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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
0-23270
Commission File Number
BORROR CORPORATION
------------------------------------------------------
(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 43017-0766
-----------------------------------------
(Address of principal executive offices)
(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 6, 1996: 6,217,820
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BORROR CORPORATION
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 10
PART II OTHER INFORMATION........................................... 18
SIGNATURES ............................................................ 19
INDEX TO EXHIBITS......................................................... 20
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BORROR CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
================================================================================================================
September 30, December 31,
1996 1995
(unaudited)
------------- ------------
ASSETS
Cash and cash equivalents $ 777 $ 207
Notes and accounts receivable, net:
Trade 2,031 1,469
Due from financial institutions for residential closings 1,039 421
Refundable federal income taxes 1,019
Real estate inventories (Note 3):
Land and land development costs 48,411 51,312
Homes under construction 45,990 40,749
Other 2,760 2,416
-------- --------
Total real estate inventories 97,161 94,477
-------- --------
Prepaid expenses and other 1,133 678
Other assets 260 504
Deferred income taxes 703 840
Property and equipment, at cost:
Property and equipment 9,130 9,197
Less accumulated depreciation (4,165) (3,781)
-------- --------
Net property and equipment 4,965 5,416
-------- --------
Total assets $108,069 $105,031
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade $ 7,327 $ 6,444
Deposits on homes under contract 2,010 1,697
Accrued liabilities 7,671 6,333
Note payable, banks (Note 2) 54,799 53,051
Term debt 4,804 8,731
-------- --------
Total liabilities 76,611 76,256
-------- --------
Commitments and contingencies (Note 5)
Shareholders' equity
Common shares, without stated value, 12,000,000 shares authorized,
6,217,820 and 6,213,870 shares issued and outstanding,
respectively 30,433 30,416
Less deferred shares awarded (26) (36)
Retained earnings (deficit) 1,051 (1,605)
-------- --------
Total shareholders' equity 31,458 28,775
-------- --------
Total liabilities and shareholders' equity $108,069 $105,031
======== ========
The accompanying notes are an integral part of the financial statements.
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BORROR CORPORATION
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
==============================================================================================================
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
Revenues $ 45,916 $ 47,764 $ 123,758 $ 128,541
Cost of real estate sold 35,381 40,454 96,323 107,960
---------- ---------- ---------- ----------
Gross profit 10,535 7,310 27,435 20,581
---------- ---------- ---------- ----------
Selling, general and administrative 6,411 6,504 18,232 20,235
---------- ---------- ---------- ----------
Income from operations 4,124 806 9,203 346
Interest expense (Notes 2 and 3) 1,816 2,192 4,932 5,182
---------- ---------- ---------- ----------
Income (loss) before income taxes 2,308 (1,386) 4,271 (4,836)
---------- ---------- ---------- ----------
Provision for income taxes 890 (486) 1,615 (1,571)
---------- ---------- ---------- ----------
Net income (loss) $ 1,418 $ (900) $ 2,656 $ (3,265)
========== ========== ========== ==========
Earnings (loss) per share $ 0.23 $ (0.15) $ 0.43 $ (0.53)
========== ========== ========== ==========
Weighted average shares outstanding 6,217,820 6,206,913 6,216,494 6,197,180
========== ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
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BORROR CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
==================================================================================================================
Common Shares
------------------------- Retained
Deferred Shares Earnings
Shares Amount Awarded (Deficit) Total
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 6,213,870 $ 30,416 $ (36) $ (1,605) $ 28,775
Net income 2,656 2,656
Shares issued - shares awarded 3,950 17 17
Deferred compensation 10 10
- ------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 6,217,820 $ 30,433 $ (26) $ 1,051 $ 31,458
- ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
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BORROR CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
===============================================================================================================
Nine Months Ended
September 30,
1996 1995
------- -------
Cash flows from operating activities:
Net income (loss) $ 2,656 $(3,265)
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation and amortization 763 1,006
Loss on disposal of property and equipment 135
Allowance for doubtful accounts 221 90
Reserve for real estate inventories 244 150
Issuance of common shares 17 54
Deferred income taxes 137 (486)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (1,401) 494
Decrease (increase) in refundable federal income tax 1,019 (1,085)
(Increase) decrease in real estate inventories (2,928) 7,785
(Increase) decrease in prepaid expenses and other (455) 34
Decrease in other assets 77 183
Increase (decrease) in accounts payable 883 (960)
Increase in deposits on homes under contract 313 350
Increase in accrued liabilities 1,338 1,968
------- -------
Net cash provided by operating activities 3,019 6,318
Cash flows from investing activities:
Purchase of property and equipment (270) (526)
------- -------
Net cash used in investing activities (270) (526)
Cash flows from financing activities:
Proceeds from note payable, banks 1,748
Payments on note payable, banks (4,361)
Payments on term debt (3,927) (1,427)
------- -------
Net cash used in financing activities (2,179) (5,788)
------- -------
Net increase in cash and cash equivalents 570 4
Cash and cash equivalents, beginning of period 207 202
------- -------
Cash and cash equivalents, end of period $ 777 $ 206
======= =======
Supplemental disclosures of cash flow information:
Interest paid (net of amounts capitalized) $ 803 $ 1,745
======= =======
Income taxes paid $ 1,153 $ 72
======= =======
Supplemental disclosures of non cash financing activities:
Land acquired by purchase contract or seller financing -- $ 3,160
======= =======
The accompanying notes are an integral part of the financial statements.
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BORROR CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all information and
footnotes required by generally accepted accounting principles for
complete financial statements. These financial statements should be read
in conjunction with the December 31, 1995 audited annual financial
statements of Borror Corporation contained in its Annual Report to
Shareholders or in its December 31, 1995 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, 1996 are not necessarily indicative of the results to
be expected for the full year.
Certain reclassifications have been made to the three months and nine
months ended September 30, 1995 financial information to conform to the
September 30, 1996 presentation. These reclassifications relate primarily
to a change of expense from cost of real estate sold to selling, general
and administrative in order to make the Company's financial statements
more comparable to other home building companies.
2. NOTE PAYABLE, BANKS:
The Company's amended and restated loan agreement provides for a
revolving credit facility of $90.0 million. Up to $10 million of this
facility may be used to issue standby letters of credit. This credit
facility matures on June 30, 1997 and is collateralized by mortgages and
security interests on substantially all of the Company's property and
assets. Borrowings under the credit facility bear interest at the prime
commercial rate of interest of the lead bank except that $15.0 million of
borrowings were at 7.1% per annum through August 27, 1995.
In March 1996, the Company amended its revolving credit facility to
require the Company to maintain a minimum tangible net worth as follows:
for the period beginning January 1, 1996, and continuing through and
including September 29, 1996, not less than $27.0 million; beginning
September 30, 1996, and continuing through and including December 31,
1996, not less than the greater of (i) $27.5 million or (ii) the sum of
$27.0 million plus an amount equal to 75% of the Company's net income
after taxes for the period January 1, 1996 through September 30, 1996;
beginning December 31, 1996, and continuing at all times thereafter not
less than the greater of (i) $29.0 million or (ii) the sum of $27.0
million plus an amount equal to 75% of the Company's net income after
taxes for the fiscal year ending December 31, 1996. At September 30, 1996,
the Company had a tangible net worth of $31.5 million.
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BORROR CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
2. NOTE PAYABLE, BANKS (CONT):
In October 1996, the Company reached tentative agreement with its bank
lending group to extend the term of its revolving credit facility from
June 30, 1997 to June 30, 1998. The new agreement is expected to include
terms and conditions similar to the existing agreement. However, it is
expected that new acquisition of land will no longer be specifically
restricted. In addition, it is expected that the ratio of uncommitted land
holdings to tangible net worth will be lowered from the present ratio of
2.00 to 1.00 to 1.75 to 1.00. Completion of the extension agreement is
expected in December 1996.
3. CAPITALIZED INTEREST:
Interest is capitalized on land during the development period and on
housing construction costs during the construction period. Capitalized
interest related to housing construction costs and finished lots is
included in interest expense in the period the home is closed. Capitalized
interest related to land under development and construction in progress
was $2.2 million and $2.9 million at September 30, 1996 and December 31,
1995, respectively. The following table summarizes the activity with
respect to capitalized interest:
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
Interest incurred $ 1,437,000 $ 1,772,000 $ 4,375,000 $ 5,244,000
Interest capitalized (1,080,000) (1,512,000) (3,553,000) (4,439,000)
------------- ------------- ------------- -------------
Interest expensed directly 357,000 260,000 822,000 805,000
Previously capitalized interest
charged to interest expense 1,459,000 1,932,000 4,110,000 4,377,000
------------- ------------- ------------- -------------
Total interest expense $ 1,816,000 $ 2,192,000 $ 4,932,000 $ 5,182,000
============= ============= ============= =============
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4. INCENTIVE STOCK PLAN:
Pursuant to the Borror Corporation Incentive Stock Plan, the Company
granted options on January 2, 1996 to selected Company personnel to
purchase 261,000 common shares and on May 18, 1996 to the Company's
outside directors to purchase 7,500 common shares. All such options were
granted at fair market value as of the grant date. On April 1, 1996 the
Company also awarded shares to selected Company personnel for meritorious
service performed during 1995.
Aggregate activity pursuant to the Incentive Stock Plan since December
31, 1995 consists of the following:
Shares
Options Awarded Total
------- ------- -----
Balance at December 31, 1995 204,000 31,870 235,870
Options granted and shares awarded during period 268,500 3,950 272,450
Options cancelled during period (46,000) (46,000)
------- ------ -------
Balance at September 30, 1996 426,500 35,820 462,320
======= ====== =======
Maximum shares reserved for issuance under this plan are: 500,000
Option prices per share range from $3.25 to $4.50
Common share equivalents in the form of stock options are excluded from
the calculation of weighted average shares outstanding at September 30, 1996,
because the potential dilutive impact from exercising these options would
either be anti-dilutive or have a less than 3% dilutive effect on earnings per
share.
5. LITIGATION:
On August 2, 1995, Lawrence Rothstein, Trustee for the Lawrence
Rothstein Trust, filed a class action in the United States District Court
for the Southern District of Ohio (Case No. C2-95-746), against the
Company, certain of its present and former directors and officers, and the
lead underwriters in the Company's initial public offering. The complaint
seeks to allege that the registration statement for the initial public
offering contained false and misleading statements and seeks to assert
violations of Sections 11, 12(2) and 15 of the Securities Act of 1933. The
complaint seeks unspecified compensatory damages, as well as interest,
costs and such other relief as the court may deem proper. The Company has
filed an answer denying the material allegations of the complaint and
expects to prepare and present a vigorous defense. The suit is now in the
discovery stage.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Although the 30-year fixed rate FHA mortgage interest rates continued to
rise from 7.50% at December 31, 1995 to 8.50% at September 30, 1996, demand for
the Company's homes remained strong as evidenced by the 1,055 sales contracts
recorded by the Company during the first nine months of 1996. The Company's
backlog of 789 homes at September 30, 1996 resulted from the substantial number
of 1996 sales, fewer closings attributed to seasonal weather conditions and
tight subcontractor labor markets.
Gross profit as a percentage of revenues continued to improve over those
reported in previous quarters. Gross profit increased to 22.9% of revenues for
third quarter 1996 compared to 15.3.% of revenues for third quarter 1995. This
improvement reflected more restrictive sales discounting policies and increased
emphasis on direct construction cost controls.
COMPANY OUTLOOK
The Company expects to be solidly profitable during fourth quarter 1996.
However remaining 1996 home closings and resulting revenues will continue to be
influenced by the Company's production capacity, which the Company is striving
to expand. Additionally, in an effort to improve profitability and to better
ensure greater market penetration, the Company is emphasizing the sale of
higher end homes.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
The statements contained in this report under the caption "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 1996 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 and/or an increase in mortgage interest rates, mortgage commitments
that expire prior to homes being delivered, the Company's ability to install
public improvements or build and close homes on a timely basis due to adverse
weather conditions, 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, labor
and financing, the continued availability of credit, the outcome of litigation,
the impact of changes in government regulation, and the other risks described
in the Company's Securities and Exchange Commission filings.
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SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS
The Company has experienced, and expects to continue to experience,
significant seasonality and quarter-to-quarter variability in home-building
activity levels. Closings and revenues normally increase in the third and
fourth quarters. 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 following table sets forth certain data for each of the last nine
quarters:
THREE SALES BACKLOG
MONTHS REVENUES CONTRACT CLOSINGS (AT PERIOD END)
ENDED (IN THOUSANDS) (IN UNITS) (IN UNITS) (IN UNITS)
=============================================================================================================================
Sept. 30, 1994 $46,728 216 326 628
Dec. 31, 1994 $53,585 270 377 521
March 31, 1995 $34,556 306 250 577
June 30, 1995 $46,221 359 325 611
Sept. 30, 1995 $47,764 334 322 623
Dec. 31, 1995 $49,571 254 309 568
March 31, 1996 $36,318 425 255 738
June 30, 1996 $41,524 325 278 785
Sept 30, 1996 $45,916 305 301 789
At September 30, 1996, the aggregate sales value of homes in backlog was
$115,031,000 compared to $83,167,000 at December 31, 1995. The average price of
homes in backlog at September 30, 1996 decreased to $145,793 from $146,421 at
December 31, 1995.
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,
1996 1995 1996 1995
----- ----- ----- -----
Revenues........................................ 100.0% 100.0% 100.0% 100.0%
Cost of real estate sold........................ 77.1 84.7 77.8 84.0
----- ----- ----- -----
Gross profit................................ 22.9 15.3 22.2 16.0
Selling, general & administrative expenses...... 13.9 13.6 14.8 15.7
----- ----- ----- -----
Income from operations...................... 9.0 1.7 7.4 0.3
Interest expense................................ 4.0 4.6 4.0 4.0
Income tax provision (benefit).................. 1.9 (1.0) 1.3 (1.2)
----- ----- ----- -----
Net income (loss)........................... 3.1% (1.9%) 2.1% (2.5%)
===== ===== ===== =====
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THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED
TO THREE MONTHS ENDED SEPTEMBER 30, 1995
REVENUES. Revenues for the third quarter 1996 were $45.9 million compared
to $47.8 million for the third quarter 1995, a $1.9 million or 4.0% decrease.
The Company closed 301 homes during third quarter 1996 compared to 322 homes
closed during third quarter 1995. The decrease in the number of homes closed is
attributed to construction delays due to difficult weather conditions during
the first several months of the current year and to fewer inventory homes
closed in the current period compared to the number closed during third quarter
1995. The average price of homes closed during third quarter 1996 increased to
$148,847 from $144,978 during third quarter 1995, or 2.7%, due to price
increases and reduced sales discounts. Included in revenues are other revenues,
consisting principally of the sale of land and building supplies to other
builders, which amounted to $1.1 million for both third quarter 1996 and third
quarter 1995.
GROSS PROFIT. Gross profit increased to 22.9% of revenues for third
quarter 1996 from 15.3% of revenues for third quarter 1995, an increase of
7.6%. The improved third quarter 1996 gross profit is attributable to price
increases, reduced sales discounts and better control of direct construction
costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses remained relatively stable at $6.4 million for third
quarter 1996 compared to $6.5 million for third quarter 1995. As a percentage
of revenues, selling, general and administrative expenses increased to 13.9%
during third quarter 1996 from 13.6% during third quarter 1995. The increase in
the percentage of selling, general and administrative expenses for third
quarter 1996 is due to reduced sales revenues compared to the same period in
the prior year.
INTEREST EXPENSE. Interest expense charged to operations decreased
$400,000 to $1.8 million for third quarter 1996 compared to $2.2 million for
third quarter 1995. The average revolving line of credit indebtedness
outstanding was $59.2 million and $65.0 million for the third quarter of 1996
and 1995, respectively. The weighted average rate of interest of the Company's
revolving line of credit was 8.8% for the third quarter of 1996 compared to
9.0% for the third quarter of 1995. The change to net capitalized interest
expense between the two quarters remained stable.
PROVISION FOR INCOME TAXES. Income tax expense was $900,000 for the third
quarter of 1996 versus an income tax benefit of $500,000 for the third quarter
of 1995. The Company's effective tax rate increased to 38.6% during the third
quarter 1996 compared to an effective tax benefit rate of 35.1% during the
third quarter 1995 due principally to the inability to utilize certain
deductions for tax purposes during 1995.
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NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED
TO NINE MONTHS ENDED SEPTEMBER 30, 1995
REVENUES. Revenues for the nine months ended September 30, 1996 were
$123.8 million compared to $128.5 million for the nine months ended September
30, 1995, a $4.7 million or 3.7% decrease. The Company closed 834 homes during
the first nine months of 1996 compared to 897 homes during the same period in
1995. The reduction in homes closed during the first nine months of 1996 was
attributed to construction delays due to the difficult weather conditions
experienced by the Company during the first several months of 1996 and to a
larger number of inventory homes closed in the first nine months of 1995
compared to the number closed during the same period in 1996. Although fewer
homes were closed in the first nine months of 1996 than in 1995, the average
price of homes closed increased to $145,171 during the first nine months of
1996 from $140,058 during the first nine months of 1995, or a 3.7% increase
between the two periods. This increase in average sale price was due to price
increases and reduced sales discounts. Included in revenues are other revenues,
consisting principally of the sale of land and building supplies to other
builders, which were $2.7 million for the first nine months of 1996 compared to
$2.9 million for the first nine months of 1995.
GROSS PROFIT. Gross profit increased to 22.2% of revenues for the first
nine months of 1996 from 16.0% for the first nine months of 1995, a 6.2%
improvement. The improvement in gross profit is related to price increases,
reduced sales discounts and better control of direct construction costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $18.2 million for the nine months ended
September 30, 1996 from $20.2 million for the nine months ended September 30,
1995. Selling, general and administrative expenses were 14.8% of revenues for
the first nine months of 1996 compared to 15.7% of revenues for the first nine
months of 1995. The decrease in selling, general and administrative expenses is
primarily attributable to a reduction in personnel expense, media and model
home expense and construction related supplies.
INTEREST EXPENSE. Interest expense for the nine months ended September 30,
1996 decreased to $4.9 million from $5.2 million for the comparable period in
1995. The average revolving line of credit indebtedness outstanding during the
first nine months of 1996 was $58.6 million compared to $70.8 million during
the first nine months of 1995. The weighted average rate of interest of the
Company's revolving line of credit was 8.6% for the nine months ended September
30, 1996 compared to 8.8% for the first nine months of 1995. Interest expense
for the first nine months of 1996 did not reflect the full impact of the lower
average borrowing during the period primarily because the Company recognized
more net capitalized interest expense during the first nine months of 1996
compared to the first nine months of 1995. This additional interest expense
reflected the reduced level of inventory homes and land and land development
costs maintained by the Company during the first nine months of 1996 compared
to the first nine months of 1995.
PROVISION FOR INCOME TAXES. Income tax expense was $1.6 million for the
first nine months of 1996 compared to an income tax benefit of $1.6 million for
the first nine months of 1995. The Company's effective tax rate increased to
37.8% during the first nine months of 1996 compared to an effective tax benefit
rate of 32.5% for the first nine months of 1995 due principally to the
inability to utilize certain deductions for tax purposes during 1995.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's capital needs depend upon its sales volume, asset turnover,
land acquisition and inventory levels. Traditionally, the Company's principal
sources of capital have been bank borrowings and internally generated cash.
However, when available, the Company utilizes seller provided financing when
purchasing land for development.
SOURCES AND USES OF CASH
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995:
Net cash provided by operating activities during the first nine months of
1996 was $3.0 million compared to $6.3 million for the comparable period in
1995. Net income for the first nine months of 1996 provided cash flow of $2.7
million compared to a use of cash resulting from a loss of $3.3 million for the
same period in 1995. In addition, $1.0 million in refundable income taxes were
received in 1996. Also, an increase in accounts payable provided operating
activities with cash flow of $900,000 compared to using cash of $1.0 million in
1995. These amounts were offset by increases in real estate inventories in 1996
of $2.9 million compared to reduced real estate inventories in 1995 of $7.8
million. Additionally, increases in accounts receivable, prepaid expenses and
other resulted in a $1.9 million use of cash in 1996 compared to providing cash
of $528,000 in 1995. Net cash used in investing activities decreased $ 256,000
because of a reduction in expenditures for property and equipment. Net cash
used in financing activities decreased to $2.2 million in 1996 compared to a
$5.8 million reduction in 1995 as a result of increasing real estate
inventories during 1996.
REAL ESTATE INVENTORIES
The Company's practice is to develop most of the lots on which it builds
its homes. Generally, the Company attempts to maintain a land inventory that
will be sufficient to meet its anticipated lot needs for the next three to five
years. At September 30, 1996, the Company, owned or controlled either through
options or contingent contracts, land that could be developed into
approximately 7,400 lots, compared to approximately 8,400 lots at September 30,
1995. Options and contingent contracts expire at varying dates through July 31,
2000. Included in the 7,400 lots at September 30, 1996 and the 8,400 lots at
September 30, 1995 were approximately 4,900 lots and 5,200 lots, respectively,
that the Company either owned or had non-cancellable contracts to purchase. 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, its evaluation of the future demand
for its homes, and the restrictions on land acquisition contained in its loan
agreement.
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REAL ESTATE INVENTORIES (CONT.)
Homes under construction fluctuate depending upon the time of year and the
number of contracts the Company has in backlog. Generally the inventory of
homes under construction increases during the second and third quarters of the
year. However, because of the Company's emphasis on reducing unsold inventory
homes in 1995, the Company actually experienced a decrease in real estate
inventories during the first nine months of 1995. 1996 has been a more typical
year with homes under construction continuing to increase during the third
quarter because of the high volume of construction activity required to
accommodate a larger backlog of contracts. The Company's investment in homes
under construction at September 30, 1996 decreased to $46.0 million from $48.1
million at September 30, 1995.
The Company intends to maintain a limited number of unsold inventory homes
for customers who desire occupancy within 60 to 90 days. However, the Company
carefully monitors the number of unsold inventory homes with the objective of
preventing a build-up of excess unsold inventory. The number of contracts
cancelled by customers with homes under construction impacts the number of
unsold inventory homes and may cause the number of unsold inventory homes to be
more or less than the number the Company feels is optimum. At September 30,
1996, the Company had 111 unsold inventory homes, including 35 condominiums, in
various stages of construction, which represented an aggregate investment of
$6.9 million versus 99 unsold inventory homes, including 44 condominiums, at
September 30, 1995 which represented an aggregate investment of $8.2 million.
These unsold inventory homes are not reflected in 1996 sales or backlog. Also,
included in the real estate inventories are building materials and supplies
stored at the Company's lumber yard site.
Additionally, during the first nine months of 1996, the Company sold 61
lots and 14.6 acres of land to other builders for $1.8 million and the Company
expects to continue to reduce its overall investment in land inventories to the
extent that it is strategically prudent to do so.
SELLER-PROVIDED DEBT
The Company periodically utilizes seller-provided term debt when acquiring
land for development. During the first nine months of 1996 the Company repaid
$3.9 million of seller-provided term debt compared to $2.0 million at September
30, 1996. Interest rates on the seller-provided term debt generally range from
8.0% to 10.0%. The existing seller-provided term debt matures by the year 2000.
In addition to seller-provided financing, the Company also has other term debt
consisting of a first mortgage of $2.8 million on its office facility in
Dublin, Ohio.
LAND PURCHASE COMMITMENTS
At September 30, 1996, the Company had commitments to purchase 87
residential lots and unimproved land at an aggregate cost of $2.9 million, all
of which is expected to be funded by September 1997. In addition, at September
30, 1996, the Company had entered into $ 20.4 million of cancelable obligations
to purchase residential lots and unimproved land in which $600,000 in good
faith deposits had been invested by the Company. Included in the $ 20.4 million
of cancelable purchase obligations are $2.0 million of purchase options with
Borror Realty Company, an affiliate of the Company. The majority of the land
subject to cancelable obligations is for post-1996 development activities. The
Company expects to fund its capital requirements for land acquisition and
development and its obligations under purchase contracts and mortgage notes
from internally generated cash or from the borrowing capacity available under
its bank credit facilities.
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CREDIT FACILITIES
At September 30, 1996, the Company had $7.3 million available under the
revolving credit facility, after adjustment for borrowing base limitations.
However, the capacity for borrowing under the revolving line of credit could
increase depending upon the Company's utilization of the proceeds. The
revolving credit facility matures on June 30, 1997, and is collateralized by
mortgages and security interests which the Company has granted to the banks on
substantially all of its property and assets. The Company believes that its
credit capacity is sufficient to meet expected seasonal demands in construction
activity.
Borrowings under the revolving credit facility bear interest at the prime
commercial rate of interest of the lead bank, which was 8.25% at September 30,
1996. The Company has entered into various agreements which effectively limit
its exposure to interest rate fluctuations on those portions of borrowings
under floating rate interest arrangements. These agreements provide effective
interest rate caps of 9.0% on revolver borrowings of $18.0 million through
September 15, 1997 and on an additional $10.0 million of revolver borrowings
through December 5, 1997. The Company's interest rate floor (collar) agreement
requires that it pay the equivalent of a minimum interest rate of 6.0% on $28.0
million of borrowings through December 5, 1997.
Under the provisions of the revolving credit facility, the Company must
adhere to certain restrictive covenants, including restrictions on the
Company's ability to purchase land, build inventory homes, pay dividends and
incur other borrowings. The most restrictive of these covenants relate to the
maintenance of a maximum total liabilities to tangible net worth ratio and a
minimum tangible net worth. The Company is required to maintain a maximum total
liabilities to tangible net worth ratio of 3.25 to 1.00. However, if the
Company's total liabilities to tangible net worth ratio exceeds 2.25 to 1.00 at
the end of any quarter, the Company must pay escalating fees. These fees are
included in interest expense. The Company had a total liabilities to tangible
net worth ratio of 2.42 to 1.00 at September 30, 1996 compared to 3.00 to 1.00
at September 30, 1995.
In March 1996, the Company amended its revolving credit facility to
require the Company to maintain a minimum tangible net worth as follows: for
the period beginning January 1, 1996, and continuing through and including
September 29, 1996, not less than $27.0 million; beginning September 30, 1996,
and continuing through and including December 31, 1996, not less than the
greater of (i) $27.5 million or (ii) the sum of $27.0 million plus an amount
equal to 75% of the Company's net income after taxes for the period January 1,
1996 through September 30, 1996; beginning December 31, 1996, and continuing at
all times thereafter not less than the greater of (i) $29.0 million or (ii) the
sum of $27.0 million plus an amount equal to 75% of the Company's net income
after taxes for the fiscal year ending December 31, 1996. At September 30,
1996, the Company had a tangible net worth of $31.5 million.
In October 1996, the Company reached tentative agreement with its bank
lending group to extend the term of its revolving credit facility from June 30,
1997 to June 30, 1998. The new agreement is expected to include terms and
conditions similar to the existing agreement. However, it is expected that new
acquisition of land will no longer be specifically restricted. In addition, it
is expected that the ratio of uncommitted land holdings to tangible net worth
will be lowered from the present ratio of 2.00 to 1.00 to 1.75 to 1.00.
Completion of the extension agreement is expected in December 1996.
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INFLATION
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. After a sales contract has
been accepted, the Company is generally able to maintain costs with
subcontractors from the date the sales contract is accepted until the date
construction is completed; however, unanticipated additional costs may be
incurred between the date a sales contract is accepted and the date
construction is completed. In addition, during periods of high construction
activities, costs may be incurred to obtain additional contractors for trades
which are not readily available, and which result in construction cost
variances and lower gross profit margins.
NEW FINANCIAL ACCOUNTING STANDARDS
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." The Statement principally addresses the valuation of
the Company's undeveloped land and land development costs and land and land
development costs in the process of development. The adoption of this statement
did not have an impact on the financial statements.
Additionally, the Company in 1996 adopted Statement of Financial
Accounting Standards No. 123 "Accounting For Stock-Based Compensation."
Generally, this statement requires companies to either recognize or disclose on
a pro forma basis, compensation expense for grants of stock, stock options, and
other equity instruments to employees, based on the new fair value accounting
rules. The Company has elected the pro forma disclosure options under this
statement, and will include all required pro forma disclosures in its Annual
Report for the year ending December 31, 1996.
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BORROR CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On August 2, 1995, Lawrence Rothstein, Trustee for the Lawrence
Rothstein Trust, filed a class action in the United States District
Court for the Southern District of Ohio (Case No. C2-95-746), against
the Company, certain of its present and former directors and officers,
and the lead underwriters in the Company's initial public offering.
The complaint seeks to allege that the registration statement for the
initial public offering contained false and misleading statements and
seeks to assert violations of Sections 11, 12(2) and 15 of the
Securities Act of 1933. The complaint seeks unspecified compensatory
damages, as well as interest, costs and such other relief as the court
may deem proper. The Company has filed an answer denying the material
allegations of the complaint and expects to prepare and present a
vigorous defense. The suit is now in the discovery stage.
Item 2. Change in Securities. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders: Not Applicable
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: See attached index (following the signature page).
(b) Reports on Form 8-K. Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BORROR CORPORATION
(Registrant)
Date: November 8, 1996 By: /s/ Douglas G. Borror
---------------------------------------
Douglas G. Borror
Chief Executive Officer,
President (Principle Executive Officer)
Date: November 8, 1996 By: /s/ Jon M. Donnell
---------------------------------------
Jon M. Donnell
Chief Operating Officer,
Chief Financial Officer
(Principle Financial Officer)
Date: November 8, 1996 By: /s/ Tad E. Lugibihl
---------------------------------------
Tad E. Lugibihl
Controller
(Principal Accounting Officer)
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INDEX TO EXHIBITS
Exhibit No. Description Location
- ----------- ----------- --------
3.1 Amended and Restated Articles of Incorporation of Incorporated by
Borror Corporation reference to Exhibit
3.1 to the Company's
Registration Statement
On Form S-1.
(File No. 33-74298), as
filed with the Commission on
January 21, 1994 and as
amended on March 2,
1994 (the Form S-1").
3.2 Amended and Restated Code of Regulation of Incorporated by
Borror Corporation reference to Exhibit
3.2 to Form S-1.
4. Specimen of Stock Certificate of Borror Corporation Incorporated by
reference to Exhibit 4
to Form S-1.
10.22 Employment Agreement dated May 17, 1996 between Page 21
Borror Corporation and Jon M. Donnell
27. Financial Data Schedule Page 34
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