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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 September 30, 1999
( ) 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
---------------------------------
(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 ____
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Number of common shares outstanding as of November 10, 1999: 6,357,480
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOMINION HOMES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
==========================================================================================================================
September 30, December 31,
1999 1998
(Unaudited)
------------------ --------------
ASSETS
Cash and cash equivalents $ 694 $ 261
Notes and accounts receivable, net:
Trade 237 133
Due from financial institutions for residential closings 653 769
Real estate inventories:
Land and land development costs 91,130 71,404
Homes under construction 60,632 50,843
Other 4,453 2,906
------------------ --------------
Total real estate inventories 156,215 125,153
------------------ --------------
Prepaid expenses and other 3,657 3,111
Deferred income taxes 1,904 1,788
Property and equipment, at cost: 8,538 7,385
Less accumulated depreciation (3,710) (3,244)
------------------ --------------
Total property and equipment 4,828 4,141
------------------ --------------
Total assets $168,188 $135,356
================== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade $ 7,067 $ 5,520
Deposits on homes under contract 2,221 2,601
Accrued liabilities 11,462 12,131
Note payable, banks 85,814 60,415
Term debt 5,790 4,461
------------------ --------------
Total liabilities 112,354 85,128
------------------ --------------
Commitments and contingencies
Shareholders' equity
Common shares, without stated value, 12,000,000 shares authorized,
6,345,480 and 6,281,504 shares issued and outstanding, respectively 31,134 30,851
Less deferred compensation (322) (371)
Retained earnings 25,022 19,748
------------------ --------------
Total shareholders' equity 55,834 50,228
================== ==============
Total liabilities and shareholders' equity $168,188 $135,356
================== ==============
The accompanying notes are an integral part of the financial statements.
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DOMINION HOMES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
===================================================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ---------- ---------- ---------
Revenues $73,067 $67,769 $198,636 $190,258
Cost of real estate sold 58,852 55,260 160,970 153,848
-------- ------ --------- --------
Gross profit 14,215 12,509 37,666 36,410
Selling, general and administrative 8,475 6,901 24,707 20,324
-------- --------- --------- --------
Income from operations 5,740 5,608 12,959 16,086
Interest expense 1,196 1,192 3,948 3,594
-------- --------- --------- --------
Income before income taxes 4,544 4,416 9,011 12,492
Provision for income taxes 1,861 1,855 3,737 5,247
-------- --------- --------- --------
Net income $ 2,683 $ 2,561 $ 5,274 $ 7,245
======== ========= ========= ========
Earnings per share
Basic $0.43 $0.41 $0.84 $1.15
======== ========= ======== =========
Diluted $0.42 $0.39 $0.81 $1.10
======== ========= ======== =========
Weighted average shares outstanding
Basic 6,312,295 6,279,016 6,306,343 6,273,326
========= =========== =========== =========
Diluted 6,461,902 6,615,017 6,490,320 6,600,175
========= =========== =========== =========
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 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 5,274 5,274
Shares awarded and redeemed 88,976 463 (35) 428
Treasury shares:
held for deferred compensation (27) (27)
other shares purchased (25,000) (180)
(180)
Deferred compensation 111 111
- ------------------------------------------ -------------- -------------- ------------- --------------- ------------- -------------
Balance, September 30, 1999 6,345,480 $31,134 $929 $(1,251) $25,022 $55,834
- ------------------------------------------ -------------- -------------- ------------- --------------- ------------- -------------
The accompanying notes are an integral part of the financial statements.
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DOMINION HOMES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
=============================================================================================================
Nine Months Ended
September 30,
-------------------------------
1999 1998
-------------------------------
Cash flows from operating activities:
Net income $ 5,274 $ 7,245
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization 1,112 477
Disposal of property & equipment (7) (14)
Issuance of common shares for compensation 428 42
Writedown of real estate inventories 256
Deferred income taxes (116) (164)
Changes in assets and liabilities:
Notes and accounts receivable 12 (653)
Real estate inventories (29,746) (7,632)
Prepaid expenses and other (651) (1,731)
Accounts payable 1,547 (280)
Deposits on homes under contract (380) 776
Accrued liabilities (618) 2,531
-------------- -------------
Net cash (used in) provided by operating activities (22,889) 597
-------------- -------------
Cash flows from investing activities:
Proceeds from sale of property & equipment 8 24
Purchase of property & equipment (1,013) (1,386)
-------------- -------------
Net cash used in investing activities (1,005) (1,362)
-------------- -------------
Cash flows from financing activities:
Proceeds from note payable, banks
220,462 183,852
Payments on note payable, banks (195,063) (179,659)
Prepaid loan fees (181) (1,458)
Payments on term debt (684) (1,805)
Common shares purchased or redeemed (207) (165)
-------------- -------------
Net cash provided by financing activities 24,327 765
-------------- -------------
Net change in cash and cash equivalents 433 0
Cash and cash equivalents, beginning of period 261 252
============== =============
Cash and cash equivalents, end of period $ 694 $ 252
============== =============
Supplemental disclosures of cash flow information:
Interest paid (net of amounts capitalized) $ 1,067 $ 736
============== =============
Income taxes paid $ 4,887 $ 6,234
============== =============
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, 1998 audited annual financial statements of the Company contained in
its Annual Report to Shareholders or in the 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 nine months
ended September 30, 1999 and 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.
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
$3.3 million and $2.0 million at September 30, 1999 and September 30, 1998,
respectively. The following table summarizes the activity with respect to
capitalized interest:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ------------ ------------- -------------
Interest incurred $1,686,000 $1,286,000 $4,852,000 $ 3,740,000
Interest capitalized (1,428,000) (973,000) (3,696,000) (2,952,000)
----------- --------- -------------- --------------
Interest expensed directly 258,000 313,000 1,156,000 788,000
Previously capitalized interest
charged to interest expense 938,000 879,000 2,792,000 2,806,000
------------ ------------ ------------ -------------
Total interest expense $1,196,000 $1,192,000 $3,948,000 $ 3,594,000
========== ========== ========== =============
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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 by a First
Consent Agreement August 9, 1999 to increase to $2.5 million from $500,000,
the amount of Common Shares the Company is allowed to redeem or purchase in
the aggregate through December 31, 2001. The First Consent Agreement was
incorporated into a First Amendment to the Credit Agreement dated September
3, 1999, along with several other amendments to the Facility. The other
amendments, among other matters, revise the definition of the Company's
borrowing base to provide additional borrowing capacity; exclude developed
lots owned by the Company for more than 24 months from the borrowing base;
update the amount of Consolidated Tangible Net Worth the Company is
required to maintain to $45 million plus 75% of the Company's Consolidated
Net Income, beginning with the fiscal year ending December 31, 1999;
require the Company's Leverage Ratio to not exceed 2.50 to 1.00 from
September 30, 1999 through December 31, 2001 and 2.25 to 1.00 thereafter;
require that the Company's Ratio of Uncommitted Land Holdings to
Consolidated Tangible Worth not exceed 2.00 to 1.00 through December 31,
2001 and 1.75 to 1.00 thereafter; reduce the amount of speculative homes
the Company is allowed to maintain in inventory to $10.0 million from $12.5
million; exclude Louisville, Kentucky from the restrictions imposed under
new market investment limitations in the Facility; and limit investment by
the Company in Louisville, Kentucky to $20.0 million.
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 September 30, 1999, the Company was in compliance with Facility
covenants and had $21.2 million available under the Facility, after
adjustment for borrowing base limitations. Borrowing availability under the
Facility could increase, depending on the Company's utilization of the
proceeds.
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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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ---------- ------------
Weighted average shares outstanding
during the period 6,312,295 6,279,016 6,306,343 6,273,326
Assuming exercise of options 149,607 336,001 183,977 326,849
---------- --------- ---------- ---------
Weighted average shares outstanding
adjusted for common share equivalents 6,461,902 6,615,017 6,490,320 6,600,175
========= ========= ========= =========
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 recorded revenues of $73.1 million from 428 home closings
in third quarter 1999 compared to $67.8 million from 437 home closings in
third quarter 1998. Net income for third quarter 1999 increased 4.8% to a
quarterly record $2.7 million, or $.42 per share on a diluted basis,
compared to $2.6 million, or $.39 per share on a diluted basis, for third
quarter 1998. Revenues increased $5.3 million, or 7.8%, due to a 9.9%
increase in the average sale price of the Company's homes in third quarter
1999 compared to third quarter 1998. Gains in revenues and gross profit,
however, were partially offset by higher selling, general and
administrative expense that increased in third quarter 1999 to $8.5 million
from $6.9 million in third quarter 1998, an increase of $1.6 million or
22.8%.
Selling, general and administrative expense began increasing in the
second half of 1998 as the Company added field personnel and enhanced its
operations systems to meet the approximately 25% growth in business from
the previous year. However, many of these additional expenses were not
fully implemented during third quarter 1998. Additionally, third quarter
1998 selling, general and administrative expense was favorably impacted by
a $400,000 one time reduction of the Company's self insured medical plan
expense. Third quarter 1999 selling, general and administrative expense
reflects increased investment in the Company's Louisville, Kentucky
operations compared to the amount reported in third quarter 1998, when the
Company entered the Louisville, Kentucky market. It also includes expenses
the Company incurred in adding new communities and sales offices in Central
Ohio and amortizing its new information systems.
New home contracts increased 22.4% to 404 for third quarter 1999
compared to 330 for the same period a year ago. The number of sales
contracts in backlog remained stable with 825 home sales contracts in
backlog at September 30, 1999 compared to 837 home sales contracts in
backlog at September 30, 1998. However, the aggregate sales value of the
homes in backlog at September 30, 1999 increased $10.3 million, or 7.6%, to
$146.6 million from $136.3 million at September 30, 1998.
On July 26, 1999 the Company announced the Board of Directors had
authorized a program to repurchase up to 500,000 of the Company's common
shares through July 31, 2000. As of September 30, 1999, the Company had
repurchased 25,000 common shares at an average price of $6.88 per share.
COMPANY OUTLOOK
Although the Company expects to close fewer homes in 1999 than it did
in 1998, it expects its average per home closing price to be higher in 1999
than in 1998. As a result, the Company expects 1999 revenues and gross
profit to be comparable to 1998 revenues and gross profit. However, because
of the increased level of selling, general, and administrative expense that
the Company has incurred during the first nine months of 1999, and expects
to maintain during fourth quarter 1999, in order to position itself for
growth in Central Ohio and Louisville, Kentucky, the Company expects 1999
net income to be lower than 1998 net income.
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The Company anticipates that its operations in Louisville, Kentucky
will become profitable in 2000. The Company is currently selling homes in
three communities in Louisville and has a fourth community under
development. The Company has sold 47 homes and closed 4 homes in the
Louisville market during the first nine months of 1999.
On November 5, 1999, the Company entered into an agreement with
Homebuilders Financial Network, Inc., providing for Homebuilders to assist
the Company in establishing a mortgage finance company to be wholly-owned
by the Company. The Company expects the mortgage finance company to be
operational by the end of first quarter, 2000. The Company does not expect
the mortgage finance company to materially impact the Company's revenues or
expenses during 1999.
YEAR 2000 READINESS DISCLOSURE STATEMENT
The Year 2000 issue 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 implemented 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 tested as Year 2000 compliant.
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
completed 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 has replaced any that was not Year 2000 compliant.
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
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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
September 30, 1999. 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 has implemented all aspects of its plan to address all known Year
2000 issues. 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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
The statements contained in this report under the captions "Company
Outlook," "Year 2000 Readiness Disclosure Statement" and other provisions
of this report which are not
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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 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 UNITS)
===========================================================================================================
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
Sept. 30, 1999 $73,067 404 428 825
- -----------------
(1) Net of cancellations
At September 30, 1999, the aggregate sales value of homes in backlog
was $146.6 million compared to $136.3 million at September 30, 1998. The
average sales value of homes in backlog at September 30, 1999 increased to
$177,742 from $162,881 at September 30, 1998. This increase reflects home
sales price increases and the sale of larger homes.
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The Company annually incurs a substantial amount of indirect
construction costs, which are essentially fixed in nature. For purposes of
financial reporting, the Company capitalizes these costs to real estate
inventories on the basis of the ratio of estimated annual indirect costs to
direct construction costs to be incurred. Thus, variations in construction
activity cause fluctuations in interim and annual gross profits.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items from the statements of income expressed as percentages of total
revenues:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of real estate sold 80.5 81.5 81.0 80.9
--------- ---------- --------- --------
Gross profit 19.5 18.5 19.0 19.1
Selling, general and
administrative expenses 11.6 10.2 12.5 10.6
---------- ---------- --------- --------
Income from operations 7.9 8.3 6.5 8.5
Interest expense 1.7 1.8 2.0 1.9
---------- ---------- --------- --------
Income before income taxes 6.2 6.5 4.5 6.6
Provision for income taxes 2.5 2.7 1.8 2.8
---------- ---------- --------- --------
Net income 3.7% 3.8% 2.7% 3.8%
========== ========== ========= ========
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THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1998
REVENUES. Revenues for third quarter 1999 increased to $73.1 million
from $67.8 million for third quarter 1998. The Company closed 428 homes
during third quarter 1999 compared to 437 homes closed during third quarter
1998. The increase in revenues is attributable to a higher average home
price, which increased by 9.9% to $170,030 during third quarter 1999 from
$154,657 during third quarter 1998. Included in revenues were other
revenues, consisting of the sale of land and building supplies to other
builders, which were $290,000 for third quarter 1999 compared to $180,000
for third quarter 1998.
GROSS PROFIT. Gross profit for third quarter 1999 increased to $14.2
million from $12.5 million for third quarter 1998. As a percentage of
revenues, the gross profit margin increased to 19.5% for third quarter 1999
from 18.5% for third quarter 1998. The primary reasons for the increase in
third quarter 1999 gross profit were an increase in the average sales price
of homes delivered during third quarter 1999 compared to third quarter 1998
and more effective control of financing and direct construction costs
during third quarter 1999 than third quarter 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for third quarter 1999 increased to $8.5 million
from $6.9 million for third quarter 1998. As a percentage of revenues,
selling, general and administrative expenses increased to 11.6% from 10.2%.
Selling, general and administrative expense grew quarter to quarter as the
Company increased its investment in the Louisville, Kentucky market, added
communities in Central Ohio and amortized its new information systems. The
quarter to quarter comparison was also impacted by a $400,000 one-time
reduction of the Company's self insured medical expense in third quarter
1998.
INTEREST EXPENSE. Interest expense for third quarter 1999 was $1.2
million, the same interest expense as third quarter 1998. As a percentage
of revenues, interest expense for third quarter 1999 decreased to 1.7% from
1.8% for third quarter 1998. Interest expense remained stable between third
quarter 1999 and 1998 despite higher borrowing levels due to a lower
average rate of interest and increased capitalization of interest during
third quarter 1999. The average revolving line of credit borrowings were
$82.2 million and $56.6 million for third quarter 1999 and 1998,
respectively. The weighted average rate of interest under the Company's
revolving line of credit was 7.8% for third quarter 1999 compared to 8.6%
for third quarter 1998. The Company capitalized more interest during third
quarter 1999 as a result of having increased land development and home
construction inventories during third quarter 1999 compared to third
quarter 1998.
PROVISION FOR INCOME TAXES. Income tax expense for both third quarter
1999 and 1998 was $1.9 million. The Company's estimated annual effective
tax rate was 41.0% for third quarter 1999 and 42.0% for third quarter 1998.
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NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1998
REVENUES. Revenues for the nine months ended September 30, 1999
increased to $198.6 million from $190.3 million for the nine months ended
September 30, 1998. The number of closings during the first nine months of
1999 declined by 73 homes, or 6%, to 1,195 homes compared to the 1,268
homes closed during the same period in 1998. Closings for the nine months
ended September 30, 1998 included seven model homes the Company sold and
leased back for use as sales models. The increase in revenues is
attributable to a higher average home sales price, which increased 10.9% to
$165,840 during the first nine months of 1999 from $149,538 during the
first nine months of 1998. The increase in the average home sales price is
primarily attributable to the Company's customers purchasing larger homes,
homes with more options, and price increases by the Company. Customers were
able to purchase larger homes and homes with more options during 1999
because the Company offered a greater selection of larger homes and because
FHA mortgage limits were increased, allowing more 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 $460,000
for the first nine months of 1999 and 1998.
GROSS PROFIT. Gross profit for the first nine months of 1999 increased
to $37.7 million from $36.4 million for the first nine months of 1998,
primarily as a result of closing homes with higher average sale prices in
the first nine months of 1999 than 1998. As a percentage of revenues, the
gross profit margin declined slightly to 19.0% for the first nine months of
1999 from 19.1% for the first nine months of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the first nine months of 1999 increased to
$24.7 million from $20.3 million for the first nine months of 1998. As a
percentage of revenues, selling, general and administrative expenses for
the first nine months of 1999 increased to 12.5% from 10.6% for the first
nine months of 1998. Selling, general and administrative expense grew as
the Company increased its investment in the Louisville, Kentucky market,
added communities in Central Ohio and amortized its new information
systems. The comparison was also impacted by a $400,000 one-time reduction
of the Company's self insured medical expense in third quarter 1998.
INTEREST EXPENSE. Interest expense for the first nine months of 1999
increased to $3.9 million from $3.6 million for the first nine months of
1998. As a percentage of revenues, interest expense for the first nine
months of 1999 increased to 2.0% from 1.9% for the first nine months of
1998. Interest expense increased because of higher average borrowings,
offset by a lower average rate of interest and because the Company
capitalized more interest during the first nine months of 1999 than the
first nine months of 1998. The average revolving line of credit borrowings
outstanding were $79.2 million and $55.4 million for the first nine months
of 1999 and 1998, respectively. The weighted average rate of interest under
the Company's revolving line of credit was 7.9% for the first nine months
of 1999 compared to 8.4% for the first nine months of 1998. The Company
capitalized more interest in 1999 as a result of having increased land
development and home construction inventories during the first nine months
of 1999 compared to the first nine months of 1998.
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PROVISION FOR INCOME TAXES. Income tax expense for the first nine
months of 1999 decreased to $3.7 million from $5.2 million for the first
nine months of 1998. The Company's estimated annual effective tax rate was
41.5% for the first nine months of 1999 and 42.0% for the first nine months
of 1998.
SOURCES AND USES OF CASH
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Operating activities for the first nine months of 1999 required cash of
$22.9 million compared to providing cash of $597,000 during the first nine
months of 1998. The principal reason for the increased use of cash during
the first nine months of 1999 was the Company's investment in real estate
inventories. The Company invested $18.4 million in land and land
development inventories, $9.8 million in home construction inventories, and
$1.5 million in lumber and building supply inventories during the first
nine months of 1999. This represented a total investment of $29.7 million
in real estate inventories during the first nine months of 1999 compared to
$7.6 million invested during the first nine months of 1998. Operating
activities also provided less cash during the first nine months of 1999 as
net income declined to $5.3 million from $7.2 million for the first nine
months of 1998. Net cash used in investing activities during the first nine
months of 1999 was $1.0 million compared to $1.4 million during the first
nine months of 1998. The Company increased its bank and term debt $24.3
million during the first nine months of 1999 compared to $765,000 during
the first nine months of 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 September 30, 1999, the Company either owned
or was under contract to purchase lots or land that could be developed into
approximately 5,900 lots, including 200 lots in Louisville, Kentucky. The
Company controlled through option agreements an additional 5,900 lots,
including 700 lots in Louisville, Kentucky. During third quarter 1999, the
Company exercised options to purchase 800 lots, including 57 lots in
Louisville, Kentucky. 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.
Land and land development inventories at September 30, 1999 increased
to $91.1 million from $71.4 million at December 31, 1998. Included in the
$91.1 million of land and land development inventories at September 30,
1999 are $5.8 million of land and land development inventories located in
Louisville, Kentucky. There were no land and land development inventories
in Louisville, Kentucky at September 30, 1998. Land and land development
inventories in Central Ohio increased due to seasonal development
activities and to replace the record number of lots sold in 1998.
Inventories also increased because the Company is developing a larger
number of communities and communities with more amenities and more up-front
development costs. Homes under construction increased $9.8
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million to $60.6 million from $50.8 million at December 31, 1998. The
principal reason for this increase is that the Company is building larger
and more expensive homes.
On September 30, 1999, the Company had 60 inventory homes in various
stages of construction, which represented an aggregate investment of $4.4
million. At September 30, 1998, the Company had 79 inventory homes, in
various stages of construction, which represented an aggregate investment
of $4.2 million. Inventory homes are not reflected in sales or backlog.
SELLER-PROVIDED DEBT
Seller-provided term debt was $4.4 million at September 30, 1999
compared to $3.3 million at September 30, 1998. The Company expects to
repay $1.6 million of the $4.4 million term debt prior to the end of 1999
and the balance of such term debt will be due prior to August 2001.
Interest rates range from 6.5% to the prime rate.
LAND PURCHASE COMMITMENTS
At September 30, 1999, the Company had commitments to purchase 105
residential lots in Central Ohio, at an aggregate cost of $2.5 million, net
of $1.2 million in good faith deposits. In addition, at September 30, 1999,
the Company had $77.4 million of cancelable obligations to purchase
residential lots and unimproved land in which $2.9 million in good faith
deposits had been invested by the Company. The majority of the land subject
to cancelable obligations is for post 1999 development activities. The
Company expects to fund its capital requirements for land acquisition and
development and its obligations under purchase contracts and mortgage notes
from internally generated cash and from the borrowing capacity available
under its bank credit 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 by a First
Consent Agreement August 9, 1999 to increase to $2.5 million from $500,000,
the amount of Common Shares the Company is allowed to redeem or purchase in
the aggregate through December 31, 2001. The First Consent Agreement was
incorporated into a First Amendment to the Credit Agreement dated September
3, 1999, along with several other amendments to the Facility. The other
amendments, among other matters, revise the definition of the Company's
borrowing base to provide additional borrowing capacity; exclude developed
lots owned by the Company for more than 24 months from the borrowing base;
update the amount of Consolidated Tangible Net Worth the Company is
required to maintain to $45 million plus 75% of the Company's Consolidated
Net Income, beginning with the fiscal year ending December 31, 1999;
require the Company's Leverage Ratio to not exceed 2.50 to 1.00 from
September 30, 1999 through December 31, 2001 and 2.25 to 1.00 thereafter;
require that the Company's Ratio of Uncommitted Land Holdings to
Consolidated Tangible Worth not exceed 2.00 to 1.00 through December 31,
2001 and 1.75 to 1.00 thereafter; reduce the amount of speculative homes
the Company is allowed to maintain in inventory to $10.0 million from $12.5
million; exclude Louisville, Kentucky from the restrictions imposed under
new market investment limitations in the Facility; and limit investment by
the Company in Louisville, Kentucky to $20.0 million.
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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 September 30, 1999, the Company was in compliance with Facility
covenants and had $21.2 million available under the Facility, after
adjustment for borrowing base limitations. Borrowing availability under the
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, which additional costs can result in lower gross
profits.
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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 36% 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 September 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 $85,814 $85,814 $85,814
Average interest rate 6.750% 6.750%
Interest-Rate Derivatives
Notional amount $30,000 $30,000 $20,000 $10,000 $10,000 $30,000 $ 99
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%
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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. Changes 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. Not
applicable
Item 5. Other Information. Not applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: See attached index (following the signature page).
(b) Reports on Form 8-K. Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOMINION HOMES, INC.
(Registrant)
Date: November 11, 1999 By: /s/Douglas G. Borror
-------------------------------------------
Douglas G. Borror
Chairman, Chief Executive Officer
Date: November 11, 1999 By: /s/Jon M. Donnell
-------------------------------------------
Jon M. Donnell
President, Chief Operating Officer
Date: November 11, 1999 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.
10.1 Split Dollar Life Insurance Agreement dated July 11, 1999 between Incorporated by reference to
Dominion Homes, Inc. and Douglas G. Borror (which agreement is the Exhibit 10.1 to the Company's June 30,
same as Split Dollar Life Insurance Agreements entered into 1999 Form 10-Q.
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 Incorporated by reference to
Homes, Inc. and Pete A. Klisares (which agreement is the same as Exhibit 10.2 to the Company's June 30,
Stock Option Agreements entered into between the Company and its 1999 Form 10-Q.
other outside, independent directors, Gerald E. Mayo and C. Ronald
Tilley)
10.3 Assignment and Assumption of Lease dated June 24, 1999 by and Incorporated by reference to
among Rommy K. Chung, Dominion Homes, Inc. and BRC Properties Inc. Exhibit 10.3 to the Company's June 30,
(formerly The Borror Corporation) 1999 Form 10-Q.
10.4 Lease dated March 1, 1994 between The Borror Corporation and Rommy Incorporated by reference to
K. Chung Exhibit 10.4 to the Company's June 30,
1999 Form 10-Q.
10.5 Assignment and Assumption of Lease dated June 24, 1999 by Incorporated by reference to
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and among Dao Q. Nguyen, Dominion Homes, Inc., and Exhibit 10.5 to the Company's June 30,
BRC Properties Inc. (formerly Borror Realty Company) 1999 Form 10-Q.
10.6 Lease dated November 12, 1997 between Borror Realty Company and Incorporated by reference to
Thomas M. Nguyen and assigned on October 2, 1998 to Dao Q. Nguyen Exhibit 10.6 to the Company's June 30,
1999 Form 10-Q.
10.7 First Consent Agreement dated August 9, 1999 amending the Loan Incorporated by reference to
Agreement dated May 29, 1998, among Dominion Homes, Inc., Exhibit 10.7 to the Company's June 30,
Huntington Capital Corp. as Syndicating Agent, Huntington National 1999 Form 10-Q.
Bank as Administrative and Issuing Agent and the Lenders listed
therein
10.8 First Amendment to Credit Agreement dated September 3, 1999 Filed herewith
amending the Loan 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
10.9 Lease dated September 29, 1999 between BRC Properties Inc. and Filed herewith
Dominion Homes, Inc.
10.10 Agreement For Services dated November 5, 1999 between Homebuilders Filed herewith
Financial Network, Inc. and Dominion Homes, Inc.
27 Financial Data Schedule Filed herewith
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