<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 June 30, 2000
or
( ) 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 or 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 August 11, 2000: 6,367,773
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOMINION HOMES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(UNAUDITED)
-------------- --------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 2,541 $ 2,862
Notes and accounts receivable, net:
Trade 328 212
Due from financial institutions for residential closings 1,405 544
Real estate inventories:
Land and land development costs 100,291 95,657
Homes under construction 75,429 60,272
Other 4,443 3,251
----------- -----------
Total real estate inventories 180,163 159,180
----------- -----------
Prepaid expenses and other 7,090 3,891
Deferred income taxes 2,048 1,904
Property and equipment, at cost 9,664 9,055
Less accumulated depreciation (4,060) (3,589)
------------ ------------
Net property and equipment 5,604 5,466
----------- -----------
Total assets $ 199,179 $ 174,059
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade $ 4,659 $ 5,273
Deposits on homes under contract 2,428 1,634
Accrued liabilities 13,557 11,364
Note payable, banks 112,413 92,308
Term debt 4,517 4,750
----------- -----------
Total liabilities 137,574 115,329
----------- -----------
Commitments and contingencies
Shareholders' equity
Common shares, without stated value, 12,000,000 shares authorized,
6,392,773 shares issued and 6,367,773 shares outstanding on June 30,
2000 and 6,382,480 shares issued and 6,357,480 shares
outstanding on December 31, 1999 31,434 31,388
Deferred compensation (252) (252)
Retained earnings 30,595 27,766
Treasury stock (172) (172)
------------ ------------
Total shareholders' equity 61,605 58,730
----------- -----------
Total liabilities and shareholders' equity $ 199,179 $ 174,059
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE> 3
DOMINION HOMES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------ ---------- ---------- -------
<S> <C> <C> <C> <C>
Revenues $76,492 $72,795 $138,710 $125,569
Cost of real estate sold 61,189 59,332 111,408 102,118
-------- --------- --------- -------
Gross profit 15,303 13,463 27,302 23,451
Selling, general and administrative 9,752 8,659 18,720 16,232
-------- --------- --------- --------
Income from operations 5,551 4,804 8,582 7,219
Interest expense 1,978 1,589 3,734 2,752
-------- --------- --------- --------
Income before income taxes 3,573 3,215 4,848 4,467
Provision for income taxes 1,501 1,347 2,019 1,876
-------- --------- --------- --------
Net income $ 2,072 $ 1,868 $ 2,829 $ 2,591
======== ========= ========== ==========
Earnings per share
Basic $0.33 $0.30 $0.44 $0.41
========= ========= ========= ========
Diluted $0.32 $0.29 $0.44 $0.40
========= ========= ========= ========
Weighted average shares outstanding
Basic 6,367,789 6,319,297 6,364,797 6,303,318
=========== =========== ========== =========
Diluted 6,480,897 6,527,661 6,474,012 6,540,960
=========== =========== ========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
<PAGE> 4
DOMINION HOMES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Shares Deferred Compensation
------------- ---------------------
Shares Amount Liability Trust Retained Treasury
Shares Earnings Stock Total
------------------------------------------ ------------- ------------ ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 6,357,480 $31,388 $1,007 $(1,259) $27,766 $(172) $58,730
Net income 2,829 2,829
Shares awarded and redeemed 10,293 46 (28) 18
Treasury shares:
Held for deferred compensation (72)
(72)
Deferred compensation 100 100
------------------------------------------ ------------- ------------ ----------- ----------- ------------ ----------- -----------
Balance, June 30, 2000 6,367,773 $31,434 $1,079 $(1,331) $30,595 $(172) $61,605
------------------------------------------ ------------- ------------ ----------- ----------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
DOMINION HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
2000 1999
-------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,829 $ 2,591
Adjustments to reconcile net income to cash
used in operating activities:
Depreciation and amortization 997 700
Issuance of common shares for compensation 46 268
Reserve for real estate inventories 210
Deferred income taxes (144) (46)
Changes in assets and liabilities:
Notes and accounts receivable (977) (725)
Real estate inventories (20,872) (21,486)
Prepaid expenses and other (3,133) (910)
Accounts payable (614) 2,481
Deposits on homes under contract 794 (133)
Accrued liabilities 2,156 (323)
--------- ---------
Net cash used in operating activities (18,708) (17,583)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of property and equipment 43 10
Purchase of property and equipment (800) (624)
--------- ---------
Net cash used in investing activities (757) (614)
--------- ---------
Cash flows from financing activities:
Proceeds from note payable, banks 140,464 142,094
Payments on note payable, banks (120,351) (123,117)
Prepaid loan fees (275)
Payments on term debt (361) (604)
Payments on capital lease obligations (193)
Common shares purchased or redeemed (132) (27)
--------- ---------
Net cash provided by financing activities 19,144 18,346
--------- ---------
Net change in cash and cash equivalents (321) 149
Cash and cash equivalents, beginning of period 2,862 261
--------- ---------
Cash and cash equivalents, end of period $ 2,541 $ 410
========= =========
Supplemental disclosures of cash flow information:
Interest paid (net of amounts capitalized) $ 320 $ 841
========= =========
Income taxes paid $ 2,511 $ 2,530
========= =========
Land acquired by seller financing $ 321 $ 1,572
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
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.
The December 31, 1999 balance sheet data were derived from audited
financial statements but does not include all disclosures required by
generally accepted accounting principles. These financial statements should
be read in conjunction with the December 31, 1999 audited annual financial
statements of the Company contained in its Annual Report or in the December
31, 1999 Form 10-K.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for interim
periods. The results of operations for the three months and six months
ended June 30, 2000 are not necessarily indicative of the results to be
expected for the full year.
2. 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.
Capitalized interest related to land under development and housing
construction costs are included in interest expense in the period in which
the home is closed. Capitalized interest related to land under development
and homes under development was $4.3 million and $2.3 million at June 30,
2000 and June 30, 1999, respectively. The following table summarizes the
activity with respect to capitalized interest:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
----------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
Interest incurred $2,471,000 $1,661,000 $4,763,000 $ 3,166,000
Interest capitalized (1,651,000) (1,124,000) (3,184,000) (2,268,000)
----------- ----------- -------------- --------------
Interest expensed directly 820,000 537,000 1,579,000 898,000
Previously capitalized interest
charged to interest expense 1,158,000 1,052,000 2,155,000 1,854,000
--------- --------- ------------- -------------
Total interest expense $1,978,000 $1,589,000 $3,734,000 $ 2,752,000
========== ========== ============= =============
</TABLE>
6
<PAGE> 7
3. NOTE PAYABLE, BANKS
The Company increased its Senior Unsecured Revolving Credit Facility
("the Facility") to $150 million from $125 million on May 26, 2000. The
Company also modified certain covenants to increase the amount of capital
and operating leases allowed under the Facility and to amend the ratio of
total liabilities to tangible net worth to 2.75 to 1.00 from 2.50 to 1.00
for the period from May 1 to August 31 for 2000 and subsequent years. These
changes to the Facility reflect the increased level of land and home
building inventories the Company is experiencing due to selling more and
larger homes and the increased level of building activity experienced by
the Company during its peak building months. The original Facility 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, 1999.
The Facility provides for a variable rate of interest on borrowings
and, consequently, the Company has entered into interest rate swap
contracts in order to reduce exposure to increasing interest rates. The
interest rate swap contracts 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 the interest rates between
5.48% and 6.13%, plus a variable margin based on the Company's interest
coverage ratio. The variable margin ranges from 1.75% to 2.50% and is
determined quarterly.
As of June 30, 2000, the Company was in compliance with the Facility
covenants and had $14.4 million available under the Facility, after
adjusting for borrowing base limitations. Borrowing availability under the
Facility could increase, depending on the Company's utilization of the
proceeds.
4. 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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
----------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Weighted average shares outstanding
during the period 6,367,789 6,319,297 6,364,797 6,303,318
Assuming exercise of options 113,108 208,364 109,215 237,642
--------- --------- --------- ---------
Weighted average shares outstanding
adjusted for common share equivalents 6,480,897 6,527,661 6,474,012 6,540,960
========= ========= ========= =========
</TABLE>
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 2000 the Financial Accounting Standards Board released
Statement of Financial Accounting Standards (SFAS) No. 138 Accounting for
Certain Derivative Instruments and Certain Hedging Activities - An
Amendment to FASB Statement No. 133 which modifies certain provisions and
definitions in accounting principles used in accounting for derivative
instruments and hedging activities. The Company is in the process of
evaluating the effect of SFAS No. 133 Accounting for Derivative Instruments
and Hedging Activities and has not yet determined the impact of this
pronouncement as amended by SFAS No. 138.
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
Net income for the three months ended June 30, 2000 increased 10.9% to $2.1
million, or $.32 per diluted share, from $1.9 million, or $.29 per diluted
share, for the previous year. The increase in second quarter net income was
largely due to improvement in the gross profit margin, which rose to 20.0% of
revenues from 18.5% for the comparable period last year. Revenues for second
quarter 2000 increased to $76.5 million, based on 443 closings, compared to
revenues of $72.8 million, based on closings of 436 closings, for second quarter
1999. The increase in revenues is principally due to the higher average price of
homes closed during second quarter 2000, which rose to $172,140 from $166,663
during second quarter 1999. The higher second quarter revenues and gross profit
were partially offset by a $1.1 million increase in selling, general and
administrative expense and a $389,000 increase in interest expense. Selling,
general and administrative expense increased due to the variable cost associated
with selling more expensive homes, opening new models, the start up of the
Company's new mortgage company, the start up of the new centralized sales office
and increased sales and marketing expense in Louisville, Kentucky. Interest
expense for second quarter 2000 increased over the previous year due to higher
levels of borrowing and higher interest rates. The Company incurred higher
levels of borrowing due principally to increased investment in land and land
development costs in the Louisville, Kentucky market and an increase in homes
under construction due to a large backlog of more expensive homes. In May 2000
the Company increased its credit facility to $150 million from $125 million and
amended its leverage ratio during the peak building months to ensure the Company
has adequate financing to support the increased sales and building volume that
it is experiencing.
The Company sold a record 420 homes in the second quarter of 2000, with a
sales value of $76.9 million, compared to 412 homes, with a sales value of $70.9
million, sold in the same period the previous year. Home contracts in backlog
increased 19.7% to 1,016 at June 30, 2000 from 849 at June 30, 1999. The
aggregate sales value of the Company's homes in backlog at June 30, 2000
increased to $192.2 million from $151.5 million at June 30, 1999. The average
sales price of homes in backlog at June 30, 2000 increased to $189,168 from
$178,407 at June 30, 1999.
COMPANY OUTLOOK
The Company continues to expect that 2000 net income will exceed 1999 net
income. The Company bases this expectation on the strong sales results
experienced during the first half of 2000. These sales resulted in a backlog of
1,016 home contracts at June 30, 2000 with a sales value of $192.2 million. The
Company also expects to continue to invest in its start-up operation in
Louisville, Kentucky and its new mortgage company, which will likely create
lower gross profit margins and higher general and administrative expense in the
second half of 2000. The Company expects both of these operations to be
profitable by the end of the year. The Company is continuing to invest in new
communities and product lines in both Central Ohio and Louisville, Kentucky and
expects to see the results of these efforts in future years.
8
<PAGE> 9
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
The statements contained in this report under the captions "Company
Outlook" and other provisions of this report which are not historical facts are
"forward looking statements" that involve various important risks, uncertainties
and other factors which could cause the Company's actual results for 2000 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, increases in the cost of acquiring and developing land,
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, entry into the mortgage
financing business, 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 that could arise from
expansion into the Louisville, Kentucky market and the other risks described in
the Company's December 31, 1999 Form 10-K and other Securities and Exchange
Commission filings.
SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS
The Company has experienced, and expects to continue to experience,
significant seasonality and quarter-to-quarter variability in homebuilding
activity levels. Typically, closings and related revenues will increase in the
second half of the year. The Company believes that this seasonality reflects the
tendency of homebuyers to shop for a new home in the Spring with the goal of
closing in the Fall or Winter. Weather conditions can also accelerate or delay
the scheduling of closings. The Company attempts to mitigate 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(1) CLOSINGS (AT PERIOD END)
ENDED (IN THOUSANDS) (IN UNITS) (IN UNITS) (IN UNITS)
===============================================================================================
<S> <C> <C> <C> <C>
Sept. 30, 1998 $67,769 330 437 837
Dec. 31, 1998 $74,679 381 467 751
Mar. 31, 1999 $52,774 453 331 873
June 30, 1999 $72,795 412 436 849
Sept. 30, 1999 $73,067 404 428 825
Dec. 31, 1999 $78,941 411 446 790
Mar. 31, 2000 $62,218 608 359 1,039
June 30, 2000 $76,492 420 443 1,016
</TABLE>
-------------------
(1) Net of cancellations
At June 30, 2000, the aggregate sales price of homes in backlog was $192.2
million compared to $151.5 million at June 30, 1999. The average sales price of
homes in backlog at June 30, 2000 increased to $189,168 from $178,407 at June
30, 1999.
9
<PAGE> 10
The Company annually incurs a substantial amount of indirect construction
costs, which are essentially fixed in nature. For purposes of financial
reporting, the Company capitalizes these costs to real estate inventories on the
basis of the ratio of estimated annual indirect costs to direct construction
costs to be incurred. Thus, variations in construction activity cause
fluctuations in interim and annual gross profits.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the statements of income expressed as percentages of total revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of real estate sold 80.0 81.5 80.3 81.3
--------- ---------- --------- ------
Gross profit 20.0 18.5 19.7 18.7
Selling, general and
administrative expenses 12.7 11.9 13.5 12.9
---------- ---------- --------- ------
Income from operations 7.3 6.6 6.2 5.8
Interest expense 2.6 2.2 2.7 2.2
---------- ---------- --------- ------
Income before income taxes 4.7 4.4 3.5 3.6
Provision for income taxes 2.0 1.8 1.5 1.5
---------- ---------- --------- ------
Net income 2.7% 2.6% 2.0% 2.1%
========== ============ ========= =======
</TABLE>
10
<PAGE> 11
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1999
REVENUES. Revenues for second quarter 2000 increased to $76.5 million,
based on 443 closings, compared to revenues of $72.8 million, based on 436
closings, during second quarter 1999. The increase in revenues is principally
due to an increase in the average price of homes closed during second quarter
2000, which rose to $172,140 from $166,663 during second quarter 1999. The
increase in the average home sale price is primarily attributable to the
Company's customers purchasing larger homes and homes with more options. The
Company attributes the sale of larger houses and homes with more options to
marketing strategies employed by the Company and a strong economy. Included in
revenues were the sale of land and building supplies to other builders of
$230,000 and $130,000 for second quarter 2000 and 1999, respectively.
GROSS PROFIT. Gross profit for second quarter 2000 increased 13.7% to $15.3
million from $13.5 million for second quarter 1999. The gross profit increase
resulted principally from the closing of more expensive homes in second quarter
2000 and increased operating efficiencies. As a percentage of revenues, the
gross profit margin increased to 20.0% for second quarter 2000 from 18.5% for
second quarter 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for second quarter 2000 increased 12.6% to $9.8 million
from $8.7 million for second quarter 1999. The increase in selling, general and
administrative expenses is a result of variable selling expenses associated with
the sale of more expensive homes, the cost of opening new sales models, the
start up of the Company's mortgage company, the start up of the Company's
centralized sales office, "The Home Store", and increased sales and marketing
expense in Louisville, Kentucky. As a percentage of revenues, selling, general
and administrative expenses increased to 12.7% for second quarter 2000 from
11.9% for second quarter 1999.
INTEREST EXPENSE. Interest expense for second quarter 2000 increased 24.5%
to $2.0 million from $1.6 million for second quarter 1999. As a percentage of
revenues, interest expense for second quarter 2000 increased to 2.6% from 2.2%
for second quarter 1999. Interest expense increased due to higher average
revolving line of credit borrowings and a higher average interest rate. The
average revolving line of credit borrowings outstanding were $107.6 million and
$83.7 million for the second quarter of 2000 and 1999, respectively. The average
revolving line of credit borrowings were higher in second quarter 2000 than
second quarter 1999 in order to finance increased real estate inventories in
second quarter 2000. The weighted average rate of interest under the Company's
revolving line of credit was 8.3% for second quarter 2000 compared to 7.1% for
second quarter 1999. The Company capitalized $493,000 more interest than it
expensed during second quarter 2000 due to the higher levels of real estate
development at June 30, 2000, compared to capitalizing $72,000 more interest
than it expensed during second quarter 1999.
PROVISION FOR INCOME TAXES. Income tax expense for second quarter 2000
increased to $1.5 million from $1.3 million for second quarter 1999. The
Company's estimated annual effective tax rate was 42.0% for second quarter 2000
and 1999, respectively.
11
<PAGE> 12
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1999
REVENUES. Revenues for the six months ended June 30, 2000 increased to
$138.7 million from $125.6 million for the six months ended June 30, 1999. The
Company closed 802 homes during the first six months of 2000 compared to 767
homes during the first six months of 1999. Closings for the six months ended
June 30, 2000 included nineteen model homes that the Company sold and leased
back to use as sales models. The sale of these homes contributed $3.2 million to
first quarter revenues. The increase in revenues is attributable to a higher
average home sale price, which increased to $172,515 during the first six months
of 2000 from $163,501 during the first six months of 1999. The increase in the
average home sale price is primarily attributable to the Company's customers
purchasing larger homes and homes with more options. The Company attributes the
sale of larger homes and homes with more options to marketing strategies
employed by the Company and a strong economy. Included in revenues were other
revenues, consisting of the sales of land and building supplies to other
builders, which were $350,000 for the first six months of 2000 compared to
$160,000 for the first six months of 1999.
GROSS PROFIT. Gross profit for the first six months of 2000 was $27.3
million compared to $23.5 million for the first six months of 1999. The gross
profit increase resulted principally from the sale of more expensive homes and
increased operating efficiencies. As a percentage of revenues, the gross profit
margin increased to 19.7% for the first six months of 2000 from 18.7% for the
first six months of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the first six months of 2000 increased to $18.7
million from $16.2 million for the first six months of 1999. The increase in
selling, general and administrative expenses is a result of higher selling
expense associated with the sale of more expensive homes, the cost of opening
new sales models, the start up of the Company's mortgage company, the start up
of the Company's centralized sales office, "The Home Store", and increased sales
and marketing expense in Louisville, Kentucky. As a percentage of revenues,
selling, general and administrative expenses for the first six months of 2000
increased to 13.5% from 12.9% for the first six months of 1999.
INTEREST EXPENSE. Interest expense for the first six months of 2000
increased to $3.7 million from $2.8 million for the first six months of 1999. As
a percentage of revenues, interest expense for the first six months of 2000
increased to 2.7% from 2.2% for the first six months of 1999. Interest expense
increased due to higher average revolving line of credit borrowings and a higher
average rate of interest. The average revolving line of credit borrowings
outstanding were $106.1 million and $77.7 million for the first six months of
2000 and 1999, respectively. Higher borrowings in the first six months of 2000
were used to finance increased real estate inventories. The weighted average
rate of interest under the Company's revolving line of credit was 8.3% for the
first six months of 2000 compared to 7.2% for the first six months of 1999. The
Company capitalized $1.0 million more interest than it expensed during the first
six months of 2000 due to higher levels of real estate under development at June
30, 2000, compared to capitalizing $414,000 more interest than it expensed
during the first six months of 1999.
PROVISION FOR INCOME TAXES. Income tax expense for the first six months of
2000 increased to $2.0 million from $1.9 million for the first six months of
1999. The Company's estimated annual effective tax rate was 42.0% for the first
six months of 2000 and 1999, respectively.
12
<PAGE> 13
SOURCES AND USES OF CASH
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
The Company used cash from operations of $18.7 million during the first six
months of 2000 compared to $17.6 million during the same period of the previous
year. Operating cash was required for both six month periods in order to fund
real estate inventories, which typically increase during the summer months and
decrease later in the year when a larger number of homes are closed. Increased
investment in homes under construction of $15.2 million, land and land
development activities of $4.6 million, and building materials and supplies of
$1.2 million during the first six months of 2000 were slightly offset by changes
in other assets and liabilities of $2.3 million. The Company invested $757,000
in capital additions during the first half of 2000 compared to $614,000 during
the first half of 1999. The Company increased its net use of financing proceeds
to $19.1 million during the first half of 2000 from $18.3 million during the
first half of 1999. The Company used the additional financing proceeds
principally to fund its increased investment in real estate inventories.
REAL ESTATE INVENTORIES
The Company's practice is to develop most of the lots on which it builds
homes. Generally, the Company attempts to maintain a land inventory that will be
sufficient to meet its anticipated lot needs for the next three to five years.
At June 30, 2000, the Company either owned or was under contract to purchase
lots or land that could be developed into approximately 6,934 lots, including
513 lots in Louisville, Kentucky. The Company controlled through option
agreements an additional 8,458 lots, including 566 lots in Louisville, Kentucky.
During second quarter 2000, the Company exercised options to purchase 278 lots,
all of which are located in Central Ohio. 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.
Real estate inventories at June 30, 2000 increased to $180.2 million from
$159.2 million at December 31, 1999. The $21.0 million increase in real estate
inventories included increases in homes under construction of $15.2 million,
land and land development inventories of $4.6 million and lumber and building
supply inventories of $1.2 million. The higher level of homes under construction
is seasonal in nature and will continue through the peak building months. The
growth in homes under construction inventories also reflects the larger number
of homes the Company has under construction and the increased costs associated
with selling more expensive homes. Land and land development inventories
increased as the Company added sales locations in Central Ohio and Louisville,
Kentucky and increased its seasonal land development inventories.
On June 30, 2000, the Company had 103 single family inventory homes in
various stages of construction, which represented an aggregate investment of
$8.4 million. At June 30, 1999, the Company had 71 inventory homes, in various
stages of construction, which represented an aggregate investment of $3.7
million. Inventory homes are not reflected in sales or backlog.
SELLER-PROVIDED DEBT
Seller-provided term debt was $2.7 million at June 30, 2000 compared to
$4.4 million at June 30, 1999. The Company expects to repay $1.2 million of the
term debt prior to the end of 2000 and the remaining balance prior to June 2002.
Interest rates range from 6.5% to 8.0%.
13
<PAGE> 14
LAND PURCHASE COMMITMENTS
At June 30, 2000, the Company had commitments to purchase 102 residential
lots at an aggregate cost of $3.2 million, net of $1,500 in good faith deposits.
In addition, at June 30, 2000, the Company had $97.3 million of cancelable
obligations to purchase residential lots and unimproved land, net of $5.1
million in good faith deposits. The majority of the land subject to cancelable
obligations is for post 2000 development activities. The Company expects to fund
its 2000 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 increased its Senior Unsecured Revolving Credit Facility ("the
Facility") to $150 million from $125 million on May 26, 2000. The Company also
modified certain covenants to increase the amount of capital and operating
leases allowed under the Facility and to amend the ratio of total liabilities to
tangible net worth to 2.75 to 1.00 from 2.50 to 1.00 for the period from May 1
to August 31 for 2000 and subsequent years. These changes to the Facility
reflect the increased level of land and home building inventories the Company is
experiencing due to selling more and larger homes and the increased level of
building activity experienced by the Company during its peak building months.
The original Facility 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, 1999.
The Facility provides for a variable rate of interest on borrowings and,
consequently, the Company has entered into interest rate swap contracts in order
to reduce exposure to increasing interest rates. The interest rate swap
contracts 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 the interest rates between 5.48% and 6.13%, plus a variable margin based
on the Company's interest coverage ratio. The variable margin ranges from 1.75%
to 2.50% and is determined quarterly.
As of June 30, 2000, the Company was in compliance with the Facility
covenants and had $14.4 million available under its Facility, after adjusting
for borrowing base limitations. Borrowing availability under the Facility could
increase, depending on the Company's utilization of the proceeds.
INFLATION AND OTHER COST INCREASES
The Company is not always able to reflect all of its cost increases in the
prices of its homes because competitive pressures and other factors require it
in many cases to maintain or discount those prices. While the Company attempts
to maintain costs with subcontractors from the date a sales contract with a
customer is accepted until the date construction is completed, unanticipated
additional costs may be incurred which cannot be passed on to 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2000 the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) No. 138 Accounting for Certain Derivative
Instruments and Certain Hedging Activities - An Amendment to FASB Statement No.
133 which modifies certain provisions and definitions in accounting principles
used in accounting for derivative instruments and hedging activities. The
Company is in the process of evaluating the effect of SFAS No. 133 Accounting
for Derivative Instruments and Hedging Activities and has not yet determined the
impact of this pronouncement as amended by SFAS No. 138.
14
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company has entered into three interest rate swap contracts with
notional amounts of $10,000,000 each, maturing on October 16, 2000, January 14,
2001 and May 6, 2003. These interest rate swap contracts, reflected in aggregate
in the table below, commenced on October 16, 1997, January 14, 1998 and May 6,
1998, respectively, and fix the variable interest rate on the Company's
revolving credit note at 6.125%, 5.475% and 5.960%, respectively. The Company
entered into interest rate swap contracts to achieve an appropriate level of
variable and fixed-rate debt as approved by senior management. Interest rate
swap contracts allow the Company to have variable-rate borrowings and to select
the level of fixed-rate debt for the Company as a whole. The expectation is that
the resulting cost of funds is lower than that available under the variable-rate
borrowings. Under interest rate swap contracts, the Company agrees with other
parties to exchange, at specified intervals, the difference between fixed rate
and floating-rate amounts calculated by reference to an agreed notional amount.
The level of fixed-rate debt, after the effect of interest rate swap contracts
have been considered, is maintained at approximately 27% 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 June 30, 2000, 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 ranging from
1.75% to 2.50%. All dollar amounts are reflected in U.S. Dollars (thousands).
<TABLE>
<CAPTION>
Total Fair Value
June 30, June 30,
2000 2001 2002 2003 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES
Variable rate $112,413 $112,413 $79,392 $112,413 $79,392
Average interest rate 8.528% 8.528% 8.528%
INTEREST-RATE DERIVATIVES
Notional amount $30,000 $20,000 $10,000 $10,000 $30,000 $30,000 $401 $74
Average pay rate 5.853% 5.718% 5.960% 5.960% 5.873% 5.869%
Average receive rate 8.528% 8.528% 8.528% 8.528% 8.528% 8.528%
</TABLE>
15
<PAGE> 16
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. 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.
On April 26, 2000, the Company held its Annual Meeting of
Shareholders. At the Annual Meeting, the shareholders ratified the
selection of PricewaterhouseCoopers LLP as independent public
accountants for the Company in 2000 by the following vote:
Shares For Shares Against Shares Abstaining
---------- -------------- -----------------
6,298,536 200 1,900
The shareholders elected as Class I Directors the three nominees
of the Board of Directors by the following vote:
Shares For Shares Withheld
---------- ---------------
Donald A. Borror 6,298,536 2,100
David S. Borror 6,298,536 2,100
Pete A. Klisares 6,298,436 2,200
Gerald E. Mayo 6,298,436 2,200
The term of office of the Class II Directors, Douglas G.
Borror, Jon M. Donnell and C. Ronald Tilley, continued after
the meeting.
The shareholders amended the Company's Amended and Restated Code
of Regulations to permit voting by electronic, telephonic and
other types of proxies by the following vote:
Shares For Shares Against Shares Abstaining
---------- -------------- -----------------
6,298,506 1,130 1,000
The shareholders amended the Company's Amended and Restated Code
of Regulations to reduce the minimum number of Directors
comprising a committee of the Board of Directors from three to one
by a vote of:
Shares For Shares Against Shares Abstaining
---------- -------------- -----------------
6,272,293 23,740 4,603
16
<PAGE> 17
Item 5. Other Information. Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: See attached index (following the signature page).
(b) Reports on Form 8-K. Not applicable.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOMINION HOMES, INC.
(Registrant)
Date: August 11, 2000 By: /s/ Douglas G. Borror
--------------------
Douglas G. Borror
Duly Authorized Officer
Date: August 11, 2000 By: /s/ Jon M. Donnell
-----------------
Jon M. Donnell
Duly Authorized Officer
Date: August 11, 2000 By: /s/ Peter J. O'Hanlon
--------------------
Peter J. O'Hanlon
Chief Financial Officer
18
<PAGE> 19
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 Filed herewith
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 (File No. 0-23270).
10. Second Amendment to Credit Agreement dated May 26, 2000 Filed herewith
27. Financial Data Schedule Filed herewith
</TABLE>
19
