-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IDtJCIPAYqU01bHGO+HKKjI3vFAU41wwxrA8g3I3VMJiOEMl5G43QmDrjE31FTSk QIBlozKYCRWQYrDLhwl/Ag== 0000950152-01-503773.txt : 20010814 0000950152-01-503773.hdr.sgml : 20010814 ACCESSION NUMBER: 0000950152-01-503773 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOMINION HOMES INC CENTRAL INDEX KEY: 0000917857 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 311393233 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23270 FILM NUMBER: 1705617 BUSINESS ADDRESS: STREET 1: 5501 FRANTZ RD CITY: DUBLIN STATE: OH ZIP: 43017-0766 BUSINESS PHONE: 6147616000 MAIL ADDRESS: STREET 1: 5501 FRANTZ RD CITY: DUBLIN STATE: OH ZIP: 43017 FORMER COMPANY: FORMER CONFORMED NAME: BORROR CORP DATE OF NAME CHANGE: 19940124 10-Q 1 l89434ae10-q.txt DOMINION HOMES, INC. FORM 10-Q 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, 2001 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 13, 2001: 6,407,907 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DOMINION HOMES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE INFORMATION)
June 30, December 31, 2001 2000 (unaudited) ------------- ------------- ASSETS Cash and cash equivalents $ 2,665 $ 2,106 Notes and accounts receivable, net: Trade 326 314 Due from financial institutions for residential closings 1,163 712 Real estate inventories: Land and land development costs 123,633 113,186 Homes under construction 97,290 66,669 Other 4,938 4,619 ----------- ----------- Total real estate inventories 225,861 184,474 ----------- ----------- Prepaid expenses and other 5,082 4,639 Deferred income taxes 3,686 2,967 Property and equipment, at cost 12,003 10,657 Less accumulated depreciation (5,530) (4,676) ------------ ------------- Net property and equipment 6,473 5,981 ----------- ----------- Total assets $ 245,256 $ 201,193 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable, trade $ 7,527 $ 5,808 Deposits on homes under contract 2,851 1,804 Accrued liabilities 20,581 16,889 Note payable, banks 136,246 105,701 Term debt 6,708 3,103 ----------- ----------- Total liabilities 173,913 133,305 ----------- ----------- Commitments and contingencies Shareholders' equity Common shares, without stated value, 12,000,000 shares authorized, 6,438,531 shares issued and 6,413,531 shares outstanding on June 30, 2001 and 6,407,227 shares issued and 6,382,227 shares outstanding on December 31, 2000 31,905 31,611 Deferred compensation (621) (376) Retained earnings 40,862 36,825 Accumulated other comprehensive loss (631) Treasury stock (172) (172) ------------ ------------ Total shareholders' equity 71,343 67,888 ----------- ----------- Total liabilities and shareholders' equity $ 245,256 $ 201,193 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 2 3 DOMINION HOMES, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT SHARE INFORMATION) ================================================================================ (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Revenues $ 90,649 $ 76,492 $ 158,011 $ 138,710 Cost of real estate sold 70,066 61,189 122,213 111,408 ---------- ---------- ---------- ---------- Gross profit 20,583 15,303 35,798 27,302 Selling, general and administrative 12,826 9,752 23,539 18,720 ---------- ---------- ---------- ---------- Income from operations 7,757 5,551 12,259 8,582 Interest expense 2,800 1,978 5,296 3,734 ---------- ---------- ---------- ---------- Income before income taxes 4,957 3,573 6,963 4,848 Provision for income taxes 2,083 1,501 2,926 2,019 ---------- ---------- ---------- ---------- Net income $ 2,874 $ 2,072 $ 4,037 $ 2,829 ========== ========== ========== ========== Earnings per share Basic $ 0.45 $ 0.33 $ 0.64 $ 0.44 ========== ========== ========== ========== Diluted $ 0.44 $ 0.32 $ 0.62 $ 0.44 ========== ========== ========== ========== Weighted average shares outstanding Basic 6,354,001 6,367,789 6,353,593 6,364,797 ========== ========== ========== ========== Diluted 6,563,561 6,480,897 6,559,306 6,474,012 ========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 3 4 DOMINION HOMES, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS) (UNAUDITED)
Deferred Compensation --------------------- Accum. Other Common Trust Retained Comprehensive Treasury Shares Liability Shares Earnings Income (Loss) Stock Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 $31,611 $928 $(1,304) $36,825 $(172) $67,888 Cummulative effect of adopting accounting principle $94 94 ------------------------------------------------------------------------------------------ Balance, January 1, 2001,as adjusted 31,611 928 (1,304) 36,825 94 (172) 67,982 Net income 4,037 4,037 Unrealized hedging loss, net of deferred taxes (725) (725) ------- Comprehensive income 3,312 ------- Shares awarded and redeemed 294 (308) (14) Shares distributed from trust for deferred compensation (149) 149 - Deferred compensation 63 63 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 2001 $31,905 $534 $(1,155) $40,862 $(631) $(172) $71,343 ==================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements 4 5 DOMINION HOMES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) ================================================================================
Six Months Ended June 30, 2001 2000 ------------- ------------- Cash flows from operating activities: Net income $ 4,037 $ 2,829 Adjustments to reconcile net income to cash used in operating activities: Depreciation and amortization 1,012 997 Issuance of common shares for compensation 46 Reserve for real estate inventories 210 Deferred income taxes (193) (144) Changes in assets and liabilities: Notes and accounts receivable (463) (977) Real estate inventories (37,637) (20,872) Prepaid expenses and other (343) (3,133) Accounts payable 1,719 (614) Deposits on homes under contract 1,047 794 Accrued liabilities 2,606 2,156 ----------- ----------- Net cash used in operating activities (28,215) (18,708) ------------ ------------ Cash flows from investing activities: Proceeds from sale of property and equipment 38 43 Purchase of property and equipment (1,183) (800) ------------ ------------ Net cash used in investing activities (1,145) (757) ------------ ------------ Cash flows from financing activities: Proceeds from note payable, banks 168,211 140,464 Payments on note payable banks (137,666) (120,359) Prepaid loan fees (271) (275) Payments on term debt (167) (361) Payments on capital lease obligations (174) (193) Common shares purchased or redeemed (14) (132) ----------- ------------ Net cash provided by financing activities 29,919 19,144 ----------- ----------- Net change in cash and cash equivalents 559 (321) Cash and cash equivalents, beginning of period 2,106 2,862 ----------- ----------- Cash and cash equivalents, end of period $ 2,665 $ 2,541 ----------- ----------- Supplemental disclosures of cash flow information: Interest paid (net of amounts capitalized) $ 336 $ 320 ----------- ----------- Income taxes paid $ 3,549 $ 2,511 =========== =========== Land acquired by seller financing $ 3,750 $ 321 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 5 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 accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America for complete financial statements. The December 31, 2000 balance sheet data were derived from audited financial statements but do not include all disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the December 31, 2000 audited annual financial statements of Dominion Homes, Inc. (the "Company") contained in its December 31, 2000 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 the six months ended June 30, 2001 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 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 construction in progress was $4.8 million and $4.3 million at June 30, 2001 and June 30, 2000, respectively. The following table summarizes the activity with respect to capitalized interest:
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Interest incurred $ 2,814,000 $ 2,471,000 $ 5,485,000 $ 4,763,000 Interest capitalized (1,775,000) (1,651,000) (3,463,000) (3,184,000) ----------- ----------- ----------- ----------- Interest expensed directly 1,039,000 820,000 2,022,000 1,579,000 Previously capitalized interest charged to interest expense 1,761,000 1,158,000 3,274,000 2,155,000 ----------- ----------- ----------- ----------- Total interest expense $ 2,800,000 $ 1,978,000 $ 5,296,000 $ 3,734,000 =========== =========== =========== ===========
6 7 3. NOTE PAYABLE, BANKS ------------------- The Company increased its Senior Unsecured Revolving Credit Facility ("the Facility") to $175 million from $150 million on May 23, 2001. The Company also modified certain Facility covenants to eliminate a reduction in the uncommitted land to tangible net worth ratio that was scheduled to go into effect January 1, 2002 and to eliminate a restriction on the amount of investment the Company was allowed to make in Louisville, Kentucky. The original Facility was executed on May 29, 1998 and is described in the Form 10-K for the year ended December 31, 2000. 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 $60 million of borrowings under the Facility. The interest rate swap contracts mature between May 6, 2003 and March 8, 2004 and fix interest rates between 5.16% and 5.98%, 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. The fair value of the interest rate swaps was a negative $1.2 million at June 30, 2001. As of June 30, 2001, the Company was in compliance with the Facility covenants and had $18.0 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. 4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES --------------------------------------------- The Company's interest rate risk management strategy uses derivative instruments to minimize earnings fluctuations caused by interest rate volatility associated with the Company's variable rate debt. The derivative financial instruments used to meet the Company's risk management objectives are interest rate swaps. The Company seeks to maintain the notional amount of interest rate swap agreements at approximately 50% of its outstanding debt. Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 138, an amendment to SFAS No. 133, which established new accounting and reporting guidelines for derivative instruments and hedging activities. SFAS No. 133 and SFAS No. 138 are collectively referred to herein as "SFAS 133." In adopting SFAS 133, the Company has designated its interest rate swaps as cash flow hedges. The after tax fair value of the swap contracts at the date of adoption was $94,000. The fair value of the swaps at the date of adoption of SFAS 133 together with changes in their fair value in subsequent periods are recognized in other comprehensive income or loss until such time as the swap contracts mature or are otherwise disposed of. Other comprehensive income or loss is reflected as a component of shareholders' equity in the accompanying balance sheets. The fair value of swap contracts is impacted by, among other factors, the changing interest rate environment. During the six months ended June 30, 2001, interest rates declined significantly causing an unrealized after tax loss on the swap contracts of approximately $725,000. Future changes in interest rates will cause unrealized gains or losses to occur and such amounts will be adjusted through other comprehensive income or loss as long as the effectiveness of the hedge is maintained. The Company has recognized a corresponding accrued liability for the estimated fair value of the interest rate swap agreements of approximately $1.2 million at June 30, 2001. 7 8 In accordance with the provisions of SFAS 133, the Company recorded the following adjustments in accumulated other comprehensive loss as of June 30, 2001: Fair value of hedging instruments upon transition, net of deferred taxes of $67,000 $ 94,000 Unrealized losses on cash flow hedges during the period, net of deferred taxes of $593,000 (725,000) ---------- Accumulated other comprehensive loss at June 30, 2001, net of Deferred taxes of $526,000 $ (631,000) ----------
The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking the hedging transactions. An assessment is made at the hedging transaction's inception and on an ongoing basis to determine whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The Company believes the swaps have been effective in achieving the risk management objectives for which they were intended since inception and will continue to be effective for the remaining term of the contract. Hedge effectiveness is measured at least quarterly based on the relative change in fair value between the derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness, as defined by SFAS 133, is recognized immediately in earnings. For the three and six months ending June 30, 2001, no gain or loss has been recognized in earnings as no amount of the cash flow hedges have been determined to be ineffective. Should it be determined that a derivative is not highly effective or that it has ceased to be a highly effective hedge, the Company will discontinue hedge accounting prospectively. This will occur when (1) offsetting changes in the fair value or cash flows of the hedged items are no longer effective; (2) the derivative expires or is sold, terminated, or exercised; or (3) management determines that designation of the derivative as a hedged instrument is no longer appropriate. When hedge accounting is discontinued because an interest rate swap qualifying as a cash flow hedge is liquidated or sold prior to maturity, the gain or loss on the interest rate swap at the time of termination remains in accumulated other comprehensive income or loss and is recognized as an adjustment to interest expense over the original contract term. In all other situations in which hedge accounting is discontinued, the derivative will be carried at its fair value on the balance sheet, with changes in its fair value recognized in current period earnings. 5. EARNINGS PER SHARE ------------------ A reconciliation of the weighted average shares used in basic and diluted earnings per share is as follows:
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 --------- --------- --------- --------- Weighted average shares outstanding during the period 6,354,001 6,367,789 6,353,593 6,364,797 Assuming exercise of options 209,560 113,108 205,713 109,215 --------- --------- --------- --------- Weighted average shares outstanding adjusted for common share equivalents 6,563,561 6,480,897 6,559,306 6,474,012 ========= ========= ========= =========
8 9 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. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income for the three months ended June 30, 2001 increased 38% to $2.9 million, or $.44 per diluted share, from $2.1 million, or $.32 per diluted share, for the previous year. Revenues for second quarter 2001 increased 18% to $90.6 million, based on 466 closings, compared to revenues of $76.5 million, based on 443 closings, for second quarter 2000. The improved revenues in the most recent quarter were due to the larger number of homes that closed and an increase in the average price of those homes. The average price of homes closed in second quarter 2001 rose to approximately $195,000 from $172,000 in second quarter 2000. Gross profit for second quarter 2001 rose to $20.6 million, or 22.7% of revenues, from $15.3 million, or 20.0% of revenues, for second quarter 2000. Gross profit increased principally due to the higher average price of homes that closed during the period, increased mortgage placement revenues and lower customer financing costs paid by the Company due to declining mortgage rates. Second quarter revenues and gross profit were partially offset by a $3.1 million increase in selling, general and administrative expenses and a $822,000 increase in interest expense. Selling, general and administrative expenses increased principally due to the variable cost associated with selling a larger number of homes, as well as more expensive homes and the general and administrative expenses of the Company's new mortgage financing services subsidiary. Interest expense for second quarter 2001 increased over the previous year due to higher levels of borrowing caused by increased investment in homes under construction of $30.6 million and land and land development costs of $10.5 million. The Company sold 589 homes in second quarter 2001, representing a sales value of $109.6 million, compared to 420 homes, representing a sales value of $76.9 million, sold in the same period of the previous year. Home contracts in backlog increased 23.9% to 1,259 at June 30, 2001 from 1,016 at June 30, 2000. The aggregate sales value of the Company's homes in backlog at June 30, 2001 increased to $242.7 million from $192.2 million at June 30, 2000. The average sales price of homes in backlog at June 30, 2001 increased to $192,766 from $189,168 at June 30, 2000. COMPANY OUTLOOK The Company believes that annual financial results for 2001 will be the best in its history and will result in record revenues and net income. The Company is well positioned in the second half of the year to close a record number of homes, with both revenues and gross profit expected to remain strong. Gross profit as a percentage of revenues however is not expected to remain at its current level due to stabilizing mortgage rates for its customers and the Company's recently-introduced lower priced series of homes. Falling mortgage rates positively impact the Company because interest rates locked at the time of contract are less expensive at the time of home delivery. Stabilized mortgage rates do not provide this savings opportunity. The Company's recently-introduced Independence series of homes, which the Company offers at prices starting at $99,800, is selling well because of its affordability but does not provide the Company with as much gross profit as its other series of homes. The Company believes the introduction of the Independence series allows it to sell to customers that could not otherwise afford its homes and it does not expect the Independence series to materially impact sales of its larger or more expensive homes. 10 11 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 2001 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, changes in mortgage finance programs, increases in the cost of acquiring and developing land, mortgage commitments that expire prior to homes being delivered, entry into the mortgage financing services business, 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 subdivision platting 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 on favorable terms, the commencement or outcome of litigation, the impact of changes in government regulation, and the other risks described in the Company's December 31, 2000 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 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:
THREE SALES BACKLOG MONTHS REVENUES CONTRACTS (1) CLOSINGS (AT PERIOD END) ENDED (IN THOUSANDS) (IN UNITS) (IN UNITS) (IN UNITS) ==================================================================================================================== 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 Sept. 30, 2000 $87,547 353 482 887 Dec. 31, 2000 $100,158 404 514 777 Mar. 31, 2001 $67,362 706 347 1,136 June 30, 2001 $90,649 589 466 1,259
- ---------- (1) net of cancellations At June 30, 2001, the aggregate sales price of homes in backlog was $242.7 million compared to $192.2 million at June 30, 2000. The average sales price of homes in backlog at June 30, 2001 increased to $192,766 from $189,168 at June 30, 2000. 11 12 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:
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ------ ------ ------ ------ Revenues 100.0% 100.0% 100.0% 100.0% Cost of real estate sold 77.3 80.0 77.3 80.3 ------ ------ ------ ------ Gross profit 22.7 20.0 22.7 19.7 Selling, general and administrative expenses 14.1 12.7 14.9 13.5 ------ ------ ------ ------ Income from operations 8.6 7.3 7.8 6.2 Interest expense 3.1 2.6 3.4 2.7 ------ ------ ------ ------ Income before income taxes 5.5 4.7 4.4 3.5 Provision for income taxes 2.3 2.0 1.8 1.5 ------ ------ ------ ------ Net income 3.2% 2.7% 2.6% 2.0% ====== ====== ====== ======
12 13 THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 REVENUES. Revenues for second quarter 2001 increased 18% to $90.6 million, based on 466 closings, compared to revenues of $76.5 million, based on 443 closings, during second quarter 2000. Included in second quarter 2001 revenues were eight homes with a sales value of $1.4 million that the Company sold and leased back for use as sales models. The increase in revenues is principally due to a 13% increase in the average price of homes that closed during second quarter 2001, which rose to $195,000 from $172,000 during second quarter 2000. The increase in the average price of homes that closed during second quarter 2001 reflects higher FHA lending limits, customer preference for larger and more expensive homes and the higher cost of home building components, particularly land costs. Included in revenues were the sale of land and building supplies to other builders of $17,000 and $230,000 for second quarter 2001 and 2000, respectively. GROSS PROFIT. Gross profit for second quarter 2001 rose 35% to $20.6 million, or 22.7% of revenues, from $15.3 million, or 20.0% of revenues, for second quarter 2000. Gross profit improved principally due to the higher average price of homes that closed, higher mortgage placement revenues and lower customer financing costs paid by the Company due to declining mortgage rates. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for second quarter 2001 increased 32% to $12.8 million, or 14.1% of revenues, from $9.8 million, or 12.7% of revenues, for second quarter 2000. The increase in selling, general and administrative expenses is a result of variable selling expenses associated with the sale of a larger number of homes, as well as more expensive homes and the general and administrative expenses of the Company's new mortgage financing services subsidiary. INTEREST Expense. Interest expense for second quarter 2001 increased 42% to $2.8 million, or 3.1% of revenues, from $2.0 million, or 2.6% of revenues, for second quarter 2000. Interest expense increased due to higher average revolving line of credit borrowings, which increased to $131.5 million during second quarter 2001 from $107.6 million during second quarter 2000. The higher average revolving line of credit borrowings in second quarter 2001 were used to finance higher levels of real estate inventories. The weighted average rate of interest under the Company's revolving line of credit was 7.7% for second quarter 2001 compared to 8.3% for second quarter 2000 PROVISION FOR INCOME TAXES. Income tax expense for second quarter 2001 increased to $2.1 million from $1.5 million for second quarter 2000. The Company's estimated annual effective tax rate was 42.0% for second quarter 2001 and 2000, respectively. 13 14 SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 REVENUES. Revenues for the six months ended June 30, 2001 increased 14% to $158.0 million, based on 813 closings, from $138.7 million, based on 802 closings, for the six months ended June 30, 2000. Included in 2001 revenues are eight homes with a sales value of $1.4 million that the Company sold and leased back for use as sales models compared to nineteen homes in 2000 with a sales value of $3.2 million. The increase in revenues is attributable to a 12% higher average sale price, which increased to $194,000 during the first six months of 2001 from $173,000 during the first six months of 2000. The increase in the average sale price during the first six months of 2001 reflects higher FHA lending limits, customer preference for larger and more expensive homes and the higher cost of home building components, particularly land costs. Included in revenues were other revenues, consisting of the sales of land and building supplies to other builders, which were $50,000 for the first six months of 2001 compared to $350,000 for the first six months of 2000. GROSS PROFIT. Gross profit for the first six months of 2001 increased 31% to $35.8 million, or 22.7% of revenues, from $27.3 million, or 19.7% of revenues, for the first six months of 2000. The gross profit increase resulted principally from the higher average price of homes that closed, higher mortgage placement revenues and lower customer financing costs paid by the Company due to declining mortgage rates. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 26% to $23.5 million, or 14.9% of revenues, for the first six months of 2001 from $18.7 million, or 13.5% of revenues, for the first six months of 2000. The increase in selling, general and administrative expenses is a result of variable selling expenses associated with the sale of a larger number of homes, as well as more expensive homes and the general and administrative expenses of the Company's new mortgage financing services subsidiary. INTEREST Expense. Interest expense for the first six months of 2001 increased 42% to $5.3 million, or 3.4% of revenues, from $3.7 million, or 2.7% of revenues, for the first six months of 2000. Interest expense increased due to higher average revolving line of credit borrowings, which increased to $124.0 million during the first six months of 2001 from $106.1 million during the first six months of 2000. The higher average revolving line of credit borrowings in the first six months of 2001 were used to finance increased real estate inventories. The weighted average rate of interest under the Company's revolving line of credit was 8.0% for the first six months of 2001 compared to 8.3% for the first six months of 2000. PROVISION FOR INCOME TAXES. Income tax expense for the first six months of 2001 increased to $2.9 million from $2.0 million for the first six months of 2000. The Company's estimated annual effective tax rate was 42.0% for the first six months of 2001 and 2000, respectively. 14 15 SOURCES AND USES OF CASH SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 The Company invested $28.2 million of additional cash in operations during the six months ended June 30, 2001 compared to $18.7 million invested during the six months ended June 30, 2000. The principal reason for the additional investment in both years was to fund growth in real estate inventories. Funding of real estate inventories during the first six months of 2001 increased $37.6 million, of which $30.9 was used to fund homes under construction and $6.7 million was used to fund additional land and land development inventories. Operating cash required to fund the growth in real estate inventories during the first six months of 2001 was partially offset by gains in net income of $4.0 million, depreciation of $1.0 million and changes in other assets and liabilities of $4.4 million. During the first six months of 2000, the Company invested $20.9 million in real estate inventories, of which $16.3 million was used to fund homes under construction, and $4.6 million was used to fund land and land development inventories. The Company also invested $1.1 million, net of proceeds from the disposal of assets, to purchase property and equipment during the first six months of 2001 compared to a net investment of $757,000 during the first six months of 2000. The Company used additional financing of $29.9 million, principally proceeds from its bank Facility, during the first six months of 2001 compared to $19.1 million during the first six months of 2000. 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, 2001, the Company either owned or was under contract to purchase lots or land that could be developed into approximately 8,700 lots, including 650 lots in Louisville, Kentucky. The Company controlled through option agreements approximately 6,400 additional lots, including 450 lots in Louisville, Kentucky. During second quarter 2001, the Company exercised options to purchase approximately 900 lots, including 200 lots in Louisville, Kentucky. Option agreements expire at varying dates through April 2009. 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, 2001 increased to $225.9 million from $184.5 million at December 31, 2000. The $41.4 million increase in real estate inventories included increases in homes under construction of $30.6 million, land and land development inventories of $10.5 million and lumber and building supply inventories of $319,000. The higher level of homes under construction reflects the larger number of homes the Company is building, the increased costs associated with building more expensive homes and the seasonal nature of building in the Company's geographic locations. The higher level of land and land development inventories reflects expanded sales locations in both Ohio and Kentucky and greater seasonal land development activities. On June 30, 2001, the Company had 147 inventory homes in various stages of construction, which represented an aggregate investment of $10.3 million, compared to 103 inventory homes, which represented an aggregate investment of $8.4 million on June 30, 2000. Inventory homes are not reflected in sales or backlog. SELLER-PROVIDED DEBT Seller-provided term debt was $5.1 million at June 30, 2001 compared to $2.7 million at June 30, 2000. The Company expects to repay $3.7 million of the term debt prior to the end of 2001 and the remaining balance during 2002. Interest rates range from 6.5% to 8.0%. 15 16 LAND PURCHASE COMMITMENTS At June 30, 2001, the Company had commitments to purchase approximately 2,800 residential lots at an aggregate cost of $35.2 million, net of $1.8 million in good faith deposits. In addition, at June 30, 2001, the Company had $38.4 million of cancelable obligations to purchase residential lots and unimproved land, net of $2.8 million in good faith deposits. The majority of commitments and cancelable obligations are for post 2001 development activity, with the commitments extending through 2005 and cancelable obligations through 2009. The Company expects to fund its land acquisition and development obligations from internally generated cash and from the borrowing capacity it expects to have available under its bank credit facility. The Company has the ability to delay or terminate with minimal cost many of its purchase obligations. In addition, many of the purchase contracts contain contingencies that delay the implementation of the contracts or prevent the contracts from being implemented. CREDIT FACILITIES The Company increased its Senior Unsecured Revolving Credit Facility ("the Facility") to $175 million from $150 million on May 23, 2001. The Company also modified certain Facility covenants to eliminate a reduction in the uncommitted land to tangible net worth ratio that was scheduled to go into effect January 1, 2002 and to eliminate a restriction on the amount of investment the Company was allowed to make in Louisville, Kentucky. The original Facility was executed on May 29, 1998 and is described in the Form 10-K for the year ended December 31, 2000. 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 $60 million of borrowings under the Facility. The interest rate swap contracts mature between May 6, 2003 and March 8, 2004 and fix interest rates between 5.16% and 5.98%, 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. The fair value of the interest rate swaps was a negative $1.2 million at June 30, 2001. As of June 30, 2001, the Company was in compliance with the Facility covenants and had $18.0 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 profit. 16 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has entered into four interest rate swap contracts with aggregate notional amounts of $60 million, as reflected in the table below. The Company enters into interest rate swap contracts to minimize earnings fluctuations caused by interest rate volatility associated with the Company's variable rate debt. 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. 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 has 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 interest rate swaps are more fully described below:
Amount Debt Start Date Maturity Date Fixed Rate ----------- ---------- ------------- ---------- $10 million May 6, 1998 May 6, 2003 5.96% $20 million Dec. 14, 2001 Jan. 12, 2004 5.98% $20 million Jan. 12, 2001 Jan. 12, 2004 5.62% $10 million Mar. 8, 2001 Mar. 8, 2004 5.16%
The following table presents descriptions of the financial instruments and derivative instruments that are held by the Company at June 30, 2001, 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 2.25%. All amounts are reflected in U.S. Dollars (thousands).
TOTAL FAIR VALUE JUNE 30, JUNE 30, -------- -------- 2001 2002 2003 2004 2001 2000 2001 2000 ---- ---- ---- ---- ---- ---- ---- ---- Liabilities - ----------- Variable rate $136,246 $136,246 $136,246 $136,246 $136,246 $112,413 $136,246 $112,413 Average interest rate 6.09% 6.09% 8.53% Interest-Rate Derivatives - ------------------------- Notional amount $ 60,000 $ 60,000 $ 60,000 $ 50,000 $ 60,000 $ 30,000 ($ 1,157) $ 401 Average pay rate 5.72% 5.72% 5.72% 5.67% 5.72% 5.87% Average receive rate 6.09% 6.09% 6.09% 6.09% 6.09% 8.53%
17 18 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. (a) On May 2, 2001, the Company held its Annual Meeting of Shareholders.: (b) See paragraph C below. (c) At the Annual Meeting, the shareholders ratified the selection of PricewaterhouseCoopers LLP as independent public accountants for the Company in 2001 by the following vote: Shares For Shares Against Shares Abstaining ---------- -------------- ----------------- 5,470,390 43,822 688,910 The shareholders elected as Class I Directors the three nominees of the Board of Directors by the following vote: Shares For Shares Withheld ---------- --------------- Douglas G. Borror 6,193,602 9,520 Jon M. Donnell 6,193,702 9,420 C. Ronald Tilley 6,193,702 9,420 The term of office of the Class II Directors, David S. Borror, Peter A. Klisares and Gerald E. Mayo continued after the meeting. (d) Not Applicable Item 5. Other Information. Not Applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: See attached Index to Exhibits (following the signature page). (b) Reports on Form 8-K. Not applicable. 18 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: August 13, 2001 By: /s/Douglas G. Borror ------------------------------ Douglas G. Borror Duly Authorized Officer Date: August 13, 2001 By: /s/Jon M. Donnell ------------------------------ Jon M. Donnell Duly Authorized Officer Date: August 13, 2001 By: /s/Peter J. O'Hanlon ------------------------------ Peter J. O'Hanlon Principal Financial Officer 19 20 INDEX TO EXHIBITS
Exhibit No. Description Location - ----------- ----------- -------- 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 (Registration 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(a) Amended and Restated Articles of Incorporation of Dominion Homes, Incorporated by reference to Inc., as filed with the Ohio Secretary of State on March 4, 1994 Exhibit 4(a)(1) to the Company's Registration Statement on Form S-8 (Registration No. 333-26817) as filed with the Commission on May 9, 1997 (the "1997 Form S-8"). 3.1(b) Certificate of Amendment to Amended and Restated Articles of Incorporated by reference to Exhibit Incorporation of Dominion Homes, Inc., as filed with the Ohio 4(a)2 of the 1997 Form S-8. Secretary of State on May 7, 1997. 3.1(c) Amended and Restated Articles of Incorporation of Dominion Homes, Incorporated by reference to Exhibit Inc., reflecting amendments through May 7, 1997 (for purposes of 4(a)(3) of the 1997 Form S-8. Commission reporting compliance only). 3.2 Amended and Restated Code of Regulations of Dominion Homes, Inc. Incorporated by reference to Exhibit 3.2 to the Company's June 30, 2000 Form 10-Q (File No. 0-23270). 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. Fourth Amendment to Credit Agreement Dated May 23, 2001 Filed herewith 10.1 Lease dated April 30, 2001 between FGSC, LLC and Dominion Homes of Kentucky, Ltd. for office space in Louisville, Kentucky. Filed herewith
20 EX-10 3 l89434aex10.txt EXHIBIT 10 1 Exhibit 10 FOURTH AMENDMENT TO CREDIT AGREEMENT ------------------------------------ THIS FOURTH AMENDMENT to Credit Agreement (this "Amendment") is entered into as of the 23rd day of May, 2001, by and among (a) Dominion Homes, Inc. (the "Company"), (b) the institutions from time to time party to the Credit Agreement (as defined below) as lenders (individually, a "Lender" and collectively, the "Lenders"), and (c) The Huntington National Bank ("Huntington"), in its separate capacity as administrative agent for the Lenders (with its successors in such capacity, the "Administrative Agent"). RECITALS: A. As of May 29, 1998, the Company, the Lenders, the Administrative Agent, Huntington, in its capacity as Issuing Bank, and Huntington Capital Corp., in its capacity as Syndication Agent for the Lenders, executed a certain Credit Agreement, which was amended by a certain First Consent Agreement dated as of August 9, 1999, a certain First Amendment to Credit Agreement dated as of September 3, 1999, a certain Second Consent and Modification dated as of December 30, 1999, a certain Second Amendment to Credit Agreement dated as of May 26, 2000 and a certain Third Amendment to Credit Agreement dated as of October 31, 2000 (as so amended, collectively the "Credit Agreement"), setting forth the terms of certain extensions of credit to the Company; and B. As of May 29, 1998, the Company executed and delivered to the Administrative Agent, inter alia, promissory notes in favor of each Lender, in the original aggregate principal sum of One Hundred Twenty Five Million Dollars ($125,000,000.00), that were thereafter replaced by certain replacement revolving notes, each dated May 26, 2000, in the aggregate principal sum of One Hundred Fifty Million Dollars ($150,000,000.00) (hereinafter collectively, the "Notes"); and C. In connection with the Credit Agreement and the Notes, the Company executed and delivered to the Administrative Agent certain other loan documents, consents, assignments, agreements, and instruments in connection with the indebtedness referred to in the Credit Agreement (all of the foregoing, together with the Notes and the Credit Agreement, are hereinafter collectively referred to as the "Loan Documents"); and D. The Company has requested that the lenders and the administrative agent amend and modify certain terms and covenants in the credit agreement to extend additional credit to the Company and to modify certain financial and other terms and covenants, and the lenders and the administrative agent are willing to do so upon the terms and conditions contained herein. NOW, THEREFORE, in consideration of the mutual covenants, agreements and promises contained herein, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the parties hereto for themselves and their successors and assigns do hereby agree, represent and warrant as follows: 1. Definitions. All capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement. 2. Section 8.16," Ratio of Uncommitted Land Holdings to Consolidated Tangible Net Worth," of the Credit Agreement is hereby amended to recite in its entirely as follows: 21 2 8.16 Ratio of Uncommitted Land Holdings to Consolidated Tangible Net Worth. The Company and its Subsidiaries shall maintain at all times a ratio of Uncommitted Land Holdings to Consolidated Tangible Net Worth of not greater than 2.00 to 1.00. 3. Section 8.22, "Further Real Estate Acquisition Limitations, New Market Investment Amount," of the Credit Agreement is hereby amended to recite in its entirety as follows. 8.22 "Further Real Estate Acquisition Limitations, New Market Investment Amount." The Company and its Subsidiaries shall not permit the Maximum New Market Investment Amount to exceed the sum of $25,000,000.00 outstanding at any time, valued at cost; provided, however the Company's total Investment or purchase of any Uncommitted Land Holdings, Speculative Homes, Model Homes and all other real or personal property constituting one or more "start up operations" or other de novo entries in any markets outside Central Ohio or the metropolitan Louisville, Kentucky area shall not exceed the aggregate sum of $15,000,000.00 outstanding at any time, valued at cost. In addition, the Company shall not build homes or develop real estate in any locations or markets other than the State of Ohio or any contiguous state. 4. The definitions of "Revolving Credit Commitments" and "Pro Rata Share" in Section 14.3, "Defined Terms," of the Credit Agreement are hereby amended to recite as follows: "Revolving Credit Commitments" means the aggregate amount of the Revolving Credit Commitments of all the Lenders, provided that the maximum aggregate principal amount of Revolving Loans and stated amount of Letters of Credit shall not exceed $175,000,000, as reduced from time to time pursuant to the terms hereof. "Pro Rata Share" means, with respect to any Lender, the percentage obtained by dividing (a) the sum of such Lender's Revolving Credit Commitment at such time by (b) the sum of the aggregate amount of all Revolving Credit Commitments at such time; provided, however, if all of the Revolving Credit Commitments are terminated pursuant to the terms of this Agreement, then "Pro Rata Share" means the percentage obtained by dividing (c) the sum of the aggregate amount of such Lender's Revolving Credit Obligations by (d) the sum of the aggregate amount of all Revolving Credit Obligations; provided, further however, that in respect of all payments of principal and interest on the following three Eurodollar Advances of the Company existing as of the date of that certain Fourth Amendment to Credit Agreement between and among the Company, the Lenders and Administrative Agent dated as of May 23, 2001: (i) Eurodollar Advance in the principal sum of $35 million maturing June 18, 2001, 22 3 (ii) Eurodollar Advance in the principal sum of $70 million maturing July 12, 2001, and (iii) Eurodollar Advance in the principal sum of $10 million maturing October 1, 2001, "Pro Rata Share" means the following respective percentages opposite the name of each Lender set forth below: (a) The Huntington National Bank 28% (b) Bank One, Michigan 20% (c) Key Bank National Association 18% (d) National City Bank 14% (e) Comerica Bank 10% (f) FirStar Bank, N.A. 10% The remainder of Section 14.3, "DEFINED TERMS," of the Loan Agreement shall remain as originally written. 5. Conditions of Effectiveness. This Amendment shall become effective as of May 23, 2001, upon satisfaction of all of the following conditions precedent: (a) The Administrative Agent shall have received seven duly executed copies of the Fourth Amendment to Credit Agreement, the loan documents referenced on Exhibit 5 (a) attached hereto, and such other certificates, instruments, documents, agreements, and opinions of counsel as may be required by the Administrative Agent, each of which shall be in form and substance satisfactory to the Administrative Agent and its counsel; and (b) The Administrative Agent shall have received a fee in respect of this Amendment in the amount of $54,500.00, which shall be shared according to the schedule set forth below: Bank One, Michigan $ 1,500 Comerica Bank $ 1,500 National City Bank $ 1,500 The Huntington National Bank $14,000 Key Bank NA $16,000 Firstar Bank NA $20,000 In addition, the Company shall have paid all other fees owing to the Administrative Agent; and (c) The representations contained in paragraph 6 below shall be true and accurate in all respects. 6. Representations. The Company represents and warrants that after giving effect to this Amendment (a) each and every one of the representations and warranties made by or on behalf of the Company in the Credit Agreement or the Loan Documents is true and correct in all respects on and as of the date hereof, except to the extent that any of such representations and warranties related, by the expressed terms thereof, solely to a date prior hereto; (b) the Company has duly and properly performed, complied with and observed each of its covenants, agreements and obligations contained in the Credit Agreement and Loan Documents; and (c) no event has occurred or is continuing, and no condition exists which would constitute an Event of Default or a Potential Default. 23 4 7. Amendment to Credit Agreement. (a) Upon the effectiveness of this Amendment, each reference in the Credit Agreement to "Credit Agreement," "Agreement," the prefix "herein," "hereof," or words of similar import, and each reference in the Loan Documents to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. (b) Except as modified herein, all of the representations, warranties, terms, covenants and conditions of the Credit Agreement, the Loan Documents and all other agreements executed in connection therewith shall remain as written originally and in full force and effect in accordance with their respective terms, and nothing herein shall affect, modify, limit or impair any of the rights and powers which the Lenders and the Administrative Agent may have thereunder. The amendment set forth herein shall be limited precisely as provided for herein, and shall not be deemed to be a waiver of, amendment of, consent to or modification of any of the rights of the Lenders or the Administrative Agent under or of any other term or provisions of the Credit Agreement, any Loan Document, or other agreement executed in connection therewith, or of any term or provision of any other instrument referred to therein or herein or of any transaction or future action on the part of the Company which would require the consent of the Lenders and the Administrative Agent, including, without limitation, waivers of Events of Default which may exist after giving effect hereto. The Company ratifies and confirms each term, provision, condition and covenant set forth in the Credit Agreement and the Loan Documents and acknowledges that the agreements set forth therein continue to be legal, valid and binding agreements, and enforceable in accordance with their respective terms. 8. Authority. The Company hereby represents and warrants to the Administrative Agent and the Lenders that (a) the Company has legal power and authority to execute and deliver the within Amendment; (b) the officer executing the within Amendment on behalf of the Company has been duly authorized to execute and deliver the same and bind the Company with respect to the provisions provided for herein; (c) the execution and delivery hereof by the Company and the performance and observance by the Company of the provisions hereof do not violate or conflict with the articles of incorporation or code of regulations of the Company or any law applicable to the Company or result in the breach of any provision of or constitute a default under any agreement, instrument or document binding upon or enforceable against the Company; and (d) this Amendment constitutes a valid and legally binding obligation upon the Company in every respect. 9. Counterparts. This Amendment may be executed in two or more counterparts, each of which, when so executed and delivered, shall be an original, but all of which together shall constitute one and the same document. Separate counterparts may be executed with the same effect as if all parties had executed the same counterparts. 10. Costs and Expenses. The Company agrees to pay on demand in accordance with the terms of the Credit Agreement all costs and expenses of the Administrative Agent in connection with the preparation, reproduction, execution and delivery of this Amendment and all other loan documents entered into in connection herewith, including the reasonable fees and out-of-pocket expenses of the Administrative Agent's counsel with respect thereto. 11. Governing Law. This Amendment shall be governed by and construed in accordance with the law of the State of Ohio. 24 5 IN WITNESS WHEREOF, the Company, the Lenders and the Administrative Agent have hereunto set their hands as of the date first set forth above. THE COMPANY: DOMINION HOMES, INC. By: /s/ Peter J. O'Hanlon -------------------------------------------- Its: Chief Financial Officer ------------------------------------------ THE LENDERS: THE HUNTINGTON NATIONAL BANK By: /s/ William R. Remias ------------------------------------------- Its: Vice President ------------------------------------------ Revolving Credit Commitment: $49,000,000 BANK ONE, MICHIGAN f/k/a NBD BANK By: /s/ Mary Jo Forte ------------------------------------------- Its: First Vice President ------------------------------------------ Revolving Credit Commitment: $30,000,000 KEYBANK NATIONAL ASSOCIATION By: /s/ Robert L. Zelina ------------------------------------------- Its: Vice President ------------------------------------------ Revolving Credit Commitment: $35,000,000 NATIONAL CITY BANK By: /s/ Steven A. Smith -------------------------------------------- Its: Senior Vice President ------------------------------------------ Revolving Credit Commitment: $21,000,000 25 6 FIRSTAR BANK, N.A. f/k/a STAR BANK, N.A. By: /s/ Marilyn K. Miller -------------------------------------------- Its: Vice President ------------------------------------------ Revolving Credit Commitment: $25,000,000 COMERICA BANK By: /s/ Charles L. Weddell -------------------------------------------- Its: Vice President ------------------------------------------ Revolving Credit Commitment: $15,000,000 ADMINISTRATIVE AGENT: THE HUNTINGTON NATIONAL BANK By: /s/ William R. Remias -------------------------------------------- Its: Vice President ------------------------------------------ 26 7 EXHIBIT 5 (a) 1. Corporate Resolution authorizing additional extension of Credit 2. Second Replacement Revolving Credit Note in favor of The Huntington National Bank 3. Second Replacement Revolving Credit Note in favor of KeyBank National Association 4. Second Replacement Revolving Credit Note in favor of Firstar Bank, N.A. 5. Replacement Subsidiary Guaranty 27 EX-10.1 4 l89434aex10-1.txt EXHIBIT 10.1 1 Exhibit 10.1 LEASE ----- This Lease ("LEASE") is made and entered into as of April 30, 2001, by and between: FGSC, LLC a Kentucky limited liability company 10214 Westport Road Louisville, Kentucky 40241 ("LANDLORD") and DOMINION HOMES OF KENTUCKY, LTD. 1214 South Hurstbourne Parkway a Kentucky limited partnership Louisville, Kentucky 40222 ("TENANT"). 1. CERTAIN DEFINITIONS AND BASIC LEASE TERMS. 1. BASIC LEASE INFORMATION. In addition to the terms that are defined elsewhere in this Lease, these terms are used in this Lease: (a) Premises: The space containing approximately 4,185 square feet in the Shopping Center, with an address of 10001 Forest Green Boulevard, Louisville, Kentucky 40222, as such space is outlined on the drawing attached to and made part of this Lease, marked Exhibit A. (b) Premises Address: 10035 Forest Green Boulevard, Louisville, Kentucky 40222. (c) Term: Sixty (60) months (and the number of days, if any, between the actual Commencement Date and the first day of the immediately preceding calendar month), beginning on the Commencement Date and expiring on the Expiration Date. (d) Commencement Date: The Commencement Date shall be the earlier of the date (i) thirty (30) days after Landlord delivers the Premises to Tenant for fixturing, with the Landlord's Work substantially complete, as set forth in section 2.1 of this Lease and in Exhibit B to this Lease, or (ii) rent payments begin July 1, 2001 if Tenant decides to complete construction on its own. (e) Expiration Date: The date that is sixty (60) months following the Commencement Date, plus the number of days, if any, to cause this Lease to end on the last day of a calendar month. 28 2 (f) Base Rent: Tenant shall pay to Landlord as minimum rent for the Leased Premises the following sums per year ("Base Rent") payable in equal monthly installments:
Period Following Minimum Minimum Per Rental Commencement Date Annual Rent Monthly Rent Square Foot - ------------------------------------------------------------------------------------------------------- Year I $69,052.59 $5,754.37 $16.50 Year 2 $69,052.59 $5,754.37 $16.50 Year 3 $69,052.59 $5,754.37 $16.50 Year 4 $75,330.00 $6,277.50 $18.00 Year 5 $75,330.00 $6,277.50 $18.00
The Base Monthly Rent shall be payable in advance commencing on the Rental Commencement Date and thereafter on the first day of each calendar month during the Lease Term, without offset for any amount due or claimed to be due from Landlord to Tenant and without relief from valuation or appraisement laws. (g) Additional Rent. All other amounts payable by Tenant pursuant to this Lease, including without limitation Tenant's Pro Rata Share of Operating Costs and Percentage Rent, all as set forth in this Lease. (h) Pro Rata Share: Tenant's Pro Rata Share shall mean 11.52 based on the expectation that the Premises will contain 4,185 square feet and that the rentable area of the Shopping Center contains 36,315 square feet of space rentable to tenants. Upon completion of construction, either Landlord or Tenant may cause the Premises and the Shopping Center to be measured, in which event Tenant's Pro Rata Share will be adjusted to reflect actual rentable square footage. Any such change in Tenant's Pro Rata Share shall be set forth in an amendment to this Lease, as contemplated by section 19 of this Lease. (i) Shopping Center: The approximately 36,315 square foot shopping center being constructed by Landlord, substantially as shown on Exhibit A. (j) Permitted Use: Office and Showroom. (k) Security Deposit. $5,000.00 in accordance with section 16 of this Lease. (l) Agents. Grubb & EllislCommercial Kentucky, Inc. 1.2 INTERPRETATION. Each of the foregoing summary provisions shall be construed and interpreted in conjunction with the other provisions of this Lease. 29 3 2. CONDITION, LEASE, TERM, EXTENSIONS AND RENT. 2.1 CONSTRUCTION OF PREMISES AND SHOPPING CENTER. Landlord shall construct the Premises and the Shopping Center in accordance with the Landlord Work as set forth in the "Work Letter" attached to and made part of this Lease, marked Exhibit B. Upon substantial completion of the Landlord Work, Landlord shall deliver the Premises to Tenant and shall notify Tenant that the Landlord Work is completed. Tenant shall then have possession of the Premises for completion of the Tenant Work in accordance with the provisions set forth in Exhibit B. 2.2 GRANT AND PREMISES. Landlord leases the Premises to Tenant, and Tenant leases the Premises from Landlord, according to this Lease. Landlord also grants to Tenant the right to use in common with other tenants the Common Areas, subject to the provisions of this Lease. The "Common Areas" means the Shopping Center except for premises leased to other tenants and also includes the right of passage and parking pursuant to certain reciprocal easement agreements benefiting the Shopping Center. 2.3 TERM. The term will be for the Term and will commence on the Commencement Date and will expire on the Expiration Date. Upon commencement of this Lease, Landlord and Tenant will execute an instrument acknowledging the Commencement and Expiration Dates as contemplated by section 20 of this Lease. 2.4 RENT. Throughout the Term of this Lease, Tenant will pay Base Rent to Landlord as rent for the Premises. Base Rent will be paid in advance on or before the first day of each calendar month of the term. If the term commences on a day other than the first day of a calendar month, then Base Rent will be prorated by Landlord based on the actual number of calendar days in such month. Base Rent will be paid to Landlord, without notice or demand, and without deduction or offset, in lawful money of the United States of America at Landlord's address, or to such other address or person or entity as Landlord may from time to time designate in writing. The Base Rent is set forth in section 1 .f of this Lease. If neither Landlord nor Tenant requests an adjustment before the Commencement Date, no adjustment will thereafter be made and the Base Rent and square footage shall be as stated in this Lease. 2.5 LATE CHARGE. Any rent not paid within five (5) days of the due date shall be subject to a late charge equal to five percent (5%) of such overdue payment. 2.6 EXTENSION OPTIONS. If this Lease is then in effect, and provided Tenant is not then in default, Tenant shall have the right to extend the term of this Lease for up to two (2) additional terms of three (3) years each. To exercise an option, Tenant shall give Landlord written notice of extension no later than one hundred twenty (120) days prior to the Expiration Date, with respect to the first extension option, and no later than one hundred twenty (120) days prior to the end of the extension term, if any, then in effect with respect to subsequent options. During any extension term(s), this Lease shall remain in full force and effect, except for Base Rent, which shall be increased as set forth below. 30 4 First Minimum Per Square Option Period Base Rent Monthly Rent Foot ------------- --------- ------------ ---- Year 6 $79,515.00 $6,626.25 $19.00 Year 7 $81,607.50 $6,800.62 $19.50 Second Minimum Per Square Option Period Base Rent Monthly Rent Foot ------------- --------- ------------ ---- Year 8 $83,700.00 $6,975.00 $20.00 Year 9 $85,742.50 $7,149.37 $20.50 Third Minimum Per Square Option Period Base Rent Monthly Rent Foot ------------- --------- ------------ ---- Year 10 $87,885.00 $7,323.75 $21.00 Year 11 $87,885.00 $7,323.75 $21.00
3. TAXES, UTILITIES, OPERATING EXPENSES AND INSURANCE. 3.1 PROPERTY TAXES. Subject to Tenant's reimbursement for its Pro Rata Share of Taxes, Landlord shall pay all ad valorem real property taxes and assessments affecting the Shopping Center and the Premises. 3.2 OTHER TAXES. Tenant will pay promptly when due all personal property taxes on Tenant's personal property in the Premises and any other taxes payable by Tenant that if not paid might give rise to a lien on the Premises or Tenant's interest in the Premises. 3.3 UTILITIES. Tenant shall provide separate meters, to cause all utility services serving the Premises (except water and sewer, which shall be part of Operating Expenses as set forth in Section 3.7 of this Lease) to be in Tenant's name, and Tenant shall pay for all utility services provided to the Premises. 3.4 TENANT'S LIABILITY INSURANCE. Commencing with the date on which the Premises are made available to Tenant and continuing thereafter throughout the Lease Term, Tenant shall maintain, at its sole expense, (a) general comprehensive public liability insurance, including bodily injury, property damage or other loss, insuring Tenant, Landlord and Landlord's lender (if any and if notice of the name and address of such lender is provided to Tenant), in an amount not less than Two Million Dollars ($2,000,000), and (b) if, and to the extent required by law, worker's compensation or similar insurance offering statutory coverage and containing statutory limits. All such insurance shall: (1) be issued by a company that is licensed to do business in the Commonwealth of Kentucky; (2) name Landlord and the holder of any mortgage as additional insureds (as their interests may appear), and (3) contain an endorsement prohibiting cancellation, failure to renew, reduction in amount of insurance or change of coverage without the insurer's giving Landlord thirty (30) days' prior written notice of such action. Tenant shall deliver a certificate of all such insurance and receipts evidencing payment of the premium for such insurance to Landlord concurrently with Tenant's execution of this Lease and at least annually thereafter no later than ten (10) days before the expiration of any policy. 3.5 PERSONAL PROPERTY INSURANCE. Tenant shall maintain in full force and effect insurance covering all of Tenant's furniture and fixtures, machinery, equipment, stock, and any other personal property owned and used in Tenant's business and found in, on, or about the Premises, and any leasehold improvements to the Premises installed by Tenant. 3.6 WAIVER OF SUBROGATION. Landlord and Tenant each waive any and all rights to recover against the other for any loss or damage to such waiving party arising from any cause covered by any property insurance required to be carried by 31 5 such party pursuant to this Section 3 or any other property insurance actually carried by such party to the extent of the limits of such policy. 3.7 TAXES AND OPERATING EXPENSES. (a) Taxes. Tenant shall pay to Landlord an amount equal to Tenant's Pro Rata Share of Taxes. (b) Operating Expenses. Tenant shall pay to Landlord an amount equal to Tenant's Pro Rata Share of Operating Expenses. (c) Manner of Payment. Tenant's Pro Rata Share of Taxes and Operating Expenses shall be paid in the following manner. Landlord may reasonably estimate in advance the amounts Tenant shall owe for its Pro Rata Share of Taxes and Operating Expenses for any full or partial calendar year. Tenant shall then pay monthly in advance with Base Rent an amount equal to 1 / 12 of the estimated amount for the calendar year. Promptly following the end of each calendar year, Landlord shall provide to Tenant a statement of actual Taxes and Operating Expensed for the previous year and Tenant's actual Pro Rata Share. If Tenant has overpaid, then Landlord shall credit such overpayment on the next due payment of Base Rent. If Tenant has underpaid, then Tenant shall pay the underpayment with the next due payment of Base Rent. (d) Proration. If the Term commences other than on January 1 or ends other than on December 31, Tenant's obligation to pay its estimated and actual Pro Rata Share of Taxes and Operating Expenses for such first and final years shall be prorated to reflect the portion of such years. (e) Landlord's Records. Landlord shall maintain complete records respecting Taxes and Operating Expenses. Tenant shall have the right to examine such records upon reasonable prior notice and within ninety (90) days of receiving Landlord's statement of actual Taxes and Operating Expenses during normal business hours at the place where Landlord normally keeps such records. Tenant shall be deemed to have accepted the statement unless Tenant takes exception in writing during that 90-day period. If Tenant takes exception, the matter to which exception is taken will be referred to an independent accountant, whose certification shall be final and conclusive. Tenant shall pay the cost of such review and certification unless such review and certification determines there was an error to Tenant's detriment. (f) Definition of Taxes. "Taxes" means all federal, state, county or local governmental taxes, fees, charges, assessments or other impositions of every kind and nature, including without limitation real property ad valorem taxes, which Landlord shall pay during any calendar year, any portion of which occurs during the term of this Lease, because of or in connection with the ownership, leasing and operation of the Shopping Center. Notwithstanding the foregoing, there shall be excluded from Taxes, and Tenant will not be obligated to pay, any inheritance tax, gift tax, transfer tax, franchise tax, income tax (based on net income), or profit tax, imposed upon Landlord. (g) Definition of Operating Expenses. "Operating expenses" means: (i) All costs of operation and maintenance of the Shopping Center, including without limitation wages, salaries, and compensation of employees properly and solely attributable to the Shopping Center; accounting, legal, janitorial, maintenance, guard, and other normal and customary services; power, water, sanitary sewer and drainage, and other utilities for the Common Areas, and water and sewer for the Premises and other leased premises; management and administrative fees capped at 5% of gross receipts; exterior grounds and 32 6 landscaping maintenance, including replacing flowers and landscaping materials; parking and drive areas; materials and supplies; roof repairs; general maintenance and repairs; insurance obtained with respect to the Shopping Center as contemplated by section 3.8 of this Lease; payments under any reciprocal easement agreements and declarations of restrictions affecting or benefiting the Shopping Center, depreciation on personal property and equipment, except as set forth in (ii) below or which is or should be capitalized on the books of Landlord; and any other costs, charges and expenses that under generally accepted accounting principles would be regarded as maintenance, and operating expenses. (iii) The Operating Expenses will not include: (1) depreciation on the Shopping Center (other than depreciation on personal property and equipment used in maintaining the Common Areas); (2) costs of alterations of space or other improvements made for tenants of the Shopping Center; (3) finders' fees and real estate brokers' commissions; (4) ground lease payments, mortgage principal, or interest; (5) capital items, except repaving and re-striping of parking areas and drives; (6) costs of replacements to personal property and equipment for which depreciation costs are included as an operating expense; (7) costs of excess or additional services provided to any tenant in the Shopping Center that are directly billed to such Tenant; (8) the cost of repairs due to casualty or condemnation that are reimbursed by third parties; (9) any income, estate, inheritance, or other transfer tax and any excess profit, franchise, or similar taxes on Landlord business; (10) all costs, including legal fees, relating to activities for the solicitation and execution of leases of space in the Shopping Center; and (11) any legal fees incurred by Landlord in enforcing its rights under other leases for premises in the Shopping Center. 3.8 INSURANCE. At all times during the term/Landlord will carry and maintain (a) fire and extended coverage insurance covering the Shopping Center, its equipment and common area furnishings, including earthquake coverage and rental insurance, in the full replacement value of the Shopping Center, (b) comprehensive public liability insurance, with limits of not less than $2,000,000, and (c) such other insurance as Landlord reasonably determines from time to time. 4. USE AND COMPLIANCE. 4.1 Use. The Premises may be used only for the Permitted Use and no other use without the express prior written consent of Landlord, and in all events subject to the terms and provisions of all recorded covenants, easements, conditions or restrictions that affect the use of the Premises. Tenant shall not permit any unlawful occupation, business or trade to be conducted on any of the Premises or any use to be made thereof contrary to applicable laws, ordinances and regulations, and Tenant shall fully comply with all laws, ordinances and regulations governing the Premises and Tenant's business conducted in the Premises. Tenant shall not use or occupy or permit any of the Premises to be used or occupied, nor do or permit anything to be done in or on any of the Premises, in a manner which would (i) violate any certificate of occupancy affecting any of the Premises, (ii) make void or voidable any insurance then in force with respect to any of the Premises, (iii) make it difficult or impossible to obtain fire or other insurance which is required hereunder, (iv) cause structural damage to the Shopping Center, or (v) constitute a public or private nuisance or waste. Tenant shall comply with all Rules and Regulations imposed by Landlord on the Shopping Center or Common Areas, as initially set forth in Exhibit D attached as part of this Lease. Landlord may reasonably amend the Rules and Regulations so long as prior notice of the amendment is given to Tenant and so long as the amendments apply to tenants of the Shopping Center in a non-discriminatory manner. 4.2 ENVIRONMENTAL COMPLIANCE. Landlord, to the best of its knowledge, represents that there are no 33 7 current environmental problems. As part of its obligation to comply with laws and other requirements, Tenant shall not (either with or without negligence) generate, use, store, or cause or permit the escape, disposal or release of any Hazardous Materials in or about the Shopping Center or the Premises in violation of applicable law and rules and regulations. Hazardous Materials shall mean (a) "hazardous wastes", as defined by the Resource Conservation and Recovery Act of 1976, as amended from time to time, (b) "hazardous substances", as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time, (c) "toxic substances", as defined by the Toxic Substances Control Act, as amended from time to time, (d) "hazardous materials", as defined by the Hazardous Materials Transportation Act, as amended from time to time, (e) any applicable state or local laws and the regulations adopted under these acts, as amended from time to time, (f) oil or other petroleum products whether refined or unrefined, (g) any highly combustible substance and (h) any substance whose presence in Landlord's reasonable judgment could be detrimental to the Shopping Center or hazardous to health or the environment. If any lender or governmental agency shall ever require testing to ascertain whether or not there has been any release of Hazardous Materials within the Premises during Tenant's occupancy hereunder, then Tenant shall reimburse the reasonable costs thereof to Landlord upon demand as Additional Rent if such requirement applies to the Premises. In addition, Tenant shall execute affidavits, representations and the like from time to time at Landlord's request concerning Tenant's best knowledge and belief regarding the presence of Hazardous Materials in the Premises. In all events, Tenant shall defend, indemnify and hold Landlord harmless of and from any and all costs and expenses of any nature arising from the release of Hazardous Materials in or about the Premises or Shopping Center if caused by Tenant or persons acting under Tenant. These within provisions of this section 4.2 shall survive the expiration or other termination of this Lease. 5. ASSIGNMENT AND SUBLETTING. Tenant may not assign this Lease, or sublet all or part of the Premises, without the prior written consent of Landlord. Any transfer on an ownership interest in Tenant shall constitute an assignment for purposes of this Lease (unless Tenant is a publicly traded corporation). No permitted assignment or subletting will release Tenant (or any guarantor) of its obligations under this Lease unless expressly agreed to in writing by Landlord at the time of approval of the assignment. 34 8 6. MAINTENANCE OF THE PREMISES. 6.1 BY TENANT. Except for maintenance obligations expressly assumed by Landlord under Section 6.2 of this Lease, Tenant shall maintain and take good care of the Premises, including without limitation the heating, air conditioning and ventilation systems, mechanical, electrical and plumbing systems, and the fixtures and plate glass, including making replacements when necessary. Tenant shall, at the expiration or other termination of this Lease, surrender and deliver up the same in like good order and condition as the same now is or shall be at the commencement of the Term hereof, ordinary wear and tear excepted. 6.2 BY LANDLORD. Landlord, at Landlord's cost, shall maintain the structural soundness of the Shopping Center and shall be responsible for the roof and all other exterior and structural components. 7. ALTERATIONS. 7.1 ALTERATIONS. Tenant will not make any structural alterations, installments, changes, replacements, additions or improvements (collectively "Alterations"), in or to the Premises or any part thereof, without the prior written consent of Landlord, which will not be unreasonably withheld or delayed. All Alterations shall be performed in a good and workmanlike manner and shall conform all requirements of local, state and federal governments. All Alterations shall be made at Tenant's expense, after (i) Tenant has obtained all necessary permits from governmental authorities and (ii) Tenant has submitted to Landlord the proposed layout of the Alterations and Landlord has approved them, which approval shall not be unreasonably withheld, delayed or conditioned. If any mechanic's lien is filed against the Premises for work or materials furnished to Tenant, the lien shall be discharged or bonded off by Tenant, solely at Tenant's expense, within thirty (30) days after Tenant receives notice thereof. Tenant shall indemnify and hold harmless Landlord from any and all expenses (including attorney's fees), liens and claims or damage to persons, property, or the Premises that may arise from the making of any Alterations. 7.2 REMAIN WITH PREMISES. Tenant agrees that all Alterations upon the Premises shall at the election of Landlord, as provided in the written consent required above, remain upon the Premises and be surrendered with the Premises at the expiration of this Lease. Notwithstanding the foregoing, provided that Tenant is not in default, Tenant shall have the right to remove at the expiration or termination of this Lease, all movable furniture, fixtures or equipment installed in the Premises solely at Tenant's expense. Should Landlord elect that alterations, installments, changes, replacements, additions to or improvements made by Tenant are not to remain on the Premises, Tenant hereby agrees that within five (5) days following the expiration of the term of this Lease, Landlord shall have the right to cause same to be removed at Tenant's sole cost and expense. 7.3 EQUIPMENT. Tenant shall not install any other equipment of any kind or nature whatsoever which will or may necessitate any changes, replacements or additions to or unreasonably burden the water system, air conditioning system or the electrical system of the Premises, or exceed the floor load capacity of the Premises, without the prior written consent of the Landlord. If Tenant wishes to install machinery or mechanical equipment which may cause noise or vibration to be transmitted to the structure of the Shopping Center or any space therein, such machinery shall be installed and maintained by Tenant, at Tenants expense, on vibration eliminators or other devices sufficient to eliminate such noise and vibration, all in accordance with Landlord's requirements. Tenant may, at its expense, install and remove additional equipment and machinery used or useful in Tenant's business, which equipment and machinery shall remain the property of Tenant and shall not become part of the real estate, provided that such installation shall not reduce the value of the Premises or its usefulness. Any equipment of Tenant not removed by Tenant within ten (10) days after the expiration or earlier termination of this Lease shall be considered abandoned by Tenant and may be appropriated, sold, destroyed or otherwise disposed of by Landlord 35 9 without first giving notice thereof and without obligation to account therefor. 7.4 CONTRACTORS. Tenant shall require any contractor retained by it to perform any Alteration to carry and maintain at Tenant's or such contractor's expense (and furnish the policy, policies or certificates thereof to Landlord, Landlord's lender and Landlord's ground lessor, if any) during such times as contractor is working in the Premises, (i) comprehensive general liability insurance policy, including, but not limited to, contractor's liability coverage, contractual liability coverage, complete operations coverage, broad form property damage endorsement and contractor's protective liability coverage, to afford protection with limits per person and for each occurrence, of not less than One Million ($1,000,000), combined single limit, with respect to personal injury and death and property damage, such insurance to provide for no deductible, to name Landlord, Landlord's lender and ground lessor as additional insureds and (ii) worker's compensation insurance or similar insurance in form and amounts as required by law. 8. SURRENDER. At the expiration or other termination of this Lease, Tenant will promptly quit and surrender the Premises broom-clean, in good order and repair, ordinary wear and tear excepted. If Tenant is not then in default, Tenant may remove from the Premises any trade fixtures, equipment, and movable furniture placed in the Premises by Tenant. Tenant will fully repair any damage occasioned by the removal of any trade fixtures, equipment, furniture, alterations, additions, and improvements. 9. CONDEMNATION. 9.1 AWARD. If any or all of the Premises are taken by the exercise of any power of eminent domain or are conveyed to or at the direction of any governmental entity under a threat of any such taking ("Condemnation"), Landlord shall be entitled to collect from the condemning authority thereunder the entire amount of any award made in any such proceeding or as consideration for such deed. Notwithstanding the foregoing, Tenant may seek a separate award pursuant to applicable law, including any tenant improvements made by Tenant at Tenant's sole cost that are not to remain with the Premises upon expiration of this Lease, loss of profit or goodwill, and moving/relocation expenses. 9.2 TOTAL TAKING. If (a) all of the Premises are taken by a Condemnation or (b) if a substantial part of the Premises or the Shopping Center is taken by a Condemnation such that the remainder is insufficient for the reasonable operation of Tenant's business, then, in either such event, this Lease shall terminate on the date upon which possession is taken by the condemning authority, and all Rent shall be prorated and paid to such date. 36 10 9.3 PARTIAL TAKING. If there is a Condemnation and this Lease does not terminate pursuant to the Section 9.2 of this Lease, the operation and effect of this Lease shall be unaffected by such Condemnation, except that the Base Rent shall be equitably reduced in proportion to the inability of Tenant to use a portion of the Premises, taking into consideration the portion taken. 10. DAMAGE AND DESTRUCTION. 10.1 DAMAGE. If the Premises are damaged by fire or other insured casualty, Landlord will give Tenant written notice of the time which will be needed to repair such damage, as determined by Landlord in its reasonable discretion, and the election which Landlord has made according to this Section 10. Such notice will be given before the 30th day (the "notice date") after the fire or other insured casualty. 10.2 REBUI1DING LEASE CONTINUES. If the Premises are damaged by fire or other insured casualty to an extent that may be repaired within ninety (90) days after the notice date, as reasonably determined by Landlord, Landlord will promptly begin to repair the damage after the notice date and will diligently pursue the completion of such repair. In that event this Lease will continue in full force and effect except that Base Rent will be abated on a pro rata basis from the date of the damage until the date of the completion of such repairs (the "repair period") based on the proportion of the rentable area of the Premises Tenant is unable to use during the repair period. 10.3 RIGHT TO TERMINATE. If the Premises are damaged by fire or other insured casualty to an extent that it may not be repaired within ninety (90) days after the notice date, as reasonably determined by Landlord, then (a) Landlord may terminate this Lease as of the date of such damage by written notice given to Tenant on or before the notice date, or (b) Tenant may terminate this Lease as of the date of such damage by written notice given to Landlord within 10 days after Landlord delivery of a written notice that the repairs cannot be made within such ninety (90) day period. If neither Landlord nor Tenant so elects to terminate this Lease, Landlord will diligently proceed to repair the Premises and Base Rent and Additional Rent will be abated on a pro rata basis during the repair period based on the proportion of the rentable area of the Premises Tenant is unable to use during the repair period. 11. SUBORDINATION 11.1 GENERAL. This Lease and Tenant's rights under this Lease are subject and subordinate to any mortgage or other lien or encumbrance ("lien") now or after the date hereof affecting or placed against the Premises (except to the extent any such instrument expressly provides that this Lease is superior to such instrument). This provision will be self-operative and no further instrument of subordination will be required in order to effect it. Notwithstanding the foregoing, Tenant will execute, acknowledge, and deliver to Landlord, within 20 days after written demand by Landlord, such documents as may be reasonably requested by Landlord or the holder of any superior lien to confirm or effect any such subordination but without amendment to this Lease. 11.2 ATTORNMENT AND NONDISTURBANCE. Tenant agrees that if any holder of a lien succeeds to Landlord interest in the Premises, Tenant will pay to such holder all rents subsequently payable under this Lease. Further, Tenant agrees that in the event of the enforcement by the holder of a superior lien of the remedies provided for by law or by such superior lien, Tenant will, upon request of any person or party succeeding to the interest of Landlord as a result of such enforcement, automatically become the Tenant of and attorn to such successor in interest without change in the terms or provisions of this Lease. Notwithstanding any subordination of this Lease, in no event shall Tenant's right to possession be disturbed (or this Lease be terminated) upon foreclosure of any mortgage, so long as Tenant is not in default hereunder. 37 11 12. ENTRY BY LANDLORD. Landlord, its agents, employees, and contractors may enter the Premises at any time in response to an emergency. Upon at least two days notice to Tenant, Landlord may exhibit the Premises to prospective purchasers and lenders. During the last 90 days of the term of this Lease, and upon at least two days notice to Tenant, Landlord may exhibit the Premises to prospective tenants. 13. LIABILITY AND INDEMNIFICATION. 13.1 INDEMNITY. Except for any injury or damage to persons or property on the Premises that is proximately caused by or results proximately from the negligence or willful act of Landlord, its agents, employees or contractors, or from Landlord's default of its obligation under section 6.2 of this Lease, Tenant will indemnify and hold harmless Landlord from and against, any and all demands, claims, causes of action, fines, penalties, damages, liabilities, judgments, and expenses (including without limitation reasonable attorneys' fees) incurred in connection with or arising from the negligent use or occupancy or negligent manner of use or occupancy of the Premises by Tenant or any person claiming under Tenant, any breach by Tenant or its employees, agents, contractors, or invitees of this Lease, and any injury or damage to the person, property, or business of Tenant, its employees, agents, contractors, or invitees entering upon the Premises under the express or implied invitation of Tenant except for any injury or damage to persons or property on the Common Areas that is proximately caused by or results proximately from the negligence or willful act of Tenant, its agents, employees, contractors, customers, guest or invitees, or from Tenant's default of its obligations of this Lease, Landlord will indemnify and hold harmless Tenant from and against, any and all demands, claims, causes of action, fines, penalties, damages, liabilities, judgments, and expenses (including without limitation reasonable attorneys' fees) occurring on the Common Areas and arising from the negligence or willful act of Landlord". 13.2 PERSONAL PROPERTY AND BUSINESS. All personal property of Tenant in the Premises shall be at the sole risk of Tenant. Landlord shall not be liable for any accident to or damage to the property of Tenant resulting from the use or operation of the heating, cooling, electrical or plumbing apparatus or any other cause whatsoever, unless caused by the negligent or willful act or omission of Landlord. 13.3 NO LIABILITY. Except to the extent caused by the negligence or willful misconduct of Landlord, its agents or employees, Landlord shall have no liability to Tenant for any damage, compensation or claim arising from the repair by Landlord of any portion of the Premises, any interruption in the use of the Premises, accident or damage resulting from the use or operation (by Landlord, Tenant or any other person) of heating, cooling, electrical or plumbing equipment or apparatus, or from untenantability of the Premises resulting from fire or other casualty, or from any robbery, theft, mysterious disappearance and/or any other casualty, or from any leakage in any part or portion of the 38 12 Premises except the roof to the extent not maintained by Landlord after notice from Tenant, or from water, rain or snow that may leak into or flow from any part of the Premises, or from drains, pipes or plumbing work in the Shopping Center. 14. DEFAULT AND REMEDIES. 14.1 EVENTS OF DEFAULT. As used in this Lease, each of the following events shall constitute and is referred to as, an "Event of Default": (a) If Tenant (i) fails to pay Base Rent, Additional Rent or any other sum which Tenant is obligated to pay by any provision of this Lease, when and as it is due and payable hereunder and without demand therefor, or (ii) in any respect violates any of the terms, conditions or covenants set forth in the provisions of this Lease; or (b) if Tenant (i) applies for or consents to the appointment of a receiver, trustee or liquidator of Tenant or of all or a substantial part of its assets, (ii) files a voluntary petition in bankruptcy or admits in writing its inability to pay its debts as they come due, (iii) makes an assignment for the benefit of its creditors, (iv) files a petition or an answer seeking a reorganization or an arrangement with creditors, or seeks to take advantage of any insolvency law, (v) performs any other act of bankruptcy, or (vi) files an answer admitting the material allegations of a reorganization insolvency proceeding; or (c) if an order of relief or other order, judgment or decree is entered by any court of competent jurisdiction adjudicating Tenant as insolvent, or otherwise entitled to the protection of or subject to any bankruptcy statute, approving a petition seeking such a reorganization, or appointing a receiver, trustee or liquidator of Tenant or otherwise commence with respect to Tenant or any of its assets any proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment, receivership or similar law, and if such order, judgment, decree or proceeding continues unstayed for more than sixty (60) consecutive days after the expiration of any stay thereof. 14.2 NOTICE, GRACE PERIOD. Upon the occurrence of an Event of Default Tenant shall not be deemed to be in default, and Landlord shall not exercise any right or remedy which it holds under any provision of this Lease or under applicable law until (a) Landlord has given written notice thereof to Tenant, and (b) Tenant has failed, (i) if such Event of Default consists of the failure to pay money, within ten (10) calendar days after the date Landlord presents notice to pay all of such money that is due, or (ii) if such Event of Default consists of something other than the failure to pay money, within thirty (30) days thereafter to commence actively, diligently and in good faith to proceed to cure such Event of Default and to continue to do so until it is fully cured; provided however, if Tenant commences to cure such default during such thirty (30) day period, and such default cannot be cured within such period despite diligent effort, Tenant shall be afforded such additional time as may reasonably required to affect a cure provided that Tenant continues to diligently pursue such cure. No notice of default shall be required of Landlord, and Tenant shall be entitled to no grace period, (1) more than once with respect to monetary default during each twelve (12) month period of the Term, or (2) if Tenant has substantially terminated or is in the process of substantially terminating its continuous occupancy and use of the Premises. 14.3 REMEDIES. Upon the occurrence of an Event of Default, Landlord, at its option, may terminate this Lease, or without terminating this Lease terminate Tenant's right of possession, may pursue any and all other remedies available to it under the laws of the Commonwealth of Kentucky, including, by way of example rather than of limitation, the rights to (a) re-enter and repossess the Premises, with lawful force, and any and all improvements thereon and additions thereto; (b)immediately recover an amount equal to the present value (as of the date of Tenant's default) of the Base Rent and Additional Rent which would have become due through the date on which the Term would have expired but for Tenant's default, which damages shall be payable to Landlord in a lump sum on demand. For purposes of this Section, present value shall be computed by discounting at a rate equal to one percent (1.0%) above the "prime rate" as then published in the Wall Street Journal, and collect such balance in any manner not inconsistent with applicable law; (c) relet any or all of the Premises for Tenant's account for any 39 13 or all of the remainder of the Lease Term, or for a longer term; and/or (d) recover from Tenant the cost to Landlord of any reasonable fees relating to reletting of the Premises including but not limited to construction costs, brokerage fees, reasonable attorney's fees. 14.4 CUMULATIVE RIGHTS. Landlord's rights and remedies set forth in this Lease are cumulative and in addition to Landlord's other rights and remedies at law or in equity, including those available as a result of any anticipatory breach of this Lease. Landlord's exercise of any such right or remedy shall not prevent the concurrent or subsequent exercise of any other right or remedy. Landlord's delay or failure to exercise or enforce any of Landlord's rights or remedies or Tenant's obligations shall not constitute a waiver of any such rights, remedies or obligations. Landlord shall not be deemed to have waived any default unless such waiver expressly set forth in an instrument signed by Landlord. Any such waiver shall not be construed as a waiver of any covenant or condition except as to the specific circumstances described in such waiver. Neither Tenant's payment of an amount less than a sum due nor Tenant's endorsement or statement on any check or letter accompanying such payment shall be deemed an accord and satisfaction. Notwithstanding any request or designation by Tenant, Landlord may apply any payment received from Tenant to any payment then due. Landlord may accept the same without prejudice to Landlord's right to recover the balance of such sum or to pursue other remedies. Re-entry and acceptance of keys shall not be considered an acceptance of a surrender of this Lease. 14.5 RIGHT OF LANDLORD TO CURE TENANT'S DEFAULT. If Tenant defaults in the performance of any of its obligations under this Lease, then Landlord shall have the right (but not the duty) to perform such obligation, and Tenant shall reimburse Landlord for any costs and expenses thereby incurred, together with interest thereon at that rate per annum that is two percent (2%) greater than the "prime rate" as then published in the Wall Street Journal, from the date such costs and expenses are incurred by Landlord to the date of payment thereof by Tenant; provided, however, that nothing herein contained shall be construed or implemented in such a manner as to allow Landlord to charge or receive interest in excess of the maximum legal rate then allowed by law. Such payment and interest shall constitute Additional Rent hereunder, which shall be due and payable with the next monthly installment of Base Rent; but the making of such payment or the taking of such action by Landlord shall not operate to cure such default or to stop Landlord from the pursuit of any remedy to which Landlord would otherwise be entitled. 15. SIGNS. Tenant shall not be entitled to place any signs in, on or about the Premises, including without limitation on the exterior walls of the Premises, unless Landlord has first approved the size, design and location in writing. In any event, Tenant shall be fully responsible for complying with all laws, ordinances and regulations regarding signs. All such signs shall be removed by Tenant, at Tenant's cost, upon expiration of this Lease and any damage to the Premises or the Shopping Center resulting from such removal shall be repaired at Tenant's cost. 16. SECURITY DEPOSIT. Contemporaneously with the execution of this Lease, Tenant shall pay to Landlord the Security Deposit set forth in Section 1.1(1) of this Lease as security for the payment and performance by Tenant of all Tenant's obligations, covenants, conditions and agreements under this Lease. Upon the expiration of the Term hereof or any extension or renewal thereof, Landlord shall, if Tenant is not in default, return such Security Deposit to Tenant, less such portion thereof as Landlord shall have appropriated to make good any default by Tenant with respect to Tenant's obligations within ninety (90) days of such expiration. If Tenant makes any default during the term of this Lease or 40 14 fails to take possession within thirty (30) days of the Commencement Date, Landlord shall have the right, but not the obligation, to apply all or any portion of the Security Deposit to remedy such default, in which event Tenant shall promptly deposit with Landlord the amount necessary to restore the Security Deposit to its original amount. The Security Deposit shall not be deemed liquidated damages, and Landlord's application of said Security Deposit to reduce its damages shall not preclude recovery from Tenant of any additional damages incurred by Landlord. If the Landlord sells or transfers its interest in the Building, Landlord shall transfer the Security Deposit, and the Landlord shall be released from all liability to Tenant for the return of such Security Deposit. 17. QUIET ENJOYMENT. Landlord hereby covenants that Tenant, on paying the Base Rent, Percentage Rent and Additional Rent and performing the covenants and agreements set forth in this Lease, shall without interference from Landlord peaceably and quietly hold and enjoy, throughout the Term the Premises and such rights as Tenant holds under this Lease with respect to the Premises. 18. GENERAL. 18.1 TIME OF THE ESSENCE. Time is of the essence of each and every provision of this Lease. 18.2 NO WAIVER. The waiver by Landlord of any agreement, condition, or provision contained in this Lease will not be deemed to be a waiver of any subsequent breach of the same or any other agreement, condition, or provision contained in this Lease, nor will any custom or practice that may grow up between the parties in the administration of the terms of this Lease be construed to waive or to lessen the right of Landlord to insist upon the performance by Tenant in strict accordance with the terms of this Lease. The subsequent acceptance of Base Rent or Additional Rent by Landlord will not be deemed to be a waiver of any preceding breach by Tenant of any agreement, condition, or provision of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord knowledge of such preceding breach at the time of acceptance of such rent. 18.3 LIMITATION ON RECOURSE. Tenant specifically agrees to look solely to Landlord interest in the Premises for the recovery of any judgments from Landlord, and neither Landlord nor any of its members, managers, directors, shareholders, partners, employees or agents shall be personally liable for any such judgments. In the event of any transfer of Landlord's interest in the Premises, Landlord shall be automatically freed and relieved from all applicable liability accruing thereafter with respect to performance of any covenant or obligation on the part of Landlord, provided any deposits or advance rents held by Landlord are turned over to the grantee and the grantee expressly assumes all of the terms, covenants and conditions of this Lease to be performed on the part of Landlord, it being intended hereby that the covenants and obligations contained in this Lease on the part of Landlord shall be binding on Landlord, its successors and assigns, only during their respective periods of ownership. Landlord may freely assign its interest under this Lease. Following any such assignment, Landlord shall remain liable for performance of all obligations of the Landlord hereunder incurred prior to such assignment. 18.4 ESTOPPEL CERTIFICATES. At any time and from time to time but within 10 days after prior written request by Landlord, Tenant will execute, acknowledge, and deliver to Landlord, promptly upon request, a certificate certifying (a) that this Lease is unmodified and in full force and effect or, if there have been modifications, that this Lease is in full force and effect, as modified, and stating the date and nature of each modification; (b) the date, if any, to which rent and other sums payable under this Lease have been paid; (c) that no written notice of any default has been delivered to Landlord, which default has not been cured, except as to defaults specified in said certificate; and (d) that there is no event of default under this Lease or an event which, 41 15 with notice or the passage of time, or both, would result in an event of default under this Lease, except for defaults specified in said certificate. 18.5 HOLDING OVER. If Tenant does not immediately surrender the Premises upon the expiration of the Lease Term, then the rent shall be increased to One Hundred Fifty (150%) per cent of the Base Rent that would have been payable pursuant to the provisions of this Lease if the Lease Term had continued during such holdover period. Any holdover shall be deemed to be a month-to-month tenancy, notwithstanding any provisions of KRS Chapter 383 to the contrary. All provisions of this Lease shall remain in full force and effect during the holdover period, except Base Rent as set forth in this section and except for the term, which shall be month to month as aforesaid. In addition to the increase in Base Rent, Tenant shall be liable to Landlord for any costs, damages or liabilities suffered by Landlord as a result of Tenant's failure to vacate the Premises at the end of the Term. 18.6 NOTICES. Any notice, request, demand, consent, approval, or other communication required or permitted under this Lease must be in writing and will be deemed to have been given when personally delivered, sent by facsimile with receipt acknowledged, deposited with any nationally recognized overnight carrier that routinely issues receipts, or deposited in any depository regularly maintained by the United States Postal Service, postage prepaid, certified mail, return receipt requested, addressed to the party for whom it is intended at its address set forth in this Lease, or to such other addresses of which the other party is given written notice pursuant to this section. Any notice shall be deemed received the day personally delivered, if personally delivered, the day receipt of a facsimile is acknowledged, if sent by facsimile, one day after deposit in either the U.S. mail, if sent by certified mail, or one day after deposit with a nationally recognized overnight carrier, if sent by overnight carrier. Failure or refusal to accept delivery shall constitute receipt. 18.7 SEVERABILITY. If any provision of this Lease proves to be illegal, invalid, or unenforceable, the remainder of this Lease will not be affected by such finding, and in lieu of each provision of this Lease that is illegal, invalid, or unenforceable a provision will be added as a part of this Lease as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable. 42 16 18.8 AMENDMENT. No amendment, alteration, modification of, or addition to the Lease will be valid or binding unless expressed in writing and signed by Landlord and Tenant. 18.9 ENTIRE AGREEMENT. This Lease contains the entire agreement between Landlord and Tenant. No promises or representations, except as contained in this Lease, have been made to Tenant respecting the condition or the manner of operating the Premises. 18.10 CAPTIONS. The captions of the various articles and sections of this Lease are for convenience only and do not necessarily define, limit, describe, or construe the contents of such articles or sections. 18.11 NOTICE OF LANDLORD DEFAULT. In the event of any alleged default in the obligation of Landlord under this Lease, Tenant will deliver to Landlord written notice listing the reasons for Landlord default and Landlord will have 30 days following receipt of such notice to cure such alleged default or, in the event the alleged default cannot reasonably be cured within a 30-day period, to commence action and proceed diligently to cure such alleged default. 18.12 GOVERNING LAW. This Lease will be governed by and construed pursuant to the laws of the Commonwealth of Kentucky. 18.13 BINDING EFFECT. The covenants, conditions, and agreements contained in this Lease will bind and inure to the benefit of Landlord and Tenant and their respective heirs, executors, administrators, successors, and, except as otherwise provided in this Lease, their assigns. 18.14 FORCE MAJEURE. If Landlord shall be delayed, or hindered, or prevented from the performance of any act required hereunder (except for the payment of monies), by reason of government restrictions, scarcity of labor or materials, or for other reasons beyond its reasonable control, the performance of such act shall be excused for the period of delay and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay. 18.15 TENANT'S AUTHORITY. Tenant hereby warrants and represents that each individual executing this Lease on behalf of Tenant is duly authorized to execute and deliver this Lease and that Tenant is an entity duly formed and existing under the laws of the State where formed, is qualified to do business in the Commonwealth of Kentucky, and has the power and authority to enter into this Lease, and that all action requisite to authorize Tenant to enter into this Lease has been duly taken. 18.16 NO RECORDING. This Lease shall not be recorded 43 17 18.17 COMMISSION. Landlord and Tenant warrant that they have not had any dealings with any realtor, broker or agent in connection with the negotiation or entering into of this Lease, except for the Agent(s), if any, identified in section 1.1(n), whose commission shall be paid for by Landlord pursuant to the terms of a separate agreement between Landlord and Agent(s). Should any claim for a commission be established by any other broker or agent, the parties hereby expressly agree to hold one another harmless with respect thereto to the extent that one or the other is shown to have been responsible for the creation of such claim. 19. ADJUSTMENTS. Upon completion of the Landlord Work contemplated by section 2.1 of this Lease and Exhibit B to this Lease, the establishment of the Commencement Date pursuant to section 1.1(d) of this Lease, any adjustments to Base Rent as contemplated by section 2.4 of this Lease, and any adjustments to Tenant's Pro Rata Share as contemplated by section 1.1 (f) of this Lease, Landlord and Tenant shall execute and deliver to each other an amendment to this Lease setting forth any such adjustments. Landlord and Tenant have executed this Lease as of the date set forth above, but actually on the dates set forth below. LANDLORD: FGSC, LLC By: /s/ Steven Poe Title: President Date: May 1, 2001 TENANT: DOMINION HOMES OF KENTUCKY, LTD. By: /s/Stephen M. George Title: President Date: April 30, 2001 44 18 EXHIBIT B Work Letter LANDLORD'S WORK. Tenant accepts the Premises `as is, where is' as of the date of this Lease and acknowledges that Landlord will make no additional improvements to the Premises, but will provide the following allowance instead. TENANT'S WORK ALLOWANCE. Landlord shall pay to Tenant an amount equal to Sixty-Five Thousand Dollars ($65,000.00) as an allowance (the "Tenant Work Allowance") to reimburse Tenant for a portion of the costs associated with the design and construction of the work to be performed by Tenant in the Premises (the "Tenant Work"). Landlord shall pay this Tenant work Allowance to Tenant upon the occurrence of all of the following: (a) inspection by Landlord to ensure Tenant complied with the approved plans and specifications for the Tenant Work, (b) receipt of lien waivers and/or affidavits reasonably acceptable to Landlord from Tenant's contractors, subcontractors and suppliers, and (c) the Lease having commenced and Tenant having taken occupancy of the Premises". 45 -----END PRIVACY-ENHANCED MESSAGE-----