1
DRAFT 7/31/97
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 June 30, 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.
------------------------------------------------------
(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 July 30, 1997: 6,241,853
2
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...................................................................... 18
SIGNATURES....................................................................................... 19
INDEX TO EXHIBITS................................................................................ 20
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3
DOMINION HOMES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
===============================================================================
June 30, December 31,
1997 1996
(unaudited)
----------- ------------
ASSETS
Cash and cash equivalents $ 252 $ 252
Notes and accounts receivable, net:
Trade 1,792 1,092
Due from financial institutions for residential closings 1,616 589
Real estate inventories:
Land and land development costs 53,986 49,990
Homes under construction 52,398 43,049
Other 2,355 2,351
-------- --------
Total real estate inventories 108,739 95,390
-------- --------
Prepaid expenses and other 119 526
Deferred income taxes 1,470 1,270
Property and equipment, at cost 8,627 8,948
Less accumulated depreciation (4,173) (4,241)
-------- --------
Net property and equipment 4,454 4,707
-------- --------
Total assets $118,442 $103,826
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade $ 8,901 $ 6,255
Deposits on homes under contract 2,202 1,825
Accrued liabilities 9,262 8,332
Note payable, banks 57,992 49,770
Term debt 4,180 4,793
-------- --------
Total liabilities 82,537 70,975
-------- --------
Commitments and contingencies (Note 3)
Shareholders' equity
Common shares, without stated value, 12,000,000 shares authorized
6,241,853 and 6,239,153 shares issued and
outstanding, respectively 30,539 30,526
Less deferred compensation (81) (107)
Retained earnings 5,447 2,432
-------- --------
Total shareholders' equity 35,905 32,851
-------- --------
Total liabilities and shareholders' equity $118,442 $103,826
======== ========
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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Revenues $ 56,672 $ 41,524 $ 93,669 $ 77,842
Cost of real estate sold 42,984 32,207 70,701 60,942
---------- ---------- ---------- ----------
Gross profit 13,688 9,317 22,968 16,900
Selling, general and administrative 7,838 6,000 14,636 11,821
---------- ---------- ---------- ----------
Income from operations 5,850 3,317 8,332 5,079
Interest expense (Note 2) 1,691 1,606 3,134 3,116
---------- ---------- ---------- ----------
Income before income taxes 4,159 1,711 5,198 1,963
Provision for income taxes (Note 5) 1,747 625 2,183 725
---------- ---------- ---------- ----------
Net income $ 2,412 $ 1,086 $ 3,015 $ 1,238
========== ========== ========== ==========
Earnings per share $ 0.38 $ 0.17 $ 0.48 $ 0.20
========== ========== ========== ==========
Weighted average shares outstanding 6,241,230 6,217,777 6,240,197 6,215,823
========== ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
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5
DOMINION HOMES, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
===============================================================================
Common Shares
------------- Deferred Retained
Shares Amount Compensation Earnings Total
- -----------------------------------------------------------------------------------------------
Balance, December 31, 1996 6,239,153 $30,526 $(107) $2,432 $32,851
Net income 3,015 3,015
Shares issued - shares awarded 2,700 13 13
Deferred compensation 26 26
- -----------------------------------------------------------------------------------------------
Balance, June 30, 1997 6,241,853 $30,539 $ (81) $5,447 $35,905
- -----------------------------------------------------------------------------------------------
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)
===============================================================================
Six Months Ended
June 30,
1997 1996
-------- -------
Cash flows from operating activities:
Net income $ 3,015 $ 1,238
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization 479 516
Loss on disposal of property and equipment 56 111
Allowance for doubtful accounts (20) 221
Reserve for real estate inventories 248
Issuance of common shares 13 17
Deferred income taxes (200) 473
Changes in assets and liabilities:
Increase in accounts receivable (1,707) (1,638)
Decrease in refundable federal income tax 1,019
(Increase) decrease in real estate inventories (13,349) 3,186
Decrease (increase) in prepaid expenses and other 301 (149)
Increase (decrease) in accounts payable 2,646 (1,708)
Increase in deposits on homes under contract 377 420
Increase (decrease) in accrued liabilities 930 (94)
-------- -------
Net cash provided by (used in) operating activities (7,459) 3,860
Cash flows from investing activities:
Purchase of property and equipment (164) (152)
Proceeds from sales of property & equipment 14
-------- -------
Net cash used in investing activities (150) (152)
Cash flows from financing activities:
Proceeds from note payable, banks 8,222 209
Payments on term debt (613) (3,917)
-------- -------
Net cash provided by (used in) financing activities 7,609 (3,708)
-------- -------
Net increase in cash and cash equivalents 0 0
Cash and cash equivalents, beginning of period 252 207
-------- -------
Cash and cash equivalents, end of period $ 252 $ 207
======== =======
Supplemental disclosures of cash flow information:
Interest paid (net of amounts capitalized) $ 1,147 $ 497
======== =======
Income taxes paid $ 2,023 --
======== =======
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 and six months
ended June 30, 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 a lot is
transferred to homes under construction, the interest capitalized on the
lot during the land development period is included as a cost of the land
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
$2.0 million and $2.6 million at June 30, 1997 and June 30, 1996,
respectively. The following table summarizes the activity with respect to
capitalized interest:
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---------- ----------- ----------- -----------
Interest incurred $1,571,000 $ 1,438,000 $ 2,996,000 $ 2,937,000
Interest capitalized (928,000) (1,202,000) (1,863,000) (2,473,000)
---------- ----------- ----------- -----------
Interest expensed directly 643,000 236,000 1,133,000 464,000
Previously capitalized interest
charged to interest expense 1,048,000 1,370,000 2,001,000 2,652,000
---------- ----------- ----------- -----------
Total interest expense $1,691,000 $ 1,606,000 $ 3,134,000 $ 3,116,000
========== =========== =========== ===========
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3. LITIGATION
----------
On May 21, 1997, the United States District Court for the Southern
District of Ohio entered a final order approving the 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. The time frame in
which to file an appeal has expired without an appeal having been filed.
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 that began operating on April 1, 1997.
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 and
reports its investment using the equity method of accounting. In the three
months and six months ended June 30, 1997, the Company recognized $90,000
as its share of the earnings from this investment.
5. PROVISION FOR INCOME TAXES
--------------------------
The Company's estimated annual effective tax rate increased to 42.0%
for the second quarter of 1997 from 36.5% for the second quarter of 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.
Supplemental pro forma earnings per share data calculated in accordance
with this pronouncement for the three months ended June 30, 1997 and June
30, 1996, are consistent with the current disclosures and have been
excluded.
7. CREDIT FACILITY
---------------
The Company is continuing to operate under the terms of the revolving
line of credit agreement described in the December 31, 1996 audited annual
financial statements of Borror Corporation (now Dominion Homes, Inc.)
contained in its Annual Report to Shareholders and in the December 31, 1996
Form 10-K. However, subsequent to June 30, 1997 the Company negotiated a
commitment with its banks to renew its $90 million revolving line of credit
through June 30, 2000. The Company expects to have a new revolving line of
credit agreement executed by all parties during the third quarter of 1997.
The new loan commitment contains the following major changes: (1) The
lenders' security interest in Company property and assets is eliminated;
(2) Pricing of the revolving line of credit will be at the lead bank's
prime rate of interest, except for $25 million of the line which will have
a fixed rate of interest, fixed at the then current prime rate, for not
less than three years; (3) Performance fee criteria have been made less
restrictive, making it less likely the Company will pay performance fees;
(4) The Company has agreed to maintain the following ratios: (A) Total
liabilities to tangible net worth not greater than 3.00 to 1.00 until
December 31, 1998, not greater than 2.75 to 1.00 from January 1, 1999 until
December 31, 1999 and not greater than 2.50 to 1.00 thereafter and (B)
Uncommitted land holdings to tangible net worth not greater than 2.00 to
1.00 until December 31, 1998, not greater than 1.85 to 1.00 from January 1,
1999 until December 31, 1999 and not greater than 1.75 to 1.00 thereafter;
(5) Uncommitted land holdings in Central Ohio are limited to $70 million
and investments in new market areas outside of Central Ohio are limited to
$7.5 million; and (6) The Company must maintain a minimum tangible net
worth of $31 million until December 31, 1997 and $31 million plus 75% of
net income for years after 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
During the second quarter of 1997 the Company closed a single quarter
record 380 homes. These closings represented a 37% increase over the 278 homes
closed during the second quarter of 1996. Also, second quarter 1997 home sales
of 333 exceeded second quarter 1996 homes sales of 325. As a result of the large
number of closings in the second quarter of 1997, the backlog of sales contracts
at June 30, 1997 declined to 731 from 785 at June 30, 1996. The aggregate sales
value of homes in backlog at June 30, 1997 declined to $113.9 million from
$115.1 million at June 30, 1996, however the average sales value of homes in
backlog increased to $155,777 from $146,757. The Company attributes the
increased number of second quarter 1997 home closings to increased production
efficiencies and favorable weather conditions as compared to the previous year.
Gross profit as a percentage of revenues for second quarter 1997 increased
to 24.1% compared to 22.4% for the same period in 1996. This improvement
reflects the delivery of homes during the current quarter with a lower average
sales price, which typically have a higher gross profit margin, and better
control of direct construction costs. Selling, general and administrative
expenses increased during second quarter 1997 to $7.8 million compared to $6.0
million for second quarter 1996. This increase resulted from the timing of the
recognition of incentive compensation in 1997, which is based upon Company
earnings, and additional selling and marketing expenses. However, selling,
general and administrative expenses as a percentage of revenues decreased to
13.8% during second quarter 1997 from 14.4% during second quarter 1996.
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 further strengthen 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, 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 owns
49.9% of Alliance and uses the equity method to report its share of profit and
loss. In the three months and six months ended June 30, 1997, the Company
recognized $90,000 as its share of the profit from this investment.
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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 the first half of 1997 has increased the Company's production capacity
beyond that of recent years. Consequently, the Company has the production
capacity to deliver more homes in 1997 than it did in 1996. This improvement in
production capacity during the first half of 1997 should help relieve, during
the second half 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.
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 half of 1997. The gross profit margin reported during the first half
of 1997 was favorably affected by the delivery of lower average priced homes
which had a higher gross profit margin. Based upon the Company's backlog at June
30, 1997 the Company expects to deliver homes at a higher average sale price
during the remainder of 1997.
From time to time the Company has received inquiries from other
homebuilders and intermediaries regarding the willingness of the Company to
discuss the sale of the Company. After consideration by the Company's Board of
Directors, the Company has determined that the sale of the Company at this time
would not be in the best interest of the shareholders and has advised such
persons of the Board's determination that the Company is not for sale and has
declined to enter into such discussions.
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)
=================================================================================
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
June 30, 1997 $56,672 333 380 731
At June 30, 1997 the aggregate sales value of homes in backlog was $113.9
million compared to $115.1 million at June 30, 1996. The average sales value of
homes in backlog at June 30, 1997 increased to $155,777 from $146,575 at June
30, 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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
----- ----- ----- -----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of real estate sold 75.9 77.6 75.5 78.3
----- ----- ----- -----
Gross profit 24.1 22.4 24.5 21.7
Selling, general and
administrative expenses 13.8 14.4 15.6 15.2
----- ----- ----- -----
Income from operations 10.3 8.0 8.9 6.5
Interest expense 3.0 3.9 3.4 4.0
Income tax provision 3.0 1.5 2.3 0.9
----- ----- ----- -----
Net income 4.3% 2.6% 3.2% 1.6%
===== ===== ===== =====
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THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1996
REVENUES. Revenues for second quarter 1997 increased to $56.7 million from
$41.5 million for second quarter 1996. The number of closings during second
quarter 1997 increased to 380 homes from 278 homes during second quarter 1996.
The increase in revenues from the increase in the number of homes closed in
second quarter 1997 was somewhat offset by a lower average home price of
approximately $800, which reduced the average home price from $146,464 to
$145,658. The primary reason for the lower average home price is that a greater
number of smaller homes were closed during second quarter 1997 compared to
second quarter 1996. Included in revenues were other revenues, consisting of the
sale of land and building supplies to other builders, which were $1.3 million
for second quarter 1997 compared to $800,000 for second quarter 1996.
GROSS PROFIT. Gross profit for second quarter 1997 increased to $13.7
million from $9.3 million for second quarter 1996, representing a gross profit
margin improvement from 22.4% to 24.1%. This 1.7% improvement in the gross
profit margin is attributable to better control of direct construction costs and
generally favorable building conditions. Also, the gross profit margin for homes
delivered in the second quarter of 1997 reflects the closing of homes with a
lower average home price which typically have a higher gross profit margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for second quarter 1997 increased to $7.8 million from
$6.0 million for second quarter 1996. This increase was primarily due to the
timing of the recognition of incentive compensation in 1997, which is based upon
Company earnings, and additional selling and marketing expenses. Selling,
general and administrative expenses, as a percentage of revenues, decreased to
13.8% from 14.4%.
INTEREST EXPENSE. Interest expense for second quarter 1997 remained
relatively stable at $1.7 million compared to $1.6 million for second quarter
1996. The higher average revolving line of credit balance and a slightly higher
revolving line of credit interest rate were offset by reduced term debt and
reduced bank fees. The weighted average rate of interest of the Company's
revolving line of credit was 8.9% for the second quarter of 1997 compared to
8.8% for the second quarter of 1996. The average revolving line of credit
borrowings outstanding were $64.9 million and $58.4 million for the second
quarter of 1997 and 1996, respectively.
PROVISION FOR INCOME TAXES. Income tax expense for second quarter 1997
increased to $1.7 million from $600,000 for second quarter 1996. The Company's
estimated annual effective tax rate increased to 42.0% for second quarter 1997
from 36.5% for second 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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SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1996
REVENUES. Revenues for the six months ended June 30, 1997 increased to
$93.7 million from $77.8 million for the six months ended June 30, 1996. The
number of closings during the first six months of 1997 increased to 646 homes
from 533 homes during the same period in 1996. The average home price during the
first six months of 1997 decreased to $142,639 from $143,098 during the first
six months of 1996. The primary reason for the lower average home price is that
a greater number of smaller homes were closed during the first half of 1997
compared to the first half of 1996. Included in revenues were other revenues,
consisting of the sale of land and building supplies to other builders, which
were $1.5 million for the first six months of 1997 compared to $1.6 for the
first six months of 1996.
GROSS PROFIT. Gross profit for the first six months of 1997 increased to
$23.0 million from $16.9 million for the first six months of 1996, representing
a gross profit margin improvement from 21.7% to 24.5%. This 2.8% improvement in
gross profit margin is attributable to fewer sales discounts, better control of
direct construction costs and generally favorable building conditions. Also, the
gross profit margin for homes delivered in the first half of 1997 reflects the
closing of homes with a lower average home price which typically have a higher
gross profit margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the first six months of 1997 increased to $14.6
million from $11.8 million for the same period in 1996. This increase was
primarily due to the timing of the recognition of incentive compensation in
1997, which is based upon Company earnings, and additional selling and marketing
expenses. Selling, general and administrative expenses, as a percentage of
revenues, remained stable at 15.6% for the first six months of 1997 compared to
15.2% for the first six months of 1996.
INTEREST EXPENSE. Interest expense remained stable at $3.1 million for the
first six months of 1997 and 1996. The higher average revolving line of credit
balance was offset by reduced term debt and reduced bank fees. The weighted
average rate of interest of the Company's revolving line of credit was 8.9% for
the first six months of both 1997 and 1996. The average revolving line of credit
borrowings outstanding were $62.5 million and $58.3 million for the first half
of 1997 and 1996, respectively.
PROVISION FOR INCOME TAXES. Income tax expense for the first six months of
1997 increased to $2.2 million from $700,000 for the first six months of 1996.
The Company's estimated annual effective tax rate increased to 42.0% for the
first six months of 1997 from 36.9% for the first six months of 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
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE, 1996:
Net cash used in operating activities for the first six months of 1997 was
$7.5 million compared to $3.9 million provided by operating activities for the
first six months of 1996. Net income for the first half of 1997 provided cash
flow of $3.0 million compared to $1.2 million for the first half of 1996. The
primary reason operating activities required cash in the first six months of
1997 was that real estate inventories increased $13.3 million compared to a $3.4
million decrease for the same period in 1996. Land purchases remained stable
between the two periods, however land development activity was $3.9 million more
in the first half of 1997 than in the first half of 1996. This increased
development activity was due primarily to better weather conditions in 1997.
Additionally, there was an increase in the number of homes built during the
first half of 1997 as compared to the first half of 1996. The improved weather
conditions during the first half of 1997 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 real estate
inventories was additional borrowings under the revolving line of credit of $8.2
million during the first half of 1997 compared to $200,000 in additional
borrowing during the first half of 1996. The Company reduced term debt by
$600,000 and $3.9 million for the first half of 1997 and 1996, respectively. On
a net basis, financing activities provided cash of $7.6 million for first half
of 1997 compared to using $3.7 million for the first half of 1996.
REAL ESTATE INVENTORIES
The Company's practice is to develop most of the lots upon 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 June 30, 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 2,400 lots.
Included in the 2,400 lots controlled through option agreements are 103 lots
owned by BRC. During the second quarter of 1997 the Company exercised options to
purchase 212 controlled lots, including 44 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 1997,
the Company sold lots and land to other builders for $1.4 million.
Land and land development costs at June 30, 1997 increased from year end as
a result of seasonal land development activity. The number of inventory homes
under construction has increased at June 30, 1997 compared to June 30, 1996. On
June 30, 1997, the Company had 75 inventory homes, including 11 condominiums, in
various stages of construction, which represented an aggregate investment of
$5.9 million compared to 46 inventory homes, including 27 condominiums, in
various stages of construction, which represent an aggregate investment of $3.3
million at June 30, 1996. At 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. Inventory homes are not
reflected in sales or backlog. The Company expects to continue to reduce the
number of inventory homes during the third 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 $2.0 million of seller-provided term debt
outstanding at June 30, 1997 and 1996 respectively. The Company did not assume
any additional seller-provided term debt during the first half of 1997. The
seller-provided term debt outstanding at June 30, 1997 had interest rates
between 8.0% and 10.0% and maturities that ranged from one to three years.
LAND PURCHASE COMMITMENTS
At June 30, 1997, the Company had commitments to purchase 161 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 June 30, 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
The Company is continuing to operate under the terms of the revolving line
of credit agreement described in the December 31, 1996 audited annual financial
statements of Borror Corporation (now Dominion Homes, Inc.) contained in its
Annual Report to Shareholders and in the December 31, 1996 Form 10-K. At June
30, 1997, the Company had $11.5 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.
Subsequent to June 30, 1997 the Company negotiated a commitment with its
banks to renew its $90 million revolving line of credit through June 30, 2000.
The Company expects to have a new revolving line of credit agreement executed by
all parties during the third quarter of 1997. The new loan commitment contains
the following major changes: (1) The lenders' security interest in Company
property and assets is eliminated; (2) Pricing of the revolving line of credit
will be at the lead bank's prime rate of interest, except for $25 million of the
line which will have a fixed rate of interest, fixed at the then current prime
rate for no less than three years; (3) Performance fee criteria have been made
less restrictive, making it less likely the Company will pay performance fees;
(4) The Company has agreed to maintain the following ratios: (A) Total
liabilities to tangible net worth not greater than 3.00 to 1.00 until December
31, 1998, not greater than 2.75 to 1.00 from January 1, 1999 until December 31,
1999 and not greater than 2.50 to 1.00 thereafter and (B) Uncommitted land
holdings to tangible net worth not greater than 2.00 to 1.00 until December 31,
1998, not greater than 1.85 to 1.00 from January 1, 1999 until December 31, 1999
and not greater than 1.75 to 1.00 thereafter; (5) Uncommitted land holdings in
Central Ohio are limited to $70 million and investments in new market areas
outside of Central Ohio are limited to $7.5 million; and (6) The Company must
maintain a minimum tangible net worth of $31 million until December 31, 1997 and
$31 million plus 75% of net income for years after 1997.
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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 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 May 21, 1997, the United States District Court for the
Southern District of Ohio entered a final order approving the
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. The time frame in which to file an appeal has expired
without an appeal having been filed. 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. 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.
DOMINION HOMES, INC.
(Registrant)
Date: July 30, 1997 By: /s/ Douglas G. Borror
------------------------------
Douglas G. Borror
Chief Executive Officer,
President
Date: July 30, 1997 By: /s/ Jon M. Donnell
------------------------------
Jon M. Donnell
Chief Operating Officer,
Chief Financial Officer
(Principal Financial Officer)
Date: July 30, 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 Incorporated by
Homes, Inc. reference to Exhibit 4
to March 31, 1997
Form 10-Q.
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.
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21
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.
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 reference to Exhibit
listed therein, and The Huntington National Bank, 10.13 to December
as agent, together with First Amendment thereto 31, 1996 Form 10-K.
dated March 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
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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
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 is 31, 1995 Form 10-K.
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.
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23
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 24.
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