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UNITED STATES 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 December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD__________ TO __________.
Commission File No. 1-6830
ORLEANS HOMEBUILDERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-0874323
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
One Greenwood Square, Suite 101
3333 Street Road
Bensalem, PA 19020
(Address of principal executive offices)
Telephone: (215) 245-7500
(Registrant's telephone number, including area code)
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 ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes____ No __X__
Number of shares of common stock, par value $0.10 per share outstanding as of
February 5, 2003: 12,627,565
(excluding 737,232 shares held in Treasury).
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
PAGE
----
PART 1 - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (unaudited)
- -------
Consolidated Balance Sheets at December 31, 2002
and June 30, 2002 1
Consolidated Statements of Operations and Changes
in Retained Earnings for the Three and Six Months
Ended December 31, 2002 and 2001 2
Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 2002 and 2001 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market
- ------- Risk 23
Item 4. Controls and Procedures 23
- ------
PART II - OTHER INFORMATION
---------------------------
Item 4. Submission of Matters to a Vote of Security Holders 24
- -------
Item 6. Exhibits and Reports on Form 8-K 24
- -------
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
(Unaudited)
December 31, June 30,
2002 2002
-------- --------
Assets
Cash and cash equivalents $ 6,833 $ 7,257
Restricted cash - customer deposits 11,890 9,230
Real estate held for development and sale:
Residential properties completed or under construction 113,854 112,279
Land held for development or sale and improvements 88,361 82,699
Property and equipment, at cost, less accumulated depreciation 1,925 1,726
Intangible assets, net of amortization 3,874 3,718
Receivables, deferred charges and other assets 39,117 21,590
-------- --------
Total Assets $265,854 $238,499
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ 19,809 $ 24,199
Accrued expenses 32,212 23,232
Customer deposits 12,799 9,775
Mortgage and other note obligations primarily secured by real
estate held for development and sale 122,290 113,058
Notes payable - related parties 3,500 3,750
Other notes payable 90 1,224
Deferred income taxes 618 618
-------- --------
Total Liabilities 191,318 175,856
-------- --------
Commitments and contingencies
Redeemable common stock 999 988
-------- --------
Shareholders' Equity:
Preferred stock, $1 par, 500,000 shares authorized:
Series D convertible preferred stock, 7% cumulative
annual dividend, $30 stated value, issued and
outstanding 100,000 shares ($3,000,000
liquidation preference) 3,000 3,000
Common stock, $.10 par, 20,000,000 shares authorized,
12,698,131 shares issued 1,270 1,270
Capital in excess of par value - common stock 17,726 17,726
Retained earnings 52,384 40,502
Treasury stock, at cost (737,232 and 812,232 shares held at
December 31, 2002 and June 30, 2002, respectively) (843) (843)
-------- --------
Total Shareholders' Equity 73,537 61,655
-------- --------
Total Liabilities and Shareholders' Equity $265,854 $238,499
======== ========
See notes to consolidated financial statements
- 1 -
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Statements of Operations
and Changes in Retained Earnings
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
--------- --------- --------- ---------
Earned revenues
Residential properties $ 86,198 $ 87,244 $ 172,228 $ 167,504
Land sales -- 53 -- 53
Other income 1,252 865 2,340 1,659
--------- --------- --------- ---------
87,450 88,162 174,568 169,216
--------- --------- --------- ---------
Costs and expenses
Residential properties 67,207 70,690 133,258 136,585
Land sales -- 67 -- 67
Other 827 740 1,823 1,257
Selling, general and administrative 10,277 9,955 20,069 18,431
Interest
Incurred 1,571 2,186 3,039 4,296
Less capitalized (1,552) (2,117) (2,956) (4,188)
--------- --------- --------- ---------
78,330 81,521 155,233 156,448
--------- --------- --------- ---------
Income from operations before income taxes 9,120 6,641 19,335 12,768
Income tax expense 3,467 2,551 7,348 4,901
--------- --------- --------- ---------
Net income 5,653 4,090 11,987 7,867
Preferred dividends 52 52 105 105
--------- --------- --------- ---------
Net income available for common shareholders 5,601 4,038 11,882 7,762
Retained earnings, at beginning of period 46,783 26,523 40,502 22,799
--------- --------- --------- ---------
Retained earnings, at end of period $ 52,384 $ 30,561 $ 52,384 $ 30,561
========= ========= ========= =========
Basic earnings per share $ 0.46 $ 0.35 $ 0.98 $ 0.67
========= ========= ========= =========
Diluted earnings per share $ 0.34 $ 0.25 $ 0.72 $ 0.49
========= ========= ========= =========
See notes to consolidated financial statements
- 2 -
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Six Months Ended
December 31,
2002 2001
--------- ---------
Cash flows from operating activities:
Net income $ 11,987 $ 7,867
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 319 310
Noncash compensation 11 22
Changes in operating assets and liabilities:
Restricted cash - customer deposits (2,660) (500)
Real estate held for development and sale (7,237) (21,973)
Receivables, deferred charges and other assets (8,527) (2,731)
Accounts payable and other liabilities (4,410) (1,384)
Customer deposits 3,024 223
--------- ---------
Net cash used in operating activities (7,493) (18,166)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (518) (455)
Acquisition of PLC, net of cash acquired (156) (791)
--------- ---------
Net cash used in investing activities (674) (1,246)
--------- ---------
Cash flows from financing activities:
Borrowings from loans secured by real estate assets 131,131 124,760
Repayment of loans secured by real estate assets (121,899) (108,678)
Borrowings from other note obligations 31 14,510
Repayment of other note obligations (1,415) (20,455)
Preferred stock dividend (105) (105)
--------- ---------
Net cash provided by financing activities 7,743 10,032
--------- ---------
Net decrease in cash and cash equivalents (424) (9,380)
Cash and cash equivalents at beginning of period 7,257 13,560
--------- ---------
Cash and cash equivalents at end of period $ 6,833 $ 4,180
========= =========
Supplemental disclosure of cash flow activities:
Interest paid, net of amounts capitalized $ 83 $ 108
========= =========
Income taxes paid $ 9,082 $ 3,890
========= =========
See notes to consolidated financial statements
- 3 -
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) Summary of Significant Accounting Policies:
The accompanying unaudited consolidated financial statements are
presented in accordance with the requirements for Form 10-Q and do
not include all the disclosures required by generally accepted
accounting principles for complete financial statements. Reference
is made to Form 10-K as of and for the year ended June 30, 2002
for Orleans Homebuilders, Inc. and subsidiaries (the "Company")
for additional disclosures, including a summary of the Company's
accounting policies.
In the opinion of management, the consolidated financial
statements contain all adjustments, consisting only of normal
recurring accruals, necessary to present fairly the consolidated
financial position of the Company for the periods presented. The
interim operating results of the Company may not be indicative of
operating results for the full year.
Certain amounts for fiscal year 2002 have been reclassified to
conform to the fiscal year 2003 presentation.
Recent accounting pronouncements:
In June 1998, the FASB issued SFAS No. 133. On June 23, 1999, the
FASB voted to defer the effectiveness of SFAS No. 133 for one
year. SFAS No. 133 is now effective for fiscal years beginning
after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for use of derivative financial instruments
and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically
designated as (i) a hedge of the exposure to changes in the fair
value of a recognized asset or liability of an unrecognized firm
commitment; (ii) a hedge of the exposure to variable cash flows of
a forecasted transaction; or (iii) in certain circumstances, a
hedge of a foreign currency exposure. On July 1, 2000, the Company
adopted this pronouncement, as amended by SFAS No. 137 and
Statement of Financial Accounting Standards No. 138, "Accounting
for Certain Hedging Activities - an Amendment of FASB No. 133".
The adoption of SFAS No. 133 did not have a material financial
impact on the financial position and results of operations of the
Company because the Company has not entered into any freestanding
derivatives and has no embedded derivatives that require
bifurcation and separate treatment. However, should the Company
change its use of such derivatives, the adoption of SFAS No. 133
could have a more significant effect on the Company prospectively.
4
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements ("SAB 101"). In June 2000, the SEC staff
amended SAB 101 to provide registrants with additional time to
implement SAB 101. The Company has adopted SAB 101, as required,
in the fourth quarter of fiscal 2001. The adoption of SAB 101 did
not have a material financial impact on the financial position or
results of operations of the Company.
In March 2000, the FASB issued FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation"
("FIN 44"). The Company was required to adopt FIN 44 effective
July 1, 2000 with respect to certain provisions applicable to new
awards, exchanges of awards in a business combination,
modifications to outstanding awards, and changes in grantee status
that occur on or after that date. FIN 44 addresses practice issues
related to the application of Accounting Practice Bulletin Opinion
No. 25, "Accounting for Stock Issued to Employees". The initial
adoption of FIN 44 by the Company did not have a material
financial impact on its consolidated financial position or results
of operations.
In June 2001, the FASB issued SFAS No. 141, which establishes
standards for reporting business combinations entered into after
June 30, 2001 and supersedes APB Opinion No. 16, "Business
Combinations" and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises". Among other things, SFAS
No. 141 requires that all business combinations be accounted for
as purchase transactions and provides specific guidance on the
definition of intangible assets which require separate treatment.
The statement is applicable for all business combinations entered
into after June 30, 2001 and also requires that companies apply
its provisions relating to intangibles from pre-existing business
combinations.
In June 2001, the FASB also issued SFAS No. 142, which establishes
standards for financial accounting and reporting for intangible
assets acquired individually or with a group of other assets and
for the reporting of goodwill and other intangible assets acquired
in a business acquisition subsequent to initial accounting under
SFAS No. 141. SFAS No. 142 supersedes APB Opinion No.17,
"Intangible Assets" and related interpretations. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001;
however, companies with fiscal years beginning after March 15,
2001 may elect to adopt the provision of SFAS No. 142 at the
beginning of its new fiscal year. Accordingly, the Company elected
to early adopt SFAS No. 142 effective with the beginning of its
fiscal year on July 1, 2001. The Company did not recognize any
charge to earnings for the cumulative effect upon adoption because
all such intangibles relate to the Company's recent acquisition of
PLC for which no impairment was required under SFAS No. 142. Upon
adoption, such intangibles, which were being amortized over ten
years prior to adoption, are no longer amortized, but continue to
be subject to periodic review for impairment. Amortization of such
intangibles was $167,000 for fiscal 2001.
5
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"),
which establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" and APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". The provisions of SFAS No. 144 are
effective in fiscal years beginning after December 15, 2001, with
early adoption permitted and, in general, are to be applied
prospectively. The Company adopted SFAS No. 144 effective July 1,
2002. The adoption of SFAS No. 144 did not have a material impact
on the financial position or results of operations of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections" ("SFAS No. 145"). SFAS No. 145 rescinds
both SFAS No. 4, "Reporting Gains and Losses from Extinguishment
of Debt" ("SFAS No. 4"), and the amendments to SFAS No. 4, SFAS
No. 64, "Extinguishments of Debt made to Satisfy Sinking-Fund
Requirements" ("SFAS No. 64"). Through this rescission, SFAS No.
145 eliminates the requirement (in both SFAS No. 4 and SFAS No.
64) that gains and losses from the extinguishment of debt be
aggregated and, if material, classified as an extraordinary item,
net of the related income tax effect. An entity is not prohibited
from classifying such gains and losses as extraordinary items, so
long as they meet the criteria in paragraph 20 of APB Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" ("APB No.
30"). However, due to the nature of the Company's operations, it
is not expected that such treatment will be available to the
Company. Any gains or losses on extinguishments of debt that were
previously classified as extraordinary items in prior periods
presented that do not meet the criteria in APB No. 30 for
classification as an extraordinary item will be reclassified to
income from continuing operations. The provisions of SFAS No. 145
are effective for financial statements issued for fiscal years
beginning after May 15, 2002. The Company adopted SFAS No. 145
effective July 1, 2002. The adoption of SFAS No. 145 did not have
a material impact on the financial position or results of
operations of the Company.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"),
which is effective for exit or disposal activities initiated after
December 31, 2002, with earlier application encouraged. SFAS No.
146 addresses the accounting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue
No. 94-3 "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". The Company adopted SFAS No.
146 effective July 1, 2002. The adoption of SFAS No. 146 did not
have a material impact on the financial position or results of
operations of the Company.
6
In December 2002 the Financial Accounting Standards Board (FASB)
issued SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure". SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation
and amends the disclosure requirements of SFAS No. 123. The
transition provisions of this Statement are effective for fiscal
years ending after December 15, 2002, and the disclosure
requirements of the Statement are effective for interim periods
beginning after December 15, 2002. The Company adopted SFAS No.
148 effective July 1, 2002. The adoption of SFAS No. 148 did not
have a material impact on the financial position or results of
operations of the Company.
In January 2003, FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an interpretation of
ARB 51". FIN 46 provides guidance on identifying entities for
which control is achieved through means other than through voting
rights ("variable interest entities or "VIE") and how to determine
when and which business enterprise should consolidate the VIE. In
addition, FIN 46 requires both the primary beneficiary and all
other enterprises with a significant variable interest in a VIE to
make additional disclosures. The transitional disclosure
requirements take effect immediately and are required for all
financial statements initially issued after January 31, 2003. The
adoption of FIN 46 is not expected to have a material impact on
the financial position or results of operations of the Company.
(B) Earnings Per Share:
Basic earnings per common share are computed by dividing net
income by weighted average number of common shares outstanding.
Basic shares outstanding includes the pro rata portion of
unconditional shares issuable as part of the purchase price of the
Parker & Lancaster Corporation acquisition on October 13, 2000.
Diluted earnings per share include additional common shares that
would have been outstanding if the dilutive potential common
shares had been issued. The weighted average number of shares used
to compute basic earnings per common share and diluted earnings
per common
7
share, and a reconciliation of the numerator and denominator used
in the computation for the three and six months ended December 31,
2002 and 2001, respectively, are shown in the following table.
Three Months Ended Six Months Ended
December 31,
---------------------------------------------------
2002 2001 2002 2001
---------- ---------- -------- -------
(Unaudited)
(in thousands)
Total common shares issued 12,698 12,698 12,698 12,698
Unconditional shares issuable 137 273 137 273
Less: Average treasury shares outstanding 737 1,340 737 1,340
---------- ---------- -------- -------
Basic EPS shares 12,098 11,631 12,098 11,631
Effect of assumed shares issued under
treasury stock method for stock options 552 749 551 712
Effect of assumed conversion of $3 million
Convertible Subordinated 7% Note 2,000 2,000 2,000 2,000
Effect of assumed conversion of
$3 million Series D Preferred Stock 2,000 2,000 2,000 2,000
---------- ---------- -------- -------
Diluted EPS shares 16,650 16,380 16,649 16,343
========== ========== ======== =======
Net income available for common
shareholders $ 5,601 $ 4,038 $ 11,882 $ 7,762
Effect of assumed conversion of $3 million
Series D Preferred Stock 52 52 105 105
Effect of assumed conversion of $3 million
Convertible Subordinated 7% Note 33 33 65 65
---------- ---------- -------- -------
Adjusted net income for diluted EPS $ 5,686 $ 4,123 $ 12,052 $ 7,932
========== ========== ======== =======
(C) Residential Properties Completed or Under Construction:
Residential properties completed or under construction consist of
the following:
December 31, June 30,
2002 2002
-------- --------
(Unaudited)
(in thousands)
Under contract for sale $ 75,533 $ 76,885
Unsold 38,321 35,394
-------- --------
$113,854 $112,279
======== ========
8
(D) Litigation:
In January 2003, a settlement in the amount of $9,000,000 was
reached in an action brought against the Company, as defendant,
arising out of an injury to a workman who was injured during the
construction phase of a home at a Company project located in
Newtown, Bucks County, PA. The settlement will be paid entirely by
the Company's liability insurance carrier as follows:
A lump sum payment of approximately $5,400,000 is payable to the
plaintiff as well as a $5,000 per month payment through 2033,
increased annually by 3%. In addition, a payment of approximately
$2,100,000 is payable to a medical trust account. The medical
trust account will be used to fund, on an annual basis through
2033, a medical custodial account for the benefit of the
plaintiff. In addition, the medical mustodial account will be
funded with an initial payment of $200,000.
The Company's liability insurance carrier is paying the entire
settlement. However, at December 31, 2002, in order to reflect the
accounting of this transaction on the Company's books and records,
the Company has recorded a $9,000,000 receivable in the
Receivables, deferred charges and other assets category of the
balance sheet as well as a $9,000,000 accrual in the Accrued
expenses category of the balance sheet. The disbursements required
by this settlement are expected to be made directly by the
insurance carrier and the Company will not be involved with the
receipt or disbursement of these funds.
During fiscal 2003, a class action lawsuit was filed against
Orleans Homebuilders, Inc. and certain of its unnamed affiliates,
in Burlington County, New Jersey. The Township of Mount Laurel
intervened as a party in the lawsuit. The lawsuit alleged, in
part, that certain townhomes and condominiums designed and
constructed by Orleans Homebuilders, Inc and certain of its
affiliates did not have sufficient combustion air in the utility
rooms, thereby causing a carbon monoxide build-up in the homes. In
January 2003, the Company reached a settlement of the lawsuit.
While the settlement is still subject to the court approval, the
pertinent terms of the settlement are as follows:
As many as approximately 3,600 homeowners will be given the
opportunity to have their homes inspected by the Township of Mount
Laurel to determine whether the utility room has adequate
combustion air as required by the applicable construction code in
effect at the time the home was constructed. If the inspection
reveals inadequate combustion air, the Company, at its sole cost
will repair the home. In addition, those homeowners given the
opportunity to have their homes inspected also will be given the
opportunity to receive a carbon monoxide detector at the Company's
sole cost and expense. The Township of Mount Laurel will act as
administrator and the Company has agreed to pay the township for
the homes inspected, up to an aggregate of $100,000. Further,
approximately 1,700 homeowners will be given a one time
opportunity to have their gas-fired appliances inspected and
cleaned at the Company's sole cost and expense. The Company has
agreed to pay plaintiffs' attorneys' fees and costs of $445,000.
9
The Company has reached a settlement with its insurer to partially
cover the costs of the settlement. The Company has accrued
estimated costs of approximately $500,000, net of insurance
proceeds, in connection with the settlement agreement.
From time to time the Company is named as a defendant in legal
actions arising from its normal business activities. Although the
amount of liability that could arise with respect to currently
pending actions cannot be accurately predicted, in the opinion of
the Company any such liability will not have a material adverse
effect on the financial position, operating results or cash flows
of the Company.
(E) Subsequent Event:
Included in the Notes payable - related parties category of the
balance sheet at December 31, 2002 is a $3,000,000 Convertible
Subordinated 7% Note dated August 8, 1996 issued to Jeffrey P.
Orleans, Chairman and Chief Executive Officer of the Company. This
note is convertible into Orleans Homebuilders, Inc. common stock
at $1.50 per share, interest is payable quarterly and principal is
due in annual installments of $1,000,000 beginning January 1,
2003. With prior notice given, in January 2003, Mr. Orleans
elected to convert the first annual installment into 666,666
shares of Orleans Homebuilders, Inc. common stock.
10
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of
- ------- ---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
Orleans Homebuilders, Inc. and its subsidiaries (collectively, the
"Company", "OHB" or "Orleans") are currently engaged in residential real estate
development in New Jersey, North Carolina, Pennsylvania, South Carolina and
Virginia. The Company has operated in the Pennsylvania and New Jersey areas for
over 80 years and began operations in North Carolina, South Carolina and
Virginia in fiscal 2001 through the acquisition of Parker & Lancaster
Corporation ("PLC"), a privately-held residential homebuilder. References to a
given fiscal year in this Quarterly Report on Form 10-Q are to the fiscal year
ending June 30th of that year. For example, the phrases "fiscal 2002" or "2002
fiscal year" refer to the fiscal year ended June 30, 2002.
Results of Operations
- ---------------------
The following table sets forth certain details as to residential sales activity
for the periods listed below. The backlog information is as of the end of each
period listed.
Six Months Ended December 31,
2002 2001
------------------------------------------------------------------------
(Unaudited)
(Dollars in thousands)
Northern Region Average Average
New Jersey and Pennsylvania: Amount Homes Price Amount Homes Price
Revenues earned $ 118,376 390 $ 304 $ 107,891 389 $ 277
New orders 127,277 344 370 100,157 371 270
Backlog 159,525 421 379 136,906 459 298
Southern Region
North Carolina, South Carolina
and Virginia:
Revenues earned $ 53,852 190 $ 283 $ 59,613 243 $ 245
New orders 70,718 239 296 50,798 203 250
Backlog 72,306 229 316 47,390 173 274
Combined Regions
Revenues earned $ 172,228 580 $ 297 $ 167,504 632 $ 265
New orders 197,995 583 340 150,955 574 263
Backlog 231,831 650 357 184,296 632 292
11
Three Months Ended December 31,
2002 2001
-----------------------------------------------------------------------
(Unaudited)
(Dollars in thousands)
Northern Region Average Average
New Jersey and Pennsylvania: Amount Homes Price Amount Homes Price
Revenues earned $ 56,307 185 $ 304 $ 56,087 200 $ 280
New orders 52,627 131 402 48,541 176 276
Backlog 159,525 421 379 136,906 459 298
Southern Region
North Carolina, South Carolina
and Virginia:
Revenues earned $ 29,891 99 $ 302 $ 31,157 125 $ 249
New orders 34,445 113 305 21,909 84 261
Backlog 72,306 229 316 47,390 173 274
Combined Regions
Revenues earned $ 86,198 284 $ 304 $ 87,244 325 $ 268
New orders 87,072 244 357 70,451 260 271
Backlog 231,831 650 357 184,296 632 292
Three Months and Six Months Ended December 31, 2002 and 2001
------------------------------------------------------------
Orders and Backlog
- ------------------
The dollar value of new orders for the six months ended December 31,
2002 increased $47,040,000, or approximately 31%, to $197,995,000 on 583 homes
compared to $150,955,000 on 574 homes for the six months ended December 31,
2001. The increase in the dollar value of new orders is a result of favorable
conditions in the homebuilding industry, most notably, favorable financing
conditions. In addition, the average price per unit of new orders in the
combined regions increased approximately 29.3%, to $340,000 per home for the
first six months of fiscal 2003, compared to $263,000 per home for the first six
months of fiscal 2002. This change in the average price per unit of new orders
is due to a change in the Company's product offerings, to more single family
homes, as well as an increase in unit sales prices due to favorable economic
conditions in the homebuilding industry. Unit sales prices have increased at the
majority of communities open during the first six months of fiscal 2003, when
compared with the same communities and products offered for sale in the first
six months of fiscal 2002. The number of new orders decreased in the northern
region due to a change in the Company's product offerings to more single family
homes when compared with the prior fiscal period. The number of new orders also
decreased due to certain delays in the opening of new communities during fiscal
2003, as a result of increasingly restrictive regulations and moratoriums by
governments which the Company believes is due to the intensity of development in
recent years. The number of new orders increased in the southern region as the
Company continues to expand in this region as a result of its October 2000
acquisition of PLC. In addition, the Company has increased its advertising and
marketing in the southern region to support its entry into this market.
12
The dollar value of new orders for the three months ended December 31,
2002 increased $16,621,000, or approximately 24%, to $87,072,000 on 244 homes
compared to $70,451,000 on 260 homes for the three months ended December 31,
2001. The dollar value of new orders increased due to favorable conditions in
the homebuilding industry and a change in the Company's product offerings as
noted in the paragraph above. The number of new orders decreased in the northern
region due to a change in the Company's product offerings to more single family
homes when compared with the prior fiscal quarter. The number of new orders also
decreased due to certain delays in the opening of new communities during the
second quarter of fiscal 2003, as a result of increasingly restrictive
regulations and moratoriums by governments which the Company believes is due to
the intensity of development in recent years. The number of new orders increased
in the southern region as the Company continues to expand in this region as a
result of its October 2000 acquisition of PLC. In addition, the Company has
increased its advertising and marketing in the southern region to support its
entry into this market.
The dollar backlog at December 31, 2002, increased $47,535,000, or
approximately 26%, to $231,831,000 on 650 homes compared to the backlog at
December 31, 2001 of $184,296,000 on 632 homes. The increase in backlog dollars
is primarily attributable to favorable economic conditions for the homebuilding
industry in the regions where the Company operates. These favorable economic
conditions, most notably favorable financing conditions, have resulted in
positive home pricing trends and consistent customer demand.
Operating Revenues
- ------------------
Earned revenues for the first six months of fiscal 2003 increased
$5,352,000 to $174,568,000, or 3.2%, compared to the first six months of fiscal
2002. Revenues from the sale of residential homes included 580 homes totaling
$172,228,000 during the first six months of fiscal 2003, as compared to 632
homes totaling $167,504,000 during the first six months of fiscal 2002. The
increase in residential revenue earned is due to an increase in northern region
residential revenue earned of approximately $10,485,000, partially offset by a
decrease in southern region residential revenue earned of approximately
$5,761,000, compared with the prior six months ended December 31, 2001. The
decrease in southern region residential revenue earned is due to a shift in
homebuyer patterns to more pre-construction sales rather than pre-built
specification home sales. Fewer homes have been delivered in the first six
months of fiscal 2003 when compared with the same period in fiscal 2002 as
pre-construction new orders take longer to fulfill than new orders for pre-built
specification homes. The overall increase in residential revenue earned is
attributable to an increase in the average selling price per home for the first
six months of fiscal 2003, compared to the comparable six months of the prior
fiscal year. This change in the average selling price per home is due to a
change in the Company's product offerings in the northern region, to more single
family homes, as well as an overall increase in unit sales prices due to
favorable economic conditions in the homebuilding industry. Furthermore, a
shortage of approved building lots in key markets has resulted in additional
favorable pricing conditions for homebuilders. The overall average selling price
per home delivered in the first six months of fiscal 2003 increased by
approximately 12.1% to $297,000 per home, compared to $265,000 per home for the
first six months of fiscal 2002. The overall average sales price per home varies
from year-to-year depending upon product offerings, among other factors. Average
sales prices have increased at the majority of communities open during the first
six months of fiscal 2003, when compared with the same communities and products
offered for sale in the first six months of fiscal 2002.
13
Earned revenues for the second quarter ended December 31, 2002
decreased $712,000, or less than 1%, to $87,450,000, compared to the second
quarter ended December 31, 2001. Revenues from the sale of residential homes
included 284 homes totaling $86,198,000 during the second quarter of fiscal
2003, as compared to 325 homes totaling $87,244,000 during the second quarter of
fiscal 2002. The decrease in residential revenue earned is due to a decrease in
the number of homes delivered in the second quarter of fiscal year 2003 compared
to the prior fiscal year quarter, partially offset by an increase in unit sales
prices. The decrease in the number of homes delivered in the northern region is
due to a change in the Company's product offerings to more single family homes,
which typically take longer to construct and deliver than multi-family homes.
The decrease in the number of homes delivered in the southern region is due to a
shift in homebuyer patterns to more pre-construction sales rather than pre-built
specification home sales. Fewer homes have been delivered in the southern region
in the second quarter of fiscal 2003 when compared with the same period in
fiscal 2002 as pre-construction new orders take longer to fulfill than new
orders for pre-built specification homes. The impact of the decrease in the
number of homes delivered was offset by an increase in the average selling price
per home for the second quarter of fiscal 2003 compared to the comparable
quarter of the prior fiscal year. This change in the average selling price per
home is due to a change in the Company's product offerings, to more single
family homes, as well as an increase in unit sales prices due to favorable
economic conditions in the homebuilding industry. Furthermore, a shortage of
approved building lots in key markets has resulted in additional favorable
pricing conditions for homebuilders. The overall average selling price per home
delivered in the second quarter of fiscal 2003 increased by approximately 13.4%
to $304,000 per home, compared to $268,000 per home for the second quarter of
fiscal 2002. The overall average sales price per home varies from year-to-year
depending upon product offerings, among other factors. Average sales prices have
increased at the majority of communities opened during the second quarter of
fiscal 2003, when compared with the same communities and units offered for sale
in the second quarter of fiscal 2002.
14
Costs and Expenses
- ------------------
Costs and expenses for the first six months of fiscal 2003 decreased
$1,215,000, or less than 1%, to $155,233,000, compared with the first six months
of fiscal 2002. The cost of residential properties for the first six months of
fiscal 2003 decreased $3,327,000 to $133,258,000, or 2.4%, when compared with
the first six months of fiscal 2002. The decrease in the cost of residential
properties compared to the increase in residential property revenue of
approximately 2.8% during the same time period is due to an increase in gross
profit margins for the first six months of fiscal 2003 compared to the first six
months of fiscal 2002. Gross profit margins on residential property revenues
were 22.6% for the first six months of fiscal 2003, compared with 18.5% for the
first six months of fiscal 2002. The increase in gross profit margin on
residential property revenues for the first six months of fiscal 2003 compared
with the first six months of fiscal 2002 is a result of favorable conditions in
the homebuilding industry, resulting in strong customer demand and positive home
pricing trends. Also contributing to the increase in gross profit margin on
residential property revenue was the decreased costs of construction financing
and the relatively stable costs for key building materials, when compared to the
prior fiscal year period.
For the first six months of fiscal 2003, selling, general and
administrative expenses increased $1,638,000 to $20,069,000, or 8.9%, when
compared with the first six months of fiscal 2002. The increase in selling,
general and administrative expenses is primarily attributable to an increase in
advertising of approximately $1,070,000. The increase in advertising is
primarily related to the southern region as the Company continues its efforts to
expand in this area and shift customers' buying patterns to more
pre-construction sales rather than pre-built specification homes. In addition,
the increase in selling, general and administrative expense is attributable to
an increase in sales commissions and incentive compensation of approximately
$571,000 attributable to the Company's growth in residential revenue and profit.
The Company has a bonus compensation plan for its executive officers and key
employees calculated at a predetermined percentage of certain of its
consolidated pretax earnings. In addition, certain regional employees not
participating in the bonus compensation plan are awarded bonuses based upon the
pretax earnings of the respective regions. The selling, general and
administrative expenses as a percentage of residential property revenue
increased to 11.7% for the first six months of fiscal 2003 compared to 11.0% for
the first six months of fiscal 2002. The increase in selling, general and
administrative expenses as a percentage of residential property revenue is
primarily attributable to the increase in fixed advertising costs, related to
the southern region as noted above, of approximately $1,070,000 when compared
with the prior year comparable period.
15
Costs and expenses for the second quarter of fiscal 2003 decreased
$3,191,000 to $78,330,000, or 3.9%, compared with the second quarter of fiscal
2002. The cost of residential properties for the second quarter of fiscal 2003
decreased $3,483,000 to $67,207,000, or 4.9%, when compared with the second
quarter of fiscal 2002. This decrease in the cost of residential properties
compared to the decrease in residential property revenue of approximately 1.2%
during the same time period is due to an increase in gross profit margins for
the second quarter of fiscal 2003 compared to the second quarter of fiscal 2002.
Gross profit margins on residential property revenues were 22% for the second
quarter of fiscal 2003, compared with 19% for the second quarter of fiscal 2002.
The increase in gross profit margin on residential property revenues for the
second quarter of fiscal 2003 compared with the second quarter of fiscal 2002 is
a result of favorable conditions in the homebuilding industry, resulting in
strong customer demand and positive home pricing trends. Also contributing to
the increase in gross profit margin on residential property revenue was the
decreased costs of construction financing and the relatively stable costs for
key building materials, when compared to the prior fiscal year quarter.
For the second quarter of fiscal 2003, selling, general and
administrative expenses increased $322,000 to $10,277,000, or 3.2%, when
compared with the second quarter of fiscal 2002. The increase in selling,
general and administrative expenses is primarily attributable to an increase in
advertising of approximately $459,000. The increase in advertising is primarily
related to the southern region as the Company continues its efforts to expand in
this area and shift customers' buying patterns to more pre-construction sales
rather than pre-built specification homes. In addition, the increase in selling,
general and administrative expense is attributable to an increase in sales
commissions and incentive compensation of approximately $234,000 attributable to
the Company's increased profitability. The Company has a bonus compensation plan
for its executive officers and key employees calculated at a predetermined
percentage of certain of its consolidated pretax earnings. In addition, certain
regional employees not participating in the bonus compensation plan are awarded
bonuses based upon the pretax earnings of the respective regions. The increase
in selling, general and administrative expense is partially offset by a decrease
in sales office expense as a result of fewer communities offered for sale in the
second quarter of fiscal 2003 compared with the second quarter of fiscal 2002.
The selling, general and administrative expenses as a percentage of residential
property revenue increased to 11.9% for the second quarter of fiscal 2003
compared to 11.4% for the second quarter of fiscal 2002. The increase in
selling, general and administrative expenses as a percentage of residential
property revenue is partially attributable to the increase in fixed advertising
costs, related to the southern region as noted above, of approximately $459,000
when compared with the prior year comparable period. In addition, the decrease
in residential property revenue resulted in an increase in selling, general and
administrative expenses as a percentage of residential property revenue for the
second quarter of fiscal 2003.
16
Net Income Available for Common Shareholders
- --------------------------------------------
Net income available for common shareholders for the first six months
of fiscal 2003 increased $4,120,000, or 53.1%, to $11,882,000 ($.98 basic and
$.72 diluted earnings per share), compared with $7,762,000 ($.67 basic and $.49
diluted earnings per share) for the first six months of fiscal 2002. Net income
available for common shareholders for the second quarter of fiscal 2003
increased $1,563,000, or 38.7%, to $5,601,000 ($.46 basic and $.34 diluted
earnings per share), compared with $4,038,000 ($.35 basic and $.25 diluted
earnings per share) for the second quarter of fiscal 2002. This increase in net
income available for common shareholders is primarily attributable to increased
residential property revenue in the northern region and favorable conditions in
the homebuilding industry resulting in strong customer demand, positive home
pricing trends and improved gross margins.
Liquidity and Capital Resources
- -------------------------------
The Company requires capital to purchase and develop land, to construct
units, to fund related carrying costs and overhead and to fund various
advertising and marketing programs to facilitate sales. These expenditures
include site preparation, roads, water and sewer lines, impact fees and
earthwork, as well as the construction costs of the homes and amenities. The
Company's sources of capital include funds derived from operations, sales of
assets and various borrowings, most of which are secured. At December 31, 2002,
the Company had approximately $114,207,000 available under existing secured
revolving and construction loans for planned development expenditures. In
addition, the Company had $4,000,000 available under an existing unsecured line
of credit and working capital arrangement with Jeffrey P. Orleans, Chairman,
Chief Executive Officer and majority shareholder of the Company.
Net cash used in operating activities for the first six months of
fiscal 2003 was $7,493,000 compared to net cash used in operating activities for
the prior fiscal year period of $18,166,000. The decrease in net cash used in
operating activities is primarily attributable to a decrease in real estate held
for development and sale and an increase in net income, partially offset by an
increase in receivables, deferred charges and other assets and a decrease in
accounts payable and other liabilities when compared with the prior fiscal year
period. The decrease in real estate held for development and sale is primarily
due to the fact that in the prior year period the Company purchased
substantially all of the assets of Rottlund Homes of New Jersey, Inc., for
approximately $15,800,000. Net cash used in investing activities for the first
six months of fiscal 2003 was $674,000, compared to $1,246,000 for the prior
fiscal year period. This decrease is primarily related to a decrease in
investing activities related to the acquisition of PLC. Net cash provided by
financing activities for the first six months of fiscal 2003 was $7,743,000,
compared to $10,032,000 for the prior fiscal year period. The decrease in net
cash provided by financing activities is partially due to the fact that in the
prior year period the Company obtained financing of approximately $15,116,000
for the purchase of substantially all of the assets of Rottlund Homes of New
Jersey, Inc. Additionally, the reduction in the number of units delivered has
resulted in less financing activity in the first six months of the current
fiscal year when compared with the same period in the prior fiscal year.
17
During the six months ended December 31, 2002, the Company acquired
land for future development that should yield approximately 410 building lots.
The aggregate purchase price was approximately $20,647,000, including
approximately $18,345,000 for land purchases in North Carolina, South Carolina
and Virginia.
As of December 31, 2002, the Company had contracted to purchase, or has
under option, land and improved lots for an aggregate purchase price of
approximately $258,704,000 that would yield approximately 6,400 homes. Including
the aforementioned lots, the Company currently controls approximately 8,500
building lots. As of December 31, 2002, the Company had incurred costs
associated with the acquisition and development of the approximately 6,400
homes, aggregating $21,920,000, including $10,765,000 of paid deposits.
Generally, the Company structures its land acquisitions so that it has the right
to cancel its agreements to purchase undeveloped land and improved lots by
forfeiture of its deposit under the agreement. Furthermore, generally the
purchase of the properties is contingent upon obtaining all governmental
approvals and satisfaction of certain requirements by the Company and the
sellers. The Company expects to utilize purchase money mortgages, secured
financings and existing capital resources to finance these acquisitions.
Contingent on the aforementioned, the Company anticipates completing a majority
of these acquisitions during the next several years.
The Company believes that funds generated from operations and financing
commitments from available lenders will provide the Company with sufficient
capital to meet its existing operating needs.
Off-Balance Sheet Arrangements, Contractual Obligations and Commitments
- -----------------------------------------------------------------------
For a discussion of the Company's off-balance sheet arrangements,
contractual obligations and commitments, please see the Off-Balance Sheet
Arrangements, Contractual Obligations and Commitments section under Item 7,
Management's Discussion and Analysis of Financial Conditions and Results of
Operations in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2002.
Critical Accounting Policies
- ----------------------------
For a discussion of the Company's critical accounting policies, please
see the Critical Accounting Policies section under Item 7, Management's
Discussion and Analysis of Financial Conditions and Results of Operations in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002.
18
Recent Accounting Pronouncements
- --------------------------------
In June 1998, the FASB issued SFAS No. 133. On June 23, 1999, the FASB
voted to defer the effectiveness of SFAS No. 133 for one year. SFAS No. 133 is
now effective for fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for use of derivative financial
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (i) a hedge of the exposure
to changes in the fair value of a recognized asset or liability of an
unrecognized firm commitment; (ii) a hedge of the exposure to variable cash
flows of a forecasted transaction; or (iii) in certain circumstances, a hedge of
a foreign currency exposure. On July 1, 2000, the Company adopted this
pronouncement, as amended by SFAS No. 137 and Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Hedging Activities - an Amendment of
FASB No. 133". The adoption of SFAS No. 133 did not have a material financial
impact on the financial position and results of operations of the Company
because the Company has not entered into any freestanding derivatives and has no
embedded derivatives that require bifurcation and separate treatment. However,
should the Company change its use of such derivatives, the adoption of SFAS No.
133 could have a more significant effect on the Company prospectively.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements
("SAB 101"). In June 2000, the SEC staff amended SAB 101 to provide registrants
with additional time to implement SAB 101. The Company has adopted SAB 101, as
required, in the fourth quarter of fiscal 2001. The adoption of SAB 101 did not
have a material financial impact on the financial position or results of
operations of the Company.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation" ("FIN 44"). The Company
was required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after that date. FIN 44 addresses practice issues related to
the application of Accounting Practice Bulletin Opinion No. 25, "Accounting for
Stock Issued to Employees". The initial adoption of FIN 44 by the Company did
not have a material financial impact on its consolidated financial position or
results of operations.
In June 2001, the FASB issued SFAS No. 141, which establishes standards
for reporting business combinations entered into after June 30, 2001 and
supersedes APB Opinion No. 16, "Business Combinations" and SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises". Among
other things, SFAS No. 141 requires that all business combinations be accounted
for as purchase transactions and provides specific guidance on the definition of
intangible assets which require separate treatment. The statement is applicable
for all business combinations entered into after June 30, 2001 and also requires
that companies apply its provisions relating to intangibles from pre-existing
business combinations.
19
In June 2001, the FASB also issued SFAS No. 142, which establishes
standards for financial accounting and reporting for intangible assets acquired
individually or with a group of other assets and for the reporting of goodwill
and other intangible assets acquired in a business acquisition subsequent to
initial accounting under SFAS No. 141. SFAS No. 142 supersedes APB Opinion
No.17, "Intangible Assets" and related interpretations. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001; however, companies
with fiscal years beginning after March 15, 2001 may elect to adopt the
provision of SFAS No. 142 at the beginning of its new fiscal year. Accordingly,
the Company elected to early adopt SFAS No. 142 effective with the beginning of
its fiscal year on July 1, 2001. The Company did not recognize any charge to
earnings for the cumulative effect upon adoption because all such intangibles
relate to the Company's recent acquisition of PLC for which no impairment was
required under SFAS No. 142. Upon adoption, such intangibles, which were being
amortized over ten years prior to adoption, are no longer amortized, but
continue to be subject to periodic review for impairment. Amortization of such
intangibles was $167,000 for fiscal 2001.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which establishes
a single accounting model for the impairment or disposal of long-lived assets,
including discontinued operations. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". The provisions of
SFAS No. 144 are effective in fiscal years beginning after December 15, 2001,
with early adoption permitted and, in general, are to be applied prospectively.
The Company adopted SFAS No. 144 effective July 1, 2002. The adoption of SFAS
No. 144 did not have a material impact on the financial position or results of
operations of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145"). SFAS No. 145 rescinds both SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" ("SFAS No. 4"), and the amendments
to SFAS No. 4, SFAS No. 64, "Extinguishments of Debt made to Satisfy
Sinking-Fund Requirements" ("SFAS No. 64"). Through this rescission, SFAS No.
145 eliminates the requirement (in both SFAS No. 4 and SFAS No. 64) that gains
and losses from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect. An
entity is not prohibited from classifying such gains and losses as extraordinary
items, so long as they meet the criteria in paragraph 20 of APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB No. 30"). However, due to the nature of the
Company's operations, it is not expected that such treatment will be available
to the Company. Any gains or losses on extinguishments of debt that were
previously classified as extraordinary items in prior periods presented that do
not meet the criteria in APB No. 30 for classification as an extraordinary item
will be reclassified to income from continuing operations. The provisions of
SFAS No. 145 are effective for financial statements issued for fiscal years
beginning after May 15, 2002. The Company adopted SFAS No. 145 effective July 1,
2002. The adoption of SFAS No. 145 did not have a material impact on the
financial position or results of operations of the Company.
20
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"), which is
effective for exit or disposal activities initiated after December 31, 2002,
with earlier application encouraged. SFAS No. 146 addresses the accounting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". The Company adopted SFAS No. 146 effective
July 1, 2002. The adoption of SFAS No. 146 did not have a material impact on the
financial position or results of operations of the Company.
In December 2002 the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation and amends the disclosure requirements of SFAS No. 123.
The transition provisions of this Statement are effective for fiscal years
ending after December 15, 2002, and the disclosure requirements of the Statement
are effective for interim periods beginning after December 15, 2002. The Company
adopted SFAS No. 148 effective July 1, 2002. The adoption of SFAS No. 148 did
not have a material impact on the financial position or results of operations of
the Company.
In January 2003, FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51". FIN
46 provides guidance on identifying entities for which control is achieved
through means other than through voting rights ("variable interest entities or
"VIE") and how to determine when and which business enterprise should
consolidate the VIE. In addition, FIN 46 requires both the primary beneficiary
and all other enterprises with a significant variable interest in a VIE to make
additional disclosures. The transitional disclosure requirements take effect
immediately and are required for all financial statements initially issued after
January 31, 2003. The adoption of FIN 46 is not expected to have a material
impact on the financial position or results of operations of the Company.
21
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
- --------------------------------------------------------------------------------
Securities Litigation Reform Act of 1995
- ----------------------------------------
In addition to historical information, this report contains statements
relating to future events or our future results. These statements are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and are subject to the Safe Harbor provisions created by
statute. Generally words such as "may", "will", "should", "could", "anticipate",
"expect", "intend", "estimate", "plan", "continue", and "believe" or the
negative of or other variation on these and other similar expressions identify
forward-looking statements. These forward-looking statements are made only as of
the date of this report. The Company does not undertake to update or revise the
forward-looking statements, whether as a result of new information, future
events or otherwise.
Forward-looking statements are based on current expectations and
involve risks and uncertainties and the Company's future results could differ
significantly from those expressed or implied by the Company's forward-looking
statements.
Many factors, including those listed below, could cause the Company's
actual consolidated results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company:
o changes in consumer confidence due to perceived uncertainty of future
employment opportunities and other factors;
o competition from national and local homebuilders in the Company's
market areas;
o changes in price and availability of building materials;
o changes in mortgage interest rates charged to buyers of the Company's
homes;
o changes in the availability and cost of financing for the Company's
operations, including land acquisitions;
o revisions in federal, state and local tax laws which provide incentives
for home ownership;
o inability to successfully integrate acquired businesses;
o delays in obtaining land development permits as a result of (i)
federal, state and local environmental and other land development
regulations, (ii) actions taken or failed to be taken by governmental
agencies having authority to issue such permits, and (iii) opposition
from third parties;
22
o increased cost of suitable development land; and
o possible liabilities relating to environmental laws or other applicable
regulatory provisions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
Market risk represents the risk of loss that may impact the
financial position, results of operations or cash flows of the Company, due to
adverse changes in financial and commodity market prices and interest rates. The
Company's principal market risk exposure continues to be interest rate risk. A
majority of the Company's debt is variable based on LIBOR and prime rate, and,
therefore, affected by changes in market interest rates. There have been no
material adverse changes to the Company's (1) exposure to risk and (2)
management of these risks, since June 30, 2002.
Item 4. Controls and Procedures
- ------- -----------------------
Evaluation of disclosure controls and procedures
- ------------------------------------------------
Within 90 days prior to the date of this report (the
"Evaluation Date"), the Company's Chief Executive Officer, President and Chief
Operating Officer and Chief Financial Officer evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)). Based on that evaluation,
these officers have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures were effective.
Changes in internal controls
- ----------------------------
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the Evaluation Date.
23
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
On December 6, 2002, the Company held its Annual Meeting of
Stockholders pursuant to a notice dated October 25, 2002. Definitive proxy
materials were filed with the Securities and Exchange Commission prior to the
meeting. A total of 11,167,792 shares were voted at the meeting constituting
93.4% of the 11,960,899 shares entitled to vote.
At the Annual Meeting, the ten nominees (Benjamin D. Goldman, Jerome
S. Goodman, Robert N. Goodman, Andrew N. Heine, David Kaplan, Lewis Katz,
Jeffrey P. Orleans, Robert M. Segal, John W. Temple and Michael T.Vesey) who
were nominated for election were all elected. The results of the vote were as
follows:
Shares for Which
Share Voted For Vote was Withheld
--------------- -----------------
Benjamin D. Goldman 10,952,379 215,413
Jerome S. Goodman 11,134,079 33,713
Robert N. Goodman 11,134,079 33,713
Andrew N. Heine 11,134,619 33,173
David Kaplan 11,133,924 33,868
Lewis Katz 11,133,924 33,868
Jeffrey P. Orleans 10,951,634 216,158
Robert M. Segal 11,133,924 33,868
John W. Temple 11,134,619 33,173
Michael T. Vesey 10,951,684 216,108
In addition, approval of the Company's Amended and Restated Incentive
Compensation Plan was voted upon as follows: shares voted for - 8,995,133;
shares voted against - 88,626; abstentions - 1,775; and broker non-votes -
2,082,258.
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits.
---------
99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.3 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
--------------------
None.
24
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
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.
ORLEANS HOMEBUILDERS, INC.
(Registrant)
February 13, 2003 /s/ Michael T. Vesey
--------------------
Michael T. Vesey
President and Chief Operating Officer
February 13, 2003 /s/ Joseph A. Santangelo
------------------------
Joseph A. Santangelo
Treasurer, Secretary and
Chief Financial Officer
25
CERTIFICATIONS
I, Jeffrey P. Orleans, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Orleans
Homebuilders, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Jeffrey P. Orleans
----------------------------
Jeffrey P. Orleans
Chief Executive Officer
26
CERTIFICATIONS
I, Michael T. Vesey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Orleans
Homebuilders, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Michael T. Vesey
--------------------------------------
Michael T. Vesey
President and Chief Operating Officer
27
CERTIFICATIONS
I, Joseph A. Santangelo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Orleans
Homebuilders, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Joseph A. Santangelo
-------------------------------
Joseph A. Santangelo
Chief Financial Officer
28
EXHIBIT INDEX
99.1* Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2* Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.3* Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
- --------------------------------------------------------------------------------
* Exhibits included with this filing.