<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 March 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
0-23270
Commission File Number
DOMINION HOMES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1393233
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
5501 Frantz Road, Dublin, Ohio 43017-0766
-----------------------------------------
(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 Former 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 May 10, 1999: 6,324,104
1
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
DOMINION HOMES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<CAPTION>
March 31, December 31,
1999 1998
(unaudited)
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 277 $ 261
Notes and accounts receivable, net:
Trade 238 133
Due from financial institutions for residential closings 1,067 769
Real estate inventories:
Land and land development costs 78,513 71,404
Homes under construction 58,589 50,843
Other 4,738 2,906
-------- --------
Total real estate inventories 141,840 125,153
-------- --------
Prepaid expenses and other 3,240 3,111
Deferred income taxes 1,788 1,788
Property and equipment, at cost 7,776 7,385
Less accumulated depreciation (3,434) (3,244)
-------- --------
Net property and equipment 4,342 4,141
-------- --------
Total assets $152,792 $135,356
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade $ 3,666 $ 5,520
Deposits on homes under contract 2,744 2,601
Accrued liabilities 11,063 12,131
Note payable, banks 78,509 60,415
Term debt 5,645 4,461
-------- --------
Total liabilities 101,627 85,128
-------- --------
Commitments and contingencies
Shareholders' equity
Common shares, without stated value, 12,000,000 shares authorized,
6,309,104 and 6,281,504 shares issued
and outstanding, respectively 31,013 30,851
Deferred compensation (319) (371)
Retained earnings 20,471 19,748
-------- --------
Total shareholders' equity 51,165 50,228
-------- --------
Total liabilities and shareholders' equity $152,792 $135,356
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 3
<TABLE>
DOMINION HOMES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<CAPTION>
Three Months Ended
March 31,
1999 1998
---------- ----------
<S> <C> <C>
Revenues $ 52,774 $ 54,458
Cost of real estate sold 42,786 43,488
---------- ----------
Gross profit 9,988 10,970
Selling, general and administrative 7,573 6,422
---------- ----------
Income from operations 2,415 4,548
Interest expense 1,163 1,091
---------- ----------
Income before income taxes 1,252 3,457
Provision for income taxes 529 1,452
---------- ----------
Net income $ 723 $ 2,005
========== ==========
Earning per share
Basic $ 0.12 $ 0.32
========== ==========
Diluted $ 0.11 $ 0.30
========== ==========
Weighted average shares outstanding
Basic 6,287,162 6,268,199
========== ==========
Diluted 6,546,032 6,579,019
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
<TABLE>
DOMINION HOMES, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<CAPTION>
Common Shares Deferred Compensation
------------------- --------------------------- Retained
Shares Amount Liability Treasury Shares Earnings Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 6,281,504 $30,851 $853 $(1,224) $19,748 $50,228
Net income 723 723
Shares awarded and redeemed 27,600 162 30 192
Treasury shares held for
deferred compensation plan (10) (10)
Deferred compensation 32 32
- ---------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 6,309,104 $31,013 $915 $(1,234) $20,471 $51,165
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
<TABLE>
DOMINION HOMES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
Three Months Ended
March 31,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 723 $ 2,005
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation and amortization 380 198
Disposal of property and equipment (47)
Issuance of common shares for compensation 162 44
Deferred income taxes 110
Changes in assets and liabilities:
Notes and accounts receivable (403) (855)
Real estate inventories (16,687) (1,174)
Prepaid expenses and other (220) (636)
Accounts payable (1,854) 428
Deposits on homes under contract 143 727
Accrued liabilities (1,050) 492
-------- --------
Net cash (used in) provided by operating activities (18,806) 1,292
-------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment 17
Purchase of property and equipment (283) (173)
-------- --------
Net cash used in investing activities (283) (156)
-------- --------
Cash flows from financing activities:
Payments on note payable banks (49,085) (51,208)
Proceeds from note payable banks 67,179 50,665
Payments on term debt (551) (593)
Proceeds from term debt 1,572
Common shares purchased or redeemed (10)
-------- --------
Net cash provided by (used in) financing activities 19,105 (1,136)
-------- --------
Net change in cash and cash equivalents 16 0
Cash and cash equivalents, beginning of period 261 252
-------- --------
Cash and cash equivalents, end of period $ 277 $ 252
======== ========
Supplemental disclosures of cash flow information:
Interest paid (net of amounts capitalized) $ 301 $ 208
======== ========
Income taxes paid $ 934 $ 485
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
DOMINION HOMES, INC.
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. The December 31, 1998 balance sheet data were derived
from audited financial statements but do not include all disclosures
required by generally accepted accounting principles. These financial
statements should be read in conjunction with the December 31, 1998 audited
annual financial statements of Dominion Homes, Inc. contained in its Annual
Report to Shareholders or in the December 31, 1998 Form 10-K.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for interim
periods. The results of operations for the three months ended March 31,
1999 are not necessarily indicative of the results to be expected for the
full year.
2. RECLASSIFICATION
----------------
Certain prior period information has been reclassified to conform to
the current period presentation.
3. CAPITALIZED INTEREST
--------------------
Interest is capitalized on land during the development period and on
housing construction costs during the construction period. As lots are
transferred to homes under construction, the interest capitalized on the
lot during the land development period is included as a cost of the land
and is expensed through cost of sales when the home is closed. Capitalized
interest related to housing construction costs is included in interest
expense in the period in which the home is closed. Capitalized interest
related to land under development and construction in progress was $2.7
million and $2.0 million at March 31, 1999 and March 31, 1998,
respectively. The following table summarizes the activity with respect to
capitalized interest:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
----------- ----------
<S> <C> <C>
Interest incurred $ 1,505,000 $1,185,000
Interest capitalized (1,144,000) (934,000)
----------- ----------
Interest expensed directly 361,000 251,000
Previously capitalized interest charged to interest expense 802,000 840,000
----------- ----------
Total interest expense $ 1,163,000 $1,091,000
=========== ==========
</TABLE>
6
<PAGE> 7
4. NOTE PAYABLE, BANKS
-------------------
The Company is currently operating under a $125 million Senior
Unsecured Revolving Credit Facility ("the Facility") that was executed on
May 29, 1998 and is described in the Company's Annual Report and Form 10-K
for the year ended December 31, 1998. The Facility provides for a variable
rate of interest on borrowings. In order to reduce exposure to increasing
rates, the Company has entered into interest rate swap contracts that fix
the interest rate on $30 million of borrowings under the Facility. The
interest rate swap contracts mature between October 16, 2000 and May 6,
2003 and fix interest rates between 5.48% and 6.13%, plus a variable margin
based on the Company's Interest Coverage Ratio. The variable margin may
range from 1.75% to 2.50% and is determined quarterly. Since the inception
of the Facility, the variable margin has been 1.75%.
As of March 31, 1999, the Company was in compliance with Facility
covenants and had $8.2 million available under its Facility, after
adjustment for borrowing base limitations. Borrowing availability under the
Facility could increase, depending on the Company's utilization of the
proceeds.
5. EARNINGS PER SHARE
------------------
A reconciliation of the weighted average shares used in basic and
diluted Earnings per Share is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
--------- ---------
<S> <C> <C>
Weighted average shares outstanding
during the period 6,287,162 6,268,199
Assuming exercise of options 258,870 310,820
--------- ---------
Weighted average shares outstanding
adjusted for common share equivalents 6,546,032 6,579,019
========= =========
</TABLE>
6. LEGAL PROCEEDINGS
-----------------
The Company is involved in various legal proceedings, most of which
arise in the ordinary course of business and some of which are covered by
insurance. In the opinion of the Company's management, none of the claims
relating to such proceedings will have a material adverse effect on the
financial condition or results of operations of the Company.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company recorded revenues of $52.8 million from 331 home closings in
first quarter 1999 compared to $54.5 million from 370 home closings in first
quarter 1998. Net income for first quarter 1999 was $723,000 or $.11 cents per
diluted share compared to $2.0 million or $.30 per diluted share for first
quarter 1998. The principal reason for the reduction in first quarter 1999 net
income was that 39 fewer homes closed in first quarter 1999 compared to first
quarter 1998. The Company believes the optimal weather conditions experienced
during the 1997-1998 winter resulted in an unusually large number of sales and
closings earlier in 1998 than the Company has historically experienced. The
1998-1999 winter weather conditions were more typical of Central Ohio and
delayed many home closings until later in 1999. While the number of closings
during first quarter 1999 declined 10.5%, revenues declined $1.7 million or
3.1%. The reason the percentage of revenues declined less than the percentage of
closings was that the average price of homes delivered in first quarter 1999
increased to $159,337 from $146,916 in first quarter 1998. The higher home price
reflects overall market demand for new homes in Central Ohio and the increased
selection of more expensive homes the Company is offering. This trend is
reflected in the Company's backlog of sales contracts, which amounted to $154.1
million from 873 sales contracts at March 31, 1999 compared to $154.8 million
from 1,003 sales contracts at March 31, 1998. The average sales price of homes
in backlog at March 31, 1999 increased to $176,487 from $154,364 at March 31,
1998. The increase in the average sales price of homes in backlog was also
favorably impacted by an increase in the FHA loan limit for the Columbus
Metropolitan Statistical Area, which limit increased in February 1999 to
$185,483 from $128,700. New home contracts for the first three months of 1999
totaled 453 versus 670 home contracts for the comparable period in 1998. As with
closings, the Company believes sales in Central Ohio were impacted by the more
severe weather conditions experienced in the current year. The 453 sales
contracts is the second largest number of home sales by the Company in any
quarter.
Selling, general and administrative expense for first quarter 1999
increased $1.2 million to $7.6 million. This increase reflects the Company's
effort to expand its overall building capacity, to start home building
activities in Louisville, Kentucky, to upgrade its computer systems with Year
2000 compliant hardware and software, and to continue its aggressive marketing
campaign.
First quarter 1999 real estate inventories, which include land, homes under
construction, lumber and other building supplies, increased $12.2 million in
Central Ohio and $4.5 million in Louisville, Kentucky from December 31, 1998. Of
this combined $16.7 million increase in real estate inventories from December
31, 1998 to March 31, 1999, $7.1 million is a result of land purchases and land
development, $7.8 million is a result of increased homes under construction, and
$1.8 million is a result of increased lumber and building supplies. Land and
land development inventories in Central Ohio increased $3.1 million from
December 31, 1998 to March 31, 1999. The company increased its land and land
development inventories in order to replace the large number of lots that were
sold in 1998 and to offer more communities in which to sell its homes. Land and
land development inventories in Louisville, Kentucky increased from December 31,
1998 to March 31, 1999 by $4.0 million as a result of the Company acquiring land
to begin building homes in Louisville. Homes under construction increased $7.3
million in Central Ohio and $500,000 in Louisville, Kentucky from December 31,
1998 to March 31, 1999.
8
<PAGE> 9
COMPANY OUTLOOK
The more typical Central Ohio winter weather that the Company experienced
in 1999 compared to 1998 has resulted in the delay of home deliveries until
later in 1999. This trend is expected to continue through second quarter 1999.
Total sales and closings for 1999 cannot be reasonably estimated until later in
the year. However, the Company does not expect to exceed for 1999 the record
number of sales and closings that occurred in 1998. The Company does expect to
realize a higher gross profit per home during 1999 than in 1998 due to higher
sales prices and a concentration of larger and more expensive homes in backlog.
In April 1999, the Company began selling homes in two communities in
Louisville, Kentucky. Lots in these communities were purchased from other
developers. In addition, a third community is under development by the Company.
The Company expects to close fewer than 50 homes in the Louisville market during
1999 and therefore expects a modest loss. However, the Company is making a
significant investment and expects to become one of the leading homebuilders in
this market.
YEAR 2000 READINESS DISCLOSURE STATEMENT
The Year 2000 problem exists because many computer programs use only the
last two digits to refer to a year. Accordingly, such computer programs do not
distinguish a year that begins with "20" from a year that begins with "19". If
not corrected, these computer programs could fail or create erroneous results.
The Company has developed and is in the process of implementing a plan for
the identification and remediation of Year 2000 issues that could affect its
business. The identification and remediation plan has five categories: (1)
mission critical software, (2) other software, (3) information technology
hardware, (4) non-information technology systems, and (5) third party related
issues.
MISSION CRITICAL SOFTWARE: The Company has identified four mission critical
software systems: homebuilding accounting and job cost, contract administration,
sales management, and lumber division accounting and inventory management. In
January 1998, the Company purchased and began implementation of a JDEdwards
homebuilding and job cost accounting software system. This is the primary
software the Company uses to run its business. The project was completed July 1,
1998 and has been tested as Year 2000 compliant. In August 1998, the Company
completed transition of its contract administration and sales management
software systems to new software systems, which have been tested as Year 2000
compliant. In 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 completed
implementation of this software system in 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 during second quarter 1999.
9
<PAGE> 10
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 began evaluating the
remainder of its information technology hardware. The Company expects to
complete this testing during second quarter 1999 and replace any non-compliant
hardware during third quarter 1999.
NON-INFORMATION TECHNOLOGY SYSTEMS: The Company has developed an inventory
of all non-information technology systems that are likely to have a material
impact on the Company's ability to conduct business, such as telephones and
security systems. The Company has begun performing internal testing and has
determined several minor systems are deficient. This testing and any necessary
changes are expected to be completed during second 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 has developed and distributed a questionnaire to be
completed by all such vendors and subcontractors with respect to their own Year
2000 compliance. For vendors and subcontractors who have not yet responded to
the questionnaire, the Company is sending a second request for information. Once
the Company has analyzed the questionnaire responses, it will 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
practical prior to the end of 1999. The Company is currently developing a plan
to ensure an adequate supply of construction materials in the event its
suppliers have a Year 2000 compliance problem.
COSTS TO ADDRESS THE YEAR 2000 ISSUES: The Company has spent approximately
$2.6 million on its Year 2000 compliance plan through March 31, 1999 and has
budgeted a total cost of $2.8 million. These costs include normal system
upgrades and technology improvements that would have been implemented regardless
of the Year 2000 issue.
RISKS: Failure of the Company or its vendors and subcontractors to
adequately address the Year 2000 issues in a timely manner could impede the
Company's ability to build and close homes and thus have a material adverse
affect on the Company's ability to generate revenues. Accordingly, the Company
intends to address all known Year 2000 issues before problems materialize.
Should the efforts on the part of the Company, its vendors, and its
subcontractors fail to adequately address their relevant Year 2000 issues, the
worst case scenario would be an interruption of revenues of an undetermined
length of time. As indicated above, the Company expects to complete its internal
testing and transition to Year 2000 compliant software and hardware by the end
of third quarter 1999. The Company has not received confirmation from many of
its vendors or subcontractors that they are year 2000 complaint. For vendors and
subcontractors that cannot be determined to be Year 2000 complaint during third
quarter 1999, the Company intends to increase its inventories or take other
measures to mitigate the problem.
10
<PAGE> 11
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
The statements contained in this report under the captions "Company
Outlook" and "Year 2000 Readiness Disclosure Statement" and other provisions of
this report which are not historical facts are "forward looking statements" that
involve various important risks, uncertainties and other factors which could
cause the Company's actual results for 1999 and beyond to differ materially from
those expressed in such forward looking statements. These important factors
include, without limitation, the following risks and uncertainties: real or
perceived adverse economic conditions, an increase in mortgage interest rates,
mortgage commitments that expire prior to homes being delivered, the Company's
ability to install public improvements or build and close homes on a timely
basis due to adverse weather conditions, delays or adverse decisions in the
zoning, permitting or inspection processes, adverse decisions or changes in
requirements by environmental agencies, the effect of changing consumer tastes
on the market acceptance for the Company's products, the impact of competitive
products and pricing, the effect of shortages or increases in the costs of
materials, subcontractors, labor and financing, the continued availability of
credit, the outcome of litigation, the impact of changes in government
regulation, problems associated with the Year 2000 issue, problems that could
arise from expansion into the Louisville, Kentucky market and the other risks
described in the Company's Securities and Exchange Commission filings.
SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS
The Company has experienced, and expects to continue to experience,
significant seasonality and quarter-to-quarter variability in homebuilding
activity levels. Typically, closings and related revenues increase in the second
half of the year. The Company believes that this seasonality reflects the
tendency of homebuyers to shop for a new home in the Spring with the goal of
closing in the Fall or Winter. Weather conditions can also accelerate or delay
the scheduling of closings. The Company is concentrating on mitigating these
seasonal variations whenever possible.
The following table sets forth certain data for each of the last eight
quarters:
<TABLE>
<CAPTION>
THREE SALES BACKLOG
MONTHS REVENUES CONTRACTS CLOSINGS (AT PERIOD END)
ENDED (IN THOUSANDS) (IN UNITS) (1) (IN UNITS) (IN UNITS)
===============================================================================================
<S> <C> <C> <C> <C>
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
Dec. 31, 1998 $74,679 381 467 751
Mar. 31, 1999 $52,774 453 331 873
</TABLE>
- ----------
(1) net of cancellations
11
<PAGE> 12
At March 31, 1999 the aggregate sales value of homes in backlog was $154.1
million compared to $154.8 million at March 31, 1998. The average sales value of
homes in backlog at March 31, 1999 increased to $176,487 compared to $154,364 at
March 31, 1998.
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
March 31,
1999 1998
------ ------
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of real estate sold 81.1 79.9
----- -----
Gross profit 18.9 20.1
Selling, general and administrative expenses 14.3 11.7
----- -----
Income from operations 4.6 8.4
Interest expense 2.2 2.0
----- -----
Income before income tax 2.4 6.4
Income tax provision 1.0 2.7
----- -----
Net income 1.4% 3.7%
===== =====
</TABLE>
12
<PAGE> 13
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
REVENUES. Revenues for first quarter 1999 were $52.8 million compared to
$54.5 million for first quarter 1998. The Company closed 331 homes during first
quarter 1999 compared to 370 homes during first quarter 1998. The 39 fewer homes
closed during first quarter 1999 resulted principally from more severe seasonal
weather conditions experienced during first quarter 1999 than first quarter
1998. While the number of closings decreased 10.5%, revenues declined only $1.7
million or 3.1% due to an increase in the average price of homes delivered
during first quarter 1999 compared to first quarter 1998. During first quarter
1999 the average price of homes delivered was $159,337 compared to $146,916
during first quarter 1998, an increase of 8.5%. This increase in average
delivered home price reflects the overall market demand for new homes in Central
Ohio and the increased selection of more expensive homes the Company is
offering. The increase in average delivered home price is also attributed to the
Company offering fewer sales discounts in first quarter 1999 than first quarter
1998.
GROSS PROFIT. Gross profit for first quarter 1999 was $10.0 million
compared to $11.0 million for first quarter 1998. The decrease in gross profit
is a result of delivering 39 fewer homes in first quarter 1999 and experiencing
a lower gross profit margin on homes delivered in that quarter. The gross profit
margin was 18.9% for first quarter 1999 compared to 20.1% for first quarter
1998. The principal reasons for the lower gross profit margin in 1999 were
increased construction costs and higher customer financing costs as compared to
first quarter 1998. The Company has been increasing home sales prices since the
second half of 1998 to offset the increased construction costs.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense for first quarter 1999 increased to $7.6 million from $6.4 million for
first quarter 1998. This $1.2 million increase in selling, general and
administrative expense is primarily the result of the Company's efforts to
expand its overall building capacity, the start-up costs in Louisville,
Kentucky, the upgrade of the Company's computer systems with Year 2000 compliant
hardware and software, and the Company's aggressive marketing campaign. As a
percentage of revenues, selling, general and administrative expense for first
quarter 1999 increased to 14.3% from 11.7% for first quarter 1998.
INTEREST EXPENSE. Interest expense for first quarter 1999 increased to $1.2
million from $1.1 million for first quarter 1998. The primary reason for the
increase in interest expense was a higher average revolving line of credit
offset by a slightly lower average interest rate. The Company also capitalized
$248,000 more interest during first quarter 1999 than first quarter 1998 as a
result of increased real estate inventories. The weighted average rate of
interest under the Company's revolving line of credit was 8.1% for first quarter
1999 compared to 8.3% for first quarter 1998. The average revolving line of
credit borrowings outstanding were $71.7 million and $53.1 million for the first
quarter of 1999 and 1998, respectively.
PROVISION FOR INCOME TAXES. Income tax expense for first quarter 1999 was
$529,000 compared to $1.5 million for first quarter 1998. The Company's
estimated annual effective tax rate was 42.0% for first quarter 1999 and 1998.
13
<PAGE> 14
SOURCES AND USES OF CASH
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998:
Operating activities during first quarter 1999 used cash of $18.8 million
compared to providing cash of $1.3 million during first quarter 1998. The
principal reason for the increased use of cash in first quarter 1999 was the
Company's investment in real estate inventories. The Company invested $7.1
million in land and land development inventories, $7.8 million in home
construction inventories, and $1.8 million in lumber and building supply
inventories during first quarter 1999. This was a total investment of $16.7
million compared to $1.2 million invested during first quarter 1998. In addition
to the increased real estate inventory investment during first quarter 1999,
operating activities generated less cash as first quarter 1999 net income
decreased to $723,000 from $2.0 million for first quarter 1998. Net cash used in
investing activities during first quarter 1999 was $283,000 compared to $156,000
during first quarter 1998. The Company increased its bank and term debt $19.1
million during first quarter 1999, principally to fund its increased investment
in real estate inventories, which includes homes under construction, compared to
reducing bank and term debt by $1.1 million during first quarter 1998.
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 March 31, 1999, the Company either owned or was under contract to
purchase lots or land that could be developed into approximately 5,500 lots,
including 267 lots in Louisville, Kentucky. The Company controlled through
option agreements an additional 6,100 lots, including 212 lots in Louisville,
Kentucky. During first quarter 1999, the Company exercised options to purchase
1,060 lots, including 210 lots in Louisville, Kentucky. Option agreements expire
at varying dates through 2003. The Company's decision to exercise any particular
option or otherwise acquire additional land is based upon an assessment of a
number of factors, including its existing land inventory at the time and its
evaluation of the future demand for its homes.
First quarter 1999 real estate inventories of land and land development
costs increased $7.1 million to $78.5 million from $71.4 million at December 31,
1998. Land and land development inventories grew in order to replace the record
number of lots sold in 1998, to have lots available for the wider range of homes
and communities the Company is offering, and to acquire land inventory in
Louisville Kentucky. Real estate inventories in Louisville, Kentucky increased
$4.5 million during first quarter 1999. Homes under construction increased $7.8
million to $58.6 million from $50.8 million at December 31, 1998 due to having
more homes under construction and because the Company is building more expensive
homes. Lumber and building supply inventories increased $1.8 million reflecting
the larger number of homes the Company had under construction and the Company's
distribution of additional building components.
On March 31, 1999, the Company had 81 single family inventory homes in
various stages of construction, which represented an aggregate investment of
$5.5 million. At March 31, 1998, the Company had 69 inventory homes, in various
stages of construction, which represented an aggregate investment of $4.8
million. Inventory homes are not reflected in sales or backlog.
14
<PAGE> 15
SELLER-PROVIDED DEBT
Seller-provided term debt increased to $4.4 million at March 31, 1999 from
$3.3 million at December 31, 1998. During first quarter 1999, the Company added
$1.6 million of term debt, which will be repaid prior to the end of 1999, and
repaid $485,000 of term debt.. The remaining term debt matures prior to August
2001 and has interest rates that range from 6.5% to the prime rate.
LAND PURCHASE COMMITMENTS
At March 31, 1999, the Company had commitments to purchase 83 residential
lots at an aggregate cost of $2.4 million, net of $135,000 in good faith
deposits. Included in the commitments are 57 lots in Louisville, Kentucky that
have an aggregate cost of $1.5 million. In addition, at March 31, 1999, the
Company had $53.8 million of cancelable obligations to purchase residential lots
and unimproved land in which $1.1 million in good faith deposits had been
invested by the Company. Included in the $53.8 million of cancelable commitments
are $2.2 million of cancelable commitments for lots in Louisville, Kentucky in
which $239,000 in good faith deposits had been invested. The majority of the
land subject to cancelable obligations is for post 1999 development activities.
The Company expects to fund its 1999 capital requirements for land acquisition
and development and its obligations under purchase contracts and mortgage notes
from internally generated cash and from the borrowing capacity available under
its bank credit facility.
CREDIT FACILITIES
The Company is currently operating under a $125 million Senior Unsecured
Revolving Credit Facility ("the Facility") that was executed on May 29, 1998 and
is described in the Company's Annual Report and Form 10-K for the year ended
December 31, 1998. The Facility provides for a variable rate of interest on
borrowings. In order to reduce exposure to increasing interest rates, the
Company has entered into interest rate swap contracts that fix the interest rate
on $30 million of borrowings under the Facility. The interest rate swap
contracts mature between October 16, 2000 and May 6, 2003 and fix interest rates
between 5.48% and 6.13%, plus a variable margin based on the Company's Interest
Coverage Ratio. The variable margin may range from 1.75% to 2.50% and is
determined quarterly. Since inception of the Facility the variable margin has
been 1.75%.
As of March 31, 1999, the Company was in compliance with Facility covenants
and had $8.2 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.
15
<PAGE> 16
INFLATION AND OTHER COST INCREASES
The Company is not always able to reflect all of its cost increases in the
prices of its homes because competitive pressures and other factors require it
in many cases to maintain or discount those prices. While the Company attempts
to maintain costs with subcontractors from the date a sales contract with a
customer is accepted until the date construction is completed, unanticipated
additional costs may be incurred which cannot be passed onto the customer. For
example, delays in construction of a home can cause the mortgage commitment to
expire and can require the Company, if mortgage interest rates have increased,
to pay significant amounts to the mortgage lender to extend the original
mortgage interest rate. In addition, during periods of high construction
activities, additional costs may be incurred to obtain subcontractor
availability when certain trades are not readily available. These costs can
result in lower gross profits.
16
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has entered into three interest rate swap contracts with
notional amounts of $10,000,000 each, maturing on October 16, 2000, January 14,
2001 and May 6, 2003. These interest rate swap contracts, reflected in aggregate
in the table below, commenced on October 16, 1997, January 14, 1998 and May 6,
1998 and fix the variable interest rate on the Company's revolving credit note
at 6.125%, 5.475% and 5.960%, respectively. The Company enters into interest
rate swap contracts to achieve an appropriate level of variable and fixed-rate
debt as approved by senior management. Interest rate swap contracts allow the
Company to have variable-rate borrowings and to select the level of fixed-rate
debt for the Company as a whole. The expectation is that the resulting cost of
funds is lower than that available under the variable-rate borrowings. Under
interest rate swap contracts, the Company agrees with other parties to exchange,
at specified intervals, the difference between fixed rate and floating-rate
amounts calculated by reference to an agreed notional amount. The level of fixed
rate debt, after the effect of interest rate swap contracts have been
considered, is maintained at approximately 50% of total borrowings under the
revolving line of credit facility. The Company does not enter into derivative
financial instrument transactions for speculative purposes.
The following table presents descriptions of the financial instruments
and derivative instruments that are held by the Company at March 31, 1999, and
which are sensitive to changes in interest rates. For the liabilities, the table
presents principal calendar year cash flows that exist by maturity date and the
related average interest rate. For the interest rate derivatives, the table
presents the notional amounts and expected interest rates that exist by
contractual dates. The notional amount is used to calculate the contractual
payments to be exchanged under the contract. The variable rates are estimated
based on the three-month forward LIBOR rate plus a variable margin of 1.75%. All
amounts are reflected in U.S. Dollars (thousands).
<TABLE>
<CAPTION>
FAIR
1999 2000 2001 2002 2003 TOTAL VALUE
---- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES
Variable rate $78,509 $78,509 $78,509
Average interest rate 6.750% 6.750%
INTEREST-RATE
DERIVATIVES
Notional amount $30,000 $30,000 $20,000 $10,000 $10,000 $30,000 $ (340)
Average pay rate 5.853% 5.853% 5.718% 5.960% 5.960% 5.869%
Average receive rate 6.750% 6.750% 6.750% 6.750% 6.750% 6.750%
</TABLE>
17
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in various legal proceedings, most of which
arise in the ordinary course of business and some of which are
covered by insurance. In the opinion of the Company's management,
none of the claims relating to such proceedings will have a
material adverse effect on the financial condition or results of
operations of the Company.
Item 2. Change in Securities and Use of Proceeds. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: See attached index (following the signature page).
(b) Reports on Form 8-K. Not applicable.
18
<PAGE> 19
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: May 10, 1999 By: /s/Douglas G. Borror
------------------------------
Douglas G. Borror
Chief Executive Officer,
President
Date: May 10, 1999 By: /s/Jon M. Donnell
------------------------------
Jon M. Donnell
Chief Operating Officer
Date: May 10, 1999 By: /s/Peter J. O'Hanlon
------------------------------
Peter J. O'Hanlon
Chief Financial Officer
19
<PAGE> 20
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
Exhibit No. Description Location
- ----------- ----------- --------
<S> <C> <C>
2.1 Corporate Exchange and Subscription Agreement, dated Incorporated by reference to
January 20, 1994, between Borror Corporation and Exhibit 2.1 to the Company's
Borror Realty Company 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 Incorporated by reference to
Subscription Agreement Exhibit 2.2 to Form S-1.
3.1 Amended and Restated Articles of Incorporation of Incorporated by reference to
Dominion Homes, 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 Incorporated by reference to
Corporation 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.
27* Financial Data Schedule Filed herewith
</TABLE>
* Filed Herewith
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF MARCH 31, 1999 AND STATEMENTS OF INCOME FOR THE THREE MONTHS ENDING
MARCH 31, 1999, OF DOMINION HOMES, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 277
<SECURITIES> 0
<RECEIVABLES> 1,341
<ALLOWANCES> 36
<INVENTORY> 141,840
<CURRENT-ASSETS> 0
<PP&E> 7,776
<DEPRECIATION> 3,434
<TOTAL-ASSETS> 152,792
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 31,013
<OTHER-SE> 20,152
<TOTAL-LIABILITY-AND-EQUITY> 152,792
<SALES> 52,774
<TOTAL-REVENUES> 52,774
<CGS> 42,786
<TOTAL-COSTS> 50,359
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,163
<INCOME-PRETAX> 1,252
<INCOME-TAX> 529
<INCOME-CONTINUING> 723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 723
<EPS-PRIMARY> .12
<EPS-DILUTED> .11
</TABLE>
