standard sales contract, which requires a deposit and generally has no
contingencies other than for buyer financing or for the sale of an existing
home, or both. "Closings" or "deliveries" occur when we convey the deed to the
buyer and we receive payment for the home. We recognize revenue and cost of real
estate sold at the time of closing. We include a home in "backlog" when a home
buyer signs our standard sales contract, but the closing has not occurred as of
the end of the period.
Homes included in "sales contracts" in the foregoing table are net of
cancellations. Most cancellations occur when home buyers cannot qualify for
financing. While most cancellations occur prior to the start of construction,
some cancellations occur during the construction process.
We annually incur a substantial amount of indirect construction costs,
which are essentially fixed in nature. For purposes of quarterly financial
reporting, we capitalize 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.
- 11 -
SECOND QUARTER 2002 COMPARED TO SECOND QUARTER 2001
REVENUES. Our revenues for second quarter 2002 increased by 46.9% to
$133.2 million from the delivery of 702 homes compared to revenues for second
quarter 2001 of $90.6 million from the delivery of 466 homes. This $42.6 million
increase in revenues was primarily due to our delivery of 236 more homes. Second
quarter 2001 revenues include eight homes with a sales value of $1.4 million
that we sold and leased back for use as sales models. There were no homes sold
and leased back for use as sales models during second quarter 2002. The increase
in deliveries resulted from the record first quarter 2002 backlog, an increased
number of closings of our new Independence Series of homes which have a shorter
build time than our other series of homes and the mild weather conditions we
experienced during the winter months. The average price of the homes we
delivered during second quarter 2002 decreased to $185,100 from $191,900 during
second quarter 2001. This decrease occurred by design and resulted from the
larger percentage of Independence Series homes that we delivered during second
quarter 2002. The Independence Series homes were introduced in late 2000 as
affordable, entry-level homes. Included in revenues are other revenues,
consisting primarily of revenues from our mortgage financing services
subsidiary. These other revenues during the second quarter of 2002 amounted to
$3.3 million compared to $1.2 million for the second quarter of 2001.
GROSS PROFIT. Our gross profit for second quarter 2002 increased by 42.3%
to $29.3 million from $20.6 million for second quarter 2001. This $8.7 million
increase was primarily due to the delivery of more homes and the increased
revenues from the mortgage financing services subsidiary.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses for second quarter 2002 increased by 23.1% to $15.8
million from $12.8 million for second quarter 2001. This $3.0 million increase
was primarily due to the increased variable costs associated with selling more
homes and operating the mortgage financing services subsidiary.
INTEREST EXPENSE. Our interest expense for second quarter 2002 and second
quarter 2001 remained constant at $2.8 million. Although we incurred slightly
higher average borrowings during second quarter 2002, our weighted average
interest rate was lower than in second quarter 2001. The average borrowings
under our bank credit facility were $131.8 million for second quarter 2002
compared to $131.5 million for second quarter 2001. The weighted average rate of
interest of total borrowings was 6.7% for second quarter 2002 compared to 8.3%
for second quarter 2001.
PROVISION FOR INCOME TAXES. Our income tax expense for second quarter 2002
increased by 113.4% to $4.4 million from $2.1 million for second quarter 2001.
Our estimated annual effective tax rate for second quarter 2002 decreased to
41.4% from 42.0% for second quarter 2001.
FIRST HALF 2002 COMPARED TO FIRST HALF 2001
REVENUES. Our revenues for the first half of 2002 increased by 46.5% to
$231.5 million from the delivery of 1,220 homes compared to revenues for the
first half of 2001 of $158.0 million from the delivery of 813 homes. This $73.5
million increase in revenues is primarily due to our delivery of 407 more homes.
First half 2001 revenues include eight homes with a sales value of $1.4 million
that we sold and leased back for use as sales models. There were no homes sold
and leased back for use as sales
- 12 -
models during the first half of 2002. The increase in first half of 2002
deliveries resulted from the large number of homes we had in backlog at the end
of 2001, an increased number of closings of our new Independence Series homes
which have a shorter build time than our other series of homes and the mild
weather conditions experienced during the winter months. The average price of
homes we delivered during the first half of 2002 decreased to $185,200 from
$191,800 during the first half of 2001. This decrease occurred by design and
resulted from the larger percentage of Independence Series homes that we
delivered during second quarter 2002. The Independence Series homes were
introduced in late 2000 as affordable, entry-level homes. Included in revenues
are other revenues, consisting primarily of revenues from our mortgage financing
services subsidiary. These other revenues during the first half of 2002 amounted
to $5.7 million compared to $2.0 million for the first half of 2001.
GROSS PROFIT. Our gross profit for the first half of 2002 increased by
45.9% to $52.2 million from $35.8 million for the first half of 2001. This $16.4
million increase was primarily due to the delivery of more homes and the
increased revenues from the mortgage financing services subsidiary.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses for the first half of 2002 increased by 25.9% to $29.6
million from $23.5 million for the first half of 2001. This $6.1 million
increase was primarily due to the increased variable costs associated with
selling more homes and operating the mortgage financing services subsidiary.
INTEREST EXPENSE. Our interest expense for the first half of 2002
decreased by 8.1% to $4.9 million from $5.3 million during the first half of
2001. Although we incurred higher average borrowings during the first half of
2002, our weighted average interest rate was lower than in the first half of
2001. The average borrowings under our bank credit facility were $135.1 million
for the first half of 2002 compared to $124.0 million for the first half of
2001. The weighted average rate of interest of total borrowings was 6.7% for the
first half of 2002 compared to 8.6% for the first half of 2001.
PROVISION FOR INCOME TAXES. Our income tax expense for the first half of
2002 increased by 151.9% to $7.4 million from $2.9 million for the first half of
2001. Our estimated annual effective tax rate for the first half of 2002
decreased to 41.6% from 42.0% for the first half of 2001.
LIQUIDITY AND CAPITAL RESOURCES
On June 28, 2002 we completed a public offering of 1,450,000 of our common
shares at a public offering price of $20.00 a share. The offering raised
approximately $26.2 million, net of the underwriter's discount and offering
expenses. We reduced the Facility by the amount of the net sale proceeds, which
lowered our Company's debt to equity ratio at June 29, 2002 to 0.85 to 1.00 from
1.41 to 1.00. Following the end of second quarter 2002, the underwriters
exercised a portion of the over-allotment option granted in conjunction with the
public offering. On July 29, 2002, the underwriters purchased a total of 107,800
additional common shares, 53,900 of which were purchased from our Company and
53,900 of which were purchased from BRC Properties Inc. The additional shares
purchased from the Company added capital of $1.0 million, which was used to
further reduce debt under the Facility.
Historically, our capital needs have depended upon sales volume, asset
turnover, land acquisition and inventory levels. Our traditional sources of
capital have been internally generated cash, bank borrowings and seller-provided
financing of land acquisitions. We have incurred substantial indebtedness in the
past and expect to incur substantial indebtedness in the future to fund our
operations and our investment in land.
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SOURCES AND USES OF CASH
FIRST HALF 2002 COMPARED TO FIRST HALF 2001
During the first six months of 2002, we generated $15.5 million of cash
flow from operations before expenditures on real estate inventories. Our real
estate inventories increased by $10.3 million because homes under construction
increased by $12.8 million and land and land development and other costs
declined by $2.5 million. The sale of common shares raised $26.2 million in cash
after expenses, which together with cash flow from operations, allowed us to
reduce debt under the Facility by $32.1 million.
During the first six months of 2001, we generated $9.4 million of cash
flow from operations before expenditures on real estate inventories. Our real
estate inventories increased by $37.6 million because homes under construction
increased by $30.6 million and land and land development and other costs
increased by $7.0 million. We utilized cash from operations together with $30.5
million of borrowings under our bank credit facility to finance the increase in
real estate inventories.
REAL ESTATE INVENTORIES
We are currently developing approximately 90% of the communities in which
we are building homes. We generally do not purchase land for resale. We attempt
to maintain a land inventory sufficient to meet our anticipated lot needs for
the next three to five years. At June 30, 2002, we owned lots or land that could
be developed into approximately 8,100 lots, including 500 lots in Louisville,
Kentucky. We controlled through option agreements or contingent contracts
approximately 7,900 additional lots, including 600 lots in Louisville, Kentucky.
These option agreements expire at various dates through 2009. During the first
half of 2002, we exercised options to purchase 1,432 lots, including 84 lots in
Louisville, Kentucky. We decide whether to exercise any particular option or
otherwise acquire additional land based upon our assessment of a number of
factors, including our existing land inventory at the time and our evaluation of
the future demand for our homes. Our real estate inventories at June 30, 2002
were $238.9 million, consisting primarily of $130.2 million of land and land
under development and $104.6 million of homes under construction.
LOT SUMMARY AS OF JUNE 30, 2002
The following table sets forth the Company's land inventory as of June 30,
2002:
FINISHED LOTS UNDER UNIMPROVED LAND TOTAL
LAND INVENTORY LOTS DEVELOPMENT ESTIMATED LOTS ESTIMATED LOTS
- ---------------------------- -------- ----------- --------------- --------------
Owned by the Company:
Central Ohio 841 1,553 5,234 7,628
Louisville, Kentucky 137 127 230 494
Controlled by the Company:
Central Ohio -- -- 7,282 7,282
Louisville, Kentucky -- -- 619 619
--- ----- ------ ------
978 1,680 13,365 16,023
=== ===== ====== ======
We selectively enter into joint ventures with other homebuilders to own
and develop communities. The participants in the joint ventures acquire
substantially all of the lots developed by the
- 14 -
joint ventures and fund the development costs of the joint ventures. In certain
cases, we may be liable under debt commitments within the particular joint
venture. As of June 30, 2002, we were party to a joint venture that finances its
own development activities. We have guaranteed the obligations under the joint
venture's loan agreement up to $1.2 million, representing our one-half interest.
At June 30, 2002, the joint venture had $922,600 in loans outstanding and our
portion was $461,300.
On June 30, 2002, we had 163 single-family inventory homes in various
stages of construction, representing an aggregate investment of $12.5 million,
compared to 147 inventory homes in various stages of construction, representing
an aggregate investment of $10.3 million on June 30, 2001. The expansion of our
recently-introduced Independence Series of homes was the major reason for the
increase in the number of inventory homes. We do not include inventory homes in
sales or backlog.
LAND PURCHASE COMMITMENTS
On June 30, 2002, we had commitments to purchase residential lots and
unimproved land at an aggregate cost of $9.7 million, net of approximately
$400,000 in good faith deposits. We intend to purchase this land over the next
few years. On June 30, 2002, we also had $76.4 million of cancelable obligations
to purchase residential lots and unimproved land, net of $1.0 million in good
faith deposits and secured by $1.9 million of performance bonds. Cancelable
obligations consist of options under which we have the right but not the
obligation to purchase land and contingent purchase contracts under which our
obligation to purchase land is subject to the satisfaction of zoning, utility,
environmental, title or other contingencies. We expect to purchase most of the
residential lots and unimproved land that we have under contract, provided we
can obtain adequate zoning and if no other significant obstacles to development
arise. We expect to fund our land acquisition and development obligations from
internally generated cash and from the borrowing capacity under the Facility.
INFLATION AND OTHER COST INCREASES
We are not always able to reflect all of our cost increases in the prices
of our homes because competitive pressures and other factors sometimes require
us to maintain or discount those prices. While we attempt to maintain costs with
subcontractors from the date a sales contract with a customer is accepted until
the date construction is completed, we may incur unanticipated costs 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 us, 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, we may incur additional costs to obtain
subcontractors when certain trades are not readily available, which additional
costs can result in lower gross profits.
DEBT
On December 31, 2001 we entered into an Amended and Restated $175.0
million Senior Unsecured Revolving Credit Facility ("the Facility"). Eight banks
participate in the Facility, led by Huntington National Bank, which serves as
the Administrative Agent and Issuing Bank under the Facility. The Facility was
amended on June 10, 2002 to permit the Company to complete the public offering
of its common shares as described below. The amendment reduced the minimum
ownership interest the Borror Family is required to hold in our Company under
the Facility from 50% to 30%. For a more detailed description of the Bank
Facility, including restrictions on our business activities, see Note 7 to the
Consolidated Financial Statements contained in our Annual Report on Form 10-K
for the year ended December 31, 2001.
- 15 -
On June 28, 2002 the Company sold 1,450,000 of its common shares at a
public offering price of $20.00 per share. After expenses the net proceeds added
approximately $26.2 million of additional capital, which has been used to reduce
debt under the Facility. On July 29, 2002, the Company sold an additional 53,900
of its common shares pursuant to the underwriter's partial exercise of an
over-allotment option granted in conjunction with the public offering. The sale
of these 53,900 common shares added approximately $1.0 million of additional
capital, which has also been used to reduce debt under the Facility.
The Facility provides for a variable rate of interest on our borrowings.
The variable rate is the three month LIBOR rate plus a margin based on our
interest coverage ratio that ranges from 1.75% to 2.5% and is determined
quarterly. In order to reduce the risks caused by interest rate fluctuations, we
have entered into interest rate swap contracts that fix the interest rate on a
portion of our borrowings under the Facility. Additional information regarding
the interest rate swap contracts we have entered into is set forth below under
the heading "Quantitative and Qualitative Disclosures About Market Risk."
As of June 30, 2002, we were in compliance with the Facility covenants and
had $68.3 million available under the Facility, after adjustment for borrowing
base limitations. Borrowing availability under the Facility could increase,
depending on our use of the proceeds of borrowings under the Facility.
As of June 30, 2002, we did not have any seller-provided term debt.
The following is a summary of our contractual cash obligations and other
commercial commitments at June 30, 2002 (in thousands):
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------
LESS THAN AFTER
TOTAL 1 YEAR 1 - 3 YEARS 4 - 5 YEARS 5 YEARS
----- ------ ----------- ----------- -------
TERM OBLIGATIONS:
Notes payable, banks $ 99,362 $ -- $ 99,362 $ -- $ --
Capital lease obligations 1,131 413 718 -- --
Operating leases 9,504 1,426 8,078 -- --
Land purchase commitments 10,073 4,789 5,284 -- --
-------- ------ -------- ----------- -------------
TOTAL CONTRACTUAL CASH OBLIGATIONS $120,070 $6,628 $113,442 $ -- $ --
======== ====== ======== =========== =============
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
--------- -------------------------------------------------------------
TOTAL
AMOUNTS LESS THAN AFTER
COMMITTED 1 YEAR 1 - 3 YEARS 4 - 5 YEARS 5 YEARS
--------- ------ ----------- ----------- -------
OTHER COMMERCIAL COMMITMENTS:
Letters of credit $ 2,134 $1,592 $ 542 $ -- $ --
Performance bonds 29,433 13,987 15,363 83 --
Guarantees 967 967 -- -- --
Cancelable land contracts 77,410 34,155 37,603 1,856 3,796
-------- ------- -------- ----------- -------------
TOTAL COMMERCIAL COMMITMENTS $109,944 $50,701 $ 53,508 $ 1,939 $ 3,796
======== ======= ======== =========== =============
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2002, we were a party to five interest rate swap contracts
with an aggregate notional amount of $70 million, as reflected in the table
below. We enter into swap contracts to minimize earnings fluctuations caused by
interest rate volatility associated with our variable rate debt. The swap
contracts allow us to have variable-rate borrowings and to select the level of
fixed-rate debt for the Company as a whole. Under the swap contracts, we agree
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 on June 30, 2002, after
considering the effect of the swap contracts, is approximately 70% of total
borrowings under our bank credit facility. We do not enter into derivative
financial instrument transactions for speculative purposes. The swap contracts
are more fully described below:
AMOUNT START DATE MATURITY DATE FIXED RATE
------ ---------- ------------- ----------
$10 million May 6, 1998 May 6, 2003 5.96%
$20 million Dec. 14, 2000 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 we held at June 30, 2002. 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. Interest on our variable rate liabilities is LIBOR plus a
variable margin ranging from 1.75% to 2.50%. Cash flows for interest on $70.0
million of the variable rate liabilities subject to interest-rate derivatives is
the contractual average pay rate plus the variable margin (2.0% for the three
months ended June 30, 2002 and 2.25% for the three months ending June 30, 2001).
The notional amount is used to calculate the contractual payments to be
exchanged under the contract. The fair value of the variable rate liabilities at
June 30, 2002 and 2001 was $99.4 million and $136.2 million, respectively.
During the three months ending June 30, 2002, the fair value of the interest
rate contracts decreased by $1.4 million, increasing the fair value loss from
$2.0 million at March 31, 2002 to $3.4 million at June 30, 2002. We do not
expect the loss to be realized because we expect to retain the swap contracts to
maturity. All dollar amounts are in thousands.
TOTAL
-----
2002 2003 2004 2005 2002 2001
---- ---- ---- ---- ---- ----
LIABILITIES
Variable rate $99,362 $99,362 $136,246
Average interest rate 6.03% 6.03% 7.73%
INTEREST-RATE DERIVATIVES
Notional amount $70,000 $70,000 $60,000 $20,000 $70,000 $60,000
Average pay rate 5.44% 5.44% 5.32% 5.98% 5.44% 5.72%
Average receive rate 1.95% 1.95% 1.95% 1.94% 1.95% 5.22%
- 17 -
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are involved in various legal proceedings that arise in the ordinary course
of business, some of which are covered by insurance. In the opinion of our
management, there are no currently pending proceedings that will have a material
adverse effect on our financial condition or results of operations.
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 1, 2002 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 2002 by the following vote:
Shares For Shares Against Shares Abstaining
---------- -------------- -----------------
5,924,701 8,960 100
The shareholders elected as Class II Directors the four nominees of
the Board of Directors by the following vote:
Shares For Shares Withheld
---------- ---------------
Donald A. Borror 5,781,822 151,939
David S. Borror 5,784,422 149,339
Peter A. Klisares 5,910,811 22,950
Gerald E. Mayo 5,910,811 22,950
The term of office of the Class I Directors, Douglas G. Borror, Jon
M. Donnell and C. Ronald Tilley continued after the meeting.
The shareholders approved the adoption of the Dominion Homes, Inc.
Incentive Growth Plan by the following vote:
Shares For Shares Against Shares Abstaining
---------- -------------- -----------------
5,924,701 8,960 100
(d) Not Applicable
- 18 -
ITEM 5. OTHER INFORMATION. The Sierra Club recently filed a lawsuit against the
City of Columbus in Federal District Court (Sierra Club Ohio Chapter v. The City
of Columbus, United States District Court, Southern District of Ohio, Eastern
Division, Case No. C2-02-722) under the Federal Clean Water Act alleging that
the City has unlawfully discharged sanitary sewage during storm events. The
Company is not a party to this lawsuit. The lawsuit seeks various remedies that,
if granted, could restrict the City's ability to permit new connections to the
Columbus sewer system pending the elimination of the discharges. Based on its
review of similar lawsuits and the remedies granted, the Company believes that
it is unlikely that any remedies granted pursuant to this lawsuit would result
in a material adverse affect on the Company's Central Ohio homebuilding
operations. The Company will continue to monitor this lawsuit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS: See attached index (following the signature page).
(b) REPORTS ON FORM 8-K. Not applicable.
- 19 -
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 14, 2002 By: /s/Douglas G. Borror
----------------------------------------
Douglas G. Borror
Chief Executive Officer
Date: August 14, 2002 By: /s/Jon M. Donnell
----------------------------------------
Jon M. Donnell
President and Chief Operating Officer
Date: August 14, 2002 By: /s/Peter J. O'Hanlon
----------------------------------------
Peter J. O'Hanlon
Senior Vice President--Finance and Chief
Financial Officer
(Principal Financial Officer)
- 20 -
INDEX TO EXHIBITS
Exhibit No. Description Location
3.1(a) Amended and Restated Articles of Incorporation Incorporated by reference to
of Dominion Homes, Inc., as filed with the Exhibit 4(a)(1) to the
Ohio Secretary of State on March 4, 1994 Company's Registration
Statement on Form S-8 (File
No. 333-26817) as filed with
the Commission on May 9, 1997
(the "1997 Form S-8").
3.1(b) Certificate of Amendment to Amended and Incorporated by reference to
Restated Articles of Incorporation of Dominion Exhibit 4(a)2 of the 1997 Form
Homes, Inc., as filed with the Ohio Secretary S-8.
of State on May 7, 1997.
3.1(c) Amended and Restated Articles of Incorporation Incorporated by reference to
of Dominion Homes, Inc., reflecting amendments Exhibit 4(a)(3) of the 1997
through May 7, 1997 (for purposes of Form S-8.
Commission reporting compliance only).
3.2 Amended and Restated Code of Regulations of Incorporated by reference to
Dominion Homes, Inc. Exhibit 3.2 to the Company's
June 30, 2000 Form 10-Q (File
No. 0-23270).
4.1 Specimen of Stock Certificate of Dominion Incorporated by reference to
Homes, Inc. Exhibit 4 to the Company's
March 31, 1997 Form 10-Q (File
No. 0-23270).
10.1 Dominion Homes, Inc. Incentive Growth Plan, Incorporated by reference to
effective as of May 1, 2002 Exhibit 10.2 to the Company's
March 31, 2002 Form 10-Q (File
No. 0-23270).
10.2 Stock Option Agreement, dated May 2, 2002, Incorporated by reference to
between Dominion Homes, Inc. and Pete A. Exhibit 10.3 to the Company's
Klisares (which agreement is substantially the March 31, 2002 Form 10-Q (File
same as Stock Option Agreements entered into No. 0-23270).
between the Company and its other outside,
independent directors, Gerald E. Mayo and C.
Ronald Tilley)
10.3 First Amendment to Amended and Restated Credit Filed Herewith
Agreement dated June 10, 2002, among Dominion
Homes, Inc., The Huntington National Bank, as
administrative and Issuing Agent, and the
Lenders listed therein
99.1 Sarbanes-Oxley certification of Chief Filed Herewith
Executive Officer and Chief Financial Officer
- 21 -