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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 March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
0-23270
Commission File Number
DOMINION HOMES, INC.
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(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
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(Address of principal executive offices)
(614) 761-6000
--------------
(Registrant's Telephone Number, Including Area Code)
Borror Corporation
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of common shares outstanding as of May 10, 1997: 6,241,853
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DOMINION HOMES, INC.
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......................................... 17
SIGNATURES .......................................................... 19
INDEX TO EXHIBITS....................................................... 20
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DOMINION HOMES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
================================================================================
March 31, December 31,
1997 1996
(UNAUDITED)
----------- -----------
ASSETS
Cash and cash equivalents $ 226 $ 252
Notes and accounts receivable, net:
Trade 1,388 1,092
Due from financial institutions for residential closings 1,161 589
Real estate inventories:
Land and land development costs 51,042 49,990
Homes under construction 51,567 43,049
Other 2,702 2,351
----------- -----------
Total real estate inventories 105,311 95,390
----------- -----------
Prepaid expenses and other 600 526
Deferred income taxes 1,270 1,270
Property and equipment, at cost 8,806 8,948
Less accumulated depreciation (4,258) (4,241)
------------ ------------
Net property and equipment 4,548 4,707
----------- -----------
Total assets $ 114,504 $ 103,826
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LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade $ 6,100 $ 6,255
Deposits on homes under contract 2,070 1,825
Accrued liabilities 8,566 8,332
Note payable, banks 60,108 49,770
Term debt 4,191 4,793
----------- -----------
Total liabilities 81,035 70,975
----------- -----------
Commitments and contingencies (Note 3)
Shareholders' equity
Common shares, without stated value, 12,000,000 shares authorized
6,239,153 shares issued and outstanding 30,526 30,526
Less deferred compensation (92) (107)
Retained earnings 3,035 2,432
----------- -----------
Total shareholders' equity 33,469 32,851
----------- -----------
Total liabilities and shareholders' equity $ 114,504 $ 103,826
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The accompanying notes are an integral part of the financial statements.
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DOMINION HOMES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
================================================================================
Three Months Ended
March 31,
1997 1996
------------- ---------
Revenues $ 36,997 $ 36,318
Cost of real estate sold 27,717 28,735
----------- -----------
Gross profit 9,280 7,583
Selling, general and administrative 6,798 5,821
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Income from operations 2,482 1,762
Interest expense (Note 2) 1,443 1,510
----------- -----------
Income before income taxes 1,039 252
Provision for income taxes (Note 5) 436 100
----------- -----------
Net income $ 603 $ 152
=========== ===========
Earnings per share (Note 6) $ 0.10 $ 0.02
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Weighted average shares outstanding 6,239,153 6,213,870
=========== ===========
The accompanying notes are an integral part of the financial statements.
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DOMINION HOMES, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
===============================================================================
COMMON SHARES Deferred Retained
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Shares Amount Compensation Earnings Total
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Balance, December 31, 1996 6,239,153 $ 30,526 $ (107) $ 2,432 $ 32,851
Net income 603 603
Deferred compensation 15 15
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Balance, March 31, 1997 6,239,153 $ 30,526 $ (92) $ 3,035 $33,469
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
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DOMINION HOMES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
================================================================================
Three Months Ended
March 31,
1997 1996
------------- ---------
Cash flows from operating activities:
Net income $ 603 $ 152
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation and amortization 235 282
Disposal of property and equipment 46 108
Write-down of accounts receivable 150
Deferred income taxes 92
Changes in assets and liabilities:
Increase in accounts receivable (868) (1,635)
Decrease in refundable federal income tax 1,019
(Increase) decrease in real estate inventories (9,921) 3,586
(Increase) decrease in prepaid expenses and other (120) 160
Decrease in accounts payable (155) (2,588)
Increase in deposits on homes under contract 245 190
Increase (decrease) in accrued liabilities 234 (1,026)
----------- ------------
Net cash (used in) provided by operating activities (9,701) 490
Cash flows from investing activities:
Purchase of property and equipment (61) (48)
------------ ------------
Net cash used in investing activities (61) (48)
Cash flows from financing activities:
Proceeds from note payable banks 10,338 2,413
Payments on term debt (602) (2,855)
------------ ------------
Net cash provided by (used in) financing activities 9,736 (442)
----------- ------------
Net change in cash and cash equivalents (26) 0
Cash and cash equivalents, beginning of period 252 207
----------- -----------
Cash and cash equivalents, end of period $ 226 $ 207
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid (net of amounts capitalized) $ 504 $ 297
=========== ===========
Income taxes paid $ 763 -
=========== ===========
The accompanying notes are an integral part of the financial statements.
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DOMINION HOMES, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
At the Company's annual meeting of shareholders on May 7, 1997, the
name of the Company was changed to Dominion Homes, Inc. from Borror
Corporation.
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, 1996 audited annual financial statements
of Borror Corporation (now Dominion Homes, Inc.) contained in its Annual
Report to Shareholders or in the December 31, 1996 Form 10-K.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for interim
periods. The results of operations for the three months ended March 31,
1997 are not necessarily indicative of the results to be expected for the
full year.
2. CAPITALIZED INTEREST
--------------------
Interest is capitalized on land during the development period and on
housing construction costs during the construction period. As lots are
transferred to homes under construction, the interest capitalized on the
lot during the land development period is included as a cost of the land
and it is expensed through cost of sales when the home is closed.
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
$2.1 million and $2.8 million at March 31, 1997 and March 31, 1996,
respectively. The following table summarizes the activity with respect to
capitalized interest:
Three Months Ended
March 31,
1997 1996
------------- ---------
Interest incurred $ 1,425,000 $ 1,499,000
Interest capitalized (935,000) (1,271,000)
-------------- --------------
Interest expensed directly 490,000 228,000
Previously capitalized interest charged to interest expense 953,000 1,282,000
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Total interest expense $ 1,443,000 $ 1,510,000
============ =============
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3. LITIGATION
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On March 18, 1997, the United States District Court for the Southern
District of Ohio held a hearing to consider approval of a proposed
settlement of a class action that had been filed on August 2, 1995 (Case
No. C2-95-746), against the Company, certain of its present and former
directors and officers, and the lead underwriters in its initial public
offering. There were no objections to the proposed settlement and no class
members requested exclusion from the settlement. A final order from the
Court concerning the proposed settlement is expected shortly. The class
action had alleged that the registration statement for the initial public
offering contained false and misleading statements and asserted violations
of Sections 11, 12(2) and 15 of the Securities Act of 1933. Under the
settlement, the defendants agreed to establish a fund of $2.3 million to
pay certain costs, expenses and attorney fees and to make a distribution to
members of the plaintiff-class. The Company's contribution to the
settlement resulted in a pre-tax charge to fourth quarter 1996 earnings of
$850,000. In entering into the settlement, neither the Company nor the
other defendants admitted liability. Nevertheless, the Company believes
that settlement of the class action was in its best interests in order to
avoid further costs of litigation.
The Company is also involved in various other legal proceedings, most
of which arise in the ordinary course of business and some of which are
covered by insurance. In the opinion of the Company's management, none of
the claims relating to such proceedings will have a material adverse effect
on the financial condition or results of operations of the Company.
4. AFFILIATED ENTITY
-----------------
During the first quarter of 1997 the Company participated in the
creation of a title insurance agency. The title insurance agency was formed
to provide title insurance to the Company's customers and third parties and
to facilitate the closing of the Company's homes. The Company owns 49.9% of
the title insurance agency, which is the largest percentage the Company is
permitted to own under Ohio law. The title insurance agency began operating
April 1, 1997.
5. PROVISION FOR INCOME TAXES
--------------------------
The Company's estimated annual effective tax rate increased to 42.0%
for the first quarter 1997 from 39.7% for the first quarter 1996. The lower
effective tax rate in 1996 was attributable to recognition of state tax
loss carryforwards which have been fully utilized.
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6. EARNINGS PER SHARE
------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per
Share". SFAS No 128 establishes standards for computing and presenting
earnings per share ("EPS") and supersedes APB Opinion No. 15 "Earnings Per
Share" ("Opinion 15"). SFAS No 128 replaces the presentation of primary EPS
with a presentation of basic EPS which excludes dilution and is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding during the period. This statement also
requires dual presentation of basic EPS and diluted EPS on the face of the
income statement for all periods presented. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Opinion 15, with some
modifications. SFAS No. 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods.
Early adoption is not permitted and the statement requires restatement of
all prior EPS data presented after the effective date.
The Company will adopt SFAS No. 128 effective with its 1997 year end.
Pro forma earnings per share data calculated in accordance with this
pronouncement for the three months ended March 31, 1997 and March 31, 1996,
are consistent with the current disclosures.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company closed a first quarter record of 266 homes during the three
months ended March 31, 1997 compared to a previous first quarter record of 255
homes in 1996. Despite the higher number of closings in first quarter 1997,
revenues did not increase proportionately because of a reduction in average
sales price of homes delivered in the first quarter of 1997 compared to 1996.
First quarter 1997 sales of 356 homes represented a strong quarterly showing but
did not match the corporate record of 425 home sales reported in the first
quarter of 1996. The backlog of 778 sales contracts at March 31, 1997
represented an aggregate sales value of $118.0 million compared to the backlog
of 738 sales contracts at March 31, 1996 which represented an aggregate sales
value of $110.7 million.
Gross profit as a percentage of revenues (gross profit margin) improved
significantly to 25.1% for first quarter 1997 from 20.9% for first quarter 1996.
This improvement reflected delivery in 1997 of houses with a lower average sales
price, which typically have a higher gross profit margin, a decrease in the
amount of previously capitalized overhead charged to cost of real estate sold
and a reduction in sales discounts. Selling, general and administrative expenses
increased both in total amount and as a percentage of revenues. This increase is
primarily attributable to additional personnel in the Company's lumber operation
and an increase in the recognition of administrative incentive compensation
which the Company accrues in relationship to earnings.
Effective with the approval of its shareholders on May 7, 1997, the Company
changed its name to Dominion Homes, Inc. (NASDAQ National Market symbol "DHOM")
from Borror Corporation. The change was made to eliminate confusion between its
previous corporate name and the principal name under which it has marketed and
built homes for many years. In addition, the Company believes that it will
realize cost savings associated with promoting a single name.
During the first quarter of 1997, the Company participated in the creation
of a title insurance agency through a limited liability company, Alliance Title
Agency, Ltd. (Alliance). Alliance was formed to provide title insurance to the
Company's customers and third parties and to facilitate the closing of the
Company's homes. The Company has a 49.9% equity interest in Alliance, which is
the largest percentage the Company is permitted to own under Ohio law. The
majority owner of Alliance is a company comprised of Chicago Title Agency of
Ohio, Inc. and one of its former principals. The Company agreed to participate
in Alliance in order to provide better service to its customers and provide an
additional source of income. Alliance began operating April 1, 1997.
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COMPANY OUTLOOK
The Company's strategic decision to start more sold homes late in 1996
combined with favorable weather conditions and an expanded subcontractor base
during first quarter 1997 has increased the Company's production capacity beyond
that of recent years. Consequently, the Company has the production ability to
deliver more homes in 1997 than it did in 1996. This improvement in production
capacity during the early part of 1997 should help relieve, during the later
part of 1997, some of the construction delays and related costs caused by a
restricted labor market that the Company has experienced in the past. In
addition, the Company has been successful in selling many of the inventory homes
the Company started without sales contracts late in 1996. Since the Company does
not plan to immediately replace many of these inventory homes, it expects to
achieve a leveling of production later in the year.
The Company anticipates improving its profitability during 1997 while
maintaining its current share of the Central Ohio market. However the Company
does not expect the gross profit margin to continue the trend reported during
the first quarter of 1997. The gross profit margin reported during the first
quarter of 1997 was favorably affected by the delivery of lower average priced
homes which had a higher gross profit margin.
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 1997 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 homebuilding
activity levels. Typically, closings and related revenues will increase
substantially 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 eight
quarters:
THREE SALES BACKLOG
MONTHS REVENUES CONTRACTS CLOSINGS (AT PERIOD END)
ENDED (IN THOUSANDS) (IN UNITS) (IN UNITS) (IN UNITS)
==================================================================================================
June 30, 1995 $46,221 359 325 611
Sept. 30, 1995 $47,764 334 322 623
Dec. 31, 1995 $49,571 254 309 568
Mar. 31, 1996 $36,318 425 255 738
June 30, 1996 $41,524 325 278 785
Sept. 30, 1996 $45,916 305 301 789
Dec. 31, 1996 $51,821 253 354 688
Mar. 31, 1997 $36,997 356 266 778
At March 31, 1997 the aggregate sales value of homes in backlog was
$118,036,000 compared to $110,736,000 at March 31, 1996.
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
March 31,
1997 1996
----------- --------
Revenues.............................................. 100.0% 100.0%
Cost of real estate sold.............................. 74.9 79.1
---------- --------
Gross profit...................................... 25.1 20.9
Selling, general and administrative expenses.......... 18.4 16.0
---------- --------
Income from operations............................ 6.7 4.9
Interest expense...................................... 3.9 4.2
Income tax provision ................................. 1.2 0.3
---------- --------
Net income ....................................... 1.6% 0.4%
========== =========
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REVENUES. Revenues for first quarter 1997 increased to $37.0 million from
$36.3 million for first quarter 1996. The number of closings during first
quarter 1997 increased to 266 homes from 255 homes during first quarter 1996.
The increase in the number of homes closed in first quarter 1997 was offset by a
lower average home sale price of approximately $1,100 which reduced the average
sales price from $139,427 to $138,327. The primary reason for the lower average
home sales price is that a greater number of smaller homes were closed during
first quarter 1997 compared to first quarter 1996. Included in revenues were
other revenues, consisting of the sale of finished lots and building supplies to
other builders, which were $202,000 for first quarter 1997 compared to $764,000
for first quarter 1996.
GROSS PROFIT. Gross profit for first quarter 1997 increased to $9.3 million
from $7.6 million for first quarter 1996, representing a gross profit margin
improvement of 4.2%. The improvement in first quarter 1997 gross profit is
attributable to a decrease in the amount of previously capitalized overhead
charged to cost of real estate sold, fewer sales discounts, better control of
direct construction costs and generally favorable building conditions. The gross
profit margin was favorably impacted by the delivery of lower average priced
homes as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for first quarter 1997 increased to $6.8 million from
$5.8 million for first quarter 1996. As a percentage of revenues this was an
increase to 18.4% from 16.0%. The increase in selling, general and
administrative expense is primarily attributable to increased personnel in the
Company's lumber operation and an increase in the recognition of administrative
incentive compensation expense which the Company accrues in relationship to
earnings.
INTEREST EXPENSE. Interest expense for first quarter 1997 decreased to $1.4
million from $1.5 million for first quarter 1996, which represents a 0.3%
decrease. The weighted average rate of interest of the Company's revolving line
of credit was 8.8% for the first quarter of 1997 compared to 9.0% for the first
quarter 1996. The average revolving line of credit borrowings outstanding were
$60.2 million and $58.2 million for the first quarter of 1997 and 1996,
respectively.
PROVISION FOR INCOME TAXES. Income tax expense for first quarter 1997
increased to $436,000 from $100,000 for first quarter 1996. This was an increase
of 0.9% of revenues between the two comparable quarters. The Company's estimated
annual effective tax rate increased to 42.0% for first quarter 1997 from 39.7%
for first quarter 1996. The lower effective tax rate in 1996 was attributable to
recognition of state tax loss carryforwards which have been fully utilized.
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SOURCES AND USES OF CASH
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996:
Net cash used in operating activities for first quarter 1997 was $9.7
million compared to $490,000 that was provided by operating activities for first
quarter 1996. Net income for first quarter 1997 provided cash flow of $603,000
compared to $152,000 for first quarter 1996. The primary reason operating
activities required cash in first quarter 1997 was that the inventory of homes
under construction increased by $9.9 million compared to a $3.6 million decrease
in the first quarter of 1996. First quarter 1997 homes under construction
increased because of the large number of homes being built and improved weather
conditions compared to the previous year. The improved weather conditions have
also allowed many homes in inventory to be at a more advanced stage of
construction in 1997 compared to 1996. Net cash used in investing activities was
comparable between the two quarters. The major source of funding for the
increase in homes under construction was additional borrowings under the
revolving line of credit which was $10.3 million in first quarter 1997 compared
to $2.4 million in first quarter 1996. The Company reduced term debt by $602,000
and $2.9 million for first quarter 1997 and 1996, respectively. On a net basis,
financing activities provided cash of $9.7 million for first quarter 1997
compared to using $442,000 for first quarter 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 March 31, 1997, the Company either owned or was under contract to
purchase lots or land that could be developed into approximately 5,100 lots and
the Company controlled through option agreements an additional 2,100 lots.
Included in the 2,100 lots controlled through option agreements are 177 lots
owned by BRC. During first quarter 1997 the Company exercised options to
purchase 391 controlled lots, including 65 lots from BRC. Option agreements
expire at varying dates through August 31, 2002. The Company's decision to
exercise any particular option or otherwise acquire additional land is based
upon an assessment of a number of factors, including its existing land inventory
at the time and its evaluation of the future demand for its homes. During first
quarter 1997, the Company sold six lots to another builder for $154,000.
The Company continued to maintain a relatively stable amount of land and
land development inventory. However, the amount of inventory of homes under
construction increased due to the larger number of homes under construction, the
emphasis the Company placed on accelerating the construction process and
favorable weather conditions.
On March 31, 1997, the Company had 135 inventory homes, including 32
condominiums, in various stages of construction, which represented an aggregate
investment of $9.3 million. At March 31, 1996, the Company had 45 inventory
homes, including 24 condominiums, in various stages of construction, which
represented an aggregate investment of $3.7 million. Inventory homes are not
reflected in sales or backlog. The Company expects to significantly reduce the
number of inventory homes during the second quarter of 1997. The Company
anticipates that this reduction of inventory homes will be accomplished at gross
profit margins consistent with its other home sales.
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SELLER-PROVIDED DEBT
The Company had $1.4 million and $5.9 million of seller-provided term debt
outstanding at March 31, 1997 and 1996 respectively. The Company did not add any
new seller-provided term debt during first quarter 1997. The seller-provided
term debt outstanding at March 31, 1997 had interest rates between 8.0% and
10.0% and maturities that ranged from one to three years.
LAND PURCHASE COMMITMENTS
At March 31, 1997, the Company had commitments to purchase 162 residential
lots and unimproved land at an aggregate cost of $4.3 million, all of which is
expected to be funded prior to December 31, 1998. In addition, at March 31,
1997, the Company had $10.9 million of cancelable obligations to purchase
residential lots and unimproved land in which $500,000 in good faith deposits
had been invested by the Company. Included in the $10.9 million of cancelable
purchase obligations are $700,000 of purchase options with BRC. The majority of
the land subject to cancelable obligations is for post 1997 development
activities. The Company expects to fund its 1997 capital requirements for land
acquisition and development and its obligations under purchase contracts and
mortgage notes from internally generated cash and from the borrowing capacity
available under its bank credit facilities.
CREDIT FACILITIES
At March 31, 1997, the Company had $10.3 million available under its
revolving credit facility, after adjustment for borrowing base limitations.
However, the borrowing availability 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, 1998 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 8.50% at March 31, 1997.
The Company has entered into various agreements which effectively limit its
exposure to interest rate fluctuations on those portions of borrowings under
floating interest rate 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 total liabilities to tangible net worth ratio, an uncommitted land holdings to
tangible net worth ratio and a minimum tangible net worth. The Company is
required to maintain a 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. In the event total liabilities to tangible net worth is equal to or less
than 2.25 to 1.00 at the end of each quarter, the Company is required to pay a
fee on the unused portion of the revolving credit line. 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 March 31, 1997 compared to 2.53 to 1.00 at March 31,
1996.
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The revolving credit facility restricts uncommitted land holdings to
tangible net worth to a ratio that is not greater than 1.75 to 1.00. At March
31, 1997 the Company's ratio of uncommitted land holdings to tangible net worth
was 1.52 to 1.00 compared to 1.68 to 1.00 at March 31, 1996.
The revolving credit facility requires the Company to maintain a minimum
tangible net worth of $30.0 million effective December 31, 1996. At March 31,
1997 the Company had a tangible net worth of $33.4 million compared to $28.7
million at March 31, 1996.
The Company is currently involved in discussions with its lenders to renew
its revolving line of credit.
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 unfavorable construction cost variances
and lower gross profit margins.
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DOMINION HOMES, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On March 18, 1997, the United States District Court for the
Southern District of Ohio held a hearing to consider approval of a
proposed settlement of a class action that had been filed on
August 2, 1995 (Case No. C2-95-746), against the Company, certain
of its present and former directors and officers, and the lead
underwriters in its initial public offering. There were no
objections to the proposed settlement and no class members
requested exclusion from the settlement. A final order from the
Court concerning the proposed settlement is expected shortly. The
class action had alleged that the registration statement for the
initial public offering contained false and misleading statements
and asserted violations of Sections 11, 12(2) and 15 of the
Securities Act of 1933. Under the settlement, the defendants
agreed to establish a fund of $2.3 million to pay certain costs,
expenses and attorney fees and to make a distribution to members
of the plaintiff-class. The Company's contribution to the
settlement resulted in a pre-tax charge to fourth quarter 1996
earnings of $850,000. In entering into the settlement, neither the
Company nor the other defendants admitted liability. Nevertheless,
the Company believes that settlement of the class action was in
its best interests in order to avoid further costs of litigation.
The Company is also involved in various other legal
proceedings, most of which arise in the ordinary course of
business and some of which are covered by insurance. In the
opinion of the Company's management, none of the claims relating
to such proceedings will have a material adverse effect on the
financial condition or results of operations of the Company.
Item 2. Change in Securities. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
On May 7, 1997, the Company held its Annual Meeting of
Shareholders. At the Annual Meeting, the shareholders ratified the
selection of Coopers & Lybrand L.L.P. as independent public
accountants for the Company in 1997 by the following vote:
Shares For Shares Against Shares Abstaining/Withheld
---------- -------------- --------------------------
6,149,250 4,650 5,400
The shareholders elected as Class I Directors the three nominees
of the Board of Directors by the following vote:
Shares For Shares/Abstaining/Withheld
---------- --------------------------
Douglas G. Borror 5,906,479 252,821
Jon M. Donnell 5,906,630 252,670
C. Ronald Tilley 5,906,630 252,670
The term of office of the Class II Directors, Donald A. Borror,
David S. Borror, Gerald E. Mayo and Pete A. Klisares, continued
after the meeting.
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The shareholders approved an amendment to the Company's Article of
Incorporation to change the name of the Company from "Borror
Corporation" to "Dominion Homes, Inc." by the following vote:
Shares For Shares Against Shares Abstaining
---------- -------------- -----------------
6,146,710 8,660 3,930
The shareholders approved an amendment of the Company's Incentive
Stock Plan to increase the number of common shares available for
award from 500,000 to 850,000 shares by the following vote:
Broker
Shares For Shares Against Shares Abstaining Non-Votes
---------- -------------- ----------------- ---------
5,657,063 430,916 3,875 67,446
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: See attached index (following the signature page).
(b) Reports on Form 8-K. Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOMINION HOMES, INC.
(Registrant)
Date: May 13, 1997 By: /s/ Douglas G. Borror
--------------------
Douglas G. Borror
Chief Executive Officer,
President
Date: May 13, 1997 By: /s/ Jon M. Donnell
-----------------
Jon M. Donnell
Chief Operating Officer,
Chief Financial Officer
(Principal Financial Officer)
Date: May 13, 1997 By: /s/ Tad E. Lugibihl
------------------
Tad E. Lugibihl
Controller
(Principal Accounting Officer)
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INDEX TO EXHIBITS
Exhibit No. Description Location
- ----------- ----------- --------
2.1 Corporate Exchange and Subscription Agreement Incorporated by
dated January 20, 1994, between Borror Corporation reference to Exhibit
and Borror Realty Company 2.1 to the Company's
Registration Statement
on Form S-1 (File No.
33-74298) as filed
with the Commission
on January 21, 1994
and as amended on
March 2, 1994
(the "Form S-1").
2.2 Form of First Amendment to Corporate Exchange Incorporated by
and Subscription Agreement reference to Exhibit
2.2 to Form S-1.
3.1 Amended and Restated Articles of Incorporation of Incorporated by
Dominion Homes, Inc., as amended May 7, 1997 reference to Exhibit
4(a)(3) to the Company's
Registration Statement
on Form S-8 (File No.
333-26817) filed with
the Commission on
May 9, 1997
(the "Form S-8").
3.2 Amended and Restated Code of Regulations of Incorporated by
Borror Corporation reference to Exhibit
3.2 to Form S-1.
4. Specimen of Stock Certificate of Dominion Page ________.
Homes, Inc.
10.1 Borror Corporation Incentive Stock Plan, as Incorporated by
amended December 5, 1995 and May 7, 1997 reference to Exhibit
4(c) to Form S-8.
10.2 Shareholder Agreement, dated January 20, 1994, Incorporated by
between Borror Corporation and Borror Realty reference to Exhibit
Company 10.4 to Form S-1.
10.3 Land Option Agreement, dated January 20, 1994, Incorporated by
between Borror Corporation and Borror Realty reference to Exhibit
Company 10.5 to Form S-1.
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10.4 Model Home Lease Agreement, dated January 20, Incorporated by
1994, between Borror Corporation and Borror Realty reference to Exhibit
Company 10.6 to Form S-1.
10.6 Architectural Department Lease Agreement, dated Incorporated by
January 4, 1994, between Borror Corporation and reference to Exhibit
Borror Realty Company 10.9 to Form S-1.
10.7 Open Ended Mortgage and Security Agreement, Incorporated by
dated December 22, 1987, between The Borror reference to Exhibit
Corporation and W. Lyman Case & Company 10.11 to Form S-1.
10.8 Decorating Center Lease Agreement, dated Incorporated by
January 4, 1994, between Borror Corporation and reference to Exhibit
Borror Realty Company, as amended by addendum 10.12 to December 31,
No. 1, effective July 1, 1994 1994 Form 10-K.
10.13 Amended and Restated Loan Agreement, dated August Incorporated by
3, 1995, among Borror Corporation, the lenders listed reference to Exhibit
therein, and The Huntington National Bank, as agent, 10.13 to December
together with First Amendment thereto dated March 31, 1996 Form 10-K.
19, 1996 and Second Amendment thereto dated
November 6, 1996
10.14 Open-End Mortgage, Assignment of Rents and Incorporated by reference
Security Agreement, dated March 2, 1995 among to Exhibit 10.16 to December
Borror Corporation, the lenders listed therein and 31, 1994 Form 10-K.
The Huntington National Bank, as agent
10.15 First Mortgage Modification Agreement, dated Incorporated by reference
August 3, 1995 among Borror Corporation, to Exhibit 10.13. to June 30,
the lenders listed therein and The Huntington 1995 Form 10-Q.
National Bank, as agent
10.16 Open-End Mortgage, Assignment of Rents and Incorporated by reference
Security Agreement, dated August 3, 1995 to Exhibit 10.14. to June 30,
among Borror Corporation, the lenders listed 1995 Form 10-Q.
therein and The Huntington National Bank, as agent
10.17 Agent - Security Agreement - Equipment, Fixtures, Incorporated by reference
Inventory and Accounts, dated August 3, 1995 to Exhibit 10.15. to June 30,
of Borror Corporation in favor of The Huntington 1995 Form 10-Q.
National Bank, Bank, as agent for the lenders
listed therein
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10.18 Incentive Stock Option Agreement, dated Incorporated by reference
January 4, 1995, between Borror Corporation to Exhibit 10.18 to December
and Richard R. Buechler (which agreement 31, 1995 Form 10-K. is
substantially the same as Incentive Stock
Option Agreements entered into between the
Company and other employees to whom
options were granted under the Company's
Incentive Stock Plan)
10.23 Amended and Restated Borror Corporation Incorporated by
Deferred Compensation Plan, dated reference to Exhibit
December 5, 1995 10.9 to December 31,
1995 Form 10-K.
10.24 Employment Agreement, dated February 28, Incorporated by
1995, between Borror Corporation and reference to Exhibit
Richard R. Buechler, as amended March 11, 1996 10.10. to December 31,
1995 Form 10-K.
10.25 Employment Agreement, dated February 28, Incorporated by
1995, between Borror Corporation and reference to Exhibit
Robert A. Meyer, Jr., as amended March 11, 1996 10.11. to December 31,
1995 Form 10-K.
10.26 First Amendment to Lease Agreement dated Incorporated by
March 19, 1996 between Borror Realty reference to Exhibit
Company and Borror Corporation 10.21. to March 31,
1995 Form 10-Q.
10.27 Employment Agreement dated May 17, 1996, Incorporated by
between Borror Corporation and Jon M. Donnell reference to Exhibit
10.22 to September 30,
1996 Form 10-Q.
10.28 First Amendment to May 17, 1996 Employment Incorporated by
Agreement between Borror Corporation reference to Exhibit
and Jon M. Donnell dated November 6, 1996. 10.28 to December
31, 1996 Form 10-K.
10.29 Restricted Stock Agreement dated August 1, 1995 Incorporated by
between Borror Corporation and Jon M. Donnell reference to Exhibit
10.19 to December
31, 1995 Form 10-K.
10.30 Restricted Stock Agreement dated November 6, 1996, Incorporated by
between Borror Corporation and Jon M. Donnell reference to Exhibit
10.30 to December
31, 1996 Form 10-K.
27 Financial Data Schedule Page 23.
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