<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
0-23270
Commission File Number
BORROR CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1393233
----------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
5501 Frantz Road, Dublin, Ohio 43017-0766
-----------------------------------------
(Address of principal executive offices)
(614) 761-6000
--------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Formal Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- ---------
Number of common shares outstanding as of August 2, 1996: 6,217,820
1
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BORROR CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements.............................................. 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 10
PART II OTHER INFORMATION................................................. 17
SIGNATURES .................................................................. 18
INDEX TO EXHIBITS............................................................... 19
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
BORROR CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
================================================================================================================
June 30, December 31,
1996 1995
(unaudited)
ASSETS ----------- ------------
<S> <C> <C>
Cash and cash equivalents $ 207 $ 207
Notes and accounts receivable, net:
Trade 1,682 1,469
Due from financial institutions for residential closings 1,625 421
Refundable federal income taxes 1,019
Real estate inventories (Note 3):
Land and land development costs 47,619 51,312
Homes under construction 40,694 40,749
Other 2,730 2,416
----------- -----------
Total real estate inventories 91,043 94,477
----------- -----------
Prepaid expenses and other 899 678
Other assets 313 504
Deferred income taxes 367 840
Property and equipment, at cost:
Property and equipment 9,063 9,197
Less accumulated depreciation (3,996) (3,781)
------------ ------------
Net property and equipment 5,067 5,416
----------- -----------
Total assets $ 101,203 $ 105,031
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade $ 4,736 $ 6,444
Deposits on homes under contract 2,117 1,697
Accrued liabilities 6,239 6,333
Note payable, banks (Note 2) 53,260 53,051
Term debt 4,814 8,731
----------- -----------
Total liabilities 71,166 76,256
----------- -----------
Commitments and contingencies (Note 5)
Shareholders' equity
Common shares, without stated value, 12,000,000 shares authorized
6,217,820 and 6,213,870 shares issued and outstanding,
respectively 30,433 30,416
Less deferred shares awarded (29) (36)
Retained deficit (367) (1,605)
------------ ------------
Total shareholders' equity 30,037 28,775
----------- -----------
Total liabilities and shareholders' equity $ 101,203 $ 105,031
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
BORROR CORPORATION
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
==============================================================================================================
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 41,524 $ 46,221 $ 77,842 $ 80,777
Cost of real estate sold 32,207 39,599 60,942 67,506
----------- ----------- ----------- -----------
Gross profit 9,317 6,622 16,900 13,271
----------- ----------- ----------- -----------
Selling, general and administrative 6,000 6,978 11,821 13,731
----------- ----------- ----------- -----------
Income (loss) from operations 3,317 (356) 5,079 (460)
Interest expense (Notes 2 and 3) 1,606 1,850 3,116 2,990
----------- ----------- ----------- -----------
Income (loss) before income taxes 1,711 (2,206) 1,963 (3,450)
----------- ------------ ----------- -----------
Provision for income taxes 625 (676) 725 (1,085)
----------- ------------ ----------- -----------
Net income (loss) $ 1,086 $ (1,530) $ 1,238 $ (2,365)
=========== ============ =========== ===========
Earnings (loss) per share $ 0.17 $ (0.25) $ 0.20 $ (0.38)
=========== ============ =========== ===========
Weighted average shares outstanding 6,217,777 6,193,432 6,215,823 6,192,232
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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BORROR CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Common Shares
--------------------- Deferred Shares Retained
Shares Amount Awarded Deficit Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 6,213,870 $ 30,416 $ (36) $ (1,605) $ 28,775
Net income 1,238 1,238
Shares issued - shares awarded 3,950 17 17
Deferred compensation 7 7
- -------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 6,217,820 $ 30,433 $ (29) $ (367) $30,037
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
<TABLE>
<CAPTION>
BORROR CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
===============================================================================================================
Six Months Ended
June 30,
1996 1995
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,238 $ (2,365)
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities:
Depreciation and amortization 516 634
Loss on disposal of property and equipment 111
Allowance for doubtful accounts 221
Reserve for real estate inventories 248 150
Issuance of common shares 17 12
Deferred income taxes 473
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (1,638) 16
Decrease (increase) in refundable federal income tax 1,019 (1,085)
Decrease in real estate inventories 3,186 854
Increase in prepaid expenses and other (221) (179)
Decrease in other assets 72 185
Decrease in accounts payable (1,708) (206)
Increase in deposits on homes under contract 420 346
(Decrease) increase in accrued liabilities (94) 509
------------ -----------
Net cash provided by (used in) operating activities 3,860 (1,129)
Cash flows from investing activities:
Purchase of property and equipment (152) (245)
------------ ------------
Net cash used in investing activities (152) (245)
Cash flows from financing activities:
Proceeds from note payable, banks 209 1,546
Payments on term debt (3,917) (169)
------------ ------------
Net cash (used in) provided by financing activities (3,708) 1,377
------------ -----------
Net increase in cash and cash equivalents 0 3
Cash and cash equivalents, beginning of period 207 202
----------- -----------
Cash and cash equivalents, end of period $ 207 $ 205
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid (net of amounts capitalized) $ 497 $ 440
=========== ===========
Income taxes paid - $ 72
=========== ===========
Supplemental disclosures of non cash financing activities:
Land acquired by purchase contract or seller financing - $ 3,160
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
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BORROR CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in
conjunction with the December 31, 1995 audited annual financial statements
of Borror Corporation contained in its Annual Report to Shareholders or in
its December 31, 1995 Form 10-K.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for interim
periods. The results of operations for the three months and six months
ended June 30, 1996 are not necessarily indicative of the results to be
expected for the full year.
Certain reclassifications have been made to the three months and six
months ended June 30, 1995 financial information to conform to the June 30,
1996 presentation. These reclassifications relate primarily to a change of
expense from cost of real estate sold to selling, general and
administrative in order to make the Company's financial statements more
comparable to other home building companies.
2. NOTE PAYABLE, BANKS:
--------------------
The Company's amended and restated loan agreement provides for a
revolving credit facility of $90.0 million. Up to $10 million of this
facility may be used to issue standby letters of credit. This credit
facility matures on June 30, 1997 and is collateralized by mortgages and
security interests on substantially all of the Company's property and
assets. Borrowings under the credit facility bear interest at the prime
commercial rate of interest of the lead bank except that $15.0 million of
borrowings bore interest at 7.1% per annum through August 27, 1995.
On March 19, 1996, the Company amended its revolving credit facility.
The purpose of the amendment was to address the unusually harsh late fall
and winter weather conditions that reduced the Company's home deliveries in
the first quarter of 1996 to less than those anticipated to close in the
remaining quarters of 1996. The primary impact of this amendment was to
require the Company to maintain a minimum tangible net worth as follows:
for the period beginning January 1, 1996, and continuing through and
including September 29, 1996, not less than $27.0 million; beginning
September 30, 1996, and continuing through and including December 31, 1996,
not less than the greater of (i) $27.5 million or (ii) the sum of $27.0
million plus an amount equal to 75% of the Company's net income after taxes
for the period January 1, 1996 through September 30, 1996; beginning
December 31, 1996, and continuing at all times thereafter not less than the
greater of (i) $29.0 million or (ii) the sum of $27.0 million plus an
amount equal to 75% of the Company's net income after taxes for the fiscal
year ending December 31, 1996. At June 30, 1996, the Company had a tangible
net worth of $29.8 million. In addition, the provision under which the
Company shall not incur a loss in any five consecutive fiscal quarters was
amended to become effective with the quarter ending June 30, 1995.
7
<PAGE> 8
BORROR CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
3. CAPITALIZED INTEREST:
---------------------
Interest is capitalized on land during the development period and on
housing construction costs during the construction period. Capitalized
interest related to housing construction costs and finished lots is
included in interest expense in the period the home is closed. Capitalized
interest related to land under development and construction in progress was
$2.6 million and $2.9 million at June 30, 1996 and December 31, 1995,
respectively. The following table summarizes the activity with respect to
capitalized interest:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Interest incurred $ 1,438,000 $ 1,848,000 $ 2,937,000 $ 3,472,000
Interest capitalized (1,202,000) (1,576,000) (2,473,000) (2,927,000)
-------------- -------------- -------------- --------------
Interest expensed directly 236,000 272,000 464,000 545,000
Previously capitalized interest
charged to interest expense 1,370,000 1,578,000 2,652,000 2,445,000
------------- ------------- ------------- -------------
Total interest expense $ 1,606,000 $ 1,850,000 $ 3,116,000 $ 2,990,000
============= ============= ============= =============
</TABLE>
4. INCENTIVE STOCK PLAN
--------------------
Pursuant to the Borror Corporation Incentive Stock Plan, the Company
granted options on January 2, 1996 to selected Company personnel to
purchase 261,000 common shares and on May 18, 1996 to the Company's outside
Directors to purchase 7,500 common shares. All such options were granted at
fair market value as of the grant date. On April 1, 1996 the Company also
awarded shares to selected Company personnel for meritorious service
performed during 1995.
Aggregate activity pursuant to the Incentive Stock Plan since December
31, 1995 consists of the following:
<TABLE>
<CAPTION>
Shares
Options Awarded Total
------- ------- -----
<S> <C> <C> <C>
Balance at December 31, 1995 204,000 31,870 235,870
Options granted and shares awarded during period 268,500 3,950 272,450
Options cancelled during period (29,000) (29,000)
------- ------- -------
Balance at June 30, 1996 443,500 35,820 479,320
======= ======= =======
Maximum shares reserved for issuance under this plan are: 500,000
Option prices per share range from $3.25 to $4.50
</TABLE>
Common share equivalents in the form of stock options are excluded from the
calculation of weighted average shares outstanding at June 30, 1996, because the
potential dilutive impact from exercising these options would either be
anti-dilutive or have a less than 3% dilutive effect on earnings per share.
8
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BORROR CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
5. LITIGATION
----------
On August 2, 1995, Lawrence Rothstein, Trustee for the Lawrence
Rothstein Trust, filed a class action in the United States District Court
for the Southern District of Ohio (Case No. C2-95-746), against the
Company, certain of its present and former directors and officers, and the
lead underwriters in the Company's initial public offering. The complaint
seeks to allege that the registration statement for the initial public
offering contained false and misleading statements and seeks to assert
violations of Sections 11, 12(2) and 15 of the Securities Act of 1933. The
complaint seeks unspecified compensatory damages, as well as interest,
costs and such other relief as the court may deem proper. The Company has
filed an answer denying the material allegations of the complaint and
expects to prepare and present a vigorous defense. The suit is now in the
discovery stage.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Although the 30-year fixed rate FHA mortgage interest rates continued to
rise from 7.50% at December 31, 1995 to 8.50% at June 30, 1996, demand for the
Company's homes remained strong as evidenced by the 750 sales recorded by the
Company in the first six months of 1996. The Company's backlog of 785 homes at
June 30, 1996 was a result of both the large number of first half 1996 sales and
fewer closings attributed to seasonal weather conditions.
Gross profits as a percentage of revenues continued to improve over those
reported in previous quarters. Gross profit increased to 22.4% of revenues for
second quarter 1996 compared to 14.4% of revenues for second quarter 1995. This
gross profit improvement reflected higher home sale prices, more restrictive
sales discounting policies implemented during the second half of 1995, increased
emphasis on direct construction cost controls and decreases from historical
amounts in additional payments for construction costs related to previously
delivered homes. In addition the Company was able, principally through personnel
reductions, to reduce selling, general and administrative expenses, both in
terms of overall expense and as a percentage of revenues.
COMPANY OUTLOOK
The Company expects to remain profitable for the rest of 1996.
Profitability improvements should result from an increase in home closings and
from continued emphasis on direct construction cost controls. The Company also
intends to further reduce its investment in land inventory to the extent that it
is strategically prudent to do so. The largest challenge facing the Company
during the remainder of the year will be to maintain adequate subcontractor
services to allow the Company to meet its scheduled home deliveries. In this
regard the Company has implemented programs designed to increase its production
capabilities. Additionally, the Company intends to place increased emphasis on
sales of higher end product.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
The statements contained in this report under the caption "Company Outlook"
and other provisions of this report which are not historical facts are "forward
looking statements" that involve various important risks, uncertainties and
other factors which could cause the Company's actual results for 1996 and beyond
to differ materially from those expressed in such forward looking statements.
These important factors include, without limitation, the following risks and
uncertainties: real or perceived adverse economic conditions and/or an increase
in mortgage interest rates, mortgage commitments that expire prior to homes
being delivered, the Company's ability to install public improvements or build
and close homes on a timely basis due to adverse weather conditions, the effect
of changing consumer tastes on the market acceptance for the Company's products,
the impact of competitive products and pricing, the effect of shortages or
increases in the costs of materials, labor and financing, the continued
availability of credit, the outcome of litigation, the impact of changes in
government regulation, and the other risks described in the Company's Securities
and Exchange Commission filings.
10
<PAGE> 11
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. Closings and revenues normally increase in the third and fourth
quarters. 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 nine
quarters:
<TABLE>
<CAPTION>
THREE SALES BACKLOG
MONTHS REVENUES CONTRACT CLOSINGS (AT PERIOD END)
ENDED (IN THOUSANDS) (IN UNITS) (IN UNITS) (IN UNITS)
=============================================================================================================================
<S> <C> <C> <C> <C>
June 30, 1994 $37,926 309 268 738
Sept. 30, 1994 $46,728 216 326 628
Dec. 31, 1994 $53,585 270 377 521
March 31, 1995 $34,556 306 250 577
June 30, 1995 $46,221 359 325 611
Sept. 30, 1995 $47,764 334 322 623
Dec. 31, 1995 $49,571 254 309 568
March 31, 1996 $36,318 425 255 738
June 30, 1996 $41,524 325 278 785
</TABLE>
At June 30, 1996, the aggregate sales value of homes in backlog was
$115,061,000 compared to $83,167,000 at December 31, 1995. The average price of
homes in backlog at June 30, 1996 increased to $146,575 from $146,421 at
December 31, 1995.
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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues ................................. 100.0% 100.0% 100.0% 100.0%
Cost of real estate sold ................. 77.6 85.6 78.3 83.6
--------- --------- --------- ---------
Gross profit ......................... 22.4 14.4 21.7 16.4
Selling, general & administrative expenses 14.4 15.1 15.2 17.0
--------- --------- --------- ---------
Income (loss) from operations ........ 8.0 (0.7) 6.5 (0.6)
Interest expense ......................... 3.9 4.0 4.0 3.6
Income tax provision (benefit) ........... 1.5 (1.5) 0.9 (1.3)
--------- --------- --------- ---------
Net income (loss) .................... 2.6% (3.2%) 1.6% (2.9%)
========= ========= ========= =========
</TABLE>
11
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THREE MONTHS ENDED JUNE 30, 1996 COMPARED
TO THREE MONTHS ENDED JUNE 30, 1995
REVENUES. Revenues for the second quarter 1996 were $41.5 million compared
to $46.2 million for the second quarter 1995, a $4.7 million or 10.2% decrease.
The Company closed 278 homes during second quarter 1996 compared to 325 homes
closed during second quarter 1995. This decrease in the number of homes closed
is attributed to construction delays due to the difficult weather conditions
during the current year and to the larger number of inventory homes closed in
second quarter 1995 compared to the number closed during second quarter 1996.
The average price of homes closed increased $7,300 or 5.3% between the two
periods due to price increases and reduced sales discounts. Included in revenues
are other revenues, consisting principally of the sale of land and building
supplies to other builders, which amounted to $800,000 in the second quarter
1996 and $1,000,000 in second quarter 1995.
GROSS PROFIT. Gross profit increased to 22.4% of revenues for second
quarter 1996 from 14.4% of revenues for second quarter 1995, an increase of
8.0%. The improved second quarter 1996 gross profit is attributable to price
increases, reduced sales discounts and better control of direct construction
costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $6.0 million for second quarter 1996 from
$7.0 million for second quarter 1995. As a percentage of revenues, selling,
general and administrative expenses declined to 14.4% during second quarter 1996
from 15.1% during second quarter 1995. The decrease in selling, general and
administrative expenses for second quarter 1996 compared to the same period in
1995 is principally due to a reduction in personnel expense, media and model
home expense, and construction related supplies.
INTEREST EXPENSE. Interest expense charged to operations decreased $200,000
to $1.6 million for second quarter 1996 compared to $1.8 million for second
quarter 1995. The average revolving line of credit indebtedness outstanding was
$58.4 million and $73.2 million for the second quarter of 1996 and 1995,
respectively. The weighted average rate of interest of the Company's revolving
line of credit was 8.8% for the second quarter of 1996 compared to 8.9% for the
second quarter of 1995. Interest expense for the second quarter 1996 did not
reflect the full impact of the lower average borrowing during the period because
the Company capitalized less interest in second quarter 1996 compared to second
quarter 1995. However, this reduction in capitalized interest was partially
offset by less previously capitalized interest charged to interest expense for
the same periods. The net reduction in capitalized interest reflected the
reduced level of inventory homes and land and land development costs maintained
by the Company during the second quarter of 1996 compared to second quarter
1995.
PROVISION FOR INCOME TAXES. Income tax expense was $600,000 for the second
quarter of 1996 versus an income tax benefit of $700,000 for the second quarter
of 1995. The Company's effective tax rate increased to 36.5% during the second
quarter 1996 compared to 30.6% during the second quarter 1995 due principally to
the inability to utilize certain deductions for tax purposes during 1995.
12
<PAGE> 13
SIX MONTHS ENDED JUNE 30, 1996 COMPARED
TO SIX MONTHS ENDED JUNE 30, 1995
REVENUES. Revenues for the six months ended June 30, 1996 were $77.8
million compared to $80.8 million for the six months ended June 30, 1995, a $2.9
million or 3.6% decrease. The Company closed 533 homes during the first six
months of 1996 compared to 575 homes during the same period in 1995. The
reduction in homes closed during the first half of 1996 was attributed to the
difficult weather conditions experienced by the Company during 1996 and to a
larger number of inventory homes closed in the first six months of 1995 compared
to the number closed during the same period in 1996. Although fewer homes were
closed in the first six months of 1996 than in 1995, the average price of homes
closed increased $5,700, or 4.2%, between the two periods. This increase in
average sale price was due to price increases and reduced sales discounts.
Included in revenues are other revenues, consisting principally of land and
building supplies to other builders, which were $1.6 million for the first half
of 1996 compared to $1.8 million for the first half of 1995.
GROSS PROFIT. Gross profit for the first six months of 1996 increased to
21.7% of revenues in 1996 from 16.4% for the first six months of 1995, a 5.3%
improvement. The improvement in gross profit is related to price increases,
reduced sales discounts and better control of direct construction costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $11.8 million for the six months ended June
30, 1996 from $13.7 million for the six months ended June 30, 1995. Selling,
general and administrative expenses were 15.2% of revenues for the first six
months of 1996 compared to 17.0% of revenues for the first six months of 1995.
The decrease in selling, general and administrative expenses is primarily
attributable to a reduction in personnel expense, media and model home expense
and construction related supplies.
INTEREST EXPENSE. Interest expense for the six months ended June 30, 1996
increased nominally to $3.1 million from $3.0 million for the six months ended
June 30, 1995. The average revolving line of credit indebtedness outstanding
during the first six months of 1996 was $58.3 compared to $73.8 during the first
six months of 1995. The weighted average rate of interest of the Company's
revolving line of credit was 8.9% for the six months ended June 30, 1996
compared to 8.8% for the first six months of 1995. Interest expense for the
first six months of 1996 did not reflect the full impact of the lower average
borrowing during the period because the Company capitalized less interest and
recognized more previously capitalized interest during the first six months of
1996 compared to the first six months of 1995. This additional interest expense
reflected the reduced level of inventory homes and land and land development
costs maintained by the Company during the first six months of 1996 compared to
the first six months of 1995.
PROVISION FOR INCOME TAXES. Income tax expense was $700,000 for the first
six months of 1996 compared to an income tax benefit of $1,100,000 for the first
six months of 1995. The Company's effective tax rate for the first half of 1996
increased 5.5% over that of the first half of 1995 due principally to the
inability to recognize the benefit of certain expenses for tax purposes in 1995.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital needs depend upon its sales volume, asset turnover,
land acquisition and inventory levels. Traditionally, the Company's principal
sources of capital have been bank borrowings and internally generated cash.
However, when available, the Company utilizes seller provided financing when
purchasing land for development.
SOURCES AND USES OF CASH
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995:
Net cash provided by operating activities increased $5.0 million for the
first six months of 1996 compared to the first six months of 1995. Net cash
provided by first half 1996 operating activities was $3.9 million compared to
net cash used in operating activities of $1.1 million for the comparable period
in 1995. This change was principally the result of net income of $1.2 million
for the first half of 1996 versus a net loss of $2.4 million during the first
half of 1995, a $3.2 million reduction in real estate inventories during the
first half of 1996 compared to a reduction of $900,000 during the first half of
1995 and the receipt of refundable income taxes of $1.0 million during the first
half of 1996. Additionally, these increases in operating cash for the first half
1996 were offset by increases in accounts receivable of $1.4 million and
decreases in accrued liabilities of $94,000. Net cash used in investing
activities decreased $93,000 because of a reduction in expenditures for property
and equipment. Net cash provided from financing activities decreased during the
first half 1996 as a result of a reduction in seller-provided term debt of $3.9
million and additional borrowings under the revolving line of credit of
$200,000.
REAL ESTATE INVENTORIES
The Company's practice is to develop most of the lots on which it builds
its homes. Generally, the Company attempts to maintain a land inventory that
will be sufficient to meet its anticipated lot needs for the next three to five
years. At June 30, 1996, the Company, owned or controlled either through options
or contingent contracts, land that could be developed into approximately 7,300
lots, compared to approximately 8,700 lots at June 30, 1995. Options and
contingent contracts expire at varying dates through July 15, 2000. Included in
the 7,300 lots at June 30, 1996 and the 8,700 lots at June 30, 1995 were
approximately 4,600 lots and 5,000 lots, respectively, that the Company either
owned or had non-cancellable contracts to purchase. 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, its evaluation of the future demand for its homes, and the
restrictions on land acquisition contained in its loan agreement.
During the first half 1996, the Company reduced its inventory of potential
lots by selling 37 lots and 14.6 acres of land to other builders for $1.1
million and the Company expects to continue to reduce its overall investment in
land inventories to the extent that it is strategically prudent to do so.
At June 30, 1996, the Company had 46 inventory homes (including
condominiums) in various stages of construction, which represented an aggregate
investment of $3.3 million versus 97 inventory homes (including condominiums) at
June 30, 1995 which represented an aggregate investment of $8.9 million. These
unsold inventory homes are not reflected in 1996 sales or backlog.
14
<PAGE> 15
SELLER-PROVIDED DEBT
The Company periodically utilizes seller-provided term debt when acquiring
land for development. During the first half of 1996 the Company repaid $3.9
million which reduced seller-provided debt to $2.0 million at June 30, 1996.
Interest rates on the seller-provided debt generally range from 8.0% to 10.0%.
The existing seller-provided term debt matures by the year 2000. In addition to
seller-provided financing, the Company also has other term debt consisting of a
first mortgage of $2.8 million on its office facility in Dublin, Ohio.
LAND PURCHASE COMMITMENTS
At June 30, 1996, the Company had commitments to purchase 103 residential
lots and unimproved land at an aggregate cost of $3.5 million, all of which is
expected to be funded by September 1997. In addition, at June 30, 1996, the
Company had entered into $21.6 million of cancelable obligations to purchase
residential lots and unimproved land in which $550,000 in good faith deposits
had been invested by the Company. Included in the $21.6 million of cancelable
purchase obligations are $900,000 of purchase options with Borror Realty
Company, an affiliate of the Company. The majority of the land subject to
cancelable obligations is for post-1996 development activities. The Company
expects to fund its 1996 capital requirements for land acquisition and
development and its obligations under purchase contracts and mortgage notes from
internally generated cash or from the borrowing capacity available under its
bank credit facilities.
CREDIT FACILITIES
At June 30, 1996, the Company had $3.9 million available under the
revolving credit facility, after adjustment for borrowing base limitations.
However, the capacity for borrowing under the revolving line of credit could
increase significantly depending upon the Company's utilization of the proceeds.
The revolving credit facility matures on June 30, 1997, and is collateralized by
mortgages and security interests which the Company has granted to the banks on
substantially all of its property and assets. The Company believes that its
credit capacity is sufficient to meet seasonal demands in construction activity.
Borrowings under the revolving credit facility bear interest at the prime
commercial rate of interest of the lead bank, which was 8.25% at June 30, 1996.
The Company has entered into various agreements which effectively limit its
exposure to interest rate fluctuations on those portions of borrowings under
floating rate interest arrangements. These agreements provide effective interest
rate caps of 9.0% on revolver borrowings of $18.0 million through September 15,
1997 and on additional $10.0 million of revolver borrowings through December 5,
1997. The Company's interest rate floor (collar) agreement requires that it pay
the equivalent of a minimum interest rate of 6.0% on $28.0 million of borrowings
through December 5, 1997.
Under the provisions of the revolving credit facility, the Company must
adhere to certain restrictive covenants, including restrictions on the Company's
ability to purchase land, build inventory homes, pay dividends and incur other
borrowings. The most restrictive of these covenants relate to the maintenance of
a maximum total liabilities to tangible net worth ratio and a minimum tangible
net worth. The Company is required to maintain a maximum total liabilities to
tangible net worth ratio of 3.25 to 1.00. However, if the Company's total
liabilities to tangible net worth ratio exceeds 2.25 to 1.00 at the end of any
quarter, the Company must pay escalating fees. These fees are included in
interest expense. The Company had a total liabilities to tangible net worth
ratio of 2.39 to 1.00 at June 30, 1996 compared to 3.05 to 1.00 at June 30,
1995.
15
<PAGE> 16
On March 19, 1996, the Company amended its revolving credit facility. The
purpose of the amendment was to address the unusually harsh late fall and winter
weather conditions that reduced the Company's home deliveries in the first
quarter of 1996 to less than those anticipated to close in the remaining
quarters of 1996. The primary impact of this amendment was to require the
Company to maintain a minimum tangible net worth as follows: for the period
beginning January 1, 1996, and continuing through and including September 29,
1996, not less than $27.0 million; beginning September 30, 1996, and continuing
through and including December 31, 1996, not less than the greater of (i) $27.5
million or (ii) the sum of $27.0 million plus an amount equal to 75% of the
Company's net income after taxes for the period January 1, 1996 through
September 30, 1996; beginning December 31, 1996, and continuing at all times
thereafter not less than the greater of (i) $29.0 million or (ii) the sum of
$27.0 million plus an amount equal to 75% of the Company's net income after
taxes for the fiscal year ending December 31, 1996. At June 30, 1996, the
Company had a tangible net worth of $29.8 million. In addition, the provision
under which the Company shall not incur a loss in any five consecutive fiscal
quarters was amended to become effective with the quarter ending June 30, 1995.
INFLATION
The Company is not always able to reflect all of its cost increases in the
prices of its homes because competitive pressures and other factors require it
in many cases to maintain or discount those prices. After a sales contract has
been accepted, the Company is generally able to maintain costs with
subcontractors from the date the sales contract is accepted until the date
construction is completed; however, unanticipated additional costs may be
incurred between the date a sales contract is accepted and the date construction
is completed. In addition, during periods of high construction activities, costs
may be incurred to obtain additional contractors for trades which are not
readily available, and which result in construction cost variances and lower
gross profit margins.
NEW FINANCIAL ACCOUNTING STANDARDS
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". The Statement principally addresses the valuation of
the Company's undeveloped land and land development costs and land and land
development costs in process of development. The adoption of this statement did
not have an impact on the financial statements.
Additionally, the Company adopted Statement of Financial Accounting
Standards No. 123 "Accounting For Stock-Based Compensation". Generally, this
statement requires companies to either recognize or disclose on a pro forma
basis, compensation expense for grants of stock, stock options, and other equity
instruments to employees, based on the new fair value accounting rules. The
Company has elected the pro forma disclosure options under this statement, and
will include all required pro forma disclosures in its Annual Report for the
year ending December 31, 1996.
16
<PAGE> 17
BORROR CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On August 2, 1995, Lawrence Rothstein, Trustee for the
Lawrence Rothstein Trust, filed a class action in the United
States District Court for the Southern District of Ohio (Case No.
C2-95-746), against the Company, certain of its present and former
directors and officers, and the lead underwriters in the Company's
initial public offering. The complaint seeks to allege that the
registration statement for the initial public offering contained
false and misleading statements and seeks to assert violations of
Sections 11, 12(2) and 15 of the Securities Act of 1933. The
complaint seeks unspecified compensatory damages, as well as
interest, costs and such other relief as the court may deem
proper. The Company has filed an answer denying the material
allegations of the complaint and expects to prepare and present a
vigorous defense. The suit is now in the discovery stage.
Item 2. Change in Securities. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
On May 17, 1996, the Company held its Annual Meeting of
Shareholders. At the annual meeting, the shareholders ratified the
selection of Coopers & Lybrand L.L.P. as independent public
accountants for the Company in 1996 by the following vote:
<TABLE>
<CAPTION>
Shares For Shares Against Shares Abstaining
---------- --------------- -----------------
<S> <C> <C> <C>
5,996,059 2,500 2,700
</TABLE>
In addition, the shareholders re-elected as Class II Directors the
three nominees of the Board of Directors by the following vote:
<TABLE>
<CAPTION>
Shares For Shares Withheld
---------- -----------------
<S> <C> <C> <C>
Donald A. Borror 5,979,009 22,250
David S. Borror 5,979,009 22,250
Pete A. Klisares 5,977,559 23,700
Gerald E. Mayo 5,975,359 25,900
</TABLE>
The term of office of the Class I Directors, Douglas G. Borror,
C. Ronald Tilley and Terry E. George, continued after the meeting.
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.
17
<PAGE> 18
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.
BORROR CORPORATION
(Registrant)
Date: August 2, 1996 By: /s/Douglas G. Borror
--------------------------------------
Douglas G. Borror
Chief Executive and Operating Officer,
President
Date: August 2, 1996 By: /s/Jon M. Donnell
--------------------------------------
Jon M. Donnell
Chief Financial Officer, Treasurer
(Principal Financial Officer)
Date: August 2, 1996 By: /s/Tad E. Lugibihl
--------------------------------------
Tad E. Lugibihl
Controller
(Principal Accounting Officer)
18
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Location
- ----------- ----------- --------
<S> <C> <C>
2.1 Corporate Exchange and Subscription Agreement Incorporated by
dated January 20, 1994, between Borror Corporation reference to Exhibit
and Borror Realty Company 2.1 to the Company's
Registration Statement
on Form S-1.
(File No. 33-74298), as
filed with the Commission
on January 21, 1994 and
as amended on March 2,
1994 (the "Form S-1").
2.2 Form of First Amendment to Corporate Exchange Incorporated by
and Subscription Agreement reference to Exhibit
2.2 to Form S-1.
3.1 Amended and Restated Articles of Incorporation of Incorporated by
Borror Corporation reference to Exhibit
3.1 to Form S-1.
3.2 Amended and Restated Code of Regulation of Incorporated by
Borror Corporation reference to Exhibit
3.2 to Form S-1.
4. Specimen of Stock Certificate of Borror Corporation Incorporated by
reference to Exhibit 4
to Form S-1.
27. Financial Data Schedule Page 20
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1996 AND STATEMENT OF INCOME FOR THE THREE MONTHS AND SIX
MONTHS ENDING JUNE 30, 1996, OF BORROR CORPORATION AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 207
<SECURITIES> 0
<RECEIVABLES> 3,869
<ALLOWANCES> 562
<INVENTORY> 91,043
<CURRENT-ASSETS> 0
<PP&E> 9,063
<DEPRECIATION> 3,996
<TOTAL-ASSETS> 101,203
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 30,433
0
0
<OTHER-SE> (396)
<TOTAL-LIABILITY-AND-EQUITY> 101,203
<SALES> 77,842
<TOTAL-REVENUES> 77,842
<CGS> 60,942
<TOTAL-COSTS> 72,763
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,116
<INCOME-PRETAX> 1,963
<INCOME-TAX> 725
<INCOME-CONTINUING> 1,238
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,238
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
