W A S H I N G T O N H O M E S
[PHOTO OMITTED]
B U I L D I N G
I N T O T H E Annual Report 1999
N E W M I L L E N N I U M
B U I L D I N G I N T O T H E N E W M I L L E N N I U M
Washington Homes
is an innovative
[LOGO] company of choice
for homebuyers,
employees, and
shareholders.
Four years ago we launched a series of strategic
initiatives to challenge ourselves to become a leading
homebuilder in the United States. By the turn of the
century we are poised to exceed all of our goals. As we
prepare to enter the new millennium, we have raised the
bar on financial and operating goals to sustain our strong
growth and build shareholder value. This report outlines
our vision for the next five years.
The award winning Landan model, named Best Home in its class, is featured on our
cover.
WASHINGTON HOMES 1
F I N A N C I A L H I G H L I G H T S
Years Ended July 31,
--------------------------------------------------------
(dollars in thousands except per share amounts) 1999 1998 1997* 1996 1995
Statement of Operations Data
- ---------------------------------------------------------------------------------------------------------
Total revenues $362,733 $240,703 $217,459 $175,025 $183,485
Gross profit 67,717 42,539 37,551 33,829 36,428
Earnings (loss) before interest,
financing fees and taxes* 24,710 11,801 (8,399) 11,240 13,520
Total interest and financing fees expense 7,356 5,793 5,836 4,771 4,921
Net earnings (loss)* 10,648 3,790 (13,289) 3,747 5,045
Earnings (loss) per common share--basic* 1.34 0.48 (1.67) 0.47 0.64
Earnings (loss) per common share--diluted 1.30 0.48 (1.67) 0.47 0.64
Dividends per common share -- -- -- -- 0.05
Selected Operating Data
- ---------------------------------------------------------------------------------------------------------
Number of homes delivered 2,124 1,479 1,315 1,087 1,167
Number of net new orders 2,229 1,709 1,305 1,127 1,124
Number of homes in backlog at end of period 1,008 821 591 601 561
Balance Sheet Data
- ---------------------------------------------------------------------------------------------------------
Cash $ 12,734 $ 10,324 $ 10,335 $ 15,384 $ 15,111
Residential inventories 130,502 115,249 114,228 125,033 119,652
Total assets 167,455 147,355 144,745 170,227 164,063
Notes and loans payable 59,526 59,230 67,104 74,282 72,608
Shareholders' equity 68,949 58,270 54,480 67,769 64,022
* 1997 includes an after-tax, non-cash charge of $15.8 million for the
impairment of long-lived assets. For further discussion of the non-cash
charge, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the accompanying "Consolidated Financial
Statements" and notes thereto.
Total Revenues Shareholders' Equity Total Debt
In Millions of Dollars In Millions of Dollars In Millions of Dollars
[THREE GRAPHS OMITTED]
2 ANNUAL REPORT 1999
L E T T E R T O S H A R E H O L D E R S
- --------------------------------------------------------------------------------
"We enter fiscal
2000 with a record
backlog as well [PHOTO OMITTED]
as tremendous
momentum and
enthusiasm."
Dear Fellow Shareholders:
We have just completed the best year -- by a wide margin -- in our Company's
history. Our revenue of $362.7 million was 51% ahead of the record revenue
achieved last year and our earnings of $10.6 million or $1.30 per fully diluted
share, was 171% ahead of last year.
We had record deliveries of 2,124 homes versus 1,479 a year ago, a 44% increase.
We received record new orders of 2,229 homes versus 1,709 last year, a 30%
increase. Most importantly, we have entered the new year with 1,008 homes under
contract in backlog, valued at $197.1 million, up from last year's 821 homes in
backlog valued at $141.6 million.
Building on this success, I believe Washington Homes is poised for continued
growth and profitability. Since our business plan adopted in 1995 resulted in
such tremendous success, we have embarked upon a similar plan for building into
the new millennium.
Regional Operations
- -------------------
With the acquisition of the operations of Breland Homes in Huntsville, Alabama
and the Gulf Coast of Mississippi, we are now focused on three regions -- the
Mid-Atlantic, which encompasses Maryland, Virginia and Pennsylvania; the
Southeast, which is comprised of North and South Carolina; and the Mid-South,
consisting of Tennessee, Alabama and Mississippi.
Many people have contributed to our successful year. Thomas J. Pellerito, our
Chief Operating Officer and President of Homebuilding, oversees the Division
Presidents in the Mid-Atlantic region as well as Regional Presidents in both the
Southeast (Robert Hurson) and Mid-South (Tony L. Kennicott). Tom as recently
completed the task of carefully evaluating each of the many quality products
used in building our homes, as well as adding over 40 new home plans of various
sizes and price points to our product line. This includes homes designed to
accommodate the narrower lots being developed today as part of the industry's
effort to promote Smart Growth. He also supervised the coordination of volume
purchases from suppliers and manufacturers by our National Purchasing Manager,
Larry Gorman, that helped improve
WASHINGTON HOMES 3
our homebuilding gross profit margin to 19.1% from 17.9% last year.
Christopher Spendley, our Chief Financial Officer, is completing the recruitment
and installation of controllers in each of our nine divisions. Chris is also
managing our MIS department, ensuring that all systems are both Y2K ready and
capable of handling the Company's growth.
Land Holdings
- -------------
We continue to improve our land holdings, in terms of the number of lots we
control, as well as the quality of new communities. Of the approximately 11,000
lots we control, 73% are under rolling option contracts, meaning a third party
land developer owns the land. We have the right to acquire the lots in
accordance with predetermined schedules consistent with anticipated sales and
production. This method of purchasing lots allows us to invest our capital in
work-in-process, thereby minimizing our debt levels. This practice has also
allowed us, over a three-year period, to double the size of our Company, expand
into four additional markets and reduce our overall debt levels by approximately
20%. This disciplined management of our balance sheet also affords us protection
in a possible down turn and, more importantly, gives us the flexibility to
expand during strong economic periods.
Ancillary Business
- ------------------
Our mortgage company now operates in all of our market areas and we have
increased our capture rate of mortgages placed on homes we build to 60% this
year versus 55% a year ago. Our title service operation is now operating in
Maryland, Virginia and Tennessee, and will soon open in Alabama and Mississippi.
Our Design Showcase is open in Maryland, Virginia, and Greensboro, North
Carolina, and will soon open in Alabama and Mississippi.
We believe we can increase future earnings from our ancillary businesses by
expanding our Design Showcase, adding title services in Alabama and Mississippi,
and increasing our mortgage capture rate.
New Business
- ------------
We have achieved greater product diversity through our acquisition of assets of
Regency Homes, a Maryland-based homebuilder. Regency's product offerings were
primarily 2,700 to 4,500 square feet in size, in contrast to our product, which
traditionally did not exceed 3,000 square feet. These larger homes provide for
more sales opportunities in the affluent and growing Northern Virginia market,
as well as additional land opportunities that are available to us because of our
wider product diversity.
During 1999, we broke ground on Heritage Pines in Raleigh, North Carolina, an
active adult community being developed through a joint venture with U.S. Home
Corporation. Additionally, we are in final negotiations and feasibility analysis
to expand our existing joint venture with U.S. Home Corporation to include
Heritage Woods, located just north of Charlotte, North Carolina. We are also in
the process of identifying other sites to continue our expansion into this
market segment.
Looking Ahead
- -------------
We are currently in one of the best housing markets in history. Although we have
seen interest rates begin to creep up a bit, we have not seen a significant drop
off in traffic or sales in our communities. I believe this is a direct result of
continued strong job growth in our market areas, which are some of the strongest
markets in the country. Even if interest rates increase, as long as the economy
remains strong, I believe we will continue to have a favorable housing market.
History shows job growth is the primary driver of housing starts, while interest
rates generally determine the price point and option level that a homebuyer will
select.
This report outlines our 2004 Plan -- which calls for us to repeat what we did
in the past three years -- double our size. While this may sound difficult to
accomplish, and unforeseen factors such as changes in the economy could alter or
delay achievement of our plan, we believe we can meet our stated objectives. As
we analyze the size and strength of each of our three regions, we believe 5,000
deliveries are possible. We are confident that this can be done prudently and
done profitably. We have begun investing for the future, without sacrificing
current earnings. In addition to identifying new, adjacent markets, we continue
to explore opportunities in our existing markets to leverage our management and
staff, as well as the infrastructure in each of our three regions.
I can assure you that your management team remains focused on profitability. We
share the short and long term goals of all of our shareholders. We will continue
to analyze strategic opportunities that emphasize maximizing investment returns
as well as provide for long term growth. This past year, we were able to achieve
an 18.3% return on equity and we are focused on further improvement in fiscal
year 2000.
Thank you for being with us for this record-breaking year. Washington Homes
looks forward to achieving greater success as we build in to the new millennium.
Sincerely,
/s/ Geaton A. DeCesaris, Jr.
Geaton A. DeCesaris, Jr.
Chairman of the Board,
President & Chief Executive Officer
4 ANNUAL REPORT 1999
R A I S I N G E X P E C T A T I O N S
[PHOTO OMITTED]
The Chesterfield is one of the models offered in our new Monogram Series, luxury
homes of 3,000 square feet and larger.
Total Deliveries by Region
[GRAPH OMITTED]
2000 and Beyond
- ---------------
In the past three years, Washington Homes has doubled in size by executing its
strategic plan.
o We have successfully expanded our home sales to a wider geographic area,
which has resulted in a record number of home deliveries in 1999.
o We continue to expand our ancillary services: mortgages, titles,
homeowner's insurance and design centers in each of our markets.
o We have dramatically expanded our product offerings to include homes over
3,000 square feet.
The plan for building into the new millennium provides for significant growth
yet continues the emphasis on a disciplined and focused approach to maximize
shareholder value.
WASHINGTON HOMES 5
top: The Oxford model features a light-filled,
two-story living room, four bedrooms, and luxury baths.
bottom: A gorgeous two-story family room is just one
of the features of the Van Buren model, a perennial favorite.
"Our customers can
[PHOTO OMITTED] purchase a home,
obtain a mortgage,
title insurance, and
homeowner's
[PHOTO OMITTED] insurance through
Washington Homes."
Homebuyer's Mortgage, Inc.
- --------------------------
In fiscal year 1999, Homebuyer's Mortgage
provided 1,406 loans for homebuyers. With an
excellent customer approval rating, Homebuyer's
Mortgage has achieved 60% capture rate
company wide and increased profitability.
Keys to Future Success
o Offering competitive mortgage programs through
offices conveniently located adjacent to each of our
homebuilding offices
o Experienced loan officers that are accustomed to
working closely with customers to find the specified
loan programs that meet individual customer needs.
o Superior communication between lender and
builder results in a seamless experience for the
customer while allowing the builder to better
manage the delivery of its backlog [PHOTO OMITTED]
New Homebuyers Title
- --------------------
Providing title services to 1,060 customers in fiscal
1999, New Homebuyers Title and affiliates offer
convenience to our buyers through offices located
in Maryland, Virginia and Tennessee. The capture
rate in the Mid-Atlantic region was over 95%.
Keys to Future Success
o Expansion of title services to other markets
o Providing better customer service
o Establishment of a national title insurance
relationship
Spacious two-story great rooms are a popular
feature of many of our new home designs.
6 ANNUAL REPORT 1999
P R O D U C T D I V E R S I T Y
"We have
dramatically
expanded our
[PHOTO OMITTED] offerings of
home designs
and available
features..."
This Landan model, whose exterior is featured on the cover, showcases the
optional see-through fireplace and sunroom.
Expanding Choices
-----------------
From townhomes, single family homes, and
active adult communities, Washington Homes
offers homes for first-time homebuyers, move-
up buyers, as well as active adults and retirees.
1999 Home Deliveries In addition to our standard features, our Design
by Selling Price Showcase displays the wide variety of choices
available to homebuyers to personalize and
[GRAPH OMITTED] customize their home.
Expanding Goals
---------------
Our management team is committed to firmly
establishing Washington Homes' reputation as a
builder of choice by designing homes that appeal
to today's homebuyer. Management is also com-
mitted to allocating capital to expand to new
areas with expected strong ecomonic growth, as
well as primarily managing its land inventory
through lot option contracts rather than outright
purchase. Furthermore, the Company has devel-
oped comprehensive agreements with many of
our vendors that have resulted in better pricing
and strengthened alliances that offer substantial
benefits to our customers.
WASHINGTON HOMES 7
Thomas J. Pellerito (left), our Chief
Operating Officer and Christopher Spendley
(right), our Chief Financial Officer
[PHOTO OMITTED] [PHOTO OMITTED]
Design Showcase
---------------
Our design centers display the wide variety
of custom options that are available
to our homebuyers.
Keys to Future Success
o Expansion of the Design Showcase
to all markets
o Increasing the variety of additional
options available in all markets
o Offering purchasers the ability to
personalize their home while creating
enthusiasm for their new home
purchase
Homebuyer's Insurance
---------------------
Our streamlined process offers our
homebuyers convenience in purchasing
homeowner's insurance.
Keys to Future Success
o Expansion of business through our
mortgage offices to provide better
customer service and convenience
o Increasing the number of new
policies sold
Our beautiful Delaware model features a two-story center family room
a well-appointed kitchen and up to five large bedrooms.
8 ANNUAL REPORT 1999
M A R K E T D I V E R S I T Y
[PHOTO OMITTED]
The Remington offers the convenience of single-level living with the luxury of
soaring cathedral ceilings, a large master bedroom suite, and country kitchen
with breakfast area.
Lots Under Control Total Lots Under Control
- ------------------
[GRAPH OMITTED]
Our regional divisions, Mid-Atlantic, Southeast
and Mid-South, are locations where strong eco-
nomic growth is expected to continue. By reduc-
ing our reliance upon any one geographic area,
Washington Homes is endeavoring to be less
dependent upon cyclical economic trends that
might affect an individual region.
[PHOTO OMITTED] Washington Homes offers traditional, garage,
and neo-traditional townhome designs. Many of
these homes feature spacious living areas,
luxury baths, and open foyers.
WASHINGTON HOMES 9
Mid-Atlantic Region
- -------------------
The federal government and major corporations
such as Marriott, Lockheed Martin and Mobil Oil
have traditionally been major regional employers.
More recently, the area's economy has been
transformed by the rapid growth of biotechnology,
telecommunications and computer technology
as businesses such as America Online and MCI/
Worldcom have established themselves in the
greater Washington/Northern Virginia area.
[MAP OMITTED] [PHOTO OMITTED]
The classic Ohio model has proven popular with many
move-up buyers and will be built in each of our regions.
This home features an expansive family room, a gourmet
kitchen and a luxurious master suite.
Southeast Region
----------------
The major cities of this region, Raleigh, Greensboro,
and Charlotte have benefited from the growth of existing
businesses and the relocation of nationally known corpora-
tions to this area. Major employers are: IBM Corporation,
Northern Telecom, GlaxoWellcome, Environmental
Protection Agency as well as Research Triangle Institute.
Charlotte is the home of Carolinas Healthcare System,
First Union Corporation, Bank of America, Duke Energy,
and Winn-Dixie. We expect to expand into South Carolina
from our Charlotte base.
Mid-South Region
- ----------------
The growth and relocation of a number of large
corporations has expanded the Nashville area's
economy. Its educated workforce and mild climate
have drawn employers such as Dell computers,
Spring PCS, and Hewlett Packard, to the area. In
addition, educational institutions such as Vanderbilt
University rank high on the list of large area
employers. Major employers in the Huntsville area
are SCI Systems, Boeing, the US Army Redstone
Arsenal, Huntsville Hospital System, Intergraph
Corporation and the Huntsville City School system.
The Gulf Coast area is a desirable place to live with
the area's growth assisted by tourism and gaming.
[PHOTO OMITTED] Active adult
communities are
offered in our
Southeast region in
conjunction with our
joint venture with U.S.
Home Corporation.
10 ANNUAL REPORT 1999
T R I B U T E T O C H A I R M A N
E M E R I T U S , S O N N Y D E C E S A R I S
[PHOTO OMITTED]
Tribute to Geaton A. DeCesaris, Sr.
- -----------------------------------
In 1999, my father, Geaton A. (Sonny) DeCesaris, Sr. chose to move into the next
stage of his life and become our Company's Chairman Emeritus. A good friend
recently shared with me the true meaning of "Emeritus." It is a title reserved
for the heart and soul of an organization - a true description of my father.
After co=founding our predecessor company, Sonny DeCesaris and Sons Development
Group (SDS), and overseeing the merger of SDS with Washington Homes in August
1988, Sonny was elected Chairman of the Board. Even then, he planned for the
future well being of the Company and prepared a succession plan. Now his plan is
being carried out.
My father is far more than just the Chairman of Washington Homes. He is a
husband of 49 years to my mother, Elizabeth, the father of nine children, the
grandfather of twenty-nine grandchildren, and recently became a great
grandfather. His legacy of hard work, his insistence on quality, and his
fairness to all, has served this company well and will continue to be the
guiding moral and ethical compass that Washington Homes will follow.
Washington Homes' 650 full and part time employees know that they are not only
part of a company, but part of a company with a heart and soul. My goal is to
emulate the leadership and vision exhibited by my father during his tenure as
Chairman. I promise to work extraordinarily hard to measure up to his success as
both a businessman and a person.
It is with great pride and anticipation that I accept the challenges ahead to
fulfill the role of Chairman that my father did so well. We are pleased that he
remains a member of our Board of Directors and will continue to lend his
guidance and assistance as the Company builds into the new millennium. This
tribute is just a small token of appreciation that I can offer Sonny, my dad, my
mentor and my friend, for his many years of hard work, unwavering dedication and
service to Washington Homes.
Geaton A. DeCesaris, Jr.
Chairman of the Board,
President & Chief Executive Officer
WASHINGTON HOMES 11
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
Results of Operations
- ---------------------
The following table presents certain information regarding the Company's
operations for the last three fiscal years.
(dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Revenues:
Homebuilding $353,729 $233,111 $206,576
Land 4,922 4,483 7,958
Other 4,082 3,109 2,925
Total $362,733 $240,703 $217,459
Homes delivered 2,124 1,479 1,315
Net new orders 2,229 1,709 1,305
Homes in backlog
at end of period 1,008 821 591
Sales value of backlog $197,135 $141,619 $ 96,343
- --------------------------------------------------------------------------------
Annual Operating Cycle
- ----------------------
The homebuilding industry in general, and the operations of the Company, are
seasonal in nature. The number of new sales contracts signed escalates from
January through April, compared to the balance of the year. Deliveries peak in
the fiscal quarter ended July 31, as a substantial portion of homes contracted
during the fiscal quarter ended April 30 are delivered. Delivery volume is
relatively constant during the remainder of the year. As a result of increased
deliveries and reduced selling, general and administrative costs as a percent of
revenues, net earnings are substantially greater in the fourth quarter, compared
to the prior three quarters.
The following tables contain quarterly operating information for the Company's
last two fiscal years and illustrates the annual operating cycle (dollars in
thousands except per share amounts):
Three Months Ended
-------------------------------------------------------
October 31, January 31, April 30, July 31,
1998 1999 1999 1999
- --------------------------------------------------------------------------------
Number of homes
delivered 407 427 533 757
Net new orders 430 432 836 531
Total revenues $69,128 $74,262 $89,397 $129,946
Gross profit from
homebuilding $12,319 $13,394 $17,152 $ 24,643
Net earnings $ 1,269 $ 1,839 $ 3,047 $ 4,493
Basic earnings per share $ 0.16 $ 0.23 $ 0.38 $ 0.57
Diluted earnings per
share $ 0.16 $ 0.23 $ 0.37 $ 0.54
- --------------------------------------------------------------------------------
Three Months Ended
-------------------------------------------------------
October 31, January 31, April 30, July 31,
1997 1998 1998 1998
- --------------------------------------------------------------------------------
Number of homes
delivered 265 290 340 584
Net new orders 289 382 640 398
Total revenues $42,806 $48,035 $54,444 $95,418
Gross profit from
homebuilding $ 7,761 $ 8,010 $ 9,244 $16,715
Net earnings $ 736 $ 64 $ 564 $ 2,426
Basic and diluted
earnings per share $ 0.09 $ 0.01 $ 0.07 $ 0.31
- --------------------------------------------------------------------------------
Geographic Concentration
- ------------------------
During the last three fiscal years the Company has built quality homes in the
metropolitan areas of Washington, DC-Baltimore, Maryland; Raleigh, Greensboro,
and Charlotte, North Carolina; Nashville, Tennessee and Pittsburgh,
Pennsylvania. In fiscal 1999, the Company acquired the assets of a local
homebuilder in the Huntsville, Alabama and the Mississippi Gulf Coast markets.
Since the purchase of the assets in Alabama and Mississippi, the Company formed
three operating regions: Mid-Atlantic (Maryland, Virginia and Pennsylvania),
Southeast (North Carolina) and Mid-South (Tennessee, Alabama, and Mississippi).
The following tables describe the Company's operations in each of its regions
during the last three fiscal years:
Net New Orders 1999 1998 1997
- --------------------------------------------------------------------
Mid-Atlantic 1,314 893 785
Southeast 666 703 454
Mid-South 249 113 66
- --------------------------------------------------------------------
Total Net New Orders 2,229 1,709 1,305
- --------------------------------------------------------------------
Homes Delivered 1999 1998 1997
- --------------------------------------------------------------------
Mid-Atlantic 1,118 832 828
Southeast 755 560 420
Mid-South 251 87 67
- --------------------------------------------------------------------
Total Homes Delivered 2,124 1,479 1,315
- --------------------------------------------------------------------
Backlog of Homes
Under Contract 1999 1998 1997
- --------------------------------------------------------------------
Mid-Atlantic 647 451 390
Southeast 239 328 185
Mid-South 122 42 16
- --------------------------------------------------------------------
Total Backlog 1,008 821 591
- --------------------------------------------------------------------
Active Communities 1999 1998 1997
- --------------------------------------------------------------------
Mid-Atlantic 37 37 35
Southeast 26 29 23
Mid-South 19 6 4
- --------------------------------------------------------------------
Total Active Communities 82 72 62
- --------------------------------------------------------------------
12 ANNUAL REPORT 1999
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- ---------------------------------------------
Financial Services
- ------------------
Financial services consist primarily of providing mortgage loan and title
services to the Company's homebuyers and others. During the fiscal year ended
July 31, 1999, the mortgage operations provided revenue of $4.8 million, up 67%
from $2.9 million in fiscal 1998 and up 135% from $2.0 million in fiscal 1997.
The increase in revenues in 1999 from 1998 and 1997 was primarily due to
increases in mortgage loan originations. The Company's financial services goals
are to improve profitability by increasing the capture rate of providing
mortgages for its homebuyers and expanding its originations of mortgages to
others.
Year Ended July 31, 1999
Compared To Year Ended July 31, 1998
- ------------------------------------
Total revenues increased by 50.7% to $362.7 million in fiscal 1999 from $240.7
in fiscal 1998, as the number of homes delivered increased by 43.6% to 2,124
units from 1,479 units. The average sales price of homes delivered in fiscal
1999 increased 5.6% to $166,500 from $157,600.
Gross profit margin as a percentage of homebuilding revenues increased to 19.1%
from 17.9% primarily as a result of the Company's cost reduction initiatives,
sales price increases and strong overall market conditions.
Selling, general and administrative expenses increased to $46.7 million in
fiscal 1999 from $33.2 million in the prior year due to increased volume, an
increase in the number of active communities and the growth in the Company's
financial services. Selling, general and administrative expenses as a percentage
of homebuilding revenues decreased to 13.2% in fiscal 1999 from 14.2% in fiscal
1998.
Interest and financing expenses increased to $7.4 million in fiscal 1999 from
$5.8 million in fiscal 1998, however, interest and financing expenses as a
percentage of homebuilding revenues decreased to 2.1% from 2.5% in fiscal 1998
due to improved inventory turnover.
Gross profit from land sales was $209,000, on revenues of $4.9 million in fiscal
1999 compared to $809,000 on revenues of $4.5 million in fiscal 1998.
Net earnings increased to $10.6 million in fiscal 1999 from $3.8 million in
fiscal 1998. The increase in deliveries which resulted in the increased revenues
was a major factor in the Company's improved earnings performance.
Year Ended July 31, 1998
Compared To Year Ended July 31, 1997
- ------------------------------------
Total revenues increased by 10.7% to $240.7 million in fiscal 1998 from $217.5
million in fiscal 1997, as the number of homes delivered increased by 12.5% to
1,479 units from 1,315 units. The average sales price of homes delivered in
fiscal 1998 increased slightly to $157,600 from $157,100.
Gross profit margin as a percentage of homebuilding revenues remained flat at
17.9% largely due to cost reduction initiatives along with a focused effort on
improving the Company's land position for each homebuilding operation, and the
Company's pricing strategy to increase inventory turnover in order to reallocate
capital to better markets.
Total selling, general, and administrative expenses increased to $33.2 million
in fiscal 1998 from $29.1 million in the prior year due to increased volume, an
increase in the number of active communities and the growth in the Company's
financial services. Selling, general, and administrative expenses as a
percentage of homebuilding revenues increased slightly to 14.2% in fiscal 1998
from 14.1% in fiscal 1997.
Interest and financing expenses remained constant at $5.8 million in fiscal
1998, however interest and financing expenses as a percentage of homebuilding
revenues decreased to 2.5% from 2.8% in fiscal 1997 due to improved inventory
turnover and better terms on the revolving credit facility which was put in
place at the beginning of fiscal year 1998.
Gross profit from land sales was $809,000 on revenues of $4.5 million in fiscal
1998 compared to $673,000 on revenues of $8.0 million in fiscal 1997. The
Company's initiative to reduce its exposure to land under development resulted
in the decrease in land sales revenues for fiscal 1998.
Net earnings increased to $3.8 million in fiscal 1998 from a net loss of $13.3
million in fiscal 1997. In fiscal 1997 the Company incurred an after-tax,
non-cash charge of $15.8 million for the impairment of long-lived assets, and an
extraordinary loss of $390,000 related to the extraordinary gain on debt
forgiveness associated with the exchange of subordinated debt during the 1992
tax year.
WASHINGTON HOMES 13
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
Capital Resources and Liquidity
- -------------------------------
Funding for the Company's residential building and land development activities
is provided principally by cash flows from homebuilding operations and borrowing
from banks and other financial institutions. The Company's capital needs depend
upon its sales volume, asset turnover, land purchases and inventory levels.
At July 31, 1999, the Company had cash and cash equivalents of $12.7 million, of
which $607,000 was restricted to collateralize deposits and escrows. The
remaining $12.1 million was available to the Company.
In April 1994, the Company issued $43 million principal amount of Senior Notes
due October 2000. Two series of Senior Notes were issued: $30.0 million with a
fixed rate of 8.61% per annum and $13.0 million with a floating rate of LIBOR
plus 2.4%. The notes are required to be repaid in three equal annual principal
installments which commenced October 1998 and will continue to October 2000.
At July 31, 1999, the Company had two secured revolving credit facilities
totaling $85 million. These facilities provide funding for land acquisition and
home construction, letters of credit, and principal repayments on the Senior
Notes. At July 31, 1999, $27.6 million was outstanding under these facilities.
Borrowings under the facilities bear interest at LIBOR plus 1.55% or 1.75%,
depending on the type of collateral and are secured by the related inventory.
In September 1999, the Company retired a $70 million revolving credit facility
and replaced it with a $120 million credit facility. This facility consists of a
$100 million revolver and a $20 million term loan which matures in October 2001
with annual renewal thereafter. Interest on the revolving credit facility and
term loan is LIBOR plus 1.75% and 2.85%, respectively.
In addition to the Senior Notes and revolving credit facilities, the Company has
loans with various lenders providing $3.0 million for land acquisition,
development and home construction. These loans bear interest at fixed rates
ranging from 8% to 10% or a variable rate of prime with maturities ranging from
the date of lot recordation through July 2000.
At July 31, 1999, the Company in the aggregate had $116.9 million in borrowing
capacity of which $57.4 million was available. During fiscal 1999, the Company's
average interest rate was 7.6%, an improvement of 40 basis points when compared
to its average interest rate during fiscal 1998 of 8.0%
The Company participates in two joint ventures formed to develop residential
land into finished building lots for sale to the Company and other homebuilders
utilizing non-recourse acquisition and development loans. The Company also
participates in a joint venture formed to develop and market an active adult
community in the Raleigh, North Carolina market.
The Company believes that it will be able to fund its activities for the
foreseeable future through a combination of operating cash flow, existing cash
balances and existing credit facilities. Except for ordinary expenditures for
the construction of homes, and acquisition and development of land, the Company
does not have any material commitments for capital expenditures at July 31,
1999.
Year 2000 Issue
- ---------------
The Year 2000 (Y2K) issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Thus the year 1999 is
represented by the number "99" in many legacy software applications.
Consequently, on January 1, 2000, the year will jump back to "00" in accordance
with many non-Y2K ready applications. To systems that are non-Y2K ready, the
time will seem to have reverted back 100 years. So, when computing basic lengths
of time, the Company's computer programs, certain building infrastructure
components (including elevators and certain HVAC systems) and any additional
time-sensitive software that are non-Y2K ready may recognize a date using "00"
as the Year 1900. This could result in system failures or miscalculations which
could cause personal injury, property damage, disruption of operations, and/or
delays in payments from the Company's customers, any or all of which could
materially adversely effect the Company's business, financial condition, or
results of operations.
State of Readiness:
- -------------------
During fiscal 1998 the Company began a formal year 2000 readiness assessment on
all information technology assets to ensure the readiness of all applications,
operating systems and hardware on its PC desktop suites and LAN and WAN server
and communications platforms; the readiness of voice and data network software
and hardware and to address the readiness of key vendors and other third
parties.
The Company's assessment involves five phases: (1) inventory Y2K items and
assigning priorities, (2) assessing the Y2K readiness of items, (3) remediating
or replacing items that are determined not to be Y2K ready, (4) testing items
for Y2K readiness and (5) designing and implementing Y2K contingency and
business continuity plans. To determine that all IT systems (whether internally
developed or purchased) are Y2K ready, each system is tested using a standard
testing methodology which includes unit testing, baseline testing, and future
date testing. Future date testing includes critical dates near the end of 1999
and into the year 2000, including leap year testing.
The inventory and assessment phases were completed in fiscal 1998. At July 31,
1999, all of the Company's application systems had been remediated and current
date tested. Essentially all but one critical hardware component was ready and
tested by July 1999. This one remaining hardware item is expected to be
resolved, tested and remediated in October 1999.
14 ANNUAL REPORT 1999
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- ---------------------------------------------
Cost:
- -----
The costs of the Company's Y2K readiness efforts are being funded with cash
flows from operations. The estimated total cost of the Y2K project is
approximately $75,000. Costs incurred during fiscal 1999 were approximately
$37,000, with the remainder of the estimated total being incurred during the
first and second quarters of fiscal 2000. In total, these costs are not expected
to have a material adverse effect on the Company's overall results of operations
or cash flows.
Risk:
- -----
The Company believes that its Y2K readiness program will prepare the Company for
Year 2000 compliance in a timely manner. However, there can be no assurance that
the Company's internal systems or equipment or those external parties on which
the Company relies will be Y2K ready in a timely manner or that the Company's
external parties contingency plans will mitigate the effects of any
non-compliance. Given the current status of the Company's Y2K assessment,
management believes that the most probable worst case scenario could result in
short term business interruptions. However, failure by the Company and/or
external parties to complete Y2K readiness work in a timely manner could have a
material adverse affect on the Company's financial position and results of
operations.
Contingency Plans:
- ------------------
The Company is developing a Y2K contingency plan designed to address problems
arising from Year 2000 failures of critical third parties and will be directed
towards providing alternate sources of supply to the Company. The Company
expects to complete its contingency planning phase for Year 2000 by October 31,
1999.
The foregoing assessment of the impact of the Y2K issue on the Company is based
on management's best estimate at the present time, and could change
substantially. The assessment is based upon numerous assumptions as to future
events. There can be no guarantee that these estimates will prove accurate, and
actual results could differ from those estimated if these assumptions prove
inaccurate.
Quantitative and Qualitative Disclosures
About Market Risk
- ----------------------------------------
The Company is exposed to market risk from changes in interest rates. Adverse
changes in interest rates can have a material effect on the Company's
operations.
At July 31, 1999, the Company had $59.5 million of debt outstanding of which
$21.8 million bears fixed interest rates. If the interest rate charged to the
Company on its variable rate debt were to increase significantly, the effect
could be materially adverse to future operations.
The Company's objective in its risk management program is to seek a reduction in
the potential negative earnings effects from changes in interest rates. The
Company's strategy to meet this objective is to maintain a balance between
fixed-rate and variable-rate debt, varying the proportion based on the Company's
perception of interest rate trends and the market place for various debt
instruments. In addition, the Company has entered into an interest rate swap
agreement which effectively converts $15 million of its variable rate debt to
fixed in an effort to minimize its market risk from changes in interest rates.
The fair values of all financial instruments approximate their carrying values
(see Note 5 to the consolidated financial statements).
Safe Harbor Statement
- ---------------------
Certain statements in the Company's Form 10-K, this Annual Report to
Shareholders, as well as statements made by the Company in periodic press
releases, oral statements made by the Company's officials to analysts and
shareholders in the course of presentations about the Company and conference
calls following the quarterly earnings releases, may be construed as
"Forward-Looking Statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements may involve
known and unknown risks, uncertainties and other factors that may cause actual
results, performance, achievements or industry results to vary materially from
predicted results, performance, achievements or those of the industry. Such
risks, uncertainties and other factors include, but are not limited to, changes
in general economic conditions; fluctuations in interest rates; increases in
costs and availability of materials, supplies and labor; and general competitive
conditions.
WASHINGTON HOMES 15
Consolidated Financial Statements
---------------------------------
Consolidated Balance Sheets
- ---------------------------
July 31,
---------------------
(dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Assets
- ------
Cash and cash equivalents $ 12,734 $ 10,324
Residential inventories 130,502 115,249
Excess of cost over net assets acquired,
(net of accumulated amortization of
$4,934 and $4,650) 8,731 6,015
Investment in join ventures 3,876 2,276
Other 11,612 13,491
- --------------------------------------------------------------------------------
Total Assets $167,455 $147,355
================================================================================
Liabilities and Shareholders' Equity
- ------------------------------------
Liabilities
Notes and loans payable $ 59,526 $ 59,230
Trade accounts payable 24,568 21,647
Income taxes payable 2,770 1,179
Deferred income taxes 1,216 2,038
Other 10,426 4,991
- --------------------------------------------------------------------------------
Total liabilities 98,506 89,085
- --------------------------------------------------------------------------------
Commitments and Contingent Liabilities
- --------------------------------------
Shareholders' equity
Common stock $.01 par value; 15,000,000 shares
authorized; 7,949,013 and 7,914,433 shares issued
and outstanding, 79 79
Non-voting common stock $.01 par
value, 1,100,000 shares authorized;
0 and 28,330 shares issued and outstanding, -- --
Additional paid-in capital 35,178 35,147
Retained earnings 33,692 23,044
- --------------------------------------------------------------------------------
Total shareholders' equity 68,949 58,270
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $167,455 $147,355
================================================================================
See Accompanying Notes to Consolidated Financial Statements.
16 ANNUAL REPORT 1999
Consolidated Financial Statements
- ---------------------------------
Consolidated Statements of Operations
- -------------------------------------
Year Ended July 31,
----------------------------------
(in thousands except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------
Revenues:
- ---------
Homebuilding $ 353,729 $ 233,111 $ 206,576
Land sales 4,922 4,483 7,958
Other income 4,082 3,109 2,925
- --------------------------------------------------------------------------------
Total revenues 362,733 240,703 217,459
================================================================================
Expenses:
- ---------
Cost of sales--homebuilding 286,221 191,381 169,698
Cost of sales--land sales 4,713 3,674 7,285
Cost of sales--impairment loss -- -- 9,200
Selling, general, and administrative 46,671 33,206 29,078
Interest expense 6,334 5,172 5,059
Financing fees 1,022 621 777
Write-down in carrying value of goodwill -- -- 9,981
Amortization and depreciation 418 641 616
- --------------------------------------------------------------------------------
Total expenses 345,379 234,695 231,694
================================================================================
Earnings (Loss) Before Income Taxes
and Extraordinary Item 17,354 6,008 (14,235)
Income tax expense (benefit) 6,706 2,218 (1,336)
- --------------------------------------------------------------------------------
Earnings (Loss) Before Extraordinary Item 10,648 3,790 (12,899)
Extraordinary item -- -- (390)
- --------------------------------------------------------------------------------
Net Earnings (Loss) $ 10,648 $ 3,790 $ (13,289)
================================================================================
Earnings (Loss) Per Share:
- --------------------------
Basic:
- ------
Earnings (Loss) Before Extraordinary Item $ 1.34 $ 0.48 $ (1.62)
Extraordinary item -- -- (0.05)
- --------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share $ 1.34 $ 0.48 $ (1.67)
================================================================================
Assuming Dilution:
- ------------------
Earnings (Loss) Before Extraordinary Item $ 1.30 $ 0.48 $ (1.62)
Extraordinary item -- -- (0.05)
- --------------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share $ 1.30 $ 0.48 $ (1.67)
================================================================================
See Accompanying Notes to Consolidated Financial Statements.
WASHINGTON HOMES 17
Consolidated Financial Statements
---------------------------------
Consolidated Statements of Shareholders' Equity
- -----------------------------------------------
Years Ended July 31, 1999, 1998, and 1997
-------------------------------------------------------------------
Common Stock Additional Total Total
---------------------------- Paid-in Retained Shareholders'
(in thousands) Shares Voting Non-voting Capital Earnings Equity
- ----------------------------------------------------------------------------------------------------
Balance, August 1, 1996 7,943 $ 70 $ 9 $35,147 $ 32,543 $ 67,769
Net loss -- -- -- -- (13,289) (13,289)
- ----------------------------------------------------------------------------------------------------
Balance, July 31, 1997 7,943 70 9 35,147 19,254 54,480
Conversion of non-voting
to voting -- 9 (9) -- -- --
Net earnings -- -- -- -- 3,790 3,790
- ----------------------------------------------------------------------------------------------------
Balance, July 31, 1998 7,943 79 -- 35,147 23,044 58,270
Exercise of stock options 6 -- -- 31 -- 31
Net earnings -- -- -- -- 10,648 10,648
- ----------------------------------------------------------------------------------------------------
Balance, July 31, 1999 7,949 $ 79 $ 0 $35,178 $ 33,692 $ 68,949
====================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
18 ANNUAL REPORT 1999
Consolidated Financial Statements
- ---------------------------------
Consolidated Statements of Cash Flows
- -------------------------------------
Year Ended July 31,
------------------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net earnings (loss) $ 10,648 $ 3,790 $ (13,289)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Amortization and depreciation 418 641 616
Deferred income taxes (822) 119 (3,314)
Write-down of goodwill -- -- 9,981
Impairment loss -- -- 9,200
Changes in assets and liabilities, net
of effects from acquisition:
Residential inventories (5,971) (1,021) 1,605
Other assets 2,639 (2,151) (901)
Trade accounts payable 1,910 5,416 (1,341)
Income taxes payable 1,591 1,042 (271)
Other liabilities 5,257 117 (89)
- --------------------------------------------------------------------------------
Net cash provided by operating
activities 15,670 7,953 2,197
Cash Flows From Investing Activities:
Purchases of property and equipment,
net of disposals (327) (90) (68)
Purchase of Breland Homes' net assets (5,272) -- --
Investment in joint venture (1,600) -- --
- --------------------------------------------------------------------------------
Net cash used in investing activities (7,199) (90) (68)
Cash Flows From Financing Activities:
Proceeds from notes and loans payable 221,771 111,967 121,977
Repayments of notes and loans payable (227,863) (119,841) (129,155)
Additional paid in capital 31 -- --
- --------------------------------------------------------------------------------
Net cash used in financing activities (6,061) (7,874) (7,178)
- --------------------------------------------------------------------------------
Net Increase (Decrease) In Cash and
Cash Equivalents 2,410 (11) (5,049)
Cash and Cash Equivalents, Beginning
of Year 10,324 10,335 15,384
- --------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 12,734 $ 10,324 $ 10,335
================================================================================
See Accompanying Notes to Consolidated Financial Statements.
WASHINGTON HOMES 19
Notes to Consolidated Financial Statements
Years Ended July 31, 1999, 1998 and 1997
------------------------------------------
1. Summary of Significant Accounting Policies
- ---------------------------------------------
Organization
- ------------
The Company is principally engaged in the business of the construction and sale
of quality residential housing in the states of Maryland, North Carolina,
Virginia, Pennsylvania, Tennessee, Alabama and Mississippi. Generally,
construction is not commenced until the Company has entered into a sales
contract with a customer. Homes are built on land that has been developed by the
Company and others.
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of Washington Homes,
Inc. and its wholly-owned subsidiaries (collectively, the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation. The Company's investment in joint ventures is accounted for using
the equity method.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
For purposes of the Statements of Cash Flows, the Company considers its cash,
including temporary investments with original maturities of three months or
less, to be cash equivalents. Included in these amounts at July 31, 1999 and
1998 were $607,000 and $238,000, respectively, that are restricted to
collateralize certain obligations of the Company.
Excess of Cost Over Net Assets Acquired, Net
- --------------------------------------------
Excess of cost over net assets acquired (goodwill) represents the excess of
purchase price over the fair value of assets acquired less any write down to
fair value and is being amortized from 15 to 40 years. The Company annually
reviews its goodwill recoverability by assessing historical profitability and
expectations as to future nondiscounted cash flows and net income. Based upon an
analysis of the market potential associated with the goodwill in fiscal 1997,
the Company wrote down to fair value the carrying value of goodwill by
approximately $10.0 million. Based upon its most recent analysis, the Company
believes that no material impairment of gooodwill exists at July 31, 1999.
Warranties
- ----------
The Company records an accrual at the date of closing for future warranty costs
based upon the relationship of deliveries to actual warranty costs.
Income Taxes
- ------------
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Deferred income taxes are provided for temporary differences in
the recognition of certain income and expenses for financial and tax reporting
purposes.
Revenue Recognition
- -------------------
Homebuilding, land sales and financial services revenues are recorded at the
date of closing with the purchaser.
Earnings (Loss) Per Common Share
- --------------------------------
Basic earnings (loss) per common share are computed based on the weighted
average number of common shares outstanding during each period. diluted earnings
(loss) per common share are computed based on the weighted average number of
shares of common stock outstanding plus equivalent shares relating to stock
options outstanding.
Financial Instruments
- ---------------------
The Company utilizes an interest rate swap agreement to reduce its exposure
resulting from fluctuations in interest rates. The interest rate swap is matched
as a hedge against the Company's variable rate debt.
Stock-Based Compensation
- ------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," requires expanded
disclosures of stock-based compensation arrangements with employees. The Company
has chosen to continue to account for employee stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation costs for stock options are measured
as the excess, if any, of the quoted market price of the Company's stock at the
measurement date (typically the date of the grant) over the amount the employee
must pay to acquire the stock (see Note 7).
Recent Accounting Pronouncements
- --------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. The Company has not determined the effect that the
adoption of SFAS No. 133 will have on its financial statement presentation or
disclosures, or on its earnings and financial position. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000.
Reclassifications
- -----------------
Certain amounts previously reported for 1998 and 1997 have been reclassified to
conform to classifications used in 1999.
2. Residential Inventories
- --------------------------
Homes in process are stated at cost (determined by accumulating actual costs,
including construction, interest and related direct over-head costs), which is
not in excess of market. Finished building lots represents the cost, which is
not in excess of market, of finished lots developed by the Company or acquired
from other developers. Upon delivery, the costs of the homes and related lots
are expensed on a specific identification basis. Land under development consists
of land being developed into finished building lots. Certain costs, including
interest, are capitalized as incurred during the development process.
20 ANNUAL REPORT 1999
Notes to Consolidated Financial Statements
Years Ended July 31, 1999, 1998 and 1997
- ------------------------------------------
The Company's inventory consists of the following:
July 31,
--------------------------
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Homes in process $ 55,226 $ 44,942
Finished lots 55,836 45,917
Land under development 19,440 24,390
- --------------------------------------------------------------------------------
$130,502 $115,249
================================================================================
In fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which, among
other things, requires impairment losses to be recorded on long-live assets that
are expected to be disposed of when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Based on a review of long-lived assets in fiscal
1997, the Company wrote down to fair value, determined based on the present
value of expected future cash flows, the carrying value of certain land
inventory by $9.2 million.
A significant portion of the land inventory write-down was attributable to two
long-term development projects in suburban Maryland. The remainder of the
write-down is related to six close-out and three condominium communities. Based
upon the Company's most recent analysis, no impairment exists at July 31, 1999.
3. Investment in Joint Ventures
- -------------------------------
The Company participates in two joint ventures formed to develop residential
land into finished building lots for sale to the Company and other homebuilders
utilizing non-recourse acquisition and development loans. The Company also
participates in a joint venture formed to develop and market an active adult
community in the Raleigh, North Carolina market. The Company's interest in the
joint ventures' operating results has not been significant to date.
4. Notes and Loans Payable
- --------------------------
Notes and loans payable consist of the following:
July 31,
------------------------
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Senior notes $28,667 $43,000
Revolving credit facilities 27,639 12,197
Land acquisition and development 3,042 3,954
Mortgages and other notes payable 178 79
- --------------------------------------------------------------------------------
$59,526 $59,230
================================================================================
Senior Notes
- ------------
In April 1994, the Company issued $43,000,000 principal amount of unsecured
Senior Notes due October 2000. Two series of Senior Notes were issued:
$30,000,000 with a fixed rate of 8.61% per annum, with interest payable
semi-annually beginning in October 1994 and $13,000,000 with a floating rate of
LIBOR plus 2.4%, (7.59% at July 31, 1999), with interest payable July 1994 and
either quarterly or semi-annually thereafter at the option of the Company.
Beginning April 1998 interest became payable on a quarterly basis for both
series of Senior Notes. Principal repayments became due in three equal annual
installments which commenced October 1998 and will continue to October 2000.
Revolving Credit Facilities
- ---------------------------
At July 31, 1999, the Company had two secured revolving credit facilities
totaling $85,000,000 to fund land acquisition and home construction, letters of
credit, and the initial principal repayments on its Senior notes. The facilities
have maturity dates (which may be extended) of October 30, 2000 and April 19,
2001. Borrowings under the facilities bear interest at thirty-day LIBOR (5.19%
at July 31, 1999) plus either 1.55% or 1.75% depending upon the type of
collateral and are secured by the related inventory.
The Senior Notes and revolving credit facilities require the Company, among
other things, to meet certain net worth, leverage and cash flow coverage tests
and place limitations on dividends, the securing of additional loans,
investments, and finished lot purchases. These provisions do not significantly
restrict the Company's operations.
Land Acquisition and Development Loans
- --------------------------------------
The Company has loans with various lenders for the acquisition and development
of land amounting to $3,042,000 and $3,954,000 at July 31, 1999 and 1998,
respectively. These loans bear interest at fixed rates ranging from 8% to 10% or
a variable rate of prime and are collateralized by the related inventory.
Mortgages and Other Notes Payable
- ---------------------------------
Mortgages and other notes payable, amounting to approximately $178,000 and
$79,000 at July 31, 1999 and 1998 respectively, bear interest at rates ranging
from 4.8% to 10% and mature in varying periods of up to 3 years.
Aggregate maturities of notes and loans payable are as follows:
For the year ending July 31, (in thousands)
- --------------------------------------------------------------------------------
2000 $17,538
2001 41,972
2002 16
- --------------------------------------------------------------------------------
$59,526
================================================================================
In January 1998, the Company entered into an interest rate swap agreement to
manage interest rate exposure on the Company's variable rate debt. Amounts to be
paid or received under the swap agreement are accrued as interest rates change
and are recognized as adjustments to interest incurred during the period. This
swap agreement expires in January 2002 and effectively converts $15 million of
variable LIBOR based borrowings to a fixed LIBOR of 5.67% at July 31, 1999.
Capitalized Interest
- --------------------
A summary of capitalized interest follows:
Year Ended July 31,
------------------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Interest capitalized at
beginning of year $ 8,140 $ 9,108 $ 9,762
Interest incurred 6,329 6,164 6,513
Interest expense (6,334) (5,172) (5,059)
Interest in cost of sales (2,483) (1,960) (2,003)
Interest in writedown from
impairment -- -- (105)
Interest capitalized at end
of year $ 5,652 $ 8,140 $ 9,108
- --------------------------------------------------------------------------------
Interest paid $ 6,141 $ 6,705 $ 6,886
Interest capitalized during the land development period is charged to cost of
sales as the related inventory is sold. Interest capitalized during the
construction period is charged to interest expense when the related inventory is
sold.
WASHINGTON HOMES 21
Notes to Consolidated Financial Statements
Years Ended July 31, 1999, 1998 and 1997
------------------------------------------
5. Fair Value of Financial Instruments
- --------------------------------------
The methods and assumptions used to estimate the fair value of each class of
financial instrument are as follows:
Cash and cash equivalents, receivables,
notes payable and accounts payable
- ---------------------------------------
The carrying amounts approximate fair value because of the short maturity of
these amounts.
Long-term debt
- --------------
The carrying amounts of the Company's bank borrowings under its short-term bank
lines and revolving credit agreements are based on floating rates identified by
reference to market rates. The fair value of the Company's other long-term debt
approximate carrying value based on quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the same
remaining maturities.
Interest rate swaps
- -------------------
The Company uses interest rate swap agreements to manage exposure to interest
rate fluctuations. The Company does not use derivative instruments for
speculative purposes. The differential paid or received on interest rate swap
agreements is recognized as an adjustment to interest incurred in the period.
The fair value of the Company's interest rate swap is not considered significant
based on the swap agreement's duration and terms.
6. Acquisitions
- ---------------
During the fiscal year ended July 31, 1999, the Company purchased certain
homebuilding assets and assumed the related liabilities of Breland Homes, Inc.;
Breland Homes of Mississippi, LLC; and Breland Properties, Inc. (collectively
"Breland Homes"). Breland Homes is a privately-owned homebuilder with
operations in Huntsville, Alabama and the Mississippi Gulf Coast. The
transaction was effective as of March 1, 1999. Included in the purchase were 82
homes in backlog.
The allocation of the purchase price is as follows:
Residential inventories $11,471,000
Excess of cost over net assets acquired 3,000,000
Other Assets 476,000
Less: liabilities assumed (9,675,000)
- -------------------------------------------------------------------------------
Net cash paid $ 5,272,000
The following unaudited pro forma information reflects the Company's results for
the years ended July 31, 1999 and July 31, 1998 adjusted to include the results
of Breland Homes.
The pro forma information is not necessarily indicative of future operations or
the actual results that would have occurred had the combination been consummated
at the beginning of the periods indicated above.
Year Ended July 31,
-----------------------
1999 1998
- --------------------------------------------------------------------------------
Total revenue $380,144 $276,623
Net earnings $ 11,033 $ 4,612
Earnings per common share
Basic $ 1.39 $ 0.58
Diluted $ 1.35 $ 0.58
7. Shareholders' Equity
- -----------------------
Common Stock
- ------------
The Company has 7,949,013 shares of Common Stock outstanding at July 31, 1999,
all of which are voting shares. During the fiscal year ended July 31, 1999,
6,250 shares of common stock were issued under the Company's Employee Stock
Option Plan. Also, during fiscal 1999, all of the remaining 28,330 shares of
non-voting common stock were exchanged with the Company for newly-issued shares
of voting common stock on a share for share basis. Except for voting right, the
non-voting common stock was substantially the same as the Company's voting
stock.
Stock Options
- -------------
The Company has adopted two plans for the issuance of stock options to its
employees and members of its Board of Directors.
On September 17, 1992, the Company adopted the Washington Homes Employee Stock
Option Plan (the "Employee Option Plan") pursuant to which options for up to
500,000 shares of Common Stock could be granted to officers and other key
employees of the Company. In July 1997, the Board of Directors voted to increase
the number of shares for which options could be granted to 1,000,000. The
amendment to the plan was subsequently approved by the shareholders in November
1997. Options granted under the Employee Option Plan can be either incentive
stock options ("Incentive Stock Options") or non-qualified options
("Non-Qualified Options") as determined by a committee of the independent
directors of the Board of Directors. Options granted under the Employee Option
Plan will have an exercise price not less than fair market value at date of
grant. Options will become exercisable, in part, after 12 months from the date
of grant and will generally remain exercisable for ten years from the date of
grant. Certain options are not exercisable until fiscal 2000.
On September 15, 1994 the Company adopted the Washington Homes Non-Employee
Directors' Stock Option Plan pursuant to which options for up to 30,000 shares
of Common Stock can be granted to directors who are not employees of the Company
or its subsidiaries. In November 1997, the shareholders approved an amendment to
increase the number of shares available for options to 100,000. Options that are
Non-Qualified Options, generally become exercisable in part after one year from
date of grant and generally remain exercisable for ten years from the date of
grant.
In September, 1996, options for 47,000 shares exercisable at $9.00 were
exchanged for new options for 47,000 shares exercisable at $3.69.
In February 1997, the Company granted options for 10,000 shares of Common Stock
exercisable at $5.36 to a non-employee consultant.
The following summarizes information about the Company's stock options
outstanding at July 31, 1999.
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted Average
--------------------- Weighted
Remaining Average
Exercise Number Term Exercise Number Exercise
Price Range Outstanding in Years Price Exercisable Price
- --------------------------------------------------------------------------------
$3.63 - $4.00 292,500 8.18 $3.90 62,000 $3.76
4.06 - 4.50 261,500 7.99 4.43 79,375 4.38
4.69 - 4.75 218,000 8.57 4.74 19,500 4.72
4.88 - 6.00 256,000 5.93 5.24 204,750 5.17
- --------------------------------------------------------------------------------
$3.63 - $6.00 1,028,000 7.65 $4.55 365,625 $4.73
22 ANNUAL REPORT 1999
Notes to Consolidated Financial Statements
Years Ended July 31, 1999, 1998 and 1997
- ------------------------------------------
Option activity for the Company is summarized below:
Employees Non-Employees
-------------------- --------------------
Weighted Weighted
Number Average Number Average
of Shares Price of Shares Price
- --------------------------------------------------------------------------------
Outstanding -- July 31, 1996 332,000 $5.66 10,000 $5.05
Granted 189,000 4.09 19,000 4.57
Canceled 89,000 4.43 -- --
Exercised -- -- -- --
- --------------------------------------------------------------------------------
Outstanding -- July 31, 1997 432,000 5.23 29,000 4.74
Granted 592,000 4.46 40,000 4.00
Canceled 43,000 4.76 -- --
Exercised -- -- -- --
- --------------------------------------------------------------------------------
Outstanding -- July 31, 1998 981,000 4.53 69,000 4.31
Granted 39,000 5.87 -- --
Canceled 54,750 4.83 -- --
Exercised 6,250 5.04 -- --
- --------------------------------------------------------------------------------
Outstanding -- July 31, 1999 959,000 4.57 69,000 4.31
Exercisable at July 31, 1999 336,125 4.75 29,500 4.54
- --------------------------------------------------------------------------------
At July 31, 1999, there were 75,750 shares reserved for future grants under both
plans.
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
issued in October 1995. In accordance with the provisions of SFAS No. 123, the
Company applies APB Opinion No. 25 and related interpretations in accounting for
its stock option plans and, accordingly, does not recognize compensation cost
based on the fair value of the options granted at grant date as prescribed by
SFAS No. 123. Had compensation been recorded consistent with SFAS No. 123, net
earnings (loss) and earnings (loss) per share would have been reduced to the pro
forma amounts indicated in the table below:
Year Ended July 31,
(in thousands except ---------------------------------
per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------
Net earnings (loss)--as reported $10,648 $3,790 (13,289)
Net earnings (loss)--pro forma 10,465 3,621 (13,314)
Basic earnings (loss) per share--as reported 1.34 0.48 (1.67)
Basic earnings (loss) per share--pro forma 1.32 0.46 (1.68)
Diluted earnings (loss) per share--as reported 1.30 0.48 (1.67)
Diluted earnings (loss) per share--pro forma 1.28 0.46 (1.68)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
Year Ended July 31,
------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Expected dividend yield -- -- --
Expected stock price volatility 40% 46% 27%
Risk-free interest rate 5.0% 5.2% 6.2%
Expected life of options 8 8 9
- --------------------------------------------------------------------------------
The weighted average fair value of options granted during 1999, 1998 and 1997
were $3.18, $2.62 and $1.96 per option, respectively.
8. Earnings per Share
- ---------------------
Earnings per share are presented in accordance with SFAS No. 128, "Earnings Per
Share." This statement requires dual presentation of basic and diluted earnings
per share on the face of the statement of operations. Basic earnings per share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average number of shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted to common stock. Options to purchase 1,028,000 shares of common stock
at $4.55 were outstanding at July 31, 1999. Options to purchase 1,050,000 shares
of common stock at $4.52 were outstanding at July 31, 1998. Options to purchase
461,000 shares of common stock at $5.20 were outstanding at July 31, 1997 but
were not included in the computation of diluted earnings per share for the year
ended July 31, 1997 because the option's exercise prices were greater than the
average market price of the common shares.
The following is a reconciliation of the amounts used in calculating basic and
diluted earnings per common share.
Per Share
(dollars in thousands) Earnings Shares Amount
- --------------------------------------------------------------------------------
Basic earnings per common share for
the year ended July 31, 1999:
Earnings available to common shareholders $10,648 7,943,996 $1.34
Effect of dilutive stock options -- 257,503 (.04)
- --------------------------------------------------------------------------------
Diluted earnings per common share for
the year ended July 31, 1999 $10,648 8,201,499 $1.30
================================================================================
Basic earnings per common share for
the year ended July 31, 1998:
Earnings available to common shareholders $ 3,790 7,942,763 $0.48
Effect of dilutive stock options -- 22,430 --
- --------------------------------------------------------------------------------
Diluted earnings per common share for
the year ended July 31, 1998 $ 3,790 7,965,193 $0.48
================================================================================
WASHINGTON HOMES 23
Notes to Consolidated Financial Statements
Years Ended July 31, 1999, 1998 and 1997
------------------------------------------
9. Segment Reporting
- --------------------
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information," establishes the standard for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports to shareholders. In accordance
with SFAS No. 131, the Company has determined that its operating activities
consist of one reportable segment, the homebuilding segment, which specializes
in the construction and sale of residential housing. Accordingly, no additional
disclosures are required.
10. Income Taxes
- ----------------
As discussed in Note 1, the Company follows the provisions of SFAS No. 109. The
provision (benefit) for income taxes includes the following:
Year Ended July 31,
--------------------------------------
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Current:
Federal $6,551 $1,982 $ 1,619
State 976 117 359
- --------------------------------------------------------------------------------
7,527 2,099 1,978
- --------------------------------------------------------------------------------
Deferred:
Federal (662) 112 (2,713)
State (159) 7 (601)
- --------------------------------------------------------------------------------
(821) 119 (3,314)
- --------------------------------------------------------------------------------
Total Provision (Benefit) $6,706 $2,218 $(1,336)
================================================================================
The difference between the effective tax rate and the expected statutory tax
rate computed on earnings before taxes is attributable to the following:
Year Ended July 31,
--------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Taxes computed at statutory rate 35.0% 34.0% (34.0)%
Increases (decreases):
State income taxes 3.1 1.4 (1.7)
Excess of cost over net assets acquired .4 1.1 24.7
Other .1 .4 1.6
- --------------------------------------------------------------------------------
Effective tax rate 38.6% 36.9% (9.4)%
================================================================================
The deferred income tax liability at July 31, 1999 and 1998 represents the tax
effect of temporary differences as follows:
July 31,
----------------------
1999 1998
- --------------------------------------------------------------------------------
Land step up in basis $ 289 $ 151
Capitalized interest 1,325 1,665
Uniform capitalized costs 572 250
Investment in joint ventures (388) 124
Warranty reserve (293) --
Accrued compensation cost (297) --
Other 8 (152)
- --------------------------------------------------------------------------------
$1,216 $2,038
================================================================================
During the years ended July 31, 1999, 1998 and 1997, income taxes in the amount
of $5,994,000, $922,000 and $3,807,000, respectively, were paid.
The Internal Revenue Service has examined the Company's tax returns for the
years ended July 31, 1992, 1993, and 1994. The IRS raised issues primarily
related to matters having to do with the Company's recapitalization in 1992
and 1993 including a $20.0 million gain on debt forgiveness which the Company
treated as non-taxable under the provisions of Section 108 of the Internal
Revenue Code. In March 1997, the Company reached a settlement with the IRS for
all items in question. As a result, the Company recognized an extraordinary loss
of $390,000 which relates to the extraordinary gain on debt forgiveness in
fiscal 1992.
11. Employee Retirement Plan
- ----------------------------
The Company has a 401(k) Plan which allows eligible employees to defer a portion
of their total compensation subject to limitations of the Internal Revenue Code.
The Company matches 50% of participant contributions, up to a maximum of the
greater of $1,000 or 1.5% of compensation for each participant. The Company's
total matching contributions under the Plan for the years ended July 31, 1999,
1998 and 1997 were approximately $163,700, $124,600 and $112,900, respectively.
Under this plan, the Company has elected to make a $250,000 profit sharing
contribution in January 2000 to all eligible non-highly compensated personnel
employed as of December 31, 1999.
12. Related Party Transactions
- ------------------------------
The Company leases certain office space from an affiliated entity. During the
years ended July 31, 1999, 1998 and 1997, $396,000, $435,000 and $443,000 were
paid, respectively.
13. Commitments and Contingent Liabilities
- ------------------------------------------
The Company leases its headquarters offices and offices for certain divisions
from an affiliate and certain other facilities from unrelated parties, all under
non-cancelable operating leases with terms ending through May 2008. Future
minimum rental payments required under operating lease commitments that have
initial or remaining non-cancelable lease terms in excess of one year subsequent
to July 31, 1999, are as follows:
For the year ending July 31, (in thousands)
- -------------------------------------------------------------------
2000 $1,588
2001 1,276
2002 716
2003 652
2004 588
Thereafter 1,740
- -------------------------------------------------------------------
Total future rental payments $6,560
===================================================================
Rental expense was $3,053,000, $2,857,000 and $2,732,000 for the years ended
July 31, 1999, 1998 and 1997, respectively.
At July 31, 1999 the Company was contingently liable to banks and other
financial institutions for approximately $19.6 million for outstanding letters
of credit and surety bonds relating to building lot acquisition contracts and
municipal bonding for land development activities.
The Company is involved in various claims and legal actions arising in the
normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
24 ANNUAL REPORT 1999
I n d e p e n d e n t A u d i t o r s ' R e p o r t
- -------------------------------------------------------
To the Shareholders and Board of Directors
of Washington Homes, Inc.
We have audited the accompanying consolidated balance sheets of Washington
Homes, Inc. and subsidiaries as of July 31, 1999 and 1998 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended July 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Washington Homes, Inc. and
subsidiaries as of July 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
McLean, VA
September 3, 1999
Directors and Officers
- ----------------------
Board of Directors
- ------------------
Geaton A. DeCesaris, Sr.(1)
Chairman Emeritus
Geaton A. DeCesaris, Jr.(1)
Chairman of the Board, President,
and Chief Executive Officer
Thomas J. Pellerito
President--Homebuilding Operations,
Chief Operating Officer
Paul C. Sukalo(1)
Senior Vice President
Construction
Thomas Connelly(2)
Chief Financial Officer
Western Pacific Housing
El Segundo, California
Richard S. Frary(2,3)
President
Tallwood Associates, Inc.
New York, New York
Ronald M. Shapiro(2,3)
Counsel to the Firm
Shapiro & Olander
Baltimore, Maryland
Chairman, Shapiro Negotiations Institute
Richard B. Talkin(2,3)
Attorney
Columbia, Maryland
(1) Executive Committee
(2) Audit Committee
(3) Compensation Committee
Executive Officers
- ------------------
Geaton A. DeCesaris, Jr.
Chairman of the Board, President,
and Chief Executive Officer
Thomas J. Pellerito
President--Homebuilding Operations,
Chief Operating Officer
Christopher Spendley
Senior Vice President, Chief Financial
Officer and Secretary
Clayton W. Miller
Senior Vice President, Chief Accounting
Officer and Treasurer
Paul C. Sukalo
Senior Vice President
Construction
Other Officers of the
Company and/or Subsidiaries
- ---------------------------
Robert Hutson
Executive Vice President
Southeast Region President
Tony L. Kennicott
Executive Vice President
Mid-South Region President
Senior Vice Presidents
- ----------------------
Jeffrey Donohue
Homebuyer's Mortgage, Inc.
Dorothy Minich
Sales and Marketing
William A. Wilder
Land Operations
Vice Presidents
- ---------------
Deborah A. Ailiff
Associate General Counsel
Timothy M. Bates
Virginia Division President
Paul Carty
Charlotte Division President
A. Hugo DeCesaris
Maryland Division President
Marco A. DeCesaris
Design Showcase
David C. DeMarco
Land Acquisitions
Larry Gorman
National Purchasing
Laurence Jaffe
General Counsel
A. J. McMurphy, III
Gulf Coast Division President
Craig Smith
Greensboro Division President
Neil Traurig
Pittsburgh Division President
Robert Yeatman
Nashville Division President
Corporate Information
- ---------------------
Company Profile
- ---------------
Ranked as one of the top 40 builders in the United States, Washington Homes
designs, builds and markets quality homes in 82 communities in Maryland,
Virginia, and Pennsylvania; and under the Westminster Homes name in North
Carolina, Tennessee, Alabama and Mississippi. The Company is an acknowledged
leader in the construction of condominiums, townhouses and single-family homes.
As a full-service homebuilder, Washington Homes also is engaged in related
businesses: Homebuyer's Mortgage, Inc., New Homebuyer's Title, Homebuyer's
Insurance, and Design Showcase. The Company has constructed over 24,000 homes
in its 34-year history.
Annual Meeting
- --------------
November 19, 1999--10 a.m.
Greenbelt Marriott Hotel, Greenbelt, Maryland
Form 10-K
- ---------
A copy of the Company's Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission, is available without charge upon written request to:
Investor Relations
Washington Homes, Inc.
1802 Brightseat Road, 6th floor
Landover, Maryland 20785
Corporate Office
- ----------------
1802 Brightseat Road, 6th floor
Landover, Maryland 20785
Transfer Agent & Registrar
- --------------------------
ChaseMellon Shareholder Services, L.L.C.
Overpeek Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
www.chasemellon.com
Independent Auditors
- --------------------
Deloitte & Touche LLP
McLean VA
Common Price Range
- ------------------
The common stock is traded on the New York Stock Exchange, Symbol "WHI."
- ----------------------------------------
Fiscal 1999 High Low
- ----------------------------------------
1st Quarter 6.25 4.00
2nd Quarter 6.50 4.63
3rd Quarter 7.00 5.13
4th Quarter 8.38 6.00
- ----------------------------------------
Fiscal 1998 High Low
- ----------------------------------------
1st Quarter 4.88 3.69
2nd Quarter 4.50 3.50
3rd Quarter 5.38 3.75
4th Quarter 6.25 4.65
As of September 30, 1999, there were approximately 195 holders of record
representing an estimated 3,300 beneficial owners of the Company's common stock.
Washington
Homes
Logo
Making the American dream affordable.(R)
1802 Brightseat Road
Landover, MD 20785
phone (301) 772-8900 o fax (301) 772-1380
www.washhomes.com