1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ to __________
0-23270
Commission File Number
DOMINION HOMES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1393233
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation 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 August 7, 1998: 6,281,504
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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........................................ 19
SIGNATURES ......................................................... 21
INDEX TO EXHIBITS...................................................... 22
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOMINION HOMES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
================================================================================
June 30, December 31,
1998 1997
Unaudited
--------- ---------
ASSETS
Cash and cash equivalents $ 2 $ 252
Notes and accounts receivable net:
Trade 256 201
Due from financial institutions for residential closings 1,316 340
Real estate inventories:
Land and land development costs 53,317 62,867
Homes under construction 56,412 47,959
Other 3,670 2,177
--------- ---------
Total real estate inventories 113,399 113,003
--------- ---------
Prepaid expenses and other 2,927 455
Deferred income taxes 2,000 2,110
Property and equipment, at cost: 4,999 4,325
Less accumulated depreciation (2,993) (2,891)
--------- ---------
Total property and equipment 2,006 1,434
--------- ---------
Total assets $ 121,906 $ 117,795
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade $ 7,961 $ 6,770
Deposits on homes under contract 3,023 1,977
Accrued liabilities 9,444 10,625
Note payable, banks 52,775 52,687
Term debt 3,271 5,076
--------- ---------
Total liabilities 76,474 77,135
--------- ---------
Commitments and contingencies
Shareholders' equity
Common shares, without stated value, 12,000,000 shares authorized,
6,276,053 and 6,266,953 shares issued and outstanding, respectively 30,779 30,673
Less deferred compensation (168) (150)
Retained earnings 14,821 10,137
--------- ---------
Total shareholders' equity 45,432 40,660
--------- ---------
Total liabilities and shareholders' equity $ 121,906 $ 117,795
========= =========
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,
1998 1997 1998 1997
---- ---- ---- ----
Revenues $68,031 $56,672 $122,489 $ 93,669
Cost of real estate sold 55,030 44,826 98,588 74,260
-------- --------- --------- --------
Gross profit 13,001 11,846 23,901 19,409
Selling, general and administrative 7,071 5,996 13,423 11,077
-------- --------- --------- --------
Income from operations 5,930 5,850 10,478 8,332
Interest expense 1,311 1,691 2,402 3,134
-------- --------- --------- --------
Income before income taxes 4,619 4,159 8,076 5,198
Provision for income taxes 1,940 1,747 3,392 2,183
-------- --------- --------- --------
Net income $2,679 $2,412 $4,684 $ 3,015
======== ========= ========= ========
Earnings per share
Basic $0.43 $0.39 $0.75 $0.48
======== ========= ======== ========
Diluted $0.41 $0.38 $0.71 $0.48
======== ========= ======== ========
Weighted average shares outstanding
Basic 6,272,646 6,241,230 6,270,435 6,240,197
========== ========== ========== =========
Diluted 6,608,399 6,318,882 6,594,730 6,319,036
========== ========== ========== =========
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, 1997 6,266,953 $30,673 $(150) $10,137 $40,660
Net Income 4,684 4,684
Shares issued - shares awarded 9,100 106 (65) 41
Deferred Compensation 47 47
- -----------------------------------------------------------------------------------------------
Balance, June 30, 1998 6,276,053 $30,779 $(168) $14,821 $45,432
- -----------------------------------------------------------------------------------------------
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,
--------
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 4,684 $ 3,015
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization 345 479
Disposal of property & equipment (7) 56
Issuance of common shares for compensation 106 13
Deferred income taxes 110 (200)
Changes in assets and liabilities:
Notes and accounts receivable (1,031) (1,303)
Real estate inventories (396) (13,773)
Prepaid expenses (1,020) 301
Accounts payable 1,191 2,646
Deposits on homes under contract 1,046 377
Accrued liabilities (1,203) 930
--------- --------
Net cash provided by (used in) operating activities 3,825 (7,459)
Cash flows from investing activities:
Proceeds from sale of property & equipment 17 14
Purchase of property & equipment (839) (164)
--------- --------
Net cash used in investing activities (822) (150)
Cash flows from financing activities:
Proceeds from note payable, banks
116,827 97,824
Payments on note payable, banks (116,739) (89,602)
Prepaid loan fees (1,536)
Payments on term debt (1,805) (613)
--------- --------
Net cash (used in) provided by financing activities (3,253)
7,609
--------- --------
Net change in cash and cash equivalents (250) 0
Cash and cash equivalents, beginning of period 252 252
--------- --------
Cash and cash equivalents, end of period $ 2 $ 252
========= ========
Supplemental disclosures of cash flow information:
Interest paid (net of amounts capitalized) $ 381 $ 1,147
========= ========
Income taxes paid $ 4,205 $ 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
The accompanying unaudited financial statements for Dominion Homes,
Inc, ("the Company") 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, 1997 audited annual financial statements of the Company contained in
its Annual Report to Shareholders or in the December 31, 1997 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, 1998 are not necessarily indicative of the results to be
expected for the full year.
2. RECLASSIFICATION
Certain prior period information has been reclassified to conform to
the current period presentation. Effective January 1, 1998 the Company made
a decision to reclassify certain indirect construction costs to cost of
real estate sold from selling, general and administrative expense.
Accordingly, the cost of real estate sold for the three months and six
months ended June 30, 1997 was increased by $1.9 million and $3.6 million
respectively. The reclassification had no impact on reported net income.
3. 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
$1.9 million and $2.0 million at June 30, 1998 and June 30, 1997,
respectively. The following table summarizes the activity with respect to
capitalized interest:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Interest incurred $ 1,269,000 $ 1,571,000 $ 2,454,000 $ 2,996,000
Interest capitalized (1,045,000) (928,000) (1,979,000) (1,863,000)
----------- ----------- ----------- -----------
Interest expensed directly 224,000 643,000 475,000 1,133,000
Previously capitalized interest
charged to interest expense 1,087,000 1,048,000 1,927,000 2,001,000
----------- ----------- ----------- -----------
Total interest expense $ 1,311,000 $ 1,691,000 $ 2,402,000 $ 3,134,000
=========== =========== =========== ===========
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4. NOTE PAYABLE, BANKS
On May 29, 1998 the Company entered into a $125 million Senior Unsecured
Revolving Credit Facility ("the Facility"). Five lending banks are party to the
Facility, which was syndicated by Huntington Capital Corp. Huntington National
Bank is the Administrative Agent and Issuing Bank of the Facility. Proceeds from
the Facility were used to refinance the $90 million loan agreement dated
September 29, 1997 and will also be used for working capital, capital
expenditures, acquisition financing and financing for other general corporate
purposes.
General provisions of the Facility include a maturity date of May 31, 2003
and combined cash advanced and Letters of Credit that are limited to the lesser
of $125 million or availability under a Borrowing Base. The Facility contains
the following other 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 bank's prime rate of interest that may be adjusted based upon the Company's
ratio of EBITDA to Interest Expense ("Interest Coverage Ratio"); or (b) a
Eurodollar rate of interest plus a variable margin based upon the Company's
Interest Coverage Ratio; (2) the Company has agreed to enter into interest rate
contracts in the amount of fifty percent of the outstanding borrowings in the
event the Eurodollar rate (without regard to the variable margin) becomes 8.50%
per anum or greater; (3) the Company has agreed to the following ratios: (a)
Interest Coverage Ratio of not less than 2.25 to 1.00 determined quarterly and
based upon the preceding four quarters; (b) total liabilities to tangible net
worth of not greater than 2.75 to 1.00 through December 31, 1999 and 2.50 to
1.00 from and after January 1, 2000; (4) the Company has agreed that uncommitted
land holdings in Central Ohio shall not exceed $73 million at the end of fiscal
1997 and shall not exceed $73 million plus fifty percent of the net income
earned by the Company thereafter, with an overall limit of $90 million; (5)
outside of Central Ohio the Company shall not, without all lender approval,
exceed the aggregate sum of $25 million for investments in uncommitted land
holdings, speculative homes, model homes and acquisitions of companies in the
homebuilding industry, except that the Company may invest up to $15 million of
such amount in one or more "start-up" operations involving uncommitted land
holdings, speculative homes and model homes not associated with an ongoing
business acquisition; (6) the Company must maintain a tangible net worth of not
less than $35 million plus seventy-five percent of net income for periods ending
on or after December 31, 1998; (7) the Company shall not exceed the aggregate
principal sum of $10 million for other borrowings, additional debt or capital
lease obligations, except that the Company may borrow an additional $5 million
of nonrecourse indebtedness from sellers of real estate, provided that such
additional non-recourse borrowings are fully reserved under the borrowing base;
(8) the Company shall not exceed $2 million of operating lease rentals and $1
million of model home rentals; (9) the Company shall not purchase, without
required lender approval, unzoned land in excess of $2.5 million; (10) the
Company will not permit the value of its inventory homes to exceed $12.5 million
and its model homes to exceed $6.5 million; (11) the Company may not incur a
loss during any five consecutive quarters; and (12) the Company may not pay
dividends during any calendar year in excess of twenty five percent of the
Company's net income after taxes for such year.
The Company has entered into interest rate swap contracts that fix the
interest rate on $30 million of borrowings. The interest rate swap contracts
mature between October 16, 2000 and May 6, 2003 and fix interest rates between
5.48% and 6.13%, plus a variable margin based on the Company's Interest Coverage
Ratio. The variable margin may range from 1.75% to 2.50% and is determined
quarterly. Since the inception of the Facility the variable margin has been
1.75%.
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The Company was in compliance with Facility covenants as of June 30,
1998 and the Company had $18.8 million available under its Facility, after
adjustment for borrowing base limitations. In addition, the Company has up
to $25.0 million available for acquisition financing. Borrowing
availability under the Facility could increase, depending on the Company's
utilization of the proceeds.
5. 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 as the weighted average shares outstanding adjusted for the
effect of common share equivalents. EPS data for the three months and six
months ended June 30, 1997 have been restated to conform with the
requirements of SFAS No. 128.
A reconciliation of the weighted average shares used in basic and diluted
EPS is as follows:
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
Weighted average shares outstanding
during the period 6,272,646 6,241,230 6,270,435 6,240,197
Assuming exercise of options 335,753 77,652 324,295 78,839
--------- --------- --------- ---------
Weighted average shares outstanding
adjusted for common share equivalents 6,608,399 6,318,882 6,594,730 6,319,036
========= ========= ========= =========
6. 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company continued its record setting trend during second quarter 1998
when it closed a single quarter record 461 homes. These closings represented a
21% increase over the 380 homes closed during second quarter 1997. Revenues from
second quarter 1998 closings increased 20% to $68.0 million from $56.7 million
for second quarter 1997. Second quarter 1998 revenues increased over second
quarter 1997 revenues due to the closing of 81 additional homes and a higher
average home price, which increased to $147,278 from $145,658 during second
quarter 1997. The Company continued to show strength in sales by recording 402
sales contracts for second quarter 1998 compared to 333 sales contracts for
second quarter 1997. There were 944 contracts in backlog at June 30, 1998,
representing an aggregate sales value of $149.8 million, compared to 731 sales
contracts in backlog at June 30, 1997, representing an aggregate sales value of
$113.9 million. The average sales value of homes in backlog at June 30, 1998
increased to $158,733 from $155,777 at June 30, 1997. Net income for second
quarter 1998 increased to $2.7 million compared to $2.4 million for second
quarter 1997. The increase in net income from additional closings was partially
offset by increases in direct construction costs attributable to a near
full-capacity subcontractor market. In addition the Company sold and leased back
seven model homes on which all gross profit was deferred, pending recognition
against future model homes lease expense.
On May 29, 1998, the Company entered into a $125 million Senior Unsecured
Revolving Credit Facility with the Huntington National Bank which increased the
Company's revolving line of credit from $90 million and extended the maturity
date to May 31, 2003. The loan agreement also provides that up to $25 million of
the revolving line of credit may be used for expansion outside of Central Ohio.
See Note 4 to the Financial Statements for additional details.
The Company has made substantial progress toward the implementation of new
computer systems which will increase operating efficiencies, provide the
technology for growth both within and outside of Central Ohio and address the
Year 2000 issues. In addition the Company has undertaken an extensive remodeling
of its corporate office building ("Building") and a relocation and realignment
of many of its corporate staff. The remodeling of the Building was undertaken in
order to allow the Company's architectural department to return to the Building
and to provide leased space in the Building for Alliance Title Agency, Ltd.
Alliance Title Agency, Ltd. is a 49.9% Company owned title agency that provides
title insurance and closing services for most of the Company's homebuyers as
well as third parties. The Building was also enlarged and internally changed to
provide better workflow and additional meeting sites. The Company expects these
changes and other staff alignment changes to more fully integrate many of the
Company's processes, new computer systems and workflow. The Company undertook
these moves in an effort to improve internal efficiency and communication in
order to reduce overall building times and to improve customer satisfaction with
the homebuilding process. The Company also continued its exploration of
locations in which to expand its operation outside of Central Ohio.
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COMPANY OUTLOOK
The Company continues to expect its 1998 financial results to exceed those
reported for 1997. The Company has closed a record 831 homes through June 30,
1998 and maintains a strong backlog of 944 sales contracts at June 30, 1998. In
light of increasing subcontractor cost pressures, the Company is continuing to
focus on controlling construction expenses. The Company does not expect these
pressures to cause delays in the building process.
During the second half of 1998 the Company expects to complete the
implementation of its new computer systems and complete the corporate office
remodeling and personnel realignment that began earlier in the year. Provided
economic conditions remain favorable and new market opportunities continue to
look promising, the Company anticipates expanding to an area outside of Central
Ohio prior to the end of 1998. The Company does not expect this expansion to
significantly impact 1998 revenues or net income.
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 on Form 10-Q 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 1998 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, delays in the zoning, permitting or inspection processes, 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, subcontractors, labor and financing, the
continued availability of credit, the outcome of litigation, the impact of
changes in government regulation, the problems associated with the Year 2000
issue, the problems that could arise from expansion to areas outside of Central
Ohio and the other risks described in the Company's December 31, 1997 Form 10-K.
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 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 Company is concentrating on mitigating these
seasonal variations whenever possible.
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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, 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
Dec. 31, 1997 $55,534 333 358 703
Mar. 31, 1998 $54,458 670 370 1,003
June 30, 1998 $68,031 402 461 944
At June 30, 1998 the aggregate sales value of homes in backlog was $149.8
million compared to $113.9 million at June 30, 1997. The average sales value of
homes in backlog at June 30, 1998 increased to $158,733 from $155,777 at June
30, 1997.
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,
1998 1997 1998 1997
---- ---- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of real estate sold 80.9 79.1 80.5 79.3
----- ----- ----- -----
Gross profit 19.1 20.9 19.5 20.7
Selling, general and
administrative expenses 10.4 10.6 11.0 11.8
----- ----- ----- -----
Income from operations 8.7 10.3 8.5 8.9
Interest expense 1.9 3.0 1.9 3.4
----- ----- ----- -----
Income before income taxes 6.8 7.3 6.6 5.5
Provision for income taxes 2.9 3.0 2.8 2.3
----- ----- ----- -----
Net income 3.9% 4.3% 3.8% 3.2%
===== ===== ===== =====
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THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1997
REVENUES. Revenues for second quarter 1998 increased to a record $68.0
million from $56.7 million for second quarter 1997. The number of closings
during second quarter 1998 increased 21.3% or 81 closings, to a record 461 homes
from 380 homes during second quarter 1997. Included in the 81 additional homes
closed during second quarter 1998 are seven model homes sold and leased back to
use as sales models. The increase in revenues is attributable to the additional
closings and a higher average home price, which increased to $147,278 during
second quarter 1998 from $145,658 during second quarter 1997, an increase of
$1,620 or 1.1%. The increase in the average home price is primarily attributable
to the Company's customers purchasing larger homes and homes with more options.
Customers were able to purchase larger homes and homes with more options during
1998 because the Company has been offering a greater selection of larger homes
and because the FHA mortgage limits were increased, allowing customers to
finance larger homes. Included in revenues were other revenues, consisting of
the sale of land and building supplies to other builders, which were $180,000
for second quarter 1998 compared to $1.3 million for second quarter 1997.
GROSS PROFIT. Gross profit for second quarter 1998 increased to $13.0
million from $11.8 million for second quarter 1997, primarily as a result of
closing 81 additional homes in second quarter 1998. As a percentage of revenues,
the gross profit margin declined to 19.1% for second quarter 1998 from 20.9% for
second quarter 1997. The decrease in second quarter 1998 gross profit margin is
principally attributed to increased direct construction costs. In addition the
Company sold and leased back seven model homes on which all gross profit was
deferred, pending recognition against future model home lease expense.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for second quarter 1998 increased to $7.1 million from
$6.0 million for second quarter 1997. This $1.1 million increase in selling,
general and administrative expenses is a result of the increase in the number of
closings and additional selling and marketing expense. As a percentage of
revenues, selling, general and administrative expenses for second quarter 1998
decreased to 10.4% from 10.6% for second quarter 1997. This decrease primarily
reflects the effect of closing more homes without significantly impacting fixed
costs.
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INTEREST EXPENSE. Interest expense for second quarter 1998 decreased to
$1.3 million from $1.7 million for second quarter 1997. As a percentage of
revenues, interest expense for second quarter 1998 decreased to 1.9% from 3.0%
for second quarter 1997. The primary reasons for the decrease in interest
expense were lower average revolving line of credit borrowings combined with a
lower average interest rate. The average revolving line of credit borrowings
outstanding were $56.4 million and $64.9 million for the second quarter of 1998
and 1997, respectively. The lower average interest rate was the result of
alternative pricing methods allowed by the September 29, 1997 and May 29, 1998
loan agreements. The weighted average rate of interest under the Company's
revolving line of credit was 8.3% for the second quarter of 1998 compared to
8.9% for second quarter 1997. The Company recognized $78,000 less net
capitalized interest as interest expense during second quarter 1998 than second
quarter 1997.
PROVISION FOR INCOME TAXES. Income tax expense for second quarter 1998
increased to $1.9 million from $1.7 million for second quarter 1997. The
Company's estimated annual effective tax rate was 42.0% for second quarter 1998
and 1997, respectively.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1997
REVENUES. Revenues for the six months ended June 30, 1998 increased to a
record $122.5 million from $93.7 million for the six months ended June 30, 1997.
The number of closings during the first six months of 1998 increased 28.6% or
185 closings, to a record 831 homes from 646 homes during the same period in
1997. Included in the 185 additional homes closed during the first six months of
1998 are seven model homes sold and leased back to use as sales models. The
increase in revenues is attributable to the additional closings and higher
average home price, which increased to $147,117 during the first six months of
1998 from $142,639 during the first six months of 1997, an increase of $4,478 or
3.1%. The increase in the average home price is primarily attributable to the
Company's customers purchasing larger homes and homes with more options.
Customers were able to purchase larger homes and homes with more options during
1998 because the Company has been offering a greater selection of larger homes
and because the FHA mortgage limits were increased allowing customers to finance
larger homes. Included in revenues were other revenues, consisting of the sales
of land and building supplies to other builders, which were $280,000 for the
first six months of 1998 compared to $1.5 million for the first six months of
1997.
GROSS PROFIT. Gross profit for the first six months of 1998 increased to
$23.9 million from $19.4 million for the first six months of 1997, primarily as
a result of closing 185 additional homes in the first six months of 1998. As a
percentage of revenues, the gross profit margin declined to 19.5% for the first
six months of 1998 from 20.7% for the first six months of 1997. The decrease in
first half 1998 gross profit margin is principally attributed to increased
direct construction costs. In addition the Company sold and leased back seven
model homes on which all gross profit was deferred, pending recognition against
future model home lease expense.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the first six months of 1998 increased to $13.4
million from $11.1 million for the first six months of 1997. This $2.3 million
increase in selling, general and administrative expenses is a result of the
increase in the number of closings and additional selling and marketing expense.
As a percentage of revenues, selling, general and administrative expenses for
the first six months of 1998 decreased to 11.0% from 11.8% for the first six
months of 1997. This decrease primarily reflects the effect of closing more
homes without significantly impacting fixed costs.
INTEREST EXPENSE. Interest expense for the first six months of 1998
decreased to $2.4 million from $3.1 million for the first six months of 1997. As
a percentage of revenues, interest expense for the first six months of 1998
decreased to 1.9% from 3.4% for the first six months of 1997. The primary
reasons for the decrease in interest expense were lower average revolving line
of credit borrowings combined with a lower average interest rate. The average
revolving line of credit borrowings outstanding were $54.7 million and $62.5
million for the first six months of 1998 and 1997, respectively. The lower
average interest rate was the result of alternative pricing methods allowed by
the September 29, 1997 and May 29, 1998 loan agreements. The weighted average
rate of interest under the Company's revolving line of credit was 8.4% for the
first six months of 1998 compared to 8.9% for the first six months of 1997. The
Company capitalized $52,000 more interest than it recognized as interest expense
during the first six months of 1998 compared to recognizing $138,000 more
previously capitalized interest as interest expense during the first six months
of 1997.
PROVISION FOR INCOME TAXES. Income tax expense for the first six months of
1998 increased to $3.4 million from $2.2 million for the first six months of
1997. The Company's estimated annual effective tax rate was 42.0% for the first
six months of 1998 and 1997, respectively.
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SOURCES AND USES OF CASH
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net cash provided by operating activities for the first six months of 1998
was $3.8 million compared to $7.5 million used in operating activities for the
first six months of 1997. Net income for the first half of 1998 provided cash
flow of $4.7 million compared to $3.0 million for the first half of 1997. Cash
from operating activities increased $11.3 million between the two periods
principally because the Company invested $13.4 million more in real estate
inventories during the first half of 1997 compared with the first half of 1998.
The increased real estate inventory investment made during the first six months
of 1997 reflected the large increase in the number of homes under construction
and favorable weather conditions compared to the first half of 1996. During the
first six months of 1998 the Company invested $800,000 in property and
equipment, compared to $150,000 during the first six months of 1997. The
$800,000 investment in property and equipment was principally the construction
of a lumber division warehouse and leasehold improvements to the corporate
office building. Net cash used in financing activities during the first six
months of 1998 was $3.3 million and resulted from prepayment of loan fees and
repayment of term debt. During the first six months of 1997 the Company funded
increased real estate inventories with $8.2 million of additional borrowing and
reduced term debt by $600,000.
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, 1998, the Company either owned or was under contract to
purchase lots or land that could be developed into approximately 4,500 lots and
the Company controlled through option agreements, an additional 5,400 lots.
During the second quarter of 1998 the Company exercised options to purchase 294
controlled lots. Option agreements expire at varying dates through August 31,
2003. 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.
Homes under construction at June 30, 1998 increased from year-end as a
result of seasonal construction activity. The number of inventory homes under
construction is lower at June 30, 1998 compared to June 30, 1997. On June 30,
1998, the Company had 58 inventory homes in various stages of construction,
which represented an aggregate investment of $3.5 million compared to 75
inventory homes, including 11 condominiums, in various stages of construction,
which represented an aggregate investment of $5.9 million at June 30, 1997.
Inventory at the Company's lumber division increased to $3.7 million at June 30,
1998 from $2.2 million at June 30, 1997. The inventory increase was a result of
increased sales and construction activity and the Company's decision to
warehouse and distribute Andersen(R) wood windows for use in its construction
activities.
SELLER-PROVIDED DEBT
The Company had $3.3 million and $1.4 million of seller-provided term debt
outstanding at June 30, 1998 and 1997 respectively. The Company did not assume
any additional seller-provided term debt during the first half of 1998. The
seller-provided term debt outstanding at June 30, 1998 had interest rates
between 6.5% and 8.5% and maturities that ranged from one to three years.
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LAND PURCHASE COMMITMENTS
At June 30, 1998, the Company had commitments to purchase 44 residential
lots and unimproved land at an aggregate cost of $1.4 million, net of deposits.
All commitments are expected to be funded prior to December 31, 1998. In
addition, at June 30, 1998, the Company had $51.4 million of cancelable
obligations to purchase residential lots and unimproved land in which $880,000
in good faith deposits had been invested by the Company. The majority of the
land subject to cancelable obligations is for post 1998 development activities.
The Company expects to fund its 1998 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 facility.
CREDIT FACILITIES
On May 29, 1998 the Company entered into a $125 million Senior Unsecured
Revolving Credit Facility ("the Facility"). Five lending banks are party to the
Facility, which was syndicated by Huntington Capital Corp. Huntington National
Bank is the Administrative Agent and Issuing Bank of the Facility. Proceeds from
the Facility were used to refinance the $90 million loan agreement dated
September 29, 1997 and will also be used for working capital, capital
expenditures, acquisition financing and financing for other general corporate
purposes. See Note 4 to the Financial Statements for additional details.
The Company has entered into interest rate swap contracts that fix the
interest rate on $30 million of borrowings. The interest rate swap contracts
mature between October 16, 2000 and May 6, 2003 and fix interest rates between
5.48% and 6.13%, plus a variable margin based on the Company's Interest Coverage
Ratio. The variable margin may range from 1.75% to 2.50% and is determined
quarterly. Since the inception of the Facility the variable margin has been
1.75%.
The Company was in compliance with all facility covenants as of June 30,
1998 and the Company had $18.8 million available under its facility, after
adjustment for borrowing base limitations. In addition, the Company had
approximately $25.0 million available for acquisition financing. Borrowing
availability under the facility could increase, depending on the Company's
utilization of the proceeds.
YEAR 2000 ISSUES
Key financial information and operations systems have been assessed and
plans developed in order to mitigate the Year 2000 issues. These plans include
upgrades of purchased software and conversion of in-house developed software.
The Company is currently in various stages of implementing the upgrades and
expects to invest between $2.0 million and $2.5 million in this effort with the
cost to be allocated over a five year period. All programs subject to Year 2000
concerns are being evaluated utilizing internal and external resources to
reprogram, replace and test. The Company intends to initiate during 1998 a
communication plan with significant suppliers to determine the status of their
Year 2000 issues and does not currently anticipate a material impact on the
Company's operations and financial results. However, if such upgrades and
conversions are not made, or are not timely completed, the Year 2000 issues
could have a material impact on the operations and financial results of the
Company.
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INFLATION AND OTHER COST INCREASES
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. For example, delays in construction of a home can cause the
mortgage commitment to expire and can require the Company, if mortgage interest
rates have increased, to pay significant amounts to the mortgage lender to
extend the original mortgage interest rate. In addition, during periods of high
construction activities, additional costs may be incurred to obtain
subcontractor availability when certain trades are not readily available, which
additional costs can result in lower gross profits.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
NOT APPLICABLE
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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 and Use of Proceeds. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
On May 20, 1998, the Company held its Annual Meeting of
Shareholders. At the Annual Meeting, the shareholders ratified the
selection of PricewaterhouseCoopers LLP (formerly Coopers and
Lybrand L.L.P.) as independent public accountants for the Company
in 1998 by the following vote:
Shares For Shares Against Shares Abstaining/Withheld
---------- -------------- --------------------------
5,540,833 2,800 1,200
The shareholders elected as Class II Directors the four nominees
of the Board of Directors by the following vote:
Shares For Shares Abstaining/Withheld
---------- --------------------------
Donald A. Borror 5,541,838 2,995
David S. Borror 5,541,838 2,995
Pete A. Klisares 5,541,838 2,995
Gerald E. Mayo 5,541,838 2,995
The term of office of the Class I Directors, Douglas G. Borror,
Jon M. Donnell and C. Ronald Tilley continued after the meeting.
The Shareholders approved the Amended and Restated Dominion Homes,
Inc. Executive Deferred Compensation Plan by the following vote:
Shares For Shares Against Shares Abstaining/Withheld
---------- -------------- --------------------------
5,497,091 36,642 2,600
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Item 5. Other Information.
Any qualified shareholder of the Company who intends to submit a
proposal to the Company at the 1999 Annual Meeting of Shareholders
(the "1999 Annual Meeting") must submit such proposal to the
Company not later than December 18, 1998 to be considered for
inclusion in the Company's Proxy Statement and form of Proxy (the
"Proxy Materials") relating to that meeting. If a shareholder
intends to present a proposal at the 1999 Annual Meeting of
Shareholders, but has not sought the inclusion of such proposal in
the Company's Proxy Materials, such proposal must be received by
the Company prior to March 3, 1999 or the Company's management
proxies for the 1999 Annual Meeting will be entitled to use their
discretionary voting authority should such proposal then be
raised, without any discussion of the matter in the Company's
Proxy Materials.
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: August 12, 1998 By: /s/DOUGLAS G. BORROR
------------------------------
Douglas G. Borror
Chief Executive Officer,
President
Date: August 12, 1998 By: /s/JON M. DONNELL
------------------------------
Jon M. Donnell
Chief Operating Officer
Date: August 12, 1998 By: /s/PETER J. O'HANLON
------------------------------
Peter J. O'Hanlon
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit No. Description Location
2.1 Corporate Exchange and Subscription Agreement, dated January 20, Incorporated by reference to
1994, between Borror Corporation and Borror Realty Company Exhibit 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 and Subscription Incorporated by reference to
Agreement Exhibit 2.2 to Form S-1.
3.1 Amended and Restated Articles of Incorporation of Dominion Homes, Incorporated by reference to
Inc., as amended May 7, 1997 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.
3.2 Amended and Restated Code of Regulations of Borror Corporation Incorporated by reference to
Exhibit 3.2 to Form S-1.
4. Specimen of Stock Certificate of Dominion Homes, Inc. Incorporated by reference to
Exhibit 4 to the Company's March 31,
1997 Form 10-Q.
10.22* Stock Option Agreement dated May 21, 1998 between Dominion Homes, Filed herewith
Inc. and Pete A. Klisares (which Agreement is the same as Stock
Option Agreements entered into between the Company and its other
outside, independent directors, Gerold E. Mayo and C. Ronald Tilley)
10.23* Loan Agreement, dated May 29, 1998, among Dominion Homes, Inc., Filed herewith
Huntington Capital Corp. as syndicating agent, Huntington National
Bank as administrative and Issuing Agent and the lenders listed
therein
10.24* Employment Agreement, dated June 1, 1998, between Dominion Homes, Filed herewith
Inc. and Peter J. O'Hanlon
10.25* Restricted Stock Agreement, dated June 1, 1998, between Dominion Filed herewith
Homes, Inc. and Peter J. O'Hanlon
10.26* Incentive Stock Option Agreement, dated June 1, 1998, Between Filed herewith
Dominion Homes, Inc. and Peter J. O'Hanlon
10.27* Restricted Stock Agreement, dated August 1, 1998, between Dominion Filed herewith
Homes, Inc. and Jon M. Donnell
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10.28* Incentive Stock Option Agreement dated July 1, 1998, between Filed herewith
Dominion Homes, Inc. and Jon M. Donnell
10.29* Amendment to Dominion Homes, Inc. Incentive Stock Option Plan, Filed herewith
dated July 29, 1998
10.30* Amendment to Dominion Homes, Inc. Amended and Restated Executive Filed herewith
Deferred Compensation Plan, dated July 29, 1998
10.31* Office Sublease Agreement, dated July 31, 1998, between Dominion Filed herewith
Homes, Inc. and Alliance Title Agency, LTD.
27* Financial Data Schedule Filed herewith
* Filed Herewith
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