<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ To _____
0-23270
Commission File Number
DOMINION HOMES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-1393233
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
5501 FRANTZ ROAD, DUBLIN, OHIO
------------------------------
(Address of principal executive offices)
43017-0766
----------
(Zip Code)
(614) 761-6000
--------------
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
--------------
(Former Name, Former Address and Formal Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- -----
Number of common shares outstanding as of November 11, 1998: 6,281,504
<PAGE> 2
DOMINION HOMES, INC.
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements................................................................... 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................. 20
PART II OTHER INFORMATION...................................................................... 21
SIGNATURES ....................................................................................... 22
INDEX TO EXHIBITS.................................................................................... 23
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOMINION HOMES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
=========================================================================================================
September 30, December 31,
1998 1997
Unaudited
-------------- -----------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 252 $ 252
Notes and accounts receivable net:
Trade 306 201
Due from financial institutions for residential closings 888 340
Real estate inventories:
Land and land development costs 62,143 62,867
Homes under construction 54,810 47,959
Other 3,682 2,177
--------- ---------
Total real estate inventories 120,635 113,003
--------- ---------
Prepaid expenses and other 3,448 455
Deferred income taxes 2,274 2,110
Property and equipment, at cost: 6,776 4,325
Less accumulated depreciation (2,975) (2,891)
--------- ---------
Total property and equipment 3,801 1,434
--------- ---------
Total assets $ 131,604 $ 117,795
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade $ 6,490 $ 6,770
Deposits on homes under contract 2,753 1,977
Accrued liabilities 12,987 10,625
Note payable, banks 56,880 52,687
Term debt 4,635 5,076
--------- ---------
Total liabilities 83,745 77,135
--------- ---------
Commitments and contingencies
Shareholders' equity
Common shares, without stated value, 12,000,000 shares authorized,
6,281,504 and 6,266,953 shares issued and outstanding, respectively 30,851 30,673
Less deferred compensation (374) (150)
Retained earnings 17,382 10,137
--------- ----------
Total shareholders' equity 47,859 40,660
========= =========
Total liabilities and shareholders' equity $ 131,604 $ 117,795
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
DOMINION HOMES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
===============================================================================
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ---------- ---------- -------
<S> <C> <C> <C> <C>
Revenues $67,769 $58,723 $190,258 $152,392
Cost of real estate sold 55,260 46,702 153,848 120,962
-------- --------- --------- --------
Gross profit 12,509 12,021 36,410 31,430
Selling, general and administrative 6,901 5,866 20,324 16,943
-------- --------- --------- --------
Income from operations 5,608 6,155 16,086 14,487
Interest expense 1,192 1,545 3,594 4,679
-------- --------- --------- --------
Income before income taxes 4,416 4,610 12,492 9,808
Provision for income taxes 1,855 1,936 5,247 4,119
-------- --------- --------- --------
Net income $2,561 $2,674 $7,245 $ 5,689
======== ========= ========= ========
Earnings per share
Basic $0.41 $0.43 $1.15 $0.91
======== ========= ======== ========
Diluted $0.39 $0.42 $1.10 $0.89
======== ========= ======== ========
Weighted average shares outstanding
Basic 6,279,016 6,256,853 6,273,326 6,245,835
========= ========= ========= =========
Diluted 6,615,017 6,438,987 6,600,175 6,365,283
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE> 5
DOMINION HOMES, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
===============================================================================
Common Shares
---------------------------------
<TABLE>
<CAPTION>
Deferred Retained
Shares Amount Compensation Earnings Total
- --------------------------------------------- ---------------- ---------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 6,266,953 $ 30,673 $(150) $ 10,137 $ 40,660
Net Income 7,245 7,245
Shares awarded and redeemed 14,551 178 (208) (30)
Treasury Shares held for Deferred
Compensation Plan (1,069) (1,069)
Deferred Compensation 1,053 1,053
- --------------------------------------------- ---------------- ---------------- ------------------ --------------- ---------------
Balance, September 30, 1998 6,281,504 $ 30,851 $(374) $ 17,382 $ 47,859
- --------------------------------------------- ---------------- ---------------- ------------------ --------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
DOMINION HOMES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
=============================================================================================================
Nine Months Ended
September 30,
--------------------------------
1998 1997
--------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 7,245 $ 5,689
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization 477 692
Disposal of property & equipment (14) 12
Issuance of common shares for compensation 42 14
Deferred income taxes (164) (369)
Changes in assets and liabilities:
Notes and accounts receivable (653) (299)
Real estate inventories (7,632) (9,100)
Prepaid expenses and other (1,731) 157
Accounts payable (280) 198
Deposits on homes under contract 776 304
Accrued liabilities 2,531 2,604
-------------- -------------
Net cash provided by (used in) operating activities 597 (98)
Cash flows from investing activities:
Proceeds from sale of property & equipment 24 67
Purchase of property & equipment (1,386) (263)
-------------- -------------
Net cash used in investing activities (1,362) (196)
Cash flows from financing activities:
Proceeds from note payable, banks 183,852 151,239
Payments on note payable, banks (179,659) (150,322)
Prepaid loan fees (1,458)
Payments on term debt (1,805) (623)
Common shares purchased or redeemed (165)
-------------- -------------
Net cash provided by financing activities 765 294
-------------- -------------
Net change in cash and cash equivalents 0 0
Cash and cash equivalents, beginning of period 252 252
============== =============
Cash and cash equivalents, end of period $ 252 $ 252
============== =============
Supplemental disclosures of cash flow information:
Interest paid (net of amounts capitalized) $ 736 $ 1,809
============== =============
Income taxes paid $ 6,234 $ 4,383
============== =============
Capital lease obligations $ 1,364 $ 0
============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 7
DOMINION HOMES, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements for Dominion Homes,
Inc. ("the Company"), have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements.
These financial statements should be read in conjunction with the December
31, 1997 audited annual financial statements of the Company contained in
its Annual Report to Shareholders or in the December 31, 1997 Form 10-K.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for interim
periods. The results of operations for the three months and nine months
ended September 30, 1998 and 1997 are not necessarily indicative of the
results to be expected for the full year.
2. RECLASSIFICATION
Certain prior period information has been reclassified to conform to
the current period presentation. Effective January 1, 1998 the Company made
a decision to reclassify certain indirect construction costs to cost of
real estate sold from selling, general and administrative expense.
Accordingly, the cost of real estate sold for the three months and nine
months ended September 30, 1997 was increased by $2.0 million and $5.6
million, respectively. The reclassification had no impact on reported net
income.
3. CAPITALIZED INTEREST
Interest is capitalized on land during the development period and on
housing construction costs during the construction period. As a lot is
transferred to homes under construction, the interest capitalized on the
lot during the land development period is included as a cost of the land
and it is expensed through cost of sales when the home is closed.
Capitalized interest related to housing construction costs is included in
interest expense in the period in which the home is closed. Capitalized
interest related to land under development and construction in progress was
$2.0 million and $1.7 million at September 30, 1998 and September 30, 1997,
respectively. The following table summarizes the activity with respect to
capitalized interest:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
Interest incurred $1,286,000 $1,313,000 $ 3,740,000 $ 4,310,000
Interest capitalized (973,000) (760,000) (2,952,000) (2,623,000)
--------- --------- -------------- --------------
Interest expensed directly 313,000 553,000 788,000 1,687,000
Previously capitalized interest
charged to interest expense 879,000 992,000 2,806,000 2,992,000
------------ ------------ ------------- -------------
Total interest expense $1,192,000 $1,545,000 $ 3,594,000 $ 4,679,000
========== ========== ============= =============
</TABLE>
7
<PAGE> 8
4. NOTE PAYABLE, BANKS
On May 29, 1998 the Company entered into a Senior Unsecured Revolving
Credit Facility ("the Facility") that matures on May 31, 2003. The Facility
provides that aggregate borrowings and letters of credit will not exceed
the lesser of $125 million or the availability under a borrowing base. Five
lending banks are party to the Facility, which was syndicated by Huntington
Capital Corp. Huntington National Bank is the Administrative Agent and
Issuing Bank of the Facility. Proceeds from the Facility were used to
refinance the Company's previous $90 million bank credit facility and will
also be used for working capital, capital expenditures, acquisition
financing and other general corporate purposes.
The Facility contains the following provisions: (1) the Company has the
option to use any combination of the following methods to price the
revolving line of credit: (a) the bank's prime rate of interest that may be
adjusted based upon the Company's ratio of EBITDA to Interest Expense
("Interest Coverage Ratio"); or (b) a Eurodollar rate of interest plus a
variable margin based upon the Company's Interest Coverage Ratio; (2) the
Company has agreed to enter into interest rate contracts in the amount of
fifty percent of the outstanding borrowings in the event the Eurodollar
rate (without regard to the variable margin) becomes 8.50% per anum or
greater; (3) the Company has agreed to the following ratios: (a) Interest
Coverage Ratio of not less than 2.25 to 1.00 determined quarterly and based
upon the preceding four quarters; (b) total liabilities to tangible net
worth of not greater than 2.75 to 1.00 through December 31, 1999 and 2.50
to 1.00 from and after January 1, 2000; (4) the Company has agreed that
uncommitted land holdings in Central Ohio shall not exceed $73 million at
the end of fiscal 1997 and shall not exceed $73 million plus fifty percent
of the net income earned by the Company thereafter, with an overall limit
of $90 million; (5) outside of Central Ohio the Company shall not, without
lender approval, exceed the aggregate sum of $25 million for investments in
uncommitted land holdings, speculative homes, model homes and acquisitions
of companies in the homebuilding industry, except that the Company may
invest up to $15 million of such amount in one or more "start-up"
operations involving uncommitted land holdings, speculative homes and model
homes not associated with an ongoing business acquisition; (6) the Company
must maintain a tangible net worth of not less than $35 million plus
seventy-five percent of net income for periods ending on or after December
31, 1998; (7) the Company shall not exceed the aggregate principal sum of
$10 million for other borrowings, additional debt or capital lease
obligations, except that the Company may borrow an additional $5 million of
nonrecourse indebtedness from sellers of real estate, provided that such
additional non-recourse borrowings are fully reserved under the borrowing
base; (8) the Company shall not exceed $2 million of operating lease
rentals and $1 million of model home rentals; (9) the Company shall not
purchase, without required lender approval, unzoned land in excess of $2.5
million; (10) the Company will not permit the value of its inventory homes
to exceed $12.5 million and its model homes to exceed $6.5 million; (11)
the Company may not incur a loss during any five consecutive quarters; and
(12) the Company may not pay dividends during any calendar year in excess
of twenty five percent of the Company's net income after taxes for such
year.
The Company has entered into interest rate swap contracts that fix the
interest rate on $30 million of borrowings under the Facility. The interest
rate swap contracts mature between October 16, 2000 and May 6, 2003 and fix
interest rates between 5.48% and 6.13%, plus a variable margin based on the
Company's Interest Coverage Ratio. The variable margin may range from 1.75%
to 2.50% and is determined quarterly. Since the inception of the Facility
the variable margin has been 1.75%.
8
<PAGE> 9
As of September 30, 1998, the Company was in compliance with Facility
covenants and the Company had $23.0 million available under its Facility,
after adjustment for borrowing base limitations. Borrowing availability
under the Facility could increase, depending on the Company's utilization
of the proceeds.
5. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share." SFAS No. 128 establishes standards for computing and presenting
earnings per share ("EPS") and supersedes APB Opinion No. 15 "Earnings Per
Share". SFAS No. 128 replaces the presentation of primary EPS with a
presentation of basic EPS, which excludes dilution and is computed by
dividing income available to common shareholders by the weighted average
number of common shares outstanding during the period. This statement also
requires dual presentation of basic EPS and diluted EPS on the face of the
income statement for all periods presented. Diluted EPS is computed as the
weighted average number of shares outstanding adjusted for the effect of
common share equivalents. EPS data for the three months and nine months
ended September 30, 1997 have been restated to conform with the
requirements of SFAS No. 128.
A reconciliation of the weighted average shares used in basic and diluted
EPS is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
----------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Weighted average shares outstanding
during the period 6,279,016 6,256,853 6,273,326 6,245,835
Assuming exercise of options 336,001 182,134 326,849 119,448
--------- --------- --------- ---------
Weighted average shares outstanding
adjusted for common share equivalents 6,615,017 6,438,987 6,600,175 6,365,283
========= ========= ========= =========
</TABLE>
6. DEFERRED COMPENSATION
The Company maintains an Executive Deferred Compensation Plan under
which the contribution and matched amounts are used by the trustee to
acquire common shares of the Company in the open market. The common shares
are held and voted by the trustee pursuant to a rabbi trust agreement. The
deferred compensation liability may only be settled with common shares.
Historically the Company has presented the shares held in the rabbi trust
and the related deferred compensation liability as a net amount in the
balance sheet.
In May 1998, the Emerging Issues Task Force issued a consensus
requiring that the common shares held in the rabbi trust and related
deferred compensation liability be classified and accounted for in equity
at historical cost. Accordingly, the balance sheet as of September 30, 1998
reflects the common shares held in the rabbi trust and the related deferred
compensation liability as components of deferred compensation in
shareholders' equity. At September 30, 1998 the cost of common shares held
in the rabbi trust was $1,069,000 and the amount of the deferred
compensation liability was $976,000.
9
<PAGE> 10
7. NEW ACCOUNTING STANDARDS
In August 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. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. The
Company has not yet determined the impact this statement will have on its
operating results. The Company plans to adopt SFAS No. 133 in its fiscal
year ending December 31, 2000.
8. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings, most of which
arise in the ordinary course of business and some of which are covered by
insurance. In the opinion of the Company's management, none of the claims
relating to such proceedings will have a material adverse effect on the
financial condition or results of operations of the Company.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company continued its record results by closing 437 homes during third
quarter 1998 compared to 383 homes during third quarter 1997. Revenues from
third quarter 1998 closings increased 15% to $67.8 million from $58.7 million
for third quarter 1997. Third quarter 1998 revenues increased over third quarter
1997 revenues due to the closing of 54 additional homes and a higher average
closing price, which increased to $154,657 during third quarter 1998 from
$153,151 during third quarter 1997. There were 330 new home contracts during
third quarter 1998, down 13% from 380 new home contracts during third quarter
1997. At September 30, 1998 there were 837 contracts in backlog representing an
aggregate sales value of $136.3 million, compared to 728 sales contracts in
backlog at September 30, 1997 representing an aggregate sales value of $111.3
million. The average sales value of homes in backlog at September 30, 1998
increased to $162,881 from $152,816 at September 30, 1997. Net income for third
quarter 1998 was $2.6 million compared to $2.7 million for third quarter 1997.
Net income during third quarter 1998 was impacted as the Company experienced
labor and material price increases, additional costs associated with record
production volume, and startup costs associated with expansion into the
Louisville, Kentucky market.
The Company's entrance into the Louisville, Kentucky homebuilding market
during third quarter 1998 was the result of extensive research by the Company of
potential markets for expansion beyond Central Ohio. The Company has commitments
to purchase 67 developed lots in Louisville and has opened and staffed an
office. Start-up expenses incurred in connection with the Louisville expansion
through September 30, 1998, which totaled less than $100,000, are reflected in
current operations.
11
<PAGE> 12
COMPANY OUTLOOK
The Company currently has its largest share of the Central Ohio homebuilder
market in its history. The Company is confident that 1998 will set new records
for sales, closings, revenues and net income.
During the first nine months of 1998, the Company incurred significant cost
increases, primarily due to labor and material price increases and additional
costs associated with record production volume. These costs resulted in a
reduction of the Company's gross profit margin during the period. In response to
these cost increases, the Company has implemented increases in home sales prices
that are expected to mitigate this decline in gross profit margin in 1999. The
current backlog reflects these price changes.
The Company expects modest changes in its product mix in 1999. While the
majority of sales in 1999 will be homes (primarily in the Century series) to
first time homebuyers, the Company expects that its percentage of sales of
larger homes (primarily in the Celebrity and Tradition series) will increase.
Larger homes typically generate a higher gross profit, but a lower (as a
percentage of sales) gross profit margin.
Start up expenses for the Company's Louisville operations are expected to
be approximately $350,000 for 1998. The Company expects it will close fewer than
50 homes in Louisville in 1999. The costs of developing a new vendor and
subcontractor base and an initial home sales pricing strategy designed to
establish market share are expected to result in lower gross profit margins on
such homes than on comparable homes sold in Central Ohio. Consequently, the
Company projects that its Louisville operations will incur a modest loss in
1999.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
The statements contained in this report under the caption "Company Outlook"
and other provisions of this report on Form 10-Q which are not historical facts
are "forward looking statements" that involve various important risks,
uncertainties and other factors which could cause the Company's actual results
for 1998 and beyond to differ materially from those expressed in such forward
looking statements. These important factors include, without limitation, the
following risks and uncertainties: real or perceived adverse economic
conditions, an increase in mortgage interest rates, mortgage commitments that
expire prior to homes being delivered, the Company's ability to install public
improvements or build and close homes on a timely basis due to adverse weather
conditions, delays or adverse decisions in the zoning, permitting or inspection
processes, the effect of changing consumer tastes on the market acceptance for
the Company's products, the impact of competitive products and pricing, the
effect of shortages or increases in the costs of materials, subcontractors,
labor and financing, the continued availability of credit, the outcome of
litigation, the impact of changes in government regulation, the problems
associated with the Year 2000 issue, problems that could arise from expansion
into the Louisville, Kentucky market and the other risks described in the
Company's December 31, 1997 Form 10-K.
SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS
The Company has experienced, and expects to continue to experience,
significant seasonality and quarter-to-quarter variability in homebuilding
activity levels. Typically, closings and related revenues will increase in the
second half of the year. The Company believes that this seasonality reflects the
tendency of homebuyers to shop for a new home in the Spring with the goal of
closing in the Fall or Winter. Weather conditions can also accelerate or delay
the scheduling of closings. The Company is concentrating on mitigating these
seasonal variations whenever possible.
12
<PAGE> 13
The following table sets forth certain data for each of the last eight
quarters:
<TABLE>
<CAPTION>
THREE SALES BACKLOG
MONTHS REVENUES CONTRACTS CLOSINGS (AT PERIOD END)
ENDED (IN THOUSANDS) (IN UNITS) (IN UNITS) (IN UNITS)
=============================================================================================
<S> <C> <C> <C> <C>
Dec. 31, 1996 $51,821 253 354 688
Mar. 31, 1997 $36,997 356 266 778
June 30, 1997 $56,672 333 380 731
Sept. 30, 1997 $58,723 380 383 728
Dec. 31, 1997 $55,534 333 358 703
Mar. 31, 1998 $54,458 670 370 1,003
June 30, 1998 $68,031 402 461 944
Sept. 30, 1998 $67,769 330 437 837
</TABLE>
At September 30, 1998 the aggregate sales value of homes in backlog was
$136.3 million compared to $111.3 million at September 30, 1997. The average
sales value of homes in backlog at September 30, 1998 increased to $162,881 from
$152,816 at September 30, 1997. This increase reflects home sales price
increases and the sale of larger homes.
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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of real estate sold 81.5 79.5 80.9 79.4
--------- ---------- --------- ------
Gross profit 18.5 20.5 19.1 20.6
Selling, general and
administrative expenses 10.2 10.0 10.6 11.1
---------- ---------- --------- ------
Income from operations 8.3 10.5 8.5 9.5
Interest expense 1.8 2.6 1.9 3.1
---------- ---------- --------- ------
Income before income taxes 6.5 7.9 6.6 6.4
Provision for income taxes 2.7 3.3 2.8 2.7
---------- ---------- --------- ------
Net income 3.8% 4.6% 3.8% 3.7%
========= =========== ======== =======
</TABLE>
13
<PAGE> 14
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1997
REVENUES. Revenues for third quarter 1998 increased to $67.8 million from
$58.7 million for third quarter 1997. The number of closings during third
quarter 1998 increased by 54 homes, or 14.1%, to 437 homes from 383 homes closed
during third quarter 1997. The increase in revenues is attributable to the
additional closings and a higher average home price, which increased by 1.0% to
$154,657 during third quarter 1998 from $153,151 during third quarter 1997.
Included in revenues were other revenues, consisting of the sale of land and
building supplies to other builders, which were $180,000 for third quarter 1998
compared to $100,000 for third quarter 1997.
GROSS PROFIT. Gross profit for third quarter 1998 increased to $12.5
million from $12.0 million for third quarter 1997. As a percentage of revenues,
the gross profit margin declined to 18.5% for third quarter 1998 from 20.5% for
third quarter 1997. Of this 2.0% decline, 1.4% was due to construction cost
increases. As market volume increased, the Company found it necessary to pay
higher costs in order to attract quality vendors and to expand the capacity of
existing subcontractors. The remaining 0.6% of this gross profit margin decline
resulted from increased financing costs that the Company pays on behalf of its
customers. Changes in FHA financing rules caused many customers to move from FHA
financing to more expensive conventional financing. In order to offset these
increases, the Company raised its sales prices. The September 30, 1998 backlog
reflects a 6.6% increase in the average sales value of homes over the same
period in 1997 due to a combination of sales price increases and a modest change
in the product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for third quarter 1998 increased to $6.9 million from
$5.9 million for third quarter 1997. As a percentage of revenues, selling,
general and administrative expenses increased to 10.2% from 10.0%. Of the
increase, $800,000 is attributable to variable expenses such as sales
commissions, delivery expense and contract administration, a portion of which
was offset by favorable experience in the Company's self-insured medical plan.
During third quarter 1998, the Company also incurred non-variable increases
totaling $200,000, which included system conversion expenses related to Year
2000 compliance and startup costs related to entry into the Louisville market.
14
<PAGE> 15
INTEREST EXPENSE. Interest expense for third quarter 1998 decreased to $1.2
million from $1.5 million for third quarter 1997. As a percentage of revenues,
interest expense for third quarter 1998 decreased to 1.8% from 2.6% for third
quarter 1997. The average revolving line of credit borrowings outstanding were
$56.6 million and $54.5 million for the third quarter of 1998 and 1997,
respectively. The weighted average rate of interest under the Company's
revolving line of credit was 8.6% for the third quarter of 1998 compared to 8.8%
for third quarter 1997. The primary reason interest expense decreased during
third quarter 1998 compared to third quarter 1997 was the Company capitalized
more interest during third quarter 1998 than third quarter 1997 as a result of
increased land development and home construction during third quarter 1998
compared to third quarter 1997.
PROVISION FOR INCOME TAXES. Income tax expense for both third quarter 1998
and 1997 was $1.9 million. The Company's estimated annual effective tax rate was
42.0% for both third quarters 1998 and 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1997
REVENUES. Revenues for the nine months ended September 30, 1998 increased
to a record $190.3 million from $152.4 million for the nine months ended
September 30, 1997. The number of closings during the first nine months of 1998
increased by 239 homes, or 23.2%, to a record 1,268 homes from 1,029 homes
closed during the same period in 1997. Included in the 239 additional homes
closed during the first nine months of 1998 are seven model homes that were sold
and leased back by the Company for use as sales models. The increase in revenues
is attributable to the additional closings and higher average home sales price,
which increased 2.1% to $149,679 during the first nine months of 1998 from
$146,538 during the first nine months of 1997. The increase in the average home
sales price is primarily attributable to the Company's customers purchasing
larger homes, homes with more options, and price increases by the Company.
Customers were able to purchase larger homes and homes with more options during
1998 because the Company has been offering a greater selection of larger homes
and because the FHA mortgage limits were increased allowing customers to finance
larger homes. Included in revenues were other revenues, consisting of the sales
of land and building supplies to other builders, which were $460,000 for the
first nine months of 1998 compared to $1.6 million for the first nine months of
1997.
GROSS PROFIT. Gross profit for the first nine months of 1998 increased to
$36.4 million from $31.4 million for the first nine months of 1997, primarily as
a result of closing 239 additional homes in the first nine months of 1998. As a
percentage of revenues, the gross profit margin declined to 19.1% for the first
nine months of 1998 from 20.6% for the first nine months of 1997. The decrease
in gross profit margin for the first nine months of 1998 is principally
attributed to increased direct construction costs and higher closing costs. In
addition, the Company sold and leased back seven model homes on which all gross
profit was deferred, pending recognition against future model home lease
expense.
15
<PAGE> 16
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the first nine months of 1998 increased to $20.3
million from $16.9 million for the first nine months of 1997. This $3.4 million
increase in selling, general and administrative expenses is primarily the result
of the increase in the number of closings resulting in higher selling, delivery
and contract administrative costs. As a percentage of revenues, selling, general
and administrative expenses for the first nine months of 1998 decreased to 10.6%
from 11.1% for the first nine months of 1997.
INTEREST EXPENSE. Interest expense for the first nine months of 1998
decreased to $3.6 million from $4.7 million for the first nine months of 1997.
As a percentage of revenues, interest expense for the first nine months of 1998
decreased to 1.9% from 3.1% for the first nine months of 1997. The primary
reasons for the decrease in interest expense were lower average revolving line
of credit borrowings, a lower average interest rate and additional capitalized
interest in 1998 compared to 1997. The average revolving line of credit
borrowings outstanding were $55.4 million and $59.8 million for the first nine
months of 1998 and 1997, respectively. The weighted average rate of interest
under the Company's revolving line of credit was 8.4% for the first nine months
of 1998 compared to 8.8% for the first nine months of 1997.
PROVISION FOR INCOME TAXES. Income tax expense for the first nine months of
1998 increased to $5.2 million from $4.1 million for the first nine months of
1997. The Company's estimated annual effective tax rate was 42.0% for the first
nine months of both 1998 and 1997.
16
<PAGE> 17
SOURCES AND USES OF CASH
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net cash provided by operating activities for the first nine months of 1998
was $597,000 compared to $98,000 used in operating activities for the first nine
months of 1997. Net income for the first nine months of 1998 provided cash flow
of $7.2 million compared to $5.7 million for the first nine months of 1997. Cash
from operating activities increased between the two periods principally because
the Company invested $1.5 million less in real estate inventories during the
first nine months of 1998 compared with the first nine months of 1997.
Offsetting the decreased investment in real estate inventories during 1998 were
additional payments for prepaid and other expenses. During the first nine months
of 1998 the Company invested $1.4 million in property and equipment, compared to
$263,000 during the first nine months of 1997. The Company invested cash of $1.4
million for the construction of a lumber division warehouse and leasehold
improvements to the corporate office building and incurred new lease obligations
of $1.4 million for new computer software. Net cash provided by financing
activities during the first nine months of 1998 was $765,000 compared to
$294,000 for the first nine months of 1997. Included in financing activities for
1998 were payments of $1.5 million for prepaid loan fees and $1.8 million for
payments on term debt compared to $600,000 for payment of term debt in 1997.
REAL ESTATE INVENTORIES
The Company's practice is to develop most of the lots upon which it builds
its homes. Generally, the Company attempts to maintain a land inventory that
will be sufficient to meet its anticipated lot needs for the next three to five
years. At September 30, 1998, the Company either owned or was under contract to
purchase lots or land that could be developed into approximately 5,100 lots and
the Company controlled through option agreements, an additional 5,200 lots.
During the third quarter of 1998 the Company exercised options to purchase 687
controlled lots. Option agreements expire at varying dates through August 31,
2003. The Company's decision to exercise any particular option or otherwise
acquire additional land is based upon an assessment of a number of factors,
including its existing land inventory at the time and its evaluation of the
future demand for its homes.
Homes under construction at September 30, 1998 increased to $54.8 million
from $48.0 million at year-end 1997 as a result of seasonal construction
activity and increased sales activity. On September 30, 1998, the Company had 79
inventory homes in various stages of construction, which represented an
aggregate investment of $4.2 million, compared to 82 inventory homes in various
stages of construction, which represented an aggregate investment of $4.9
million at September 30, 1997. Inventory at the Company's lumber division
increased to $3.7 million at September 30, 1998 from $2.3 million at September
30, 1997. The inventory increase was a result of increased sales and
construction activity and the Company's decision to warehouse and distribute
Andersen(R) wood windows for use in its construction activities.
SELLER-PROVIDED DEBT
The Company had $3.3 million and $1.4 million of seller-provided term debt
outstanding at September 30, 1998 and 1997, respectively. The Company did not
acquire any additional seller-provided term debt during the first nine months of
1998. The seller-provided term debt outstanding at September 30, 1998 has
interest rates that range between 6.5% and 8.5% and terms that require repayment
between 1999 and 2001.
17
<PAGE> 18
LAND PURCHASE COMMITMENTS
At September 30, 1998, the Company had commitments to purchase 130
residential lots and unimproved land that the Company will develop into 28 lots,
at an aggregate cost of $5.5 million, net of deposits. Included in the
commitments are 67 lots in Louisville, Kentucky that have an aggregate cost, net
of deposits, of $2.9 million. In addition, at September 30, 1998, the Company
had $43.4 million of cancelable obligations to purchase residential lots and
unimproved land in which $777,000 in good faith deposits had been invested by
the Company. The majority of the land subject to cancelable obligations is for
post 1998 development activities. The Company expects to fund its 1998 capital
requirements for land acquisition and development and its obligations under
purchase contracts and mortgage notes from internally generated cash and from
the borrowing capacity available under its bank credit facility.
CREDIT FACILITIES
On May 29, 1998 the Company entered into a $125 million Senior Unsecured
Revolving Credit Facility ("the Facility"). Five lending banks are party to the
Facility, which was syndicated by Huntington Capital Corp. Huntington National
Bank is the Administrative Agent and Issuing Bank of the Facility. Proceeds from
the Facility were used to refinance the Company's previous $90 million bank
credit facility and will also be used for working capital, capital expenditures,
acquisition financing and for other general corporate purposes. See Note 4 to
the Financial Statements for additional details.
The Company has entered into interest rate swap contracts that fix the
interest rate on $30 million of borrowings under the Facility. The interest rate
swap contracts mature between October 16, 2000 and May 6, 2003 and fix interest
rates between 5.48% and 6.13%, plus a variable margin based on the Company's
Interest Coverage Ratio. The variable margin may range from 1.75% to 2.50% and
is determined quarterly. Since the inception of the Facility the variable margin
has been 1.75%.
As of September 30, 1998, the Company was in compliance with Facility
covenants and the Company had $23.0 million available under its Facility, after
adjustment for borrowing base limitations. Borrowing availability under the
credit Facility could increase, depending on the Company's utilization of the
proceeds.
YEAR 2000 ISSUES
The Year 2000 problem exists because many computer programs use only the
last two digits to refer to a year. Accordingly, such computer programs do not
distinguish a year that begins with "20" from a year that begins with "19". If
not corrected, these computer programs could fail or create erroneous results.
The Company is in the process of developing and implementing a plan for the
identification and remediation of Year 2000 issues that could affect its
business. The identification and remediation plan has five categories: (1)
mission critical software, (2) other software, (3) information technology
hardware, (4) non-information technology systems, and (5) third party related
issues.
18
<PAGE> 19
MISSION CRITICAL SOFTWARE: The Company has identified four mission critical
software systems: homebuilding accounting and job cost, contract administration,
sales management and lumber division accounting and inventory management. In
January 1998, the Company purchased and began implementation of a JDEdwards
homebuilding and job cost accounting software system. The project was completed
July 1, 1998 and has been tested as Year 2000 compliant. In August 1998, the
Company completed transition of its contract administration and sales management
software systems to new software systems which have been tested as Year 2000
compliant. In September 1998, the Company began implementation of a JDEdwards
accounting and inventory management software system at its lumber division. This
system has been warranted to be Year 2000 compliant. The Company expects to
complete the implementation of this software system by February 1999.
OTHER SOFTWARE: The Company maintains and periodically updates an inventory of
all other software utilized by it, such as word processing, spreadsheet and
database management. During third quarter 1998, the Company began testing this
software for Year 2000 compliance. The Company expects to complete this testing
and transition to Year 2000 compliant software by second quarter 1999.
INFORMATION TECHNOLOGY HARDWARE: The Company maintains and periodically updates
an inventory of all information technology hardware. The Company has identified
and tested for Year 2000 compliance the items that are likely to have the
greatest impact on the Company's ability to conduct business, such as its
network server. During fourth quarter 1998, the Company intends to begin
evaluating the remainder of its information technology hardware. The Company
expects to complete this testing and replace any non-compliant hardware by third
quarter 1999.
NON-INFORMATION TECHNOLOGY SYSTEMS: The Company has begun developing an
inventory of all non-information technology systems that are likely to have a
material impact on the Company's ability to conduct business, such as telephones
and security systems. The Company intends to perform internal testing and gather
third party representations as to the systems' Year 2000 compliance. This
process and any necessary migrations to new systems are expected to be completed
by third quarter 1999.
THIRD PARTY RELATED ISSUES: The Company has identified those vendors and
subcontractors which have a material affect on the Company's ability to conduct
business. The Company is developing a questionnaire to be completed by all such
vendors and subcontractors with respect to their own Year 2000 compliance. The
Company intends to distribute these questionnaires and analyze the responses
during first quarter 1999, and to take appropriate action to assist
non-compliant vendors and subcontractors to become compliant and/or to
transition to compliant vendors and subcontractors as soon as practicable prior
to the end of 1999.
COSTS TO ADDRESS THE YEAR 2000 ISSUES: The Company has spent approximately $2.2
million on its Year 2000 compliance plan through the third quarter 1998 and has
budgeted a total cost of $2.8 million. These costs include normal system
upgrades and technology improvements that would have been implemented regardless
of the Year 2000 issue.
19
<PAGE> 20
RISKS: Failure of the Company or its vendors and subcontractors to
adequately address the Year 2000 issues in a timely manner could impede the
Company's ability to build and close homes and thus have a material adverse
affect on the Company's ability to generate revenues. Accordingly, the Company
intends to address all known Year 2000 issues before problems materialize.
Should the efforts on the part of the Company, its vendors, and subcontractors
fail to adequately address their relevant Year 2000 issues, the worst case
scenario would be an interruption of revenues of an undetermined length of time.
As indicated above, the Company expects to complete its internal testing and
transition to Year 2000 compliant software and hardware by third quarter 1999.
The Company does not know at this time whether the vendors and subcontractors
which are material to its business are currently Year 2000 compliant and, if
not, whether they will become Year 2000 compliant on a timely basis. The Company
has not yet begun to develop a contingency plan in the event that current
non-compliant vendors and subcontractors cannot become compliant on a timely
basis, but it intends to develop such a plan by third quarter 1999.
INFLATION AND OTHER COST INCREASES
The Company is not always able to reflect all of its cost increases in the
prices of its homes because competitive pressures and other factors require it
in many cases to maintain or discount those prices. While the Company attempts
to maintain costs with subcontractors from the date a sales contract with a
customer is accepted until the date construction is completed, unanticipated
additional costs may be incurred which cannot be passed onto the customer. For
example, delays in construction of a home can cause the mortgage commitment to
expire and can require the Company, if mortgage interest rates have increased,
to pay significant amounts to the mortgage lender to extend the original
mortgage interest rate. In addition, during periods of high construction
activities, additional costs may be incurred to obtain subcontractor
availability when certain trades are not readily available, which additional
costs can result in lower gross profits.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
NOT APPLICABLE
20
<PAGE> 21
DOMINION HOMES, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in various legal proceedings, most of
which arise in the ordinary course of business and some of which
are covered by insurance. In the opinion of the Company's
management, none of the claims relating to such proceedings will
have a material adverse effect on the financial condition or
results of operations of the Company.
Item 2. Changes in Securities and Use of Proceeds. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders. Not
applicable
Item 5. Other Information.
Any qualified shareholder of the Company who intends to submit a
proposal to the Company at the 1999 Annual Meeting of Shareholders
(the "1999 Annual Meeting") must submit such proposal to the
Company no later than December 18, 1998 to be considered for
inclusion in the Company's Proxy Statement and form of Proxy (the
"Proxy Materials") relating to that meeting. If a shareholder
intends to present a proposal at the 1999 Annual Meeting of
Shareholders, but has not sought the inclusion of such proposal in
the Company's Proxy Materials, such proposal must be received by
the Company prior to March 3, 1999 or the Company's management
proxies for the 1999 Annual Meeting will be entitled to use their
discretionary voting authority should such proposal then be
raised, without any discussion of the matter in the Company's
Proxy Materials.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: See attached index (following the signature page).
(b) Reports on Form 8-K. Not applicable.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOMINION HOMES, INC.
(Registrant)
Date: November 13, 1998 By: /s/ Douglas G. Borror
--------------------
Douglas G. Borror
Chief Executive Officer,
President
Date: November 13, 1998 By: /s/ Jon M. Donnell
-----------------
Jon M. Donnell
Chief Operating Officer
Date: November 13, 1998 By: /s/ Peter J. O'Hanlon
--------------------
Peter J. O'Hanlon
Chief Financial Officer
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
<S> <C> <C>
2.1 Corporate Exchange and Subscription Agreement, dated January 20, Incorporated by reference to
1994, between Borror Corporation and Borror Realty Company Exhibit 2.1 to the Company's
Registration Statement on Form S-1
(File No. 33-74298) as filed with the
Commission on January 21, 1994 and as
amended on March 2, 1994 (The "Form
S-1").
2.2 Form of First Amendment to Corporate Exchange and Subscription Incorporated by reference to
Agreement Exhibit 2.2 to Form S-1.
3.1 Amended and Restated Articles of Incorporation of Dominion Homes, Incorporated by reference to
Inc., as amended May 7, 1997 Exhibit 4(a)(3) to the Company's
Registration Statement on Form S-8
(File No. 333-26817) filed with the
Commission on May 9, 1997.
3.2 Amended and Restated Code of Regulations of Borror Corporation Incorporated by reference to
Exhibit 3.2 to Form S-1.
4. Specimen of Stock Certificate of Dominion Homes, Inc. Incorporated by reference to
Exhibit 4 to the Company's March 31,
1997 Form 10-Q.
10.1 Restricted Stock Agreement, dated August 1, 1998, between Dominion Incorporated by reference to
Homes, Inc. and Jon M. Donnell Exhibit 10.27 to the Company's June
30, 1998 Form 10-Q.
10.2 Incentive Stock Option Agreement dated July 1, 1998, between Incorporated by reference to
Dominion Homes, Inc. and Jon M. Donnell Exhibit 10.28 to the Company's June
30, 1998 Form 10-Q.
10.3 Amendment to Dominion Homes, Inc. Incentive Stock Option Plan, Incorporated by reference to
dated July 29, 1998 Exhibit 10.29 to the Company's June
30, 1998 Form 10-Q.
10.4 Amendment to Dominion Homes, Inc. Amended and Restated Executive Incorporated by reference to
Deferred Compensation Plan, dated July 29, 1998 Exhibit 10.30 to the Company's June
30, 1998 Form 10-Q.
10.5 Office Sublease Agreement, dated July 31, 1998, between Dominion Incorporated by reference to
Homes, Inc. and Alliance Title Agency, LTD. Exhibit 10.31 to the Company's June
30, 1998 Form 10-Q.
27* Financial Data Schedule Filed herewith
</TABLE>
* Filed Herewith
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF SEPTEMBER 30, 1998 AND STATEMENTS OF INCOME FOR THE NINE MONTHS
ENDING SEPTEMBER 30, 1998, OF DOMINION HOMES, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 252
<SECURITIES> 0
<RECEIVABLES> 1,247
<ALLOWANCES> (53)
<INVENTORY> 120,635
<CURRENT-ASSETS> 0
<PP&E> 6,776
<DEPRECIATION> (2,975)
<TOTAL-ASSETS> 131,604
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 30,851
<OTHER-SE> 17,008
<TOTAL-LIABILITY-AND-EQUITY> 131,604
<SALES> 190,258
<TOTAL-REVENUES> 190,258
<CGS> 153,848
<TOTAL-COSTS> 174,172
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,594
<INCOME-PRETAX> 12,492
<INCOME-TAX> 5,247
<INCOME-CONTINUING> 7,245
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,245
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.10
</TABLE>
