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, 1999
or
( ) 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 or organization) Identification No.)
5501 Frantz Road, Dublin, Ohio
------------------------------
(Address of principal executive offices)
43017-0766
----------
(Zip Code)
(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 10, 1999: 6,293,480
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOMINION HOMES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
================================================================================
June 30, December 31,
1999 1998
(Unaudited)
------------------ ---------------
ASSETS
Cash and cash equivalents $ 410 $ 261
Notes and accounts receivable, net:
Trade 222 133
Due from financial institutions for residential closings 1,405 769
Real estate inventories:
Land and land development costs 82,146 71,404
Homes under construction 61,300 50,843
Other 4,765 2,906
------------------ --------------
Total real estate inventories 148,211 125,153
------------------ --------------
Prepaid expenses and other 3,812 3,111
Deferred income taxes 1,834 1,788
Property and equipment, at cost: 8,224 7,385
Less accumulated depreciation (3,477) (3,244)
------------------ --------------
Total property and equipment 4,747 4,141
------------------ --------------
Total assets $ 160,641 $ 135,356
================== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade $ 8,001 $ 5,520
Deposits on homes under contract 2,468 2,601
Accrued liabilities 11,825 12,131
Note payable, banks 79,392 60,415
Term debt 5,869 4,461
------------------ --------------
Total liabilities 107,555 85,128
------------------ --------------
Commitments and contingencies
Shareholders' equity
Common shares, without stated value, 12,000,000 shares authorized,
6,324,104 and 6,281,504 shares issued and outstanding, respectively 31,119 30,851
Less deferred compensation (372) (371)
Retained earnings 22,339 19,748
------------------ --------------
Total shareholders' equity 53,086 50,228
------------------ --------------
Total liabilities and shareholders' equity $ 160,641 $ 135,356
================== ==============
The accompanying notes are an integral part of the financial statements.
2
3
DOMINION HOMES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
================================================================================
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues $ 72,795 $ 68,031 $ 125,569 $ 122,489
Cost of real estate sold 59,332 55,030 102,118 98,588
--------- --------- --------- ---------
Gross profit 13,463 13,001 23,451 23,901
Selling, general and administrative 8,659 7,071 16,232 13,423
--------- --------- --------- ---------
Income from operations 4,804 5,930 7,219 10,478
Interest expense 1,589 1,311 2,752 2,402
--------- --------- --------- ---------
Income before income taxes 3,215 4,619 4,467 8,076
Provision for income taxes 1,347 1,940 1,876 3,392
--------- --------- --------- ---------
Net income $ 1,868 $ 2,679 $ 2,591 $ 4,684
========= ========= ========= =========
Earnings per share
Basic $0.30 $0.43 $0.41 $0.75
========= ========= ========= =========
Diluted $0.29 $0.41 $0.40 $0.71
========= ========= ========= =========
Weighted average shares outstanding
Basic 6,319,297 6,272,646 6,303,318 6,270,435
========= ========= ========= =========
Diluted 6,527,661 6,608,399 6,540,960 6,594,730
========= ========= ========= =========
The accompanying notes are an integral part of the financial statements
3
4
DOMINION HOMES, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
Common Shares Deferred Compensation
--------------------------- ------------------------------
Retained
Shares Amount Liability Treasury Shares Earnings Total
- ------------------------------------- ------------- ------------- ------------- ---------------- ------------ ------------
Balance, December 31, 1998 6,281,504 $30,851 $853 $(1,224) $19,748 $50,228
Net income 2,591 2,591
Shares awarded and redeemed 42,600 268 (35) 233
Treasury shares held for
deferred compensation plan (27) (27)
Deferred compensation 61 61
- ------------------------------------- ------------- ------------- ------------- ---------------- ------------ ------------
Balance, June 30, 1999 6,324,104 $31,119 $879 $(1,251) $22,339 $53,086
- ------------------------------------- ------------- ------------- ------------- ---------------- ------------ ------------
The accompanying notes are an integral part of the financial statements.
4
5
DOMINION HOMES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
================================================================================
Six Months Ended
June 30,
----------------------------------
1999 1998
----------------------------------
Cash flows from operating activities:
Net income $ 2,591 $ 4,684
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation and amortization 706 345
Disposal of property and equipment (6) (7)
Issuance of common shares for compensation 268 106
Deferred income taxes (46) 110
Changes in assets and liabilities:
Notes and accounts receivable (725) (1,031)
Real estate inventories (21,486) (396)
Prepaid expenses and other (910) (1,020)
Accounts payable 2,481 1,191
Deposits on homes under contract (133) 1,046
Accrued liabilities (323) (1,203)
-------------- ---------------
Net cash (used in) provided by operating activities (17,583) 3,825
-------------- ---------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 10 17
Purchase of property and equipment (624) (839)
-------------- ---------------
Net cash used in investing activities (614) (822)
-------------- ---------------
Cash flows from financing activities:
Proceeds from note payable, banks 142,094 116,827
Payments on note payable, banks (123,117) (116,739)
Prepaid loan fees (1,536)
Payments on term debt (604) (1,805)
Common shares purchased or redeemed (27)
-------------- ---------------
Net cash provided by (used in) financing activities 18,346 (3,253)
-------------- ---------------
Net change in cash and cash equivalents 149 (250)
Cash and cash equivalents, beginning of period 261 252
============== ===============
Cash and cash equivalents, end of period $ 410 $ 2
============== ===============
Supplemental disclosures of cash flow information:
Interest paid (net of amounts capitalized) $ 841 $ 381
============== ===============
Income taxes paid $ 2,530 $ 4,205
============== ===============
Land acquired by seller financing $ 1,572
============== ===============
The accompanying notes are an integral part of the financial statements.
5
6
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.
The December 31, 1998 balance sheet data was derived from audited financial
statements but does not include all disclosures required by generally
accepted accounting principles. These financial statements should be read
in conjunction with the December 31, 1998 audited annual financial
statements of the Company contained in its Annual Report to Shareholders or
in its December 31, 1998 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, 1999 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.
3. CAPITALIZED INTEREST
Interest is capitalized on land during the development period and on
housing construction costs during the construction period. As lots are
transferred to homes under construction, the interest capitalized on the
lot during the land development period is included as a cost of the land
and is expensed through cost of sales when the home is closed. Capitalized
interest related to housing construction costs is included in interest
expense in the period in which the home is closed. Capitalized interest
related to land under development and construction in progress was $2.3
million and $1.9 million at June 30, 1999 and June 30, 1998, respectively.
The following table summarizes the activity with respect to capitalized
interest:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
----------- ------------ ------------- --------------
Interest incurred $1,661,000 $1,269,000 $3,166,000 $ 2,454,000
Interest capitalized (1,124,000) (1,045,000) (2,268,000) (1,979,000)
----------- ----------- ----------- --------------
Interest expensed directly 537,000 224,000 898,000 475,000
Previously capitalized interest
charged to interest expense 1,052,000 1,087,000 1,854,000 1,927,000
--------- --------- ------------- -------------
Total interest expense $1,589,000 $1,311,000 $2,752,000 $ 2,402,000
========== ========== ============= =============
6
7
4. NOTE PAYABLE, BANKS
The Company is currently operating under a $125 million Senior
Unsecured Revolving Credit Facility ("the Facility") that was executed on
May 29, 1998 and is described in the Company's Annual Report and Form 10-K
for the year ended December 31, 1998. The Facility was amended August 9,
1999, to increase to $2.5 million from $500,000, the amount of its Common
Shares that the Company is allowed to redeem or purchase in any year. The
Facility provides for a variable rate of interest on borrowings. In order
to reduce exposure to increasing interest rates, the Company has entered
into interest rate swap contracts that fix the interest rate on $30 million
of borrowings under the Facility. 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%.
As of June 30, 1999, the Company was in compliance with Facility
covenants and had $12.7 million available under its Facility, after
adjustment for borrowing base limitations. Borrowing availability under the
Facility could increase, depending on the Company's utilization of the
proceeds.
5. EARNINGS PER SHARE
A reconciliation of the weighted average shares used in basic and
diluted Earnings Per Share is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
----------- ----------- ---------- ----------
Weighted average shares outstanding
during the period 6,319,297 6,272,646 6,303,318 6,270,435
Assuming exercise of options 208,364 335,753 237,642 324,295
--------- ---------- ---------- ---------
Weighted average shares outstanding
adjusted for common share equivalents 6,527,661 6,608,399 6,540,960 6,594,730
========= ========= ========= =========
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.
7
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company recorded revenues of $72.8 million from 436 home closings in
second quarter 1999 compared to $68.0 million from 461 home closings in second
quarter 1998. Net income for second quarter 1999 was $1.9 million, or $.29 per
diluted share, compared to $2.7 million, or $.41 per diluted share, for second
quarter 1998. Despite closing 25 fewer homes in second quarter 1999 than second
quarter 1998, revenues and gross profit in second quarter 1999 were higher due
to an increase in the average price of homes closed in second quarter 1999. The
average price of homes closed in second quarter 1999 increased to $166,663 from
$147,278 in second quarter 1998, an increase of $19,385 or 13.2%. The increases
in second quarter 1999 revenues and gross profit, however, were offset by higher
selling, general and administrative expense that increased in second quarter
1999 to $8.7 million from $7.1 million in second quarter 1998, an increase of
$1.6 million or 22.5%.
Selling, general and administrative expense began increasing in the second
half of 1998 as the Company added field personnel and enhanced its operational
systems to meet the approximately 25% growth in its business from the prior
year. This expense level continued during the first half of 1999. Also, the
Company's expenses in 1999 include the impact of the growth in its Louisville,
Kentucky division, which began operations in September 1998.
New home contracts in second quarter 1999 increased to 412 contracts from
402 contracts in second quarter 1998. Due to the record sales experienced during
first quarter 1998, the Company's backlog of sales contracts at June 30, 1999
declined to 849 contracts from 944 contracts at June 30, 1998. However, the
aggregate sales value of the contracts in backlog at June 30, 1999 increased to
$151.5 million from $149.8 million at June 30, 1998, reflecting the increased
sales prices of the Company's homes. The average sales price of homes in backlog
at June 30, 1999 increased to $178,407 from $158,733 at June 30, 1998, an
increase of $19,674 or 12.4%.
8
9
COMPANY OUTLOOK
The Company expects enhanced deliveries during second half 1999, but
anticipates sales, revenues and net income for the full year to be somewhat less
than reported for 1998. The increased sales price of homes in backlog at June
30, 1999, combined with higher gross margins, are expected to partially mitigate
the effects of fewer closings expected in 1999 compared to 1998. The Company
expects to maintain its selling, general and administrative expenses at the
current level for the balance of the year in order to efficiently meet the
current level of activity in central Ohio and to expand its building capacity in
Louisville, Kentucky, where the Company anticipates future growth.
During second quarter 1999, the Company's customers began to experience
higher mortgage interest rates. Such increases in mortgage interest rates did
not appear to have materially affected the Company's sales during second quarter
1999. However, additional increases in mortgage interest rates could reduce the
demand for the Company's homes.
The Company is optimistic that it will gain market share in Louisville's
strong home buying market but does not expect that the Louisville operation will
be profitable in 1999. In April 1999, the Company began selling homes in two
Louisville communities and has a third community under development. Through June
30, 1999, the Company has sold 23 homes and closed two homes in the Louisville
market.
YEAR 2000 READINESS DISCLOSURE STATEMENT
The Year 2000 problem exists because many computer programs use only the
last two digits to refer to a year. Accordingly, such computer programs do not
distinguish a year that begins with "20" from a year that begins with "19." If
not corrected, these computer programs could fail or create erroneous results.
The Company has developed and is in the process of implementing a plan for
the identification and remediation of Year 2000 issues that could affect its
business. The identification and remediation plan has five categories: (1)
mission critical software, (2) other software, (3) information technology
hardware, (4) non-information technology systems, and (5) third party related
issues.
MISSION CRITICAL SOFTWARE: The Company has identified four mission critical
software systems: homebuilding accounting and job cost, contract administration,
sales management, and lumber division accounting and inventory management. In
January 1998, the Company purchased and began implementation of a JDEdwards
homebuilding and job cost accounting software system. This is the primary
software the Company uses to run its business. The project was completed July 1,
1998 and has been tested as Year 2000 compliant. In August 1998, the Company
completed transition of its contract administration and sales management
software systems to new software systems, which have been tested as Year 2000
compliant. In February 1999, the Company completed implementation of a JDEdwards
accounting and inventory management software system at its lumber division. This
system has been warranted to be Year 2000 compliant. The Company expects to test
the system by the end of third quarter 1999.
OTHER SOFTWARE: The Company maintains and periodically updates an inventory
of all other software utilized by it, such as word processing, spreadsheet, and
database management. During third quarter 1998, the Company began testing this
software for Year 2000 compliance. The Company expects to complete this testing
and transition to Year 2000 compliant software during third quarter 1999.
INFORMATION TECHNOLOGY HARDWARE: The Company maintains and periodically
updates an inventory of all information technology hardware. The Company has
identified and obtained written confirmation from hardware manufacturers that
their hardware is Year 2000 compliant. The Company has tested all hardware and
replaced any that was not Year 2000 compliant.
9
10
NON-INFORMATION TECHNOLOGY SYSTEMS: The Company has developed an inventory
of all non-information technology systems that are likely to have a material
impact on the Company's ability to conduct business, such as telephones and
security systems. The Company has performed internal testing and has completed
all necessary changes.
THIRD PARTY RELATED ISSUES: The Company has identified those vendors and
subcontractors which have a material effect on the Company's ability to conduct
business. The Company has developed and distributed a questionnaire to all
vendors and subcontractors with respect to their own Year 2000 compliance. The
Company has received responses from the vendors and subcontractors that it
considers to be material to its operations. Based on these responses, the
Company has not identified any anticipated Year 2000 problems that could
materially impact the Company's operations. Nonetheless, the Company expects to
buy additional lumber, prior to December 31, 1999, to help assure an adequate
supply of lumber in the event that its lumber suppliers encounter an
unanticipated Year 2000 problem. In the event that any of the Company's other
vendors or subcontractors encounter a material Year 2000 problem, the Company
will attempt to move its business to alternate vendors or subcontractors. The
Company, however, cannot guarantee that other vendors and subcontractors will be
available or that they will be able to meet the demands of the Company
COSTS TO ADDRESS THE YEAR 2000 ISSUES: The Company has spent approximately
$2.6 million on its Year 2000 compliance plan through June 30, 1999 and has
budgeted a total cost of $2.8 million. These costs include normal system
upgrades and technology improvements that would have been implemented regardless
of the Year 2000 issue.
RISKS: Failure of the Company or its vendors and subcontractors to
adequately address the Year 2000 issues in a timely manner could impede the
Company's ability to build and close homes and thus have a material adverse
affect on the Company's ability to generate revenues. Accordingly, the Company
intends to address all known Year 2000 issues before problems materialize.
Should the efforts on the part of the Company, its vendors, and its
subcontractors fail to adequately address their relevant Year 2000 issues, the
worst case scenario would be an interruption of revenues of an undetermined
length of time. The Company has developed the contingency plan identified above
under "Third Party Related Issues," to deal with any unexpected Year 2000
problems from its vendors and subcontractors. The Company does not expect to
develop any further contingency plans prior to the end of 1999.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This standard is effective for financial
statements for fiscal quarters of fiscal years beginning after June 15, 2000.
The Company will be required to adopt SFAS No. 133 effective January 1, 2001.
SFAS No. 133 standardizes the accounting for derivative instruments by requiring
that all entities recognize them as assets and liabilities in the balance sheet
and subsequently measure them at fair market value. It also prescribes specific
accounting principles to be applied to hedging activities and hedging
transactions, which are significantly different from prior accounting
principles. The Company has not yet determined the impact of SFAS No. 133.
10
11
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
The statements contained in this report under the captions "Company
Outlook" and "Year 2000 Readiness Disclosure Statement" 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 1999 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, 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 or adverse decisions in the
zoning, permitting or inspection processes, adverse decisions or change in
requirements by environmental agencies, 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, problems associated with the Year 2000 issue, problems that could
arise from expansion into the Louisville, Kentucky market and the other risks
described in the Company's Securities and Exchange Commission filings.
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.
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) (1) (IN UNITS) (IN NITS)
==========================================================================================================
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
Sept. 30, 1998 $67,769 330 437 837
Dec. 31, 1998 $74,679 381 467 751
Mar. 31, 1999 $52,774 453 331 873
June 30, 1999 $72,795 412 436 849
- -------------------
(1) Net of cancellations
At June 30, 1999, the aggregate sales price of homes in backlog was $151.5
million compared to $149.8 million at June 30, 1998. The average sales price of
homes in backlog at June 30, 1999 increased to $178,407 from $158,733 at June
30, 1998.
11
12
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,
1999 1998 1999 1998
----------- ----------- ----------- --------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of real estate sold 81.5 80.9 81.3 80.5
--------- ---------- --------- --------
Gross profit 18.5 19.1 18.7 19.5
Selling, general and
administrative expenses 11.9 10.4 12.9 11.0
---------- ---------- --------- --------
Income from operations 6.6 8.7 5.8 8.5
Interest expense 2.2 1.9 2.2 1.9
---------- ---------- --------- --------
Income before income taxes 4.4 6.8 3.6 6.6
Provision for income taxes 1.8 2.9 1.5 2.8
---------- ---------- --------- --------
Net income 2.6% 3.9% 2.1% 3.8%
========== ============ ========= =========
12
13
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1998
REVENUES. Revenues for second quarter 1999 increased to $72.8 million from
$68.0 million for second quarter 1998 despite the Company closing 25 fewer homes
in second quarter 1999. Second quarter 1998 included seven model homes that the
Company sold and leased back for use as sales models. The increase in revenues
is attributable to a higher average home sale price, which increased to $166,663
during second quarter 1999 from $147,278 during second quarter 1998, an increase
of $19,385 or 13.2%. The increase in the average home sale 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 because the Company offered a greater selection of larger homes and
because the FHA mortgage limits were increased, allowing customers to finance
larger homes. Included in revenues were the sale of land and building supplies
to other builders of $130,000 and $180,000 for second quarter 1999 and 1998,
respectively.
GROSS PROFIT. Gross profit for second quarter 1999 increased to $13.5
million from $13.0 million for second quarter 1998, primarily as a result of
closing higher priced homes in second quarter 1999. As a percentage of revenues,
the gross profit margin declined to 18.5% for second quarter 1999 from 19.1% for
second quarter 1998. The decrease in second quarter 1999 gross profit margin is
principally attributed to fewer deliveries and the increased cost of many home
building materials.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for second quarter 1999 increased to $8.7 million from
$7.1 million for second quarter 1998. This $1.6 million increase in selling,
general and administrative expenses is a result of the Company adding personnel
and equipment in Central Ohio in order to expand its building capacity relative
to second quarter 1998 and to invest in its new Louisville, Kentucky market. In
addition, second quarter 1999 selling, general and administrative expenses fully
recognized the amortized expense associated with the investment the Company
previously made in computer systems in order to build homes more efficiently,
distribute materials and components of its homes more effectively, provide
internal and external communication, and address Year 2000 computer hardware and
software concerns. As a percentage of revenues, selling, general and
administrative expenses for second quarter 1999 increased to 11.9% from 10.4%
for second quarter 1998.
INTEREST EXPENSE. Interest expense for second quarter 1999 increased to
$1.6 million from $1.3 million for second quarter 1998. As a percentage of
revenues, interest expense for second quarter 1999 increased to 2.2% from 1.9%
for second quarter 1998. The primary reasons for the increase in interest
expense were higher average revolving line of credit borrowings partially offset
by a lower average interest rate. The average revolving line of credit
borrowings outstanding were $83.7 million and $56.4 million for the second
quarter of 1999 and 1998, respectively. The average revolving line of credit
borrowings were higher in second quarter 1999 than second quarter 1998 in order
to finance increased real estate inventories in second quarter 1999. The
weighted average rate of interest under the Company's revolving line of credit
was 7.1% for second quarter 1999 compared to 8.3% for second quarter 1998. The
Company capitalized $114,000 more net interest expense in second quarter 1999
than second quarter 1998 due to increased development and construction
inventories.
PROVISION FOR INCOME TAXES. Income tax expense for second quarter 1999
decreased to $1.3 million from $1.9 million for second quarter 1998. The
Company's estimated annual effective tax rate was 42.0% for second quarter 1999
and 1998, respectively.
13
14
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1998
REVENUES. Revenues for the six months ended June 30, 1999 increased to
$125.6 million from $122.5 million for the six months ended June 30, 1998. The
Company closed 767 homes during the first six months of 1999 compared to 831
homes during the first six months of 1998, a decrease of 64 homes or 7.7%.
Closings for the six months ended June 30, 1998 included seven model homes that
the Company sold and leased back to use as sales models. The increase in
revenues is attributable to a higher average home sale price, which increased to
$163,501 during the first six months of 1999 from $147,117 during the first six
months of 1998, an increase of $16,384 or 11.1%. The increase in the average
home sale 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 because the Company offered 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 $160,000 for the first six months of 1999 compared to
$280,000 for the first six months of 1998.
GROSS PROFIT. Gross profit for the first six months of 1999 was $23.5
million compared to $23.9 million for the first six months of 1998, despite
closing 64 fewer homes in the first six months of 1999 than 1998. As a
percentage of revenues, the gross profit margin declined to 18.7% for the first
six months of 1999 from 19.5% for the first six months of 1998. The higher
average home sales price during the first half of 1999 significantly offset the
effects of delivering fewer homes with a lower gross profit margin. The decrease
in first half 1999 gross profit margin is principally attributable to fewer
deliveries and the increased cost of home building materials.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the first six months of 1999 increased to $16.2
million from $13.4 million for the first six months of 1998. This $2.8 million
increase in selling, general and administrative expenses is a result of the
Company adding personnel and equipment in Central Ohio in order to expand its
building capacity relative to first half 1998 and to invest in its new
Louisville, Kentucky market. In addition, first half 1999 selling, general and
administrative expenses fully recognized the amortized expense associated with
the investment the Company previously made in computer systems in order to build
homes more efficiently, distribute materials and components of its homes more
effectively, provide internal and external communication, and address Year 2000
computer hardware and software concerns. As a percentage of revenues, selling,
general and administrative expenses for the first six months of 1999 increased
to 12.9% from 11.0% for the first six months of 1998.
INTEREST EXPENSE. Interest expense for the first six months of 1999
increased to $2.8 million from $2.4 million for the first six months of 1998. As
a percentage of revenues, interest expense for the first six months of 1999
increased to 2.2% from 1.9% for the first six months of 1998. The primary
reasons for the increase in interest expense was a higher average revolving line
of credit borrowings partially offset by a lower average interest rate. The
average revolving line of credit borrowings outstanding were $77.7 million and
$54.7 million for the first six months of 1999 and 1998, respectively. The
average revolving line of credit borrowings were higher in the first six months
of 1999 than the first six months of 1998 in order to finance increased real
estate inventories in 1999. The weighted average rate of interest under the
Company's revolving line of credit was 7.2% for the first six months of 1999
compared to 8.4% for the first six months of 1998. The Company capitalized
$362,000 more net interest expense during the first six months of 1999 than the
first six months of 1998 due to increased development and construction
inventories.
PROVISION FOR INCOME TAXES. Income tax expense for the first six months of
1999 decreased to $1.9 million from $3.4 million for the first six months of
1998. The Company's estimated annual effective tax rate was 42.0% for the first
six months of 1999 and 1998, respectively.
14
15
SOURCES AND USES OF CASH
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Operating activities for the first six months of 1999 used cash of $19.2
million compared to providing cash of $3.8 million during the first six months
of 1998. The principal reason for the increased use of cash in first half 1999
was the Company's investment in real estate inventories. The Company invested
$9.1 million in land and land development inventories, $10.5 million in home
construction inventories, and $1.9 million in lumber and building supply
inventories during first half 1999. This represented a total investment of $21.5
million in real estate inventories in first half of 1999 compared to $400,000
invested during first half 1998. In addition to the increased real estate
inventory investment during first half 1999, operating activities generated less
cash as first half 1999 net income decreased to $2.6 million from $4.7 million
for first half 1998. Net cash used in investing activities during first half
1999 was $614,000 compared to $822,000 during first half 1998. The Company
increased its bank and term debt $19.9 million during first half 1999 compared
to reducing bank and term debt by $3.3 million during first half 1998. The
Company increased its bank term debt principally to fund its increased
investment in real estate inventories, which includes homes under construction.
REAL ESTATE INVENTORIES
The Company's practice is to develop most of the lots on which it builds
its homes. Generally, the Company attempts to maintain a land inventory that
will be sufficient to meet its anticipated lot needs for the next three to five
years. At June 30, 1999, the Company either owned or was under contract to
purchase lots or land that could be developed into approximately 5,500 lots,
including 238 lots in Louisville, Kentucky. The Company controlled through
option agreements an additional 6,200 lots, including 282 lots in Louisville,
Kentucky. During second quarter 1999, the Company exercised options to purchase
473 lots, all of which are located in Central Ohio. Option agreements expire at
varying dates through 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.
Real estate inventories of land and land development costs at June 30, 1999
increased to $82.1 million from $71.4 million at December 31, 1998. Included in
the $82.1 million of real estate inventories at June 30, 1999 are $4.1 million
of real estate inventories located in Louisville, Kentucky. Land and land
development inventories grew because of seasonal development activities and to
replace the record number of lots sold in 1998. Land and land development
inventories also increased because the Company is developing larger communities
with more amenities and up-front development costs, the Company is offering a
wider range of homes and communities, and the Company is acquiring and
developing land inventory in Louisville, Kentucky. Homes under construction
increased $10.5 million to $61.3 million from $50.8 million at December 31,
1998. The principal reasons for this increase are that many of the Company's
homes were at a more advanced stage of construction at June 30, 1999 compared to
June 30, 1998 and because the Company is building more expensive homes.
On June 30, 1999, the Company had 71 single family inventory homes in
various stages of construction, which represented an aggregate investment of
$3.7 million. At June 30, 1998, the Company had 58 inventory homes, in various
stages of construction, which represented an aggregate investment of $3.5
million. Inventory homes are not reflected in sales or backlog.
SELLER-PROVIDED DEBT
Seller-provided term debt was $4.4 million at June 30, 1999 compared to
$3.3 million at June 30, 1998. The Company will repay $1.6 million of the $4.4
million term debt prior to the end of 1999 and the remaining term debt will be
repaid prior to August 2001. Interest rates range from 6.5% to the prime rate.
15
16
LAND PURCHASE COMMITMENTS
At June 30, 1999, the Company had commitments to purchase 71 residential
lots at an aggregate cost of $1.9 million, net of $112,000 in good faith
deposits. Included in the commitments are 57 lots in Louisville, Kentucky that
have an aggregate cost of $1.5 million. In addition, at June 30, 1999, the
Company had $56.7 million of cancelable obligations to purchase residential lots
and unimproved land, net of $2.2 million in good faith deposits. Included in the
$56.7 million of cancelable commitments are $2.3 million of cancelable
commitments for lots in Louisville, Kentucky. The majority of the land subject
to cancelable obligations is for post 1999 development activities. The Company
expects to fund its 1999 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
The Company is currently operating under a $125 million Senior
Unsecured Revolving Credit Facility ("the Facility") that was executed on May
29, 1998 and is described in the Company's Annual Report and Form 10-K for the
year ended December 31, 1998. The Facility was amended August 9, 1999, to
increase to $2.5 million from $500,000, the amount of its Common Shares that the
Company is allowed to redeem or purchase in any year. The Facility provides for
a variable rate of interest on borrowings. In order to reduce exposure to
increasing interest rates, the Company has entered into interest rate swap
contracts that fix the interest rate on $30 million of borrowings under the
Facility. 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 inception of the
Facility the variable margin has been 1.75%.
As of June 30, 1999, the Company was in compliance with Facility covenants
and had $12.7 million available under its Facility, after adjustment for
borrowing base limitations. Borrowing availability under the credit Facility
could increase, depending on the Company's utilization of the proceeds.
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. While the Company attempts
to maintain costs with subcontractors from the date a sales contract with a
customer is accepted until the date construction is completed, unanticipated
additional costs may be incurred which cannot be passed onto the customer. 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. These costs can
result in lower gross profits.
16
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company has entered into three interest rate swap contracts with
notional amounts of $10,000,000 each, maturing on October 16, 2000, January 14,
2001 and May 6, 2003. These interest rate swap contracts, reflected in aggregate
in the table below, commenced on October 16, 1997, January 14, 1998 and May 6,
1998, respectively, and fix the variable interest rate on the Company's
revolving credit note at 6.125%, 5.475% and 5.960%, respectively. The Company
entered into interest rate swap contracts to achieve an appropriate level of
variable and fixed-rate debt as approved by senior management. Interest rate
swap contracts allow the Company to have variable-rate borrowings and to select
the level of fixed-rate debt for the Company as a whole. The expectation is that
the resulting cost of funds is lower than that available under the variable-rate
borrowings. Under interest rate swap contracts, the Company agrees with other
parties to exchange, at specified intervals, the difference between fixed rate
and floating-rate amounts calculated by reference to an agreed notional amount.
The level of fixed rate debt, after the effect of interest rate swap contracts
have been considered, is maintained at approximately 38% of total borrowings
under the revolving line of credit facility. The Company does not enter into
derivative financial instrument transactions for speculative purposes.
The following table presents descriptions of the financial instruments
and derivative instruments that are held by the Company at June 30, 1999, and
which are sensitive to changes in interest rates. For the liabilities, the table
presents principal calendar year cash flows that exist by maturity date and the
related average interest rate. For the interest rate derivatives, the table
presents the notional amounts and expected interest rates that exist by
contractual dates. The notional amount is used to calculate the contractual
payments to be exchanged under the contract. The variable rates are estimated
based on the three-month forward LIBOR rate plus a variable margin of 1.75%. All
dollar amounts are reflected in U.S. Dollars (thousands).
FAIR
1999 2000 2001 2002 2003 TOTAL VALUE
---- ---- ---- ---- ---- ----- -----
Liabilities
- -----------
Variable rate $79,392 $79,392 $79,392
Average interest rate 6.750% 6.750%
Interest-Rate Derivatives
- -------------------------
Notional amount $30,000 $30,000 $20,000 $10,000 $10,000 $30,000 $ 74
Average pay rate 5.853% 5.853% 5.718% 5.960% 5.960% 5.869%
Average receive rate 6.750% 6.750% 6.750% 6.750% 6.750% 6.750%
17
18
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 April 28, 1999, the Company held its Annual Meeting of
Shareholders. At the Annual Meeting, the shareholders ratified the
selection of PricewaterhouseCoopers L.L.P., as independent public
accountants for the Company in 1999 by the following vote:
Shares For Shares Against Shares Abstaining/Withheld
---------- -------------- --------------------------
6,224,008 700 850
The shareholders elected as Class I Directors the three nominees
of the Board of Directors by the following vote:
Shares For Shares Abstaining/Withheld
---------- --------------------------
Douglas G. Borror 6,212,763 12,795
Jon M. Donnell 6,212,763 12,795
C. Ronald Tilley 6,212,763 12,795
The term of office of the Class II Directors, Donald A. Borror,
David S. Borror, Peter A. Klisares and Gerald A. Mayo continued
after the meeting.
18
19
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.
19
20
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 11, 1999 By: /s/Douglas G. Borror
--------------------
Douglas G. Borror
Chairman,
Chief Executive Officer
Date: August 11, 1999 By: /s/Jon M. Donnell
-----------------
Jon M. Donnell
President
Chief Operating Officer
Date: August 11, 1999 By: /s/Peter J. O'Hanlon
--------------------
Peter J. O'Hanlon
Chief Financial Officer
20
21
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.
10.1 Split Dollar Life Insurance Agreement dated July 11, 1999 between Filed herewith
Dominion Homes, Inc. and Douglas G. Borror (which agreement is the
same as Split Dollar Life Insurance Agreements entered into between
the Company and other executive officers of the Company except for
life insurance values for which a supplemental schedule is
attached)
10.2 Stock Option Agreement dated April 29, 1999 between Dominion Filed herewith
Homes, 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, Gerald E. Mayo and C. Ronald
Tilley)
10.3 Assignment and Assumption of Lease dated June 24, 1999 by and Filed herewith
among Rommy K. Chung, Dominion Homes, Inc., and BRC Properties
Inc. (formerly The Borror Corporation)
10.4 Lease dated March 1, 1994 between The Borror Corporation and Rommy Filed herewith
K. Chung
21
22
10.5 Assignment and Assumption of Lease dated June 24, 1999 by and Filed herewith
among Dao Q. Nguyen, Dominion Homes, Inc., and BRC Properties Inc.
(formerly Borror Realty Company)
10.6 Lease dated November 12, 1997 between Borror Realty Company and Filed herewith
Thomas M. Nguyen and assigned on October 2, 1998 to Dao Q. Nguyen
10.7 First Consent Agreement dated August 9, 1999 amending the Loan Filed herewith
Agreement dated May 29, 1998, among Dominion Homes, Inc.,
Huntington Capital Corp. as Syndicating Agent, Huntington National
Bank as Administrative and Issuing Agent and the Lenders listed
therein.
27 Financial Data Schedule Filed herewith
22