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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 November 10, 1997: 6,264,853
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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...................................................................... 18
SIGNATURES ....................................................................................... 19
INDEX TO EXHIBITS.................................................................................... 20
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DOMINION HOMES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
September 30, December 31,
1997 1996
(unaudited)
------------- ------------
ASSETS
Cash and cash equivalents $ 252 $ 252
Notes and accounts receivable, net:
Trade 1,696 1,092
Due from financial institutions for residential closings 462 589
Real estate inventories:
Land and land development costs 53,561 49,990
Homes under construction 48,463 43,049
Other 2,288 2,351
----------- -----------
Total real estate inventories 104,312 95,390
----------- -----------
Prepaid expenses and other 250 526
Deferred income taxes 1,639 1,270
Property and equipment, at cost 8,689 8,948
Less accumulated depreciation (4,310) (4,241)
----------- -----------
Net property and equipment 4,379 4,707
----------- -----------
Total assets $ 112,990 $ 103,826
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade $ 6,453 $ 6,255
Deposits on homes under contract 2,129 1,825
Accrued liabilities 10,936 8,332
Note payable, banks (Note 7) 50,687 49,770
Term debt 4,170 4,793
----------- -----------
Total liabilities 74,375 70,975
----------- -----------
Commitments and contingencies (Note 3)
Shareholders' equity
Common shares, without stated value, 12,000,000 shares authorized 6,264,853
and 6,239,153 shares issued and
outstanding, respectively 30,667 30,526
Less deferred compensation (173) (107)
Retained earnings 8,121 2,432
----------- -----------
Total shareholders' equity 38,615 32,851
----------- -----------
Total liabilities and shareholders' equity $ 112,990 $ 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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------------ ---------- ---------- ---------
Revenues $58,723 $45,916 $152,392 $123,758
Cost of real estate sold 44,687 35,381 115,388 96,323
-------- --------- --------- --------
Gross profit 14,036 10,535 37,004 27,435
Selling, general and administrative 7,881 6,411 22,517 18,232
-------- --------- --------- --------
Income from operations 6,155 4,124 14,487 9,203
Interest expense (Note 2) 1,545 1,816 4,679 4,932
-------- --------- --------- --------
Income before income taxes 4,610 2,308 9,808 4,271
Provision for income taxes (Note 5) 1,936 890 4,119 1,615
-------- --------- --------- --------
Net income $ 2,674 $ 1,418 $ 5,689 $ 2,656
-------- --------- --------- --------
Earnings per share (Note 6) $0.41 $0.23 $0.89 $0.43
-------- --------- --------- --------
Weighted average shares outstanding 6,447,084 6,217,820 6,370,931 6,216,494
----------- ----------- ----------- ---------
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
Shares Amount Compensation Earnings Total
------ ------ -------- -----
Balance, December 31, 1996 6,239,153 $30,526 $(107) $2,432 $32,851
Net income 5,689 5,689
Shares issued - shares awarded 25,700 141 (127) 14
Deferred compensation 61 61
--------- ------- ----- ------ -------
Balance, September 30, 1997 6,264,853 $30,667 $(173) $8,121 $38,615
========= ======= ===== ====== =======
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)
Nine Months Ended
September 30,
1997 1996
------------- -------------
Cash flows from operating activities:
Net income $5,689 $2,656
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization 692 763
Loss on disposal of property and equipment 12 135
Allowance for doubtful accounts (36) 221
Reserve for real estate inventories 244
Issuance of common shares for compensation 14 17
Deferred income taxes (369) 137
Changes in assets and liabilities:
Increase in accounts receivable (441) (1,401)
Decrease in refundable federal income tax 1,019
Increase in real estate inventories (8,922) (2,928)
Decrease (increase) in prepaid expenses and other 157 (378)
Increase in accounts payable 198 883
Increase in deposits on homes under contract 304 313
Increase in accrued liabilities 2,604 1,338
----------- -----------
Net cash (used in) provided by operating activities (98) 3,019
Cash flows from investing activities:
Purchase of property and equipment (263) (270)
Proceeds from sales of property & equipment 67
----------- -----------
Net cash used in investing activities (196) (270)
Cash flows from financing activities:
Net proceeds from note payable, banks 917 1,748
Payments on term debt (623) (3,927)
----------- -----------
Net cash provided by (used in) financing activities 294 (2,179)
----------- -----------
Net increase in cash and cash equivalents 0 570
Cash and cash equivalents, beginning of period 252 207
----------- -----------
Cash and cash equivalents, end of period $ 252 $ 777
----------- -----------
Supplemental disclosures of cash flow information:
Interest paid (net of amounts capitalized) $1,809 $803
----------- -----------
Income taxes paid $4,383 $1,153
----------- -----------
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 the Company 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 nine months
ended September 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 $1.7 million and $2.2 million at September 30, 1997 and December 31,
1996, respectively. The following table summarizes the activity with
respect to capitalized interest:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----------- ------------ ------------- -------------
Interest incurred $1,313,000 $1,437,000 $4,310,000 $4,375,000
Interest capitalized (760,000) (1,080,000) (2,623,000) (3,553,000)
---------- ---------- ---------- ----------
Interest expensed directly 553,000 357,000 1,687,000 822,000
Previously capitalized interest
charged to interest expense 992,000 1,459,000 2,992,000 4,110,000
---------- ---------- ---------- ----------
Total interest expense $1,545,000 $1,816,000 $4,679,000 $4,932,000
---------- ---------- ---------- ----------
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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 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, Alliance Title 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 nine months ended September
30, 1997, the Company recognized $66,000 and $156,000 respectively 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 third quarter of 1997 from 38.6% for the third 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.
If SFAS No. 128 had been adopted at September 30, 1997, basic and diluted
earnings per share would have been:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----------- ----------- ----------- --------
Basic earnings per share $0.43 $0.23 $0.91 $0.43
Diluted earnings per share $0.41 $0.23 $0.89 $0.43
7. CREDIT FACILITY
During the first nine months of 1997 the Company operated under the
terms of the bank credit facility described in the December 31, 1996
audited annual financial statements of the Company contained in its Annual
Report to Shareholders and in the December 31, 1996 Form 10-K. On
September 29, 1997 the Company executed a Loan Agreement with its banks
for a new credit facility having a maturity date of June 30, 2000. The new
credit facility provides for revolving loan and letters of credit (limited
to $15 million in the aggregate) of up to $90 million in the aggregate,
subject to borrowing base limitations. The new credit facility is
unsecured and will remain unsecured so long as the Company's ratio of
total liabilities to tangible net worth ("leverage ratio") as of the end
of each fiscal quarter through December 31, 1999 does not exceed 2.75 to 1
and so long as the leverage ratio does not exceed 2.50 to 1 for any two
consecutive quarters thereafter. The credit facility contains the
following major provisions: (1) the Company has the option to use any
combination of the following methods to price the revolving line of
credit: (a) the lead bank's prime rate of interest that may be adjusted
based upon performance criteria; (b) a Eurodollar rate of interest plus a
variable margin based upon the Company's leverage ratio; or (c) a fixed
rate of interest as determined by the lead bank; (2) the Company has
agreed to fix the interest rate through the maturity date of the loan
agreement on a minimum of $10 million of the revolving line of credit by
June 30, 1998 and a minimum additional amount of $15 million by June 30,
1999; (3) the Company has agreed to not exceed the following ratios: (a) a
leverage ratio of 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) an uncommitted land
holdings to tangible net worth ratio of 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;
(4) uncommitted land holdings in Central Ohio are limited to $70 million;
(5) investments in new market areas outside of Central Ohio are limited to
$7.5 million in the aggregate and $5 million in any one market; (6) the
Company will not permit the value of its model homes to exceed $6.5
million in the aggregate; (7) the Company will not permit the value of its
speculative homes and condominiums to exceed $12.5 million in the
aggregate and the value of its speculative condominiums to exceed $3.0
million; (8) the Company must maintain a minimum tangible net worth of $31
million until December 30, 1997, and for December 31, 1997, and each year
thereafter, the sum of $31 million plus 75% of net income (but not less
than $32 million during the period from December 31, 1997 through December
31, 1998); and (9) the Company may not incur a loss during any five
consecutive quarters.
On October 14, 1997 the Company entered into contract to fix the
interest rate on $10 million of the outstanding revolving line of credit
for a three year term. The interest rate was fixed at a three month
Eurodollar rate of 6.125 percent plus a variable margin. The variable
margin is determined quarterly, based upon the Company's leverage ratio,
and can range from 2.25 percent to 3.25 percent. The current interest rate
on the $10 million fixed rate portion of the revolving line of credit is
8.375 percent and the Company's current overall effective borrowing rate is
approximately 8.1 percent.
The Company was in compliance with all credit facility covenants as of
September 30, 1997 and the Company had $15.2 million available under its
credit facility, after adjustment for borrowing base limitation. However,
the borrowing availability under the credit facility could increase,
depending on the Company's utilization of the proceeds.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
During the third quarter of 1997 the Company closed a record single
quarter 383 homes, which represented a 27% increase over the 301 homes closed
during the third quarter of 1996. The Company attributes the increased number
of third quarter 1997 home closings to increased production efficiencies and
favorable weather conditions as compared to the previous year. The Company sold
380 homes in the third quarter of 1997 compared to 305 homes in the third
quarter of 1996 and 1069 homes in the nine months ended September 30, 1997
compared to 1055 homes in the nine months ended September 30, 1996. Although
the Company sold 14 more homes in the first nine months of 1997 than the first
nine months of 1996, the backlog of sales contracts at September 30, 1997
declined to 728 from 789 at September 30, 1996 due to the large number of
closings during the first nine months of 1997. The aggregate sales value of
homes in backlog at September 30, 1997 declined to $111.3 million from $115.0
million at September 30, 1996, however the average sales value of homes in
backlog increased to $152,816 from $145,793. The increase in the average sales
value of homes is primarily attributed to higher FHA limits in 1997 that
allowed the Company's customers using FHA financing to purchase a larger home
or a home with more options during 1997 than 1996. During 1997, the Company has
emphasized selling larger homes, selling homes with more options and
selectively increasing prices.
Gross profit as a percentage of revenues for third quarter 1997 increased
to 23.9% compared to 22.9% for the same period in 1996. This improvement
reflects the delivery of homes during the current quarter with more purchaser
selected options, which have a higher gross profit margin, selective price
increases, a stable mortgage rate environment that minimized the cost of
financing the Company pays on behalf of its customers, and more effective
control of direct construction costs. As expected, the Company's gross profit
margin declined from the second quarter of 1997, reflecting the lower gross
profit margin associated with closing larger homes. Selling, general and
administrative expenses increased during third quarter 1997 to $7.9 million
compared to $6.4 million for third quarter 1996. This increase resulted from
the timing of the recognition of incentive compensation in 1997, which is based
upon Company earnings, higher production overhead costs incurred as a result of
the increase in the number of closings and additional selling and marketing
expenses. However selling, general and administrative expenses, as a percentage
of revenues, decreased to 13.4% during third quarter 1997 from 13.9% during
third quarter 1996.
During the first quarter of 1997 the Company participated in the creation
of a title insurance agency, Alliance Title 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 nine months ended September 30, 1997, the Company recognized $66,000
and $156,000, respectively, as its share of the earnings from this investment.
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COMPANY OUTLOOK
The Company continues to focus on opportunities to grow its revenues.
Within Central Ohio that effort is reflected in both the maximization of sales
per market penetration point as well as the strategic addition of new market
penetration points. Regional opportunities outside of Central Ohio are being
investigated by a Company formed task force. This task force has been actively
gathering demographics and other pertinent data related to these potential new
markets and will give consideration to these factors in addition to the national
economic climate in making its recommendation to the Board of Directors.
The Company's strategic decision to start more sold homes late in 1996
combined with favorable weather conditions and an expanded subcontractor base
during 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 nine months of 1997 should help relieve, during the last
quarter of 1997, some of the construction delays and related costs caused by a
restricted labor market that the Company has experienced in the past.
The Company also intends to continue to emphasize the sale of larger homes
which may reduce the gross profit margin per house. Based upon the Company's
backlog at September 30, 1997 the Company expects to deliver homes at a higher
average price during the remainder of 1997.
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 second half of the year. The Company believes that this
seasonality reflects the tendency of homebuyers to shop for a new home in the
Spring with the goal of closing in the Fall or Winter. Weather conditions can
also accelerate or delay the scheduling of closings.
The 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)
----- -------------- ---------- ---------- ----------
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
Sept. 30, 1997 $58,723 380 383 728
At September 30, 1997 the aggregate sales value of homes in backlog was
$111.3 million compared to $115.0 million at September 30, 1996. The average
sales value of homes in backlog at September 30, 1997 increased to $152,816
from $145,793 at September 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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----------- ----------- ----------- ---------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of real estate sold 76.1 77.1 75.7 77.8
----- ----- ----- -----
Gross profit 23.9 22.9 24.3 22.2
Selling, general and
administrative expenses 13.4 13.9 14.8 14.8
----- ----- ----- -----
Income from operations 10.5 9.0 9.5 7.4
Interest expense 2.6 4.0 3.1 4.0
Income tax provision 3.3 1.9 2.7 1.3
----- ----- ----- -----
Net income 4.6% 3.1% 3.7% 2.1%
----- ----- ----- -----
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THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1996
REVENUES. Revenues for third quarter 1997 increased to $58.7 million from
$45.9 million for third quarter 1996. The number of closings during third
quarter 1997 increased to 383 homes from 301 homes during third quarter 1996.
The increase in revenues is attributed to the increased number of closings and
a higher average home price which increased to $153,151 from $148,847, an
increase of $4,304. The increase in the average home price is primarily
attributed to the Company's customers purchasing larger homes or homes with
more options during 1997 than 1996. The Company was also able to selectively
increase the price on some of its homes. Included in revenues were other
revenues, consisting of the sale of land and building supplies to other
builders, which were $100,000 for third quarter 1997 compared to $1.1 million
for third quarter 1996.
GROSS PROFIT. Gross profit for third quarter 1997 increased to $14.0
million from $10.5 million for third quarter 1996, representing a gross profit
margin improvement to 23.9% from 22.9%. This 1.0% improvement in the gross
profit margin reflects the delivery of homes with more customer selected
options, which have a higher gross profit margin, selective price increases, a
stable mortgage rate environment that minimized the cost of the financing the
Company pays on behalf of its customers and more effective control of direct
construction costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for third quarter 1997 increased to $7.9 million from
$6.4 million for third quarter 1996. This increase was primarily due to the
timing of the recognition of incentive compensation in 1997, which is based
upon Company earnings, higher production overhead costs incurred as a result of
the increase in the number of closings and additional selling and marketing
expenses. Selling, general and administrative expenses, as a percentage of
revenues, decreased to 13.4% from 13.9%.
INTEREST EXPENSE. Interest expense for third quarter 1997 declined to $1.5
million compared to $1.8 million for third quarter 1996. Interest expense for
the third quarter of 1997 compared to the third quarter of 1996 was lower
because of a lower average revolving line of credit balance, a recognition of
less net capitalized interest expense, a lower average term debt balance and
reduced bank fees. The weighted average rate of interest of the Company's
revolving line of credit was 8.8% for the third quarter of both 1997 and 1996.
The average revolving line of credit borrowings outstanding were $54.5 million
and $59.2 million for the third quarter of 1997 and 1996, respectively.
PROVISION FOR INCOME TAXES. Income tax expense for third quarter 1997
increased to $1.9 million from $900,000 for third quarter 1996. The Company's
estimated annual effective tax rate increased to 42.0% for third quarter 1997
from 38.6% for third 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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NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1996
REVENUES. Revenues for the nine months ended September 30, 1997 increased
to $152.4 million from $123.8 million for the nine months ended September 30,
1996. The number of closings during the first nine months of 1997 increased to
1,029 homes from 834 homes during the same period in 1996. The increase in
revenues for the first nine months of 1997 compared to the first nine months of
1996 is attributed to the increased number of closings and a higher average
home price which increased to $146,538 from $145,171, an increase of $1,367.
The increase in the average home price is primarily attributed to the Company's
customers purchasing larger homes or homes with more options during 1997 than
1996. The Company was also able to selectively increase the price on some of
its homes. The increase in average home price occurred principally in the third
quarter of 1997. Included in revenues were other revenues, consisting of the
sale of land and building supplies to other builders, which were $1.6 million
for the first nine months of 1997 compared to $2.7 million for the first nine
months of 1996.
GROSS PROFIT. Gross profit for the first nine months of 1997 increased to
$37.0 million from $27.4 million for the first nine months of 1996,
representing a gross profit margin improvement to 24.3% from 22.2%. This 2.1%
improvement in gross profit margin is attributable to the delivery of homes
with more customer selected options, which have a higher gross profit margin,
selective price increases, a stable mortgage rate environment that minimized
the cost of the financing the Company pays on behalf of its customers and more
effective control of direct construction costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the first nine months of 1997 increased to $22.5
million from $18.2 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, higher production overhead expenses
as a result of the increase in the number of closings and additional selling
and marketing expenses. Selling, general and administrative expenses, as a
percentage of revenues, remained stable at 14.8% for the first nine months of
1997 and 1996.
INTEREST EXPENSE. Interest expense decreased to $4.7 million for the first
nine months of 1997 compared to $4.9 million for the first nine months of 1996.
The primary reason for the decrease was a recognition of less net capitalized
interest expense, a lower average term debt balance and reduced bank fees. The
weighted average rate of interest of the Company's revolving line of credit was
8.8% for the first nine months of 1997 and 8.6% for the first nine months of
1996. The average revolving line of credit borrowings outstanding were $59.8
million and $58.6 million for the first nine months of 1997 and 1996,
respectively.
PROVISION FOR INCOME TAXES. Income tax expense for the first nine months
of 1997 increased to $4.1 million from $1.6 million for the first nine months
of 1996. The Company's estimated annual effective tax rate increased to 42.0%
for the first nine months of 1997 from 37.8% for the first nine 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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15
SOURCES AND USES OF CASH
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996:
Net cash used in operating activities was $98,000 for the nine months
ended September 30, 1997 compared to net cash provided by operations of $3.0
million for the nine months ended September 30, 1996. The Company has used cash
generated from the sale of homes to invest in real estate inventories to meet
customer demand. Homes under construction have increased to $48.5 million as of
September 30, 1997 from $43.1 million as of December 31, 1996 and $46.0 million
as of September 30, 1996. Land and land development costs have increased to
$53.6 million as of September 30, 1997 from $50.0 million as of December 31,
1996 and $48.4 million as of September 30, 1996. Net cash used in investing
activities was comparable for the nine months ended September 30, 1997 and
1996. Net cash provided by financing activities was $294,000 for the nine
months ended September 30, 1997 compared to net cash used in financing
activities of $2.2 million for the nine months ended September 30, 1996. This
difference is primarily the result of the $3.3 million decrease in payments on
term debt.
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 September 30, 1997, the Company either owned or was under contract to
purchase lots or land that could be developed into approximately 4,900 lots and
the Company controlled through option agreements an additional 2,300 lots.
Included in the 2,300 lots controlled through option agreements are 67 lots
owned by Borror Realty Company, an affiliate of the Company ("BRC"). During the
third quarter of 1997 the Company exercised options to purchase 83 controlled
lots, including 60 lots from BRC. Option agreements expire at varying dates
through October 30, 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 the first nine months of
1997, the Company sold lots and land to other builders for $1.4 million.
Land and land development costs at September 30, 1997 increased from year
end as a result of seasonal land development activity and a need to replace
lots no longer available to the Company from BRC because of BRC's reduced land
inventory. Homes under construction also increased from year end as a result of
having more homes under construction and having homes generally at a more
advanced stage of construction. The aggregate investment in inventory homes
however declined $3.7 million from year end. On September 30, 1997, the Company
had 82 inventory homes, including 2 condominiums, in various stages of
construction, which represented an aggregate investment of $4.9 million,
compared to 111 inventory homes, including 35 condominiums, in various stages
of construction, which represented an aggregate investment of $6.9 million at
September 30, 1996.
SELLER-PROVIDED DEBT
The Company had $1.4 million and $2.0 million of seller-provided term debt
outstanding at September 30, 1997 and 1996 respectively. The Company did not
assume any additional seller-provided term debt during the first nine months of
1997. The seller-provided term debt outstanding at September 30, 1997 had
interest rates between 8.0% and 10.0% and maturities that ranged from one to
three years.
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16
LAND PURCHASE COMMITMENTS
At September 30, 1997, the Company had commitments to purchase 181
residential lots and unimproved land at an aggregate cost of $5.3 million, $1.5
million of which is expected to be funded in 1997 with the remaining amount due
in 1998. In addition, at September 30, 1997, the Company had $21.1 million of
cancelable obligations to purchase residential lots and unimproved land in
which $460,000 in good faith deposits had been invested by the Company.
Included in the $21.1 million of cancelable purchase obligations are $728,000
of purchase options with BRC. The Company expects to fund its capital
requirements for land acquisition and development and its obligations under
purchase contracts and mortgage notes from internally generated cash and from
the borrowing capacity available under its bank credit facilities.
CREDIT FACILITIES
During the first nine months of 1997 the Company operated under the terms
of the bank credit facility described in the December 31, 1996 audited annual
financial statements of the Company contained in its Annual Report to
Shareholders and in the December 31, 1996 Form 10-K. On September 29, 1997 the
Company executed a Loan Agreement with its banks for a new credit facility
having a maturity date of June 30, 2000. The new credit facility provides the
revolving loan and letters of credit (limited to $15 million in the aggregate)
of up to $90 million in the aggregate, subject to borrowing base limitations.
The new credit facility is unsecured and will remain unsecured so long as the
Company's ratio of total liabilities to tangible net worth ("leverage ratio")
as of the end of each fiscal quarter through December 31, 1999 does not exceed
2.75 to 1 and so long as the leverage ratio does not exceed 2.50 to 1 for any
two consecutive quarters thereafter. The credit facility contains the following
major provisions: (1) the Company has the option to use any combination of the
following methods to price the revolving line of credit: (a) the lead bank's
prime rate of interest that may be adjusted based upon performance criteria;
(b) a Eurodollar rate of interest plus a variable margin based upon the
Company's leverage ratio; or (c) a fixed rate of interest as determined by the
lead bank; (2) the Company has agreed to fix the interest rate through the
maturity date of the loan agreement on a minimum of $10 million of the
revolving line of credit by June 30, 1998 and a minimum additional amount of
$15 million by June 30, 1999; (3) the Company has agreed to not exceed the
following ratios: (a) a leverage ratio of 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) an
uncommitted land holdings to tangible net worth ratio of 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; (4)
uncommitted land holdings in Central Ohio are limited to $70 million; (5)
investments in new market areas outside of Central Ohio are limited to $7.5
million in the aggregate and $5 million in any one market; (6) the Company will
not permit the value of its model homes to exceed $6.5 million in the
aggregate; (7) the Company will not permit the value of it speculative homes
and condominiums to exceed $12.5 million in the aggregate and the value of its
speculative condominiums to exceed $3.0 million; (8) the Company must maintain
a minimum tangible net worth of $31 million until December 30, 1997, and for
December 31, 1997 and each year thereafter, the sum of $31 million plus 75% of
net income (but not less than $32 million during the period from December 31,
1997 through December 31, 1998); and (9) the Company may not incur a loss
during any five consecutive quarters.
16
17
On October 14, 1997 the Company entered into contract to fix the interest
rate on $10 million of the outstanding revolving line of credit for a three year
term. The interest rate was fixed at a three month Eurodollar rate of 6.125
percent plus a variable margin. The variable margin is determined quarterly,
based upon the Company's leverage ratio, and can range from 2.25 percent to 3.25
percent. The current interest rate on the $10 million fixed rate portion of the
revolving line of credit is 8.375 percent and the Company's current overall
effective borrowing rate is approximately 8.1 percent.
The Company was in compliance with all credit facility covenants as of
September 30, 1997 and the Company had $15.2 million available under its credit
facility, after adjustment for borrowing base limitation. However, the borrowing
availability under the credit facility could increase, depending on the
Company's utilization of the proceeds.
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.
The Company is involved in various legal proceedings, most of
which arise in the ordinary course of business and some of which
are covered by insurance. In the opinion of the Company's
management, none of the claims relating to such proceedings will
have a material adverse effect on the financial condition or
results of operations of the Company.
Item 2. Change in Securities. 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: Nov. 11, 1997 By: /s/Douglas G. Borror
-------------------------------
Douglas G. Borror
Chief Executive Officer,
President
Date: Nov. 11, 1997 By: /s/Jon M. Donnell
-------------------------------
Jon M. Donnell
Chief Operating Officer,
Chief Financial Officer
(Principal Financial Officer)
Date: Nov. 11, 1997 By: /s/Tad E. Lugibihl
-------------------------------
Tad E. Lugibihl
Controller
(Principal Accounting Officer)
19
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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.
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* Loan Agreement, dated September 29, 1997, Filed Herewith
among Dominion Homes, Inc., the lenders listed
therein, and The Huntington National Bank, as agent.
10.14 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)
10.15* Incentive Stock Option Agreement, dated Filed Herewith
July 1, 1997, between Borror Corporation
and Richard R. Buechler (which agreement
is substantially the same as Incentive Stock
Option Agreements entered into between the
Company and other employees to whom options
were granted on July 1, 1997 under the
Company's Incentive Stock Plan)
22
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 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.
10.24* Restricted Stock Agreement dated August 1, 1997,
between Dominion Homes, Inc., and Jon M. Donnell Filed Herewith
27* Financial Data Schedule Filed Herewith
* Filed Herewith