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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6830
ORLEANS HOMEBUILDERS, INC.
(formerly FPA Corporation)
------------------------------------------------------
(Exact name of registrant as specified in its charter)
One Greenwood Square, #101
3333 Street Road
Delaware 59-0874323 Bensalem, PA 19020
------------------------------- ------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer (Address of Principal Executive Office)
incorporation or organization) Identification No.)
(215) 245-7500
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
- -------------------------------------- -----------------------
Common Stock, $.10 Par Value Per Share American Stock Exchange
(also formerly registered under
Section 12(g) of the Act)
Securities Registered Pursuant to Section
12(g) of the Act: None
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 twelve 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
The aggregate market value of the registrant's Common Stock held by
nonaffiliates of the registrant as of August 29, 2003 was approximately
$25,364,000.
Number of shares of the registrant's outstanding Common Stock as of August 29,
2003 was 12,667,565 shares (excluding 697,232 shares held in Treasury).
Documents incorporated by reference:
Part III is incorporated by reference to the proxy statement for the annual
meeting of Stockholders scheduled to be held in December, 2003.
TABLE OF CONTENTS
PART I
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PAGE
----
ITEM 1. Business 1
ITEM 2. Properties 10
ITEM 3. Legal Proceedings 10
ITEM 4. Submission of Matters to a Vote of Security Holders 14
PART II
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ITEM 5. Market for Registrant's Common Stock and
Related Stockholder Matters 14
ITEM 6. Selected Financial Data 16
ITEM 7. Management's Discussion and Analysis of Financial 17
Condition and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosures About
Market Risk 38
ITEM 8. Financial Statements and Supplementary Data 39
ITEM 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 65
ITEM 9A. Controls and Procedure 66
PART III
--------
ITEM 10. Directors and Executive Officers of Registrant 66
ITEM 11. Executive Compensation 66
ITEM 12. Security Ownership of Certain Beneficial Owners 66
and Management
ITEM 13. Certain Relationships and Related Transactions 66
ITEM 14. Principal Accountant Fees and Services 67
PART IV
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ITEM 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 67
Item l. Business.
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General
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Orleans Homebuilders, Inc. and its subsidiaries (collectively, the
"Company", "OHB" or "Orleans") primarily develops residential communities in
Southeastern Pennsylvania, Central and Southern New Jersey, and the metropolitan
areas of Richmond, Virginia and Charlotte, Greensboro and Raleigh, North
Carolina. The Company has operated in the Pennsylvania and New Jersey areas for
over 85 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 (see Note 2 of
Notes to Consolidated Financial Statements for further details on the
acquisition). In July 2003, the Company entered the central Florida market
through its acquisition of Masterpiece Homes, Inc. ("Masterpiece"), an
established homebuilder located in Orange City, Florida. Masterpiece reported
revenues for the calendar year ended 2002 and the six months ended June 30, 2003
of approximately $26,300,000 and $20,000,000, respectively. Except as
specifically indicated, information in this report does not include the
operations of Masterpiece.
The Company operates as a land developer, primarily for its own use,
and as a builder. The Company builds and sells condominiums, townhouses and
single-family homes to first-time homebuyers, first and second-time move-up
homebuyers, luxury homebuyers, empty nesters and active adult homebuyers. During
the fiscal year ended June 30, 2003 ("fiscal 2003"), the Company delivered 1,243
homes, as compared to 1,322 homes in the fiscal year ended June 30, 2002
("fiscal 2002"). Revenues earned from residential property activities increased
by 9% during fiscal 2003 to $382,570,000 as compared to $351,060,000 in fiscal
2002. The Company's backlog at June 30, 2003 was $285,767,000, representing 752
homes, which was 38.7% greater than the backlog of $206,064,000, representing
647 homes, at June 30, 2002.
Jeffrey P. Orleans, Chairman of the Board and Chief Executive Officer
of the Company, owns directly or indirectly approximately 7,940,794 shares of
common stock, par value $.10 per share ("Common Stock"), which represents
approximately 62.7% of the outstanding shares, excluding treasury shares, as of
August 29, 2003. In addition, if Mr. Orleans were to convert his Convertible
Subordinated 7% Note (see Note 6 of Notes to Consolidated Financial Statements)
and his Series D Preferred Stock (see Note 7 of Notes to Consolidated Financial
Statements) into Common Stock, he would then own 70.5% of the then outstanding
Common Stock.
The Company makes available free of charge through the Company's
website (orleanshomes.com) its annual reports on Form 10-K, quarterly reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the
Company electronically files such material, or furnishers it to, the Securities
and Exchange Commission.
1
Residential
-----------
The Company's activities in developing residential communities include
the sale of residential properties and the sale of land and developed homesites
to independent builders. The Company occasionally participates in joint ventures
in certain of these activities.
The following table sets forth certain information at June 30, 2003
with respect its residential developments.
RESIDENTIAL DEVELOPMENTS AS OF JUNE 30, 2003
- ----------------------------------------------------------------------------------------------------------------
Total Units Total Units
Remaining Under Under
Number of Lots Contract Purchase
State Communities Unit Price Range Owned of Sale Agreements
- ---------- ----------------- ------------------------- ------------- ------------ ---------------
NC 31 $132,000 - $404,000 820 116 690
NJ 16 $168,000 - $758,000 941 327 2,700
PA 7 $276,000 - $698,000 505 135 2,250
SC 3 $186,000 - $318,000 39 17 120
VA 22 $213,000 - $533,000 258 157 1,100
----------------- ------------- ------------ ---------------
79 2,563 752 6,860
================= ============= ============ ===============
2
The following table sets forth certain details as to residential sales
activity. The information provided is for the twelve months ended June 30, 2003,
2002, and 2001 in the case of revenues earned and new orders, and as of June 30,
2003, 2002, and 2001 in the case of backlog.
Year Ended June 30,
--------------------------------
(in thousands, except Home data)
--------------------------------
2003 2002 2001
--------------------------------
Northern Region
New Jersey and Pennsylvania
Revenues earned $247,035 $223,987 $200,108
Homes 766 808 739
Average Price $ 323 $ 277 $ 271
New Orders $286,345 $229,971 $203,102
Homes 761 798 740
Average Price $ 376 $ 288 $ 274
Backlog $189,934 $150,624 $130,893
Homes 462 467 410
Average Price $ 411 $ 323 $ 319
Southern Region (1)
North Carolina, South Carolina and Virginia
Revenues earned $135,535 $127,073 $ 82,276
Homes 477 514 346
Average Price $ 284 $ 247 $ 238
New Orders $175,928 $126,308 $109,991
Homes 587 481 443
Average Price $ 300 $ 263 $ 248
Backlog $ 95,833 $ 55,440 $ 56,205
Homes 290 180 213
Average Price $ 330 $ 308 $ 264
Combined Regions
Revenues earned $382,570 $351,060 $282,384
Homes 1,243 1,322 1,085
Average Price $ 308 $ 266 $ 260
New Orders $462,273 $356,279 $313,093
Homes 1,348 1,279 1,183
Average Price $ 343 $ 279 $ 265
Backlog $285,767 $206,064 $187,098
Homes 752 647 623
Average Price $ 380 $ 318 $ 300
(1) For the year ended June 30, 2001 ("Fiscal 2001") information on revenue
earned and new orders is for the period beginning October 13, 2000, the date the
Company entered this market through its acquisition of PLC.
3
Operating Policies
- ------------------
Construction
- ------------
The Company has historically designed its own products with the
assistance of unaffiliated architectural firms as well as supervised the
development and building of its communities. When the Company constructs units,
it acts as a general contractor and employs subcontractors at specified prices
for the installation of site improvements and construction of its residential
units. Agreements with subcontractors provide for a fixed price for work
performed or materials supplied and are generally short-term.
The Company generally begins construction of condominium and townhouse
buildings after commitments for at least 50% of the homes in that building. In
addition, a majority of the single family detached homes are constructed after
contracts are signed and mortgage approval has been obtained. Depending on the
market conditions and the specific community, the Company may also build
speculative homes. Speculative homes are homes that are under construction or
completed, but for which the Company does not have a signed sales contract.
These homes are often marketed to individuals who are relocating and have
immediate housing needs. Many of these homes are sold while under construction.
The Company monitors its speculative inventory to determine adequate return on
investment. The Company does not manufacture any of the materials or other items
used in the development of its communities, nor does the Company maintain
substantial inventories of materials. Standard building materials, appliances
and other components are purchased in volume. The Company has not experienced
significant delays in obtaining materials needed by it to date and has
long-standing relationships with many of its major suppliers and contractors.
However, prices for these goods and services may fluctuate due to various
factors, including supply and demand shortages which may be beyond the control
of the Company or its suppliers and contractors. None of the Company's suppliers
accounted for more than 10% of the Company's total purchases in the fiscal 2003.
Sales and Customer Financing
- ----------------------------
The Company conducts a marketing program that is directed to purchasers of
primary residences. In New Jersey and Pennsylvania, A.P. Orleans, Inc., a wholly
owned subsidiary of the Company, is the exclusive sales agent. In this region,
residential communities are sold principally through on-site sales offices
utilizing the Company's own sales team as well as outside sales brokers. In May
2003, the Company opened an 8,000 square foot design center, conveniently
located for most of its New Jersey and Pennsylvania residential developments, in
Bensalem, Pennsylvania. The design center concept provides a large display of
4
numerous options and upgrades offered for sale by the Company. Thus, instead of
making selections from a small sample of items located at each community, the
homebuyer now has the opportunity to view numerous options and upgrades as if
they were already installed. In addition, homebuyers have the opportunity to
work one-on-one with a design consultant when making their selections. The
Company believes that these benefits to the customer will increase the options
and upgrades sold on a per home basis and also give the Company further insight
into buyer preferences. In North Carolina, South Carolina and Virginia, the
Company utilizes a combination of outside sales brokers, on-site sales office
staff and inside sales coordinators. The outside sales brokers and, in select
communities, on-site sales office staff, are responsible for the initial
customer contact and sale of the homes and are generally compensated on a
commission basis. The inside sales coordinators are responsible for managing the
customer through the new home orientation and selection process. The inside
sales coordinators are generally compensated with both salary and commission.
Fully furnished and landscaped model homes and sales centers are
constructed to promote sales. A variety of custom changes are permitted at the
request of the homebuyers. The Company advertises extensively using newspapers,
radio, billboards, direct mail advertising, illustrated brochures and via the
internet, through its own website as well as websites of others. The Company's
websites, orleanshomes.com and parkerorleans.com, are designed to provide a
visitor with information regarding the Company's communities, including model
type and elevation, floor plan layout and price range, as well as a multimedia
gallery offering panoramic video tours or streaming video presentations of some
of its homes. The Company also has a Preferred Buyer Program, a special discount
program which makes it easy for anyone living in an Orleans home to move into
another Orleans community.
The Company's customers generally require mortgage financing to
complete their purchases. The Company has a mortgage subsidiary to assist its
homebuyers in obtaining financing from unaffiliated lenders and the mortgage
subsidiary receives a fee for this service. In addition, the Company offers
numerous special mortgage programs designed to attract the homebuyer.
Land Policy
- -----------
The Company acquires land in order to provide an adequate and
well-located supply for its residential building operations. The Company's
strategy for land acquisition and development is dictated by specific market
conditions where the Company conducts its operations. In general, the Company
seeks to minimize the overall risks associated with acquiring undeveloped land
by structuring purchase agreements that allow the Company to control the process
of obtaining environmental and other regulatory approvals, but defer the
5
acquisition of such land until the approval process has been completed and the
Company is ready to commence construction. In certain regions, primarily the
southern region, the Company acquires improved lots from land developers on a
lot takedown basis. Under a typical agreement with a land developer, a minimal
number of lots are purchased initially, and the remaining lot takedowns are
subject to the terms of an option agreement. In evaluating possible
opportunities to acquire land, the Company considers a variety of factors
including feasibility of development, proximity to developed areas, population
growth patterns, customer preferences, estimated cost of development and
availability and cost of financing.
The Company engages in many phases of development activity, including
land and site planning, obtaining environmental and other regulatory approvals,
and the construction of roads, sewer, water and drainage facilities, recreation
facilities and other amenities.
The Company considers economic and market conditions for residential
lots in each of its various communities in assessing the relative desirability
of constructing homes or selling lots to other builders.
As of June 30, 2003, the Company had contracted to acquire 42 parcels
of undeveloped land and approximately 1,910 improved lots in its existing
markets, totaling approximately 6,860 residential building lots for an aggregate
purchase price of approximately $301,208,000. 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. As of June 30, 2003, the Company had incurred costs associated
with the acquisition and development of these parcels aggregating $20,778,000,
including $10,556,000 of paid deposits. Furthermore, the agreements are
generally subject to obtaining the required regulatory approval. Contingent on
the aforementioned, the Company anticipates completing a majority of these
acquisitions during the next several years.
Cost Sharing Arrangements and Joint Ventures:
- ---------------------------------------------
From time to time, the Company has developed and owned projects through
joint ventures with other parties. More recently, in the northern region, the
Company has partnered with other homebuilders and developers to acquire land
and/or to develop or improve common off-site facilities, such as sewer treatment
plants. Most of these agreements are set up as cost sharing arrangements whereby
the homebuilders and developers share in the cost of acquiring the parcel or
improving the off-site facility. Determinations by the Company to enter into
these agreements have been based upon a number of factors, including the
opportunity to limit the financial exposure involved on the acquisition of
larger parcels of land and the ability to pool resources with other homebuilders
6
and developers with respect to completion of the regulatory approval process for
a particular parcel. Once the approval process is complete and the land has been
acquired, each Company will typically take ownership of a segment of the parcel
and begin its own land development and construction process. In some communities
in the southern region, as an alternative to land acquisition financing, the
Company has partnered with developers to construct and sell homes on the
developers' lots. At the time of settlement, the developer receives a fixed
amount for the cost of the lot and a portion of the profits from the sale of the
home. The Company will continue to evaluate all opportunities related to cost
sharing agreements and joint ventures; however, at the present time, this does
not constitute a material portion of the Company's operations.
Government Regulation
- ---------------------
The Company and its subcontractors are subject to continuing compliance
requirements of various federal, state and local statutes, ordinances, rules and
regulations regarding zoning, plumbing, heating, air conditioning and electrical
systems, building permits and similar matters. The intensity of development in
recent years in areas in which the Company is actively developing real estate
has resulted in increasingly restrictive regulation and moratoriums by
governments due to density, sewer and water, ecological and similar factors.
Further expansion and development will require prior approval of federal, state
and local authorities and may result in delay or curtailment of development
activities and costly compliance programs.
In January 1983, the New Jersey Supreme Court rendered a decision known
as the "Mount Laurel II" decision, which has the effect of requiring certain
municipalities in New Jersey to provide housing for persons of low and moderate
income. In order to comply with such requirements, municipalities in New Jersey
may require developers, including the Company, in connection with the
development of residential communities, to contribute funds or otherwise assist
in the achievement of a fair share of low or moderate income housing in such
municipalities. To satisfy these requirements, these municipalities generally
approve additional lots within the residential communities the Company is
developing and require the Company to build low and moderate income housing on
those lots. The Company's gross profit on homes built on the lots approved for
low and moderate income housing is usually substantially less than the gross
profit the Company recognizes on other homes in those communities. The Company
had residential property revenue for low and moderate income housing units
totaling approximately $617,000 and $1,780,000 in fiscal 2003 and 2002,
respectively. The Company had no residential property revenue for low and
moderate income housing units in fiscal 2001. In addition, the Company
7
contributed $200,000, $815,000 and $242,000 to municipalities in fiscal 2003,
2002, and 2001, respectively, in order to satisfy low and moderate income
housing requirements for municipalities in which it builds. Further, the Company
currently has commitments with four municipalities for affordable housing
contributions totaling approximately $2,885,000, payable in installments through
June 2008.
In recent years, regulation by federal and state authorities relating
to the sale and advertising of condominium interests and residential real estate
has become more restrictive and extensive. In order to advertise and sell
condominiums and residential real estate in many jurisdictions, including
Pennsylvania and New Jersey, the Company has been required to prepare a
registration statement or other disclosure document and, in some cases, to file
such materials with a designated regulatory agency.
Despite the Company's past ability to obtain necessary permits and
authorizations for its projects, more stringent requirements may be imposed on
developers and home builders in the future. Although the Company cannot
determine the effect of such requirements, they could result in time-consuming
and expensive compliance programs and substantial expenditures for environmental
controls which could have a material adverse effect on the results of operations
of the Company. In addition, the continued effectiveness of permits already
granted is subject to many factors which are beyond the Company's control,
including changes in policies, rules and regulations and their interpretation
and application.
Environmental Regulation and Litigation
- ---------------------------------------
Development and sale of real property creates a potential for
environmental liability on the part of the developer, owner, or any mortgage
lender for its own acts or omissions as well as those of prior owners of the
subject property or adjacent parcels. If hazardous substances are discovered on
or emanating from any of the Company's properties, the Company as well as any
prior owners or operators may be held liable for costs and liabilities relating
to such hazardous substances. Environmental studies are generally undertaken in
connection with property acquisitions by the Company and the Company endeavors
to obtain Phase I environmental site assessments on all properties acquired.
Further governmental regulation on environmental matters affecting residential
development could impose substantial additional expense to the Company, which
could adversely affect the results of operations of the Company or the value of
properties owned, or under contract of purchase by the Company. (See Note 11 of
Notes to Consolidated Financial Statements and Item 3, Legal Proceedings, for a
discussion of specific environmental litigation.)
8
Competition
- -----------
The real estate industry is highly competitive. The Company competes on
the basis of its reputation, location, design, price, financing programs,
quality of product and related amenities. The Company competes with regional and
national home builders in its areas of development, some of which have greater
sales, financial resources and geographical diversity than the Company. Numerous
local residential builders and individual resales of residential units and
homesites provide additional competition.
Employees
- ---------
The Company, as of June 30, 2003, employed 147 executive,
administrative and clerical personnel, 85 sales personnel and 173 construction
supervisory personnel and laborers, for a total of 405 employees.
The level of construction and sales employees varies throughout the
year in relation to the level of activities at the Company's various
developments. The Company has had no work stoppages and considers its relations
with employees to be good.
Economic Conditions
- -------------------
The Company's business is affected by general economic conditions in
the United States and its related regions and particularly by the level of
interest rates. The Company cannot determine whether interest rates will
continue to be at levels attractive to prospective home buyers or whether
mortgage and construction financing will continue to be available.
Seasonality
- -----------
The sale and construction of homes may be adversely affected by harsh
winter weather conditions in some of the regions in which the Company operates.
9
Item 2. Properties.
- ------- -----------
Lease of Executive Offices
- --------------------------
The Company leases office space for its corporate headquarters at 3333
Street Road, Bensalem, Pennsylvania 19020, consisting of approximately 18,500
square feet. The Company also leases additional office space consisting of
approximately 8,000 square feet in Bensalem, Pennsylvania, 4,600 square feet in
Hainesport, New Jersey, 14,000 square feet in Richmond, Virginia and a total of
12,000 square feet in three North Carolina locations for certain centralized
support services related to operations in those regions.
Item 3. Legal Proceedings.
- ------- ------------------
General
- -------
The Company is a plaintiff or defendant in various cases arising out of
its business operations. The Company believes that it has adequate reserves,
insurance or meritorious defenses in all pending cases in which it is a
defendant and that adverse decisions in any or all of the cases would not have a
material effect upon the Company.
Personal Injury
- ---------------
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, Pennsylvania. The settlement,
which was further amended in June 2003, will be paid entirely by the Company's
liability insurance carrier.
A lump sum payment of approximately $5,600,000 was paid to the
plaintiff. In addition, payment in the amount of approximately $1,300,000 is to
be placed in a structured settlement annuity which shall tender payments to the
plaintiff, or the plaintiff's designated beneficiary in the event of the death
of the plaintiff, in the amount of $5,000 per month through 2033, such payment
increasing annually by 3%. Further, a payment of approximately $2,100,000 is to
be placed , by the insurance carrier, in a structured settlement annuity which
shall tender payments to the plaintiff in the amount of $120,000 per year
beginning September 2003 and annually thereafter until the death of the
plaintiff.
10
Carbon Monoxide Litigation
- --------------------------
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. The pertinent terms of the settlement are as follows:
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.
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 of $470,000, in connection
with the settlement agreement.
11
Colts Neck Litigation
- ---------------------
Pursuant to an Order dated February 6, 1996 issued by the New Jersey
Department of Environmental Protection ("NJDEP"), the Company submitted a
Closure/Post-Closure Plan ("Plan") and Classification Exception Area ("CEA") for
certain affected portions of Colts Neck Estates, a single family residential
development built by the Company in Washington Township, Gloucester County, New
Jersey. The affected areas include those portions of Colts Neck where solid
waste allegedly was deposited. NJDEP approved the Plan and CEA on July 22, 1996
and the Company carried it out thereafter. NJDEP as a standard condition of its
approval of the Plan and CEA reserves the right to amend its approval to require
additional remediation measures if warranted. Neither the implementation of the
Plan nor CEA is expected to have a material adverse effect on the Company's
results of operations or its financial position.
Approximately 145 homeowners at Colts Neck instituted three lawsuits
against the Company, which were separately filed in state and Federal courts
between April and November 1993. These suits were consolidated in the United
States District Court for the District of New Jersey and were subject to
court-sponsored mediation. Asserting a variety of state and federal claims, the
plaintiffs in the consolidated action alleged that the Company and other
defendants built and sold them homes which had been constructed on and adjacent
to land which had been used as a municipal waste landfill and a pig farm. The
complaints asserted claims under the federal Comprehensive Environmental
Response, Compensation and Liability Act, the Federal Solid Waste Disposal Act,
the New Jersey Sanitary Landfill Facility Closure and Contingency Act, the New
Jersey Spill Compensation and Control Act, as well as under state common law and
other statutory law.
In September 1993, the Company brought an action in New Jersey state
court against more than 30 of its insurance companies seeking indemnification
and reimbursement of costs of defense in connection with the three Colts Neck
actions referred to above.
As a result of the court sponsored mediation, the Company and the
plaintiffs in the consolidated federal litigation entered into a settlement
agreement. Under that agreement, which was approved by the Court, a $6,000,000
judgment was entered against the Company in favor of a class comprising most of
the current and former homeowners. The Company, which had paid $650,000 on
August 28, 1996 to the plaintiff class, has no liability for the remainder of
the judgment, which is to be paid solely from the proceeds of the state court
litigation against the Company's insurance carriers. Although, under the
settlement agreement the Company is obligated to prosecute and fund the
litigation against its insurance companies, the Company is entitled to obtain
some reimbursement of those expenses. Specifically, under the settlement
agreement, the Company may obtain reimbursement of its aggregate litigation
expenses in excess of $100,000 incurred in connection with its continued
12
prosecution of the insurance claims to the extent that settlements are reached
and to the extent that the portion of those settlement funds designated to fund
the litigation are not exhausted. The Company's right to reimbursement may,
under certain circumstances, be limited to a total of $300,000.
In August 2002, settlement agreements were reached with all
remaining insurance company defendants to settle the Colts Neck insurance
litigation. Under the terms of the settlement agreement between the Company and
the plaintiffs, the proceeds from the insurance settlements were paid to the
plaintiffs. The Company, in turn, is relieved of all further obligations to
prosecute the Colts Neck insurance litigation.
13
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
- ------- ---------------------------------------------------------------------
The principal market on which the Company's Common Stock is traded is
the American Stock Exchange, Inc. (Symbol: OHB).
The high and low sales prices on the American Stock Exchange for the
periods indicated below are as follows:
Fiscal year
ended June 30, High Low
-------------- ---- ---
2003 First Quarter $ 8.55 $ 6.16
Second Quarter 8.15 6.50
Third Quarter 8.74 6.93
Fourth Quarter 11.90 6.90
2002 First Quarter $ 3.18 $ 2.20
Second Quarter 7.00 2.30
Third Quarter 9.34 5.55
Fourth Quarter 9.90 6.30
The number of common stockholders of record of the Company as of August
29, 2003 was approximately 200. The Company has not paid a cash dividend since
December 1982. Payment of dividends will depend upon the earnings of the
Company, its funds derived from operations, its working capital needs, its debt
service requirements, its general financial condition and other factors
(including, without limitation, restrictions in certain financing agreements).
No assurance can be given that the Company will pay dividends in the future.
14
Equity Compensation Plan Information
Number of securities
remaining available for
Number of securities to be future issuance under
issued upon exercise of Weighted-average exercise equity compensation plans
outstanding options, price of outstanding (excluding securities
warrants options, warrants and reflected in
Plan category and rights rights column (a))
- ------------- -------------------------- ------------------------- ------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders ..... 637,500 $1.53 255,000
Equity compensation plans not
approved by security holders ..... (1) N/A N/A
Total....................... 677,500 $1.49 255,000
(1) In connection with the Company's acquisition of PLC on October 13, 2000,
the Company entered into employment agreements with certain of the former
PLC shareholders. Performance under the employment agreements entitles the
former PLC shareholders to an aggregate of 150,000 shares of common stock
of the Company issuable in equal installments on each of the first four
anniversaries of the closing of the acquisition. Through June 30, 2003, the
Company had issued 75,000 shares of common stock under these agreements.
The former PLC shareholders have the right to cause the Company to
repurchase the common stock issued pursuant to the PLC acquisition and the
employment agreements approximately five years after the closing of the
acquisition at a price of $3.33 per share.
The agreement pursuant to which the Company acquired PLC on October 13,
2000 (the "Acquisition Agreement") provides for the issuance to the former PLC
shareholders of an aggregate of 150,000 shares of the Company's common stock in
equal installments on each of the first four anniversaries of the closing of the
acquisition. In addition, in connection with the Company's acquisition of PLC,
the Company entered into employment agreements the with the former PLC
shareholders (the "Employment Agreements"). Performance under the Employment
Agreements entitles the former PLC shareholders to an aggregate of 150,000
shares of the Company's common stock also to be issued in equal installments on
each of the first four anniversaries of the closing of the acquisition. During
each of fiscal 2003 and 2002, the Company issued 75,000 shares of common stock
pursuant to these agreements. This issuance was exempt from registration under
Section 4(2) of the Securities Act of 1933 as a result of the limited number of
persons to whom the shares were issued and the fact that the obligation to issue
the shares was the result of a negotiated transaction. The Company anticipates
that it will issue the balance of the shares in accordance with the terms of the
Acquisition Agreement and the Employment Agreements.
15
Item 6. Selected Financial Data.
The following table sets forth selected financial data for the Company
and should be read in conjunction with the Consolidated Financial Statements and
Notes thereto included under Item 8 of this Form 10-K.
Year Ended June 30,
(In thousands, except per share data)
Operating Data 2003 2002 2001 2000 1999
-------------- ---- ---- ---- ---- ----
Earned revenues $ 388,485 $ 354,656 $ 287,222 $ 178,997 $ 150,573
Net income available for
common shareholders 27,087 17,703 10,549 7,329 5,220
Per share data for net income
available for common shareholders:
Basic 2.18 1.51 0.91 0.65 0.46
Diluted 1.65 1.09 0.67 0.49 0.36
Balance at June 30,
(In thousands)
Balance Sheet Data 2003 2002 2001 2000 1999
------------------ ---- ---- ---- ---- ----
Residential properties $ 109,895 $ 112,279 $ 100,950 $ 65,669 $ 51,800
Land and improvements 100,791 82,699 71,739 61,991 59,763
Inventory not owned 18,443 - - - -
Total assets 290,709 238,499 213,500 150,328 136,537
Mortgage obligations
secured by real estate 106,707 113,058 102,605 69,344 67,129
Other notes payable 2,531 4,974 11,669 7,563 8,951
Shareholders' equity 89,539 61,655 43,820 33,271 25,942
The Company has not paid a cash dividend since December 1982.
16
Item 7. 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 85 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 (see Note 2 of
Notes to Consolidated Financial Statements for further details on the
acquisition). In July 2003, the Company entered the central Florida market
through its acquisition of Masterpiece Homes, Inc. ("Masterpiece"), an
established homebuilder located in Orange City, Florida. Masterpiece reported
revenues for the calendar year ended 2002 and the six months ended June 30, 2003
of approximately $26,300,000 and $20,000,000, respectively. Except as
specifically indicated, information in this report does not include the
operations of Masterpiece.
Results of Operations
- ---------------------
The tables included in "Item 1 - Business" summarize the Company's
revenues, new orders and backlog data for fiscal 2003 with comparable data for
fiscal 2002 and 2001.
Fiscal Years Ended June 30, 2003 and 2002
-----------------------------------------
Orders and Backlog
- ------------------
The dollar value of new orders for fiscal 2003 increased $105,994,000,
or 29.8%, to $462,273,000 on 1,348 homes compared to $356,279,000 on 1,279 homes
for fiscal 2002. 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 23%, to $343,000 per home for
fiscal 2003, compared to $279,000 per home for 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 in fiscal 2003,
when compared with the same communities and products offered for sale in fiscal
2002.
17
Overall the number of new orders for fiscal 2003 increased by 69 homes,
or 5.4%, to 1,348 homes compared to 1,279 homes for fiscal 2002. In the northern
region, the number of new orders for fiscal 2003 decreased to 761 homes from 798
homes in fiscal 2002 due to a change in the Company's product offerings to more
single family homes when compared with the prior fiscal year. The number of new
orders also decreased due to 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. In the southern region, the number of new orders for fiscal
2003 increased to 587 homes from 481 homes in fiscal 2002 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 expansion in this market.
The dollar backlog at June 30, 2003 increased $79,703,000, or
approximately 38.7%, to $285,767,000 on 752 homes compared to the backlog at
June 30, 2002 of $206,064,000 on 647 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 fiscal 2003 increased $33,829,000 to $388,485,000,
or 9.5%, compared to fiscal 2002. Earned revenues principally consist of
revenues from the sale of residential properties, but also include revenue from
land sales, interest income, property management fees and mortgage processing
income. Revenues from the sale of residential homes included 1,243 homes
totaling $382,570,000 during fiscal 2003, as compared to 1,322 homes totaling
$351,060,000 during fiscal 2002. The increase in residential revenue earned is
due to an increase in northern region residential revenue earned of
approximately $23,048,000 and an increase in southern region residential revenue
earned of approximately $8,462,000, compared with the prior fiscal year ended
June 30, 2002. The overall increase in residential revenue earned is
attributable to an increase in the average selling price per home for fiscal
2003, compared to the prior fiscal year, partially offset by a decrease in homes
delivered in fiscal 2003 compared to fiscal 2002. 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
18
resulted in additional favorable pricing conditions for homebuilders. The
overall decrease in homes delivered is partially due to a shift in homebuyer
patterns in the southern region to more pre-construction sales rather than
pre-built specification home sales. Fewer homes have been delivered in the
southern region in fiscal 2003 when compared with fiscal 2002 as
pre-construction new orders take longer to fulfill than new orders for pre-built
specification homes. In addition, a change in the Company's product offerings,
to more single family homes, has resulted in fewer homes delivered during fiscal
2003 when compared with fiscal 2002. Further, harsh winter weather conditions in
the regions in which the Company operates have also contributed to a decrease in
the number of homes delivered for fiscal 2003 compared to fiscal 2002. The
overall average selling price per home delivered in fiscal 2003 increased by
approximately 15.8% to $308,000 per home, compared to $266,000 per home for
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 fiscal 2003, when compared
with the same communities and products offered for sale in fiscal 2002.
Costs and Expenses
- ------------------
Costs and expenses for fiscal 2003 increased $17,494,000, or 5.4%, to
$343,430,000, compared with fiscal 2002. The cost of residential properties for
fiscal 2003 increased $10,473,000 to $294,066,000, or 3.7%, when compared with
fiscal 2002. The increase in the cost of residential properties by approximately
3.7% compared to the increase in residential property revenue of approximately
9% during the same time period is due to an increase in gross profit margins for
fiscal 2003 compared to fiscal 2002. Gross profit margins on residential
property revenues were 23.1% for fiscal 2003, compared with 19.2% for fiscal
2002. The increase in gross profit margin on residential property revenues for
fiscal 2003 compared with 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.
For fiscal 2003, selling, general and administrative expenses increased
$5,222,000 to $44,821,000, or 13.2%, when compared with fiscal 2002. The
increase in selling, general and administrative expenses is primarily
attributable to an increase in sales commissions and incentive compensation of
approximately $3,160,000 attributable to the Company's growth in residential
revenue and profit. The Company has a bonus compensation plan for its executive
19
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. An increase in advertising costs of
approximately $856,000 also contributed to an increase in selling, general and
administrative expense. The increase in advertising costs 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. The selling, general and administrative
expenses as a percentage of residential property revenue increased to 11.7% for
fiscal 2003 compared to 11.3% for 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, and an increase in incentive compensation as
a result of the overall increased profitability of the Company when compared
with the prior year comparable period.
Income Tax Expense
- ------------------
For fiscal 2003, income tax expense increased $6,951,000 to
$17,758,000, or 64.3%, when compared with fiscal 2002. The increase in income
tax expense is primarily attributable to an increase in income from operations.
Additionally, as a result of changes in state tax laws, during fiscal year 2003,
in the states in which the Company operates, the Company adjusted its effective
tax rate on a cumulative basis to 39.4% of income from operations before income
taxes for fiscal 2003 compared to 37.6% from operations before income taxes for
fiscal 2002. The increase in the effective tax rate results in an increase in
income tax expense of $817,000 for fiscal 2003 when compared with the same
effective tax rate of 37.6% for fiscal 2002.
Net Income Available for Common Shareholders
- --------------------------------------------
Net income available for common shareholders for fiscal 2003 increased
$9,384,000, or 53%, to $27,087,000 ($2.18 basic and $1.65 diluted earnings per
share), compared with $17,703,000 ($1.51 basic and $1.09 diluted earnings per
share) for 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.
20
Fiscal Years Ended June 30, 2002 and 2001
-----------------------------------------
Orders and Backlog
- ------------------
The dollar value of new orders for fiscal 2002 increased $43,186,000,
or 13.8%, to $356,279,000 on 1,279 homes compared to $313,093,000 on 1,183 homes
for fiscal 2001. The increase in new order dollars and new orders is partially
attributable to the Company's expansion into North Carolina, South Carolina and
Virginia, that is, the southern region, through its acquisition of PLC on
October 13, 2000. The Company reported new orders from the southern region for
fiscal 2002 compared to the prior fiscal year reporting of new orders from the
southern region for the period October 13, 2000, the PLC acquisition date,
through June 30, 2001, approximately nine months. In addition, new orders in
Pennsylvania and New Jersey (the northern region), increased by $26,869,000, or
13.2%, when compared to new orders in the northern region for fiscal 2001. The
increase in new orders in the northern region is primarily attributable to
favorable conditions in the homebuilding industry, most notably, favorable
financing conditions. Further, average price per unit of new orders in the
combined regions increased to approximately $279,000 per home for fiscal 2002
compared to approximately $265,000 per home for fiscal 2001, due to a change in
product mix as a result of the Company's current product offerings, as well as
unit sales price increases. Overall, unit sales prices have increased at the
majority of communities open during fiscal 2002, when compared with the same
communities and units offered for sale in fiscal 2001.
The dollar backlog at June 30, 2002, increased $18,966,000, or
approximately 10.1%, to $206,064,000 on 647 homes compared to the backlog at
June 30, 2001 of $187,098,000 on 623 homes. The increase in backlog and 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 financing conditions, have resulted in strong
customer demand and positive home pricing trends.
21
Operating Revenues
- ------------------
Earned revenues for fiscal 2002 increased $67,434,000 to $354,656,000,
or 23.5%, compared to fiscal 2001. Earned revenues principally consist of
revenues from the sale of residential properties, but also include revenue from
land sales, interest income, property management fees and mortgage processing
income. Revenues from the sale of residential homes included 1,322 homes
totaling $351,060,000 during fiscal 2002, as compared to 1,085 homes totaling
$282,384,000 during fiscal 2001. Approximately $44,797,000 of the increase in
residential revenue earned is attributable to the Company's southern region
operations in North Carolina, South Carolina and Virginia and the remaining
increase of $22,637,000 is attributable to the Company's northern region
operations in New Jersey and Pennsylvania. The average selling price per home
increased to approximately $266,000 for fiscal 2002 as compared to approximately
$260,000 for fiscal 2001. The increase in residential revenue earned is
attributable to an increase in the number of homes delivered and average selling
price per home for fiscal year 2002 compared to the prior fiscal year. The
number of homes delivered and average selling price have increased due to
favorable economic conditions in the homebuilding industry, most notably,
favorable financing conditions, and the inclusion of a full year of results for
the Company's expansion into North Carolina, South Carolina and Virginia through
its acquisition of PLC in October 2000. Favorable financing conditions have
resulted in strong customer demand and positive home pricing trends. The overall
average sales price per home varies from year-to-year depending upon current
product offerings. Average sales prices have increased at the majority of
communities open during fiscal 2002, when compared with the same communities and
units offered for sale in fiscal 2001. Earned revenues, excluding revenues from
the sale of residential properties, decreased to $3,596,000 in fiscal 2002 from
$4,838,000 in fiscal 2001 as a result of a reduction in land sales.
22
Costs and Expenses
- ------------------
Costs and expenses for fiscal 2002 increased $56,247,000, or 20.9%,
compared with fiscal 2001. The cost of residential properties for fiscal 2002
increased $47,464,000 to $283,593,000, or 20.1%, when compared with fiscal 2001.
The increase in cost of residential properties is primarily attributable to the
Company's growth in residential revenue. Gross profit margin on residential
property revenues was 19.2% for fiscal 2002 compared with 16.4% for fiscal 2001.
The increase in gross profit margin on residential property revenues for fiscal
2002 compared with fiscal 2001 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,
as well as the relatively stable costs for key building materials, in fiscal
2002 when compared to the prior fiscal year.
For fiscal 2002, selling, general and administrative expenses increased
$9,117,000 to $39,298,000, or 30.2%, when compared with fiscal 2001. The
increase in selling, general and administrative expenses is partially
attributable to the reporting of fixed expenses in the southern region for
twelve months of fiscal 2002 compared to approximately nine months in fiscal
2001 due to the timing of the Company's entry into the southern region market
through its acquisition of PLC on October 13, 2000. In addition, selling,
general and administrative expenses increased due to an increase in sales
commissions of $3,495,000 and incentive compensation of $1,926,000 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 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 11.2% during fiscal 2002 compared to 10.7% in the
prior fiscal year. The increase in selling, general and administrative expenses
as a percentage of residential property revenues is attributable to an increase
in fixed costs as a result of the Company's geographic expansion into North
Carolina, South Carolina and Virginia.
23
Net Income Available for Common Shareholders
- --------------------------------------------
Net income available for common shareholders for fiscal 2002 increased
$7,154,000, or 67.8%, to $17,703,000 ($1.51 basic and $1.09 diluted earnings per
share), compared with $10,549,000 ($.91 basic and $.67 diluted earnings per
share) for fiscal 2001. This increase in net income available for common
shareholders is attributable to favorable conditions in the homebuilding
industry resulting in strong customer demand, positive home pricing and improved
gross margins, as well as the Company's acquired operations in North Carolina,
South Carolina and Virginia through its October 13, 2000 acquisition of PLC.
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 June 30, 2003, the
Company had approximately $145,112,000 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 provided by operating activities for fiscal 2003 was
$11,447,000 compared to net cash used in operating activities for the prior
fiscal year of $7,305,000. The increase in net cash provided by operating
activities of $18,752,000 when compared with the prior year is primarily
attributable to an increase in net income of $9,384,000 and an increase in
accounts payable and accrued expenses of $5,100,000 and a decrease in real
estate held for development and sale of $6,581,000, partially offset by a
decrease in receivables, deferred charges and other assets of approximately
$3,945,000 when compared with the prior fiscal year. The increase in net income
is due to an increase in the Company's revenue earned for fiscal 2003 compared
with the prior fiscal year. Net cash used in investing activities for fiscal
2003 was $1,613,000, compared to $2,678,000 for the prior fiscal year. This
decrease is primarily related to a decrease in investing activities related to
the acquisition of PLC. Net cash used in financing activities for fiscal 2003
was $8,208,000, compared to net cash provided by financing activities of
24
$3,680,000 for the prior fiscal year. The increase in net cash used in financing
activities is due to a reduction in borrowings and an increase in repayments by
the Company during fiscal 2003, as the Company is able to meet its cash needs
through available cash provided by operating activities.
During the fiscal year ended June 30, 2003, the Company acquired land
for future development that is expected to yield approximately 1,400 building
lots. The aggregate purchase price was approximately $54,852,000, including
approximately $33,630,000 for land purchases in North Carolina, South Carolina
and Virginia.
In connection with the acquisition of PLC on October 13, 2000,
contingent payments representing an aggregate of 50% of PLC's pretax profits in
excess of $1,750,000 for each of the fiscal years ended June 30, 2001, 2002 and
2003 are payable to certain of the former PLC shareholders. The contingent
payments are subject to an aggregate cumulative pay-out limitation of
$2,500,000. Contingent payments of approximately $577,000, $1,529,000 and
$394,000 were earned for fiscal 2003, 2002 and 2001, respectively, with actual
cumulative contingent payments due reaching the aggregate cumulative payout
limitation of $2,500,000. This completes the cumulative pay-out of the
contingent payments in connection with the PLC acquisition.
On July 28, 2003, the Company acquired all of the issued and
outstanding shares of Masterpiece Homes, Inc. ("Masterpiece"), and entered into
an employment agreement with the president of Masterpiece. Masterpiece is an
established homebuilder located in Orange City, Florida. The terms of the stock
purchase agreement and employment agreement are as follows: (i) $3,900,000 in
cash, at closing; and (ii) $2,130,000 payable January 1, 2005, unless prior to
that date the president is terminated for cause or terminates his employment
without good reason, as defined in the employment agreement; (iii) sale of
30,000 shares of the Company's common stock at $8 per share with a put option at
the same price; (iv) the right to purchase 15,000 shares of the Company's common
stock at $10.64 per share on December 31, 2004, 2005 and 2006; and (v)
contingent payments representing 25% of Masterpiece's pre-tax profits for the
calendar years ended December 31, 2004, 2005 and 2006.
25
As of June 30, 2003 the Company had contracted to purchase, or has
under option, land and improved lots for an aggregate purchase price of
approximately $301,208,000 that are expected to yield approximately 6,860 homes.
Including the aforementioned lots, the Company currently controls approximately
9,423 building lots. As of June 30, 2003, the Company had incurred costs
associated with the acquisition and development of the approximately 6,860
homes, aggregating $20,778,000, including $10,556,000 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. However, on occasion the Company obtains land without having obtained
all governmental approvals. In these circumstances, the Company performs
reasonable due diligence to ascertain the likelihood that governmental approvals
will be granted. 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.
Inflation
- ---------
Inflation can have a significant impact on the Company's business
performance and the homebuilding industry in general. Rising costs of land,
materials, labor, overhead, administrative costs and interest rates on floating
credit facilities can adversely affect the Company's business performance. In
addition, rising costs of certain items, such as lumber, can adversely affect
the expected profitability of the Company's backlog. Generally, the Company has
been able to recover any increases in costs through increased selling prices.
However, there is no assurance the Company will be able to continue to increase
selling prices to cover the effects of inflation in the future.
26
Off-balance sheet arrangements, contractual obligations and commitments
- -----------------------------------------------------------------------
Certain off-balance sheet arrangements, contractual obligations and
commitments are disclosed in various sections of the Consolidated Financial
Statements, Notes to Consolidated Financial Statements, and below. Some typical
off-balance sheet arrangements commonly affecting homebuilders include:
o Cost sharing arrangement and unconsolidated real estate joint
ventures--capital contribution requirements
o Variable interest entities
o Debt and debt service guarantees
o Surety bonds and standby letters of credit
o Executed contracts for construction and development activity
Each of these items are described in detail below as they directly affect the
Company.
Cost sharing arrangements and unconsolidated real estate joint ventures--capital
contribution requirements
- --------------------------------------------------------------------------------
The Company has developed and owned projects through joint ventures,
accounted for using the equity method, with other parties in the past however,
at the present time joint venture activities do not constitute a material
portion of the Company's operations. In addition, the Company has partnered with
other homebuilders and developers, under cost sharing agreements, to acquire
land and/or to develop or improve common off-site facilities, such as sewer
treatment plants, that will benefit both parties. Most of these agreements are
set up as cost sharing agreements whereby the homebuilders and developers share
in the cost of acquiring the parcel or improving the off-site facility. The
Company currently does not have any material unfunded commitments with respect
to joint ventures and cost sharing arrangements.
Debt and debt service guarantees
- --------------------------------
At June 30, 2003, the Company has mortgage and other note obligations
on the balance sheet totaling $109,238,000. The Company currently does not have
any off-balance sheet debt service guarantees.
Surety bonds and standby letters of credit
- ------------------------------------------
As of June 30, 2003, the Company had $71,400,000 in surety bonds and
$1,880,000 in outstanding standby letters of credit, totaling $73,280,000 in
favor of local municipalities or financial institutions to guarantee the
construction of real property improvements or financial obligations. The
27
$71,400,000 in surety bonds are to guarantee the construction of public
improvements and infrastructure such as sewer, streets, traffic signals,
grading, and wildlife preservations in connection with the Company's various
development projects. Surety bonds are commonly required by public agencies from
homebuilders such as the Company and other real estate developers. The surety
bonds and standby letters of credit are renewable and expire upon completion of
the required improvements. Standby letters of credit are a form of credit
enhancement that is commonly required in real estate development to secure the
construction of public improvements. In the past three years, no surety bonds or
standby letters of credit have been drawn on for use to satisfy the Company's
obligations.
Executed contracts for site work and construction activity
- ----------------------------------------------------------
The Company has entered into site work and construction contracts with
various suppliers and contractors. These contracts are for construction and
development activity in the numerous communities the Company has under
development, and are originated in the normal course of business. The site work
contracts generally require specific performance by the contractor to prepare
the land for construction and are written on a community by community basis. For
larger communities, site work contracts are awarded in phases, in order to limit
any long term commitment by the Company or its contractor. Generally, site work
contracts are completed in less than one year. The Company acts as a general
contractor and contracts with various subcontractors at specified prices for
construction of its homes. Subcontractors generally work on a piece meal basis
and are not awarded contracts for a specified number of homes. These commitments
are typically funded by construction loans and are originated in the normal
course of business.
The following table summarizes the Company's outstanding obligations as
of June 30, 2003 and the effect such obligations are expected to have on
liquidity and cash flow in future periods. For Mortgage and Other Note
Obligations, payments due by period are shown based on the expiration date of
the loan. Generally, the Company repays the loan obligation prior to the
expiration date of the loan, as the homes which are collateral are sold. Loan
obligations are repaid at a predetermined percentage (approximately 85%) of the
base selling price of a home when a sale is completed (see Note 6 of Notes to
Consolidated Financial Statements for further details), which usually results in
the loan being fully repaid before all lots of the development are delivered.
28
Payments Due by Year Ended June 30,
-----------------------------------------------------------------------------------------------------
Obligations Total 2004 2005 2006 2007 2008 thereafter
------------ ---------- ----------- ---------- ----------- ----------- ------------
Mortgage and Other
Note Obligations $109,238 $87,866 $13,178 $6,699 $1,495 $ - $ -
Operating Leases 3,318 776 709 639 382 158 654
Affordable Housing
Contributions 2,885 777 776 551 451 330 -
------------ ---------- ----------- ---------- ----------- ----------- ------------
Total Obligations $115,441 $89,419 $14,663 $7,889 $2,328 $488 $654
============ ========== =========== ========== =========== =========== ============
The above tables do not include certain obligations made in the
ordinary course of business, such as trade payables.
Critical Accounting Policies
- ----------------------------
The preparation of the Company's consolidated financial statements
require the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to revenue recognition, impairment of
real estate assets, capitalization of costs, environmental liability exposure,
miscellaneous litigation reserves, and income taxes. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies reflect
the more significant judgments and estimates used in the preparation of the
consolidated financial statements.
29
Consolidation of Variable Interest Entities
- -------------------------------------------
In January 2003, the FASB issued FASB Interpretation No. 46
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51"
("FIN 46") which 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.
FIN 46 requires significant use of judgment and estimates in
determining its application. See New Accounting Pronouncements section of this
10-K for additional discussion of FIN 46.
Estimates
- ---------
Impairment charges to reduce the Company's real estate inventories to
net realizable value are recorded using several factors including management's
plans for future operations, recent operating results and projected cash flows,
which include assumptions related to expected future demand and market
conditions. The adequacy of the Company's impairment charges could be materially
affected by changes in market conditions.
Estimates for construction costs for homes closed are recorded in the
period when the related home is closed. These estimates are based on detailed
budgets for each home and historical experience and trends. If actual costs
change, significant variances may be encountered.
Reserves for the estimated cost of homes under warranty are recorded in
the period in which the related home is closed and is based on historical
experience and trends. Should actual warranty experience change, revisions to
the estimated warranty liability would be required.
Estimates for the costs to complete land development are recorded upon
completion of the related land development project. Estimates for land and land
development costs are allocated to development phases based on the total number
of lots expected to be developed within each subdivision and are based on
detailed budgets for the land development project and historical experience and
trends. If actual costs or the total number of lots developed changes,
significant variances may be encountered.
Revenue recognition
- -------------------
Revenue is primarily derived from residential property sales. The
Company recognizes revenues from sales of residential properties at the time of
closing. The Company also sells developed and undeveloped land in bulk and under
option agreements. Revenues from sales of land and other real estate are
30
recognized when the Company has received an adequate cash down payment and all
other conditions necessary for profit recognition have been satisfied. To the
extent that certain sales or portions thereof do not meet all conditions
necessary for profit recognition, the Company uses other methods to recognize
profit, including the percentage-of-completion, cost recovery and the deposit
methods. These methods of profit recognition defer a portion or all of the
profit to the extent it is dependent upon the occurrence of future events. Also,
in general, specific identification and relative sales value methods are used to
determine the cost of sales. Management estimates of future costs to be incurred
after the completion of each sale are included in cost of sales. A change in
circumstances that causes these estimates of future costs to increase or
decrease significantly would affect the gain or loss recognized on future sales.
Impairment
- ----------
The Company assesses the impairment of real estate assets when events
or changes in circumstances indicate that the net book value may not be
recoverable. Indicators the Company considers important which could trigger an
impairment review include the following:
- significant negative industry or economic trends;
- a significant underperformance relative to historical or projected
future operating results;
- a significant change in the manner in which an asset is used; and
- an accumulation of costs significantly in excess of the amount
originally expected to construct an asset.
Real estate is stated at the lower of cost or estimated fair value
using the methodology described as follows. A write-down to estimated fair value
is recorded when the Company determines that the net book value exceeds the
estimated selling prices less cost to sell. These evaluations are made on a
property-by-property basis. When the Company determines that the net book value
of an asset may not be recoverable based upon the estimated undiscounted cash
flow, an impairment write-down is recorded. Values from comparable property
sales will also be considered. The evaluation of future cash flows and fair
value of individual properties requires significant judgment and assumptions,
including estimates of market value, development absorption, and remaining
development costs. Significant adverse changes in circumstances affecting these
judgments and assumptions in future periods could cause a significant impairment
adjustment to be recorded.
31
Capitalization of costs
- -----------------------
Costs capitalized include, direct construction and development costs,
including predevelopment costs, interest on indebtedness, real estate taxes,
insurance, construction overhead and indirect project costs. Costs previously
capitalized related to any abandoned development opportunities are written off
when it is determined such costs will not provide any future benefits. Any
decrease in development activity may result in a portion of capitalized costs to
be expensed as incurred.
Environmental liability exposure
- --------------------------------
Development and sale of real property creates a potential for
environmental liability on the part of the Company as owner and developer, for
its own acts as well as those of prior owners of the subject property or
adjacent parcels. If hazardous substances are discovered on or emanating from
any of the Company's properties, the Company and prior owners, may be held
liable for costs and liabilities relating to such hazardous substances.
Environmental studies are generally undertaken in connection with property
acquisitions by the Company. In the event the Company incurs environmental
remediation costs, including clean up costs, consulting fees for environmental
studies and investigations, monitoring costs, and legal costs relating to clean
up, litigation defense, and the pursuit of responsible third parties, such costs
incurred in connection with properties previously sold are expensed. Costs
relating to land under development and undeveloped land are capitalized as part
of development costs. Costs incurred for properties to be sold are deferred and
charged to cost of sales when the properties are sold. Should a previously
undetected, substantial environmental hazard be found on the Company's
properties, significant liquidity could be consumed by the resulting clean up
requirements and a material expense may be recorded. Further, governmental
regulation on environmental matters affecting residential development could
impose substantial additional expense to the Company, which could adversely
affect the results of operations of the Company or the value of properties
owned, or under contract of purchase by the Company (see Item 3, Legal
Proceedings, and Note 11 of Notes to Consolidated Financial Statements for a
discussion of specific environmental litigation).
Income taxes
- ------------
As part of the process of preparing the consolidated financial
statements, significant management judgment is required to estimate income
taxes. Estimates are based on interpretation of tax laws. The Company estimates
actual current tax due and assesses temporary differences resulting from
32
differing treatment of items for tax and accounting purposes. The temporary
differences result in deferred tax assets and liabilities, which are included
within the consolidated balance sheet (see Note 8 of Notes to Consolidated
Financial Statements for a discussion of income taxes). Adjustments may be
required by a change in assessment of deferred tax assets and liabilities,
changes due to audit adjustments by Federal and State tax authorities, and
changes in tax laws. To the extent adjustments are required in any given period
the adjustments would be included within the tax provision in the statement of
operations and/or balance sheet. These adjustments could materially impact the
financial position and results of operation and liquidity of the Company.
New Accounting Pronouncements
- -----------------------------
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 June, 2001, the FASB issued SFAS No. 141, "Business Combinations"
("SFAS No. 141"), which establishes standards for reporting business
combinations entered into after June 30, 2001 and supercedes 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, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), which establishes standards for financial
accounting and reporting for intangible assets acquired individually of 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 supercedes 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 new fiscal year on July 1, 2001. The
33
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 and does not expect that
the adoption will have a material impact on its consolidated results of
operations and financial position.
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 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
34
after May 15, 2002. The Company adopted the provisions of this statement on July
1, 2002 and adoption did not have a material impact on the Company's results of
operations or financial position.
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 does not anticipate a material
impact on the results of operations or financial position from the adoption of
SFAS No. 146.
In December 2002 the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS No 148") which
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, the FASB issued FASB Interpretation No. 46
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51"
("FIN 46"). A Variable Interest Entity (VIE) is created when (i) the equity
investment at risk is not sufficient to permit the entity from financing its
activities without additional subordinated financial support from other parties
or (ii) equity holders either (a) lack direct or indirect ability to make
decisions about the entity, (b) are not obligated to absorb expected losses of
the entity or (c) do not have the right to receive expected residual returns of
the entity if they occur. If an entity is deemed to be a VIE, pursuant to FIN
46, an enterprise that absorbs a majority of the expected losses of the VIE is
considered the primary beneficiary and must consolidate the VIE. Fin 46 is
effective immediately for VIE's created after January 31, 2003. For VIE's
created before January 31, 2003, FIN 46 must be applied when the transition
period provisions are adopted.
Based on the provisions of FIN 46, the Company has concluded that
whenever it options land or lots from an entity and pays a significant
non-refundable deposit, a VIE is created under condition (ii) (b) of the
previous paragraph. The Company has been deemed to have provided subordinated
financial support, which refers to variable interests that will absorb some or
all of an entity's expected theoretical losses if they occur. For each VIE
created the Company will compute expected losses and residual returns based on
the probability of future cash flows as outlined in FIN 46. If the Company is
35
deemed to be the primary beneficiary of the VIE it will consolidate the VIE on
its balance sheet. The fair value of the VIE's inventory will be reported as
"Inventory Not Owned - Variable Interest Entities".
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 "Accounting for Certain Financial Instruments With
Characteristics of Both Liabilities and Equity" ("SFAS No. 150"). This standard
requires issuers to classify as liabilities the following three types of
freestanding financial instruments: (1) mandatorily redeemable financial
instruments, (2) obligations to repurchase the issuer's equity shares by
transferring assets; and (3) certain obligations to issue a variable number of
shares. The Company will adopt the provisions of this statement, as required, on
July 1, 2003, and it is not expected to have a significant financial impact on
the financial position of the Company.
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 Act of 1934, as amended (the
"Exchange Act") and are subject to the Safe Harbor provisions created by the
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. We do 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 our future results could differ
significantly from those expressed or implied by our 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 the price and availability of building material;
o changes in mortgage interest rates charged to buyers of the
Company's homes;
36
o changes in the availability and cost of financing for the Company's
operations, including land acquisition;
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;
o increased cost of suitable development land; and
o possible liabilities relating to environmental laws or other
applicable regulatory provisions.
37
Item 7A. 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
is exposed to market risk in the area of interest rate changes. A majority of
the Company's debt is variable rate based on LIBOR and prime rate, and,
therefore, affected by changes in market interest rates. Based on current
operations, an increase/decrease in interest rates of 100 basis points will
result in a corresponding increase/decrease in cost of sales and interest
charges incurred by the Company of approximately $1,155,000 in a fiscal year, a
portion of which will be capitalized and included in cost of sales as homes are
delivered. Generally, the Company has in the past been able to increase prices
to cover portions of any increase in cost of sales and interest charges incurred
resulting from any increase in interest rates. As a result, the Company believes
that reasonably possible near-term changes in interest rates will not result in
a material negative effect on future earnings, fair values or cash flows of the
Company.
38
Item 8. Financial Statements and Supplementary Data.
- ------- --------------------------------------------
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of independent accountants 40
Consolidated balance sheets at June 30, 2003
and June 30, 2002 41
Consolidated statements of operations and retained
earnings for the years ended June 30, 2003,
2002 and 2001 42
Consolidated statements of shareholders' equity for the
years ended June 30, 2003, 2002 and 2001 43
Consolidated statements of cash flows for the
years ended June 30, 2003, 2002 and 2001 44
Notes to consolidated financial statements 45
All other schedules have been omitted because they are not applicable
or the required information is shown in the consolidated financial statements or
notes thereto.
The individual financial statements of the Registrant's subsidiaries
have been omitted since the Registrant is primarily an operating company and all
subsidiaries included in the consolidated financial statements, in the
aggregate, do not have minority equity interest and/or indebtedness to any
person other than the Registrant or its consolidated subsidiaries in amounts
which together exceed 5 percent of total consolidated assets at June 30, 2003,
excepting indebtedness incurred in the ordinary course of business.
39
Report of Independent Auditors
To the Board of Directors and Shareholders
of Orleans Homebuilders, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Orleans Homebuilders, Inc. and its subsidiaries (the "Company") at June 30, 2003
and June 30, 2002, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 2003 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 4, the Company has adopted the provisions of FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities ("VIEs"), an
interpretation of ARB No. 51" for VIEs entered into or modified after February
1, 2003. Such adoption effects land purchase transactions with significant
deposits.
PricewaterhouseCoopers LLP
Philadelphia, PA
September 5, 2003
40
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
June 30, June 30,
2003 2002
-------------- -----------------
Assets
Cash and cash equivalents $ 8,883 $ 7,257
Restricted cash - customer deposits 15,065 9,230
Real estate held for development and sale:
Residential properties completed or under construction 109,895 112,279
Land held for development or sale and improvements 100,791 82,699
Inventory not owned - Variable Interest Entities 18,443 -
Property and equipment, at cost, less accumulated depreciation 2,428 1,726
Deferred income taxes 233 -
Intangible assets, net of amortization 4,180 3,718
Receivables, deferred charges and other assets 30,791 21,590
-------------- -----------------
Total Assets $ 290,709 $ 238,499
============== =================
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ 29,306 $ 24,199
Accrued expenses 27,445 23,232
Customer deposits 16,539 9,775
Obligations related to inventory not owned 17,643 -
Mortgage and other note obligations primarily secured by real
estate held for development and sale 106,707 113,058
Notes payable - related parties 2,500 3,750
Other notes payable 31 1,224
Deferred income taxes - 618
-------------- ------------------
Total Liabilities 200,171 175,856
-------------- ------------------
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, 13,364,797 and 12,698,131
shares issued at June 30, 2003 and June 30, 2002, respectively 1,337 1,270
Capital in excess of par value - common stock 18,659 17,726
Retained earnings 67,589 40,502
Treasury stock, at cost (727,232 and 812,232 shares held at June 30, 2003 and
June 30, 2002, respectively) (1,046) (843)
-------------- -----------------
Total Shareholders' Equity 89,539 61,655
-------------- -----------------
Total Liabilities and Shareholders' Equity $ 290,709 $ 238,499
============== =================
See notes to consolidated financial statements
41
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Statements of Operations
and Retained Earnings
(in thousands, except per share amounts)
For the year ended June 30,
2003 2002 2001
--------------- -------------- ---------------
Earned revenues
Residential properties $ 382,570 $ 351,060 $ 282,384
Land sales 744 80 1,786
Other income 5,171 3,516 3,052
--------------- -------------- ---------------
388,485 354,656 287,222
--------------- -------------- ---------------
Costs and expenses
Residential properties 294,066 283,593 236,129
Land sales 875 102 1,664
Other 3,436 2,520 1,290
Selling, general and administrative 44,821 39,599 30,181
Interest
Incurred 6,420 7,644 8,992
Less capitalized (6,188) (7,522) (8,567)
--------------- -------------- ---------------
343,430 325,936 269,689
--------------- -------------- ---------------
Income from operations before income taxes 45,055 28,720 17,533
Income tax expense 17,758 10,807 6,774
--------------- -------------- ---------------
Net income 27,297 17,913 10,759
Preferred dividends 210 210 210
--------------- -------------- ---------------
Net income available for common shareholders 27,087 17,703 10,549
Retained earnings, at beginning of period 40,502 22,799 12,250
--------------- -------------- ---------------
Retained earnings, at end of period $ 67,589 $ 40,502 $ 22,799
=============== ============== ===============
Basic earnings per share $ 2.18 $ 1.51 $ 0.91
=============== ============== ===============
Diluted earnings per share $ 1.65 $ 1.09 $ 0.67
=============== ============== ===============
See notes to consolidated financial statements
42
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(dollars in thousands)
Preferred Stock Common Stock
Shares Shares
Issued and Issued and
Outstanding Amount Outstanding Amount
------------ --------- ------------ ----------
Balance at July 1, 2000 100,000 $ 3,000 12,698,131 $ 1,270
Net income
Preferred dividends
------------ --------- ------------ ----------
Balance at June 30, 2001 100,000 3,000 12,698,131 1,270
Stock options exercised
Shares issued in connection with
acquisition of PLC
Net income
Preferred dividends
------------ --------- ------------ ----------
Balance at June 30, 2002 100,000 3,000 12,698,131 1,270
Stock options exercised
Treasury stock purchase
Shares issued in connection with
acquisition of PLC
Net income
Preferred dividends
------------ --------- ------------ ----------
Balance at June 30, 2003 100,000 $ 3,000 12,698,131 $ 1,270
============ ========= ============ ==========
[RESTUBBED]
Capital in
Excess of Treasury Stock
Par Value - Retained Share
Common Stock Earnings Held Amount Total
------------- ----------- ------------- ------- -----------
Balance at July 1, 2000 $ 17,726 $ 12,250 1,340,238 $ (975) $ 33,271
Net income 10,759 10,759
Preferred dividends (210) (210)
------------- ----------- ------------- ------- -----------
Balance at June 30, 2001 17,726 22,799 1,340,238 (975) 43,820
Stock options exercised (453,006) 132 132
Shares issued in connection with
acquisition of PLC (75,000) -
Net income 17,913 17,913
Preferred dividends (210) (210)
------------- ----------- ------------- ------- -----------
Balance at June 30, 2002 17,726 40,502 812,232 (843) 61,655
Stock options exercised (40,000) 37 37
Treasury stock purchase 30,000 (240) (240)
Shares issued in connection with
acquisition of PLC (75,000) -
Net income 27,297 27,297
Preferred dividends (210) (210)
------------- ----------- ------------- ------- -----------
Balance at June 30, 2003 $ 17,726 $ 67,589 727,232 $(1,046) $ 88,539
============= =========== ============= ======= ===========
See notes to consolidated financial statements
43
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Twelve Months Ended
June 30,
2003 2002 2001
-------------- ---------- -----------
Cash flows from operating activities:
Net income $ 27,297 $ 17,913 $ 10,759
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 449 526 507
Deferred taxes (851) (1,500) (227)
Noncash compensation 11 45 33
Changes in operating assets and liabilities:
Restricted cash - customer deposits (5,835) (806) 313
Real estate held for development and sale (15,708) (22,289) 362
Receivables, deferred charges and other assets (10,001) (6,055) (6,126)
Accounts payable and other liabilities 9,320 4,220 10,895
Customer deposits 6,764 641 38
------------ ---------- -----------
Net cash provided by (used in) operating activities 11,446 (7,305) 16,554
------------ ---------- -----------
Cash flows from investing activities:
Purchases of property and equipment (1,151) (1,273) (412)
Acquisition of PLC, net of cash acquired (462) (1,405) (4,714)
------------ ---------- -----------
Net cash used in investing activities (1,613) (2,678) (5,126)
------------ ---------- -----------
Cash flows from financing activities:
Borrowings from loans secured by real estate assets 252,962 262,981 178,119
Repayment of loans secured by real estate assets (259,313) (252,528) (181,602)
Borrowings from other note obligations 4,000 17,770 10,673
Repayment of other note obligations (5,443) (24,465) (7,567)
Treasury stock purchase (240) - -
Stock options exercised 37 132 -
Preferred stock dividend (210) (210) (210)
------------ ---------- -----------
Net cash (used in) provided by financing activities (8,207) 3,680 (587)
------------ ---------- -----------
Net increase (decrease) in cash and cash equivalents 1,626 (6,303) 10,841
Cash and cash equivalents at beginning of period 7,257 13,560 2,719
------------ ---------- -----------
Cash and cash equivalents at end of period $ 8,883 $ 7,257 $ 13,560
============ ========== ===========
See notes to consolidated financial statements
44
Orleans Homebuilders, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Orleans Homebuilders, Inc. and its subsidiaries (the "Company" or "OHB") are
currently engaged in residential real estate development in New Jersey, North
Carolina, Pennsylvania, South Carolina and Virginia. A summary of the
significant accounting principles and practices used in the preparation of the
consolidated financial statements is as follows:
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. On October 13, 2000, the
Company acquired all of the issued and outstanding shares of Parker & Lancaster
Corporation ("PLC"). Unless otherwise indicated, the term, the "Company" or
"OHB" includes the accounts of PLC and its subsidiaries. PLC is engaged in
residential real estate development in North Carolina, South Carolina and
Virginia. The Consolidated Statements of Operations and Retained Earnings and
the Consolidated Statements of Cash Flows include the accounts of PLC and its
wholly-owned subsidiaries beginning October 13, 2000. The Consolidated Balance
Sheets include the accounts of PLC and its wholly-owned subsidiaries as of June
30, 2003 and 2002. In addition, certain joint ventures and business arrangements
will be consolidated pursuant to FIN 46. See recent accounting pronouncements
section of this Note 1 and Note 4 for additional discussion of FIN 46. All
material intercompany transactions and accounts have been eliminated.
Earned revenues from real estate transactions
The Company recognizes revenues from sales of residential properties at the time
of closing. The Company also sells developed and undeveloped land in bulk and
under option agreements. Revenues from sales of land and other real estate are
recognized when the Company has received an adequate cash down payment and all
other conditions necessary for profit recognition have been satisfied. To the
extent that certain sales or portions thereof do not meet all conditions
necessary for profit recognition, the Company uses other methods to recognize
profit, including the percentage-of-completion, cost recovery and the deposit
methods. These methods of profit recognition defer a portion or all of the
profit to the extent it is dependent upon the occurrence of future events.
Real estate capitalization and cost allocation
Residential properties completed or under construction are stated at cost or
estimated net realizable value, whichever is lower. Costs include land and land
improvements, direct construction costs and development costs, including
predevelopment costs, interest on indebtedness, real estate taxes, insurance,
construction overhead and indirect project costs. Selling and advertising costs
are expensed as incurred. Total estimated costs of multi-unit developments are
allocated to individual units based upon specific identification methods.
Land and improvement costs include land, land improvements, interest on
indebtedness and real estate taxes. Appropriate costs are allocated to projects
on the basis of acreage, dwelling units and relative sales value. Land held for
development and sale and improvements are stated at cost or estimated net
realizable value, whichever is lower.
Land and land improvements applicable to condominiums, townhomes and
single-family homes, are transferred to construction in progress when
construction commences.
45
Interest costs included in costs and expenses of residential properties and land
sold for fiscal years 2003, 2002 and 2001 were $8,073,000, $11,958,000 and
$11,789,000, respectively.
Intangible Assets
Effective July 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("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 Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No.
141"). In accordance with SFAS No. 142, upon adoption of SFAS No. 142, the
Company discontinued the amortization relating to all existing indefinite lived
intangible assets. The amortization of indefinite lived intangible assets was
approximately $167,000 during the year ended June 30, 2001.
Intangible assets that have finite useful lives will be amortized over their
useful lives. SFAS No. 142 requires an annual assessment of goodwill and
non-amortizable intangible assets to determine potential impairment of such
asset. The initial assessment was completed upon adoption and again at June 30,
2003 and no impairment charge was determined to be required.
Advertising costs
The total amount of advertising costs charged to selling, general and
administrative expense was $5,731,000, $4,875,000 and $3,858,000 for the three
years ended June 30, 2003, 2002, and 2001, respectively.
Depreciation, amortization and maintenance expense
Depreciation and amortization is primarily provided on the straight-line method
at rates calculated to amortize the cost of the assets over their estimated
useful lives. Expenditures for maintenance, repairs and minor renewals are
expensed as incurred; major renewals and betterments are capitalized. At the
time depreciable assets are retired or otherwise disposed of, the cost and the
accumulated depreciation of the assets are eliminated from the accounts and any
profit or loss is recognized.
Leases
The Company's leasing arrangements as lessee include the leasing of certain
office space and equipment. These leases have been classified as operating
leases. Rent expense was approximately $623,000, $515,000, and $360,000 for the
three years ended June 30, 2003, 2002 and 2001, respectively. The Company has
operating lease commitments of $776,000, $709,000, $639,000, $382,000, $158,000
and $654,000 for the years ended June 30, 2004, 2005, 2006, 2007, 2008 and
thereafter, respectively.
Stock-Based Compensation
Effective July 1, 2002, the Company adopted the preferable fair value
recognition provisions of SFAS No. 123, "Accounting for Stock Issued to
Employees." The Company selected the prospective method of adoption as permitted
by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure." See Note 9 for additional disclosure and discussion on stock-based
compensation.
46
Income taxes
The Company and its subsidiaries file a consolidated federal income tax return.
See Note 8 for an additional discussion of income tax matters.
Earnings per share
Basic earnings per common share are computed by dividing net income by the
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 PLC acquisition. Diluted earnings per share include
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued.
Disclosures about fair value of financial instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
the Company to disclose the estimated fair market value of its financial
instruments. The Company believes that the carrying value of its financial
instruments (primarily mortgages receivable and mortgage notes payable)
approximates fair market value and that any differences are not significant.
This assessment is based upon substantially all of the Company's debt
obligations being based upon LIBOR or the prime rate of interest which are
variable market rates.
Segment reporting
Since the Company operates primarily in a single extended geographical market
with similar products at its various development projects, it is considered to
represent a single operating segment for financial reporting purposes.
Consolidated statements of cash flows
For purposes of reporting cash flows, short-term investments with original
maturities of ninety days or less are considered cash equivalents. Interest
payments, net of amounts capitalized, for fiscal 2003, 2002 and 2001, were
$232,000, $122,000 and $373,000, respectively. Income taxes paid were
$17,007,000, $11,565,000 and $6,718,000 for fiscal 2003, 2002 and 2001,
respectively.
Non-cash activity
The Company has a Convertible Subordinated 7% Note dated August 8, 1996 issued
to Jeffrey P. Orleans, Chairman and Chief Executive Officer of the Company. This
note is included in the Notes payable - related parties category of the balance
sheet and 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,
as of January, 1, 2003, Mr. Orleans converted the first annual installment of
$1,000,000 into 666,666 shares of the Company's common stock. As of June 30,
2003 the remaining balance of the Convertible Subordinated 7% Note is
$2,000,000.
On April 3, 2002, Benjamin D. Goldman, Vice Chairman of the Company, surrendered
47,619 shares of Company common stock, with a fair market value of $6.30 per
share, in exchange for the exercise of stock options totaling 400,000 shares of
common stock, issued from treasury stock, at $.75 per share. The fair market
value of the stock surrendered was determined by the market price for the stock
on the American Stock Exchange at the close of business on April 3, 2002.
Non-cash assets acquired and liabilities assumed as a result of the PLC
acquisition were approximately $47,234,000 and $43,089,000, respectively. In
connection with the acquisition, the Company issued a subordinated promissory
note in the aggregate principal amount of $1,000,000, payable over four years.
In addition, the Company agreed to issue an aggregate of 300,000 shares of
47
common stock issuable in equal installments on each of the next four
anniversaries of the closing of the acquisition. The former shareholders of PLC
have the right to cause the Company to repurchase the common stock issued in
this transaction approximately five years after the closing of the acquisition
at a price of $3.33 per share.
Comprehensive income
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130") effective for fiscal
years beginning after December 15, 1997. The statement changes the reporting of
certain items reported as changes in the shareholders' equity section of the
balance sheet and establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all components of comprehensive
income shall be reported in the financial statements in the period in which they
are recognized. Furthermore, a total amount for comprehensive income shall be
displayed in the financial statements. The Company has adopted this standard
effective July 1, 1998. The primary components of comprehensive income are net
income, foreign currency translations, minimum pension liabilities, and the
change in value of certain investments in marketable securities classified as
available-for-sale. Upon adoption of Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133") and Statement of Financial Accounting Standards No. 137 "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133" ("SFAS No. 137") (effective for the Company on
July 1, 2000), comprehensive income was also affected by the mark-to-market on
the effective portion of hedge instruments. Since the Company had no material
such items, comprehensive income and net income are the same for fiscal 2003,
2002 and 2001.
Management's estimates and assumptions
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent accounting pronouncements
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 June, 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS No.
141"), which establishes standards for reporting business combinations entered
into after June 30, 2001 and supercedes 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.
48
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"), which establishes standards for financial accounting
and reporting for intangible assets acquired individually of 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 supercedes 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 new 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 and does not expect that the
adoption will have a material impact on its consolidated results of operations
and financial position.
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 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 the provisions of this statement on July
1, 2002 and adoption did not have a material impact on the Company's results of
operations or financial position.
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 does not anticipate a material impact on the results of operations or
financial position from the adoption of SFAS No. 146.
49
In December 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS No 148") which 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, the FASB issued FASB Interpretation No. 46 "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"). A
Variable Interest Entity (VIE) is created when (i) the equity investment at risk
is not sufficient to permit the entity from financing its activities without
additional subordinated financial support from other parties or (ii) equity
holders either (a) lack direct or indirect ability to make decisions about the
entity, (b) are not obligated to absorb expected losses of the entity or (c) do
not have the right to receive expected residual returns of the entity if they
occur. If an entity is deemed to be a VIE, pursuant to FIN 46, an enterprise
that absorbs a majority of the expected losses of the VIE is considered the
primary beneficiary and must consolidate the VIE. Fin 46 is effective
immediately for VIE's created after January 31, 2003. For VIE's created before
January 31, 2003, FIN 46 must be applied when the transition period provisions
are adopted.
Based on the provisions of FIN 46, the Company has concluded that whenever it
options land or lots from an entity and pays a significant non-refundable
deposit, a VIE is created under condition (ii) (b) of the previous paragraph.
The Company has been deemed to have provided subordinated financial support,
which refers to variable interests that will absorb some or all of an entity's
expected theoretical losses if they occur. For each VIE created the Company will
compute expected losses and residual returns based on the probability of future
cash flows as outlined in FIN 46. If the Company is deemed to be the primary
beneficiary of the VIE it will consolidate the VIE on its balance sheet. The
fair value of the VIE's inventory will be reported as "Inventory Not Owned -
Variable Interest Entities".
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150
"Accounting for Certain Financial Instruments With Characteristics of Both
Liabilities and Equity" ("SFAS No. 150"). This standard requires issuers to
classify as liabilities the following three types of freestanding financial
instruments: (1) mandatorily redeemable financial instruments, (2) obligations
to repurchase the issuer's equity shares by transferring assets; and (3) certain
obligations to issue a variable number of shares. The Company will adopt the
provisions of this statement, as required, on July 1, 2003, and it is not
expected to have a significant financial impact on the financial position of the
Company.
50
Note 2. Acquisitions
On October 13, 2000, the Company acquired all of the issued and outstanding
shares of PLC and entered into employment agreements ranging from two to three
years with certain of the former PLC shareholders for combined consideration of
(i) approximately $5,000,000 in cash; (ii) $1,000,000 of subordinated promissory
notes which bear interest at the prime rate, subject to a cap of 10% and a floor
of 8% (subject to the 8% floor at June 30, 2003 and 2002) with principal payable
over four years; (iii) 300,000 shares of common stock of the Company (150,000 of
which are issuable under certain employment agreements) payable in equal
installments on each of the four anniversaries of the closing of the
acquisition; and (iv) contingent payments representing an aggregate of 50% of
PLC's pre-tax profits in excess of $1,750,000 for each of the fiscal years ended
June 30, 2001, 2002 and 2003, subject to an aggregate cumulative pay-out
limitation of $2,500,000. Through June 30, 2003, the contingent payments earned
based on PLC's share of the pre-tax profits have reached the cumulative payout
limitation of $2,500,000. The Company also incurred approximately $485,000 in
acquisition costs to complete this transaction. The Company accounted for these
transactions in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations", whereby certain of these amounts were considered to be
part of the purchase price of the business and the remainder part of employee
compensation. With respect to the amounts allocated to the purchase, such amount
was allocated to the fair value of the assets and liabilities acquired with the
excess of approximately $2,480,000 allocated to intangible assets and goodwill.
Accumulated amortization of the intangible assets and goodwill at June 30, 2001
was approximately $167,000. In accordance with SFAS No. 142, the Company
discontinued the amortization related to all intangible assets and goodwill
recorded in connection with the PLC acquisition. See also Intangible Assets in
Note 1 to these Consolidated Notes. During fiscal 2003, 2002 and 2001 intangible
assets and goodwill increased by approximately $462,000, $1,405,000 and
$183,000, respectively, as a result of the allocation of additional contingent
payments earned by the former PLC shareholders.
The former shareholders of PLC have the right to cause the Company to repurchase
the common stock issued pursuant to the PLC acquisition and related employment
agreements approximately five years after the closing of the acquisition at a
price of $3.33 per share. If the PLC acquisition occurred on July 1, 2000, pro
forma information for the Company would have been as follows:
For the Year Ended
June 30, 2001
(unaudited)
(in thousands, except per
share amounts)
Revenue $ 306,867
Income from operations 17,623
Net income available for
common shareholders 10,832
Earnings per share:
Basic 0.93
Diluted 0.69
51
Note 3. Certain Transactions with Related Parties
In December 1997, the Company purchased land approved for the development of 181
lots from Mr. Orleans in exchange for a $500,000 Purchase Money Mortgage, plus a
share of one-half of the gross profit in excess of 16% on 134 of the lots.
During fiscal 2002 and 2001, 54 and 48 lots, respectively, have settled and the
Company incurred additional costs of approximately $383,000 and $145,000,
respectively, for Mr. Orleans' share of the gross profit. As of June 30, 2002,
all of the lots have been settled and the Company paid Mr. Orleans approximately
$660,000 in total under this agreement, with the remaining amount of $29,000
being paid during fiscal 2003.
Mr. Goldman and Mr. Orleans each own a 33-1/3% equity interest in a limited
partnership that has a consulting agreement with a third party real estate title
insurance company (the "Title Company"). The Company purchases real estate title
insurance and related closing services from the Title Company for various
parcels of land acquired by the Company. The Company paid the Title Company
approximately $80,000, $190,000 and $197,000, for the fiscal years 2003, 2002
and 2001, respectively. These costs are considered to approximate fair value for
services provided. In addition, the Company's homebuyers may elect to utilize
the Title Company for the purchase of real estate title insurance and real
estate closing services but, the homebuyers are under no obligation to do so.
Under the terms of the consulting agreement, which expires in July 2007, the
limited partnership providing the consulting services is entitled to receive 50%
of the pretax profits attributable to certain operations of the Title Company,
subject to certain adjustments. In addition, the limited partnership and the
principals of the limited partnership, including Mr. Goldman and Mr. Orleans,
have agreed not to engage in the real estate title insurance business or the
real estate closing business during the term of the consulting agreement.
During fiscal 2003, Jeffrey P. Orleans, Chairman and Chief Executive Officer of
the Company, purchased five low income homes, with an aggregate sales value of
approximately $317,000. These transactions satisfied, in part, the Company's low
income housing requirements in Mount Laurel Township, New Jersey. The selling
prices for these homes, which are determined by state statute, are the same as
if the homes had been sold to unaffiliated third parties.
During fiscal 2003 the Company entered into two separate ten year leases for the
rental of office space with a company that is controlled by Mr. Orleans. The
Company expects to take possession of the leased premises sometime during fiscal
2004 at which time the lease term will begin. The annual rental for the leased
office space is $112,000 and escalates to $128,000 after the fifth year of the
lease. The Company is also responsible to pay its pro rata share of common area
maintenance costs. These costs are considered to approximate fair value for
services provided.
The Company leases office space and obtains real estate title insurance for
various parcels of land acquired by the Company from companies controlled by Mr.
Russell Parker, the president of the Company's subsidiary, PLC. The annual
rental for the office space leased from an entity controlled by Mr. Parker is
approximately $65,000 and is considered to approximate a fair market value
rental. The Company paid real estate title insurance premiums to an entity
controlled by Mr. Parker, of approximately $89,000, $69,000 and $12,000 for
fiscal 2003, 2002 and 2001, respectively. These costs are considered to
approximate fair value for services provided.
Real estate title insurance paid by the Company is capitalized as a cost of
acquiring the specific parcel in accordance with the Company's real estate
capitalization and cost allocation policies and is subsequently expensed as part
of cost of sales upon consummation of sales to the third party homebuyers. See
Note 1 to the consolidated financial statements for a discussion of these
policies.
52
See Note 6 to the consolidated financial statements for a discussion of other
related party financing transactions.
Note 4. Real Estate Held for Development and Sale
A summary of real estate held for development and sale is as follows:
Balance at June 30,
2003 2002
----------- -----------
(in thousands)
Condominiums and townhomes $ 28,837 $ 27,917
Single-family homes 81,058 84,362
Land held for development or
sale and improvements 100,791 82,699
Inventory not owned 17,643 -
----------- -----------
Total real estate held for
development and sale $ 228,329 $ 194,978
=========== ===========
In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"). A
Variable Interest Entity (VIE) is created when (i) the equity investment at risk
is not sufficient to permit the entity from financing its activities without
additional subordinated financial support from other parties or (ii) equity
holders either (a) lack direct or indirect ability to make decisions about the
entity, (b) are not obligated to absorb expected losses of the entity or (c) do
not have the right to receive expected residual returns of the entity if they
occur. If an entity is deemed to be a VIE, pursuant to FIN 46, an enterprise
that absorbs a majority of the expected losses of the VIE is considered the
primary beneficiary and must consolidate the VIE. Fin 46 is effective
immediately for VIE's created after January 31, 2003. For VIE's created before
January 31, 2003, FIN 46 must be applied when the transition period provisions
are adopted.
Based on the provisions of FIN 46, the Company has concluded that whenever it
options land or lots from an entity and pays a significant non-refundable
deposit, a VIE is created under condition (ii) (b) of the previous paragraph.
The Company has been deemed to have provided subordinated financial support,
which refers to variable interests that will absorb some or all of an entity's
expected theoretical losses if they occur. For each VIE created the Company will
compute expected losses and residual returns based on the probability of future
cash flows as outlined in FIN 46. If the Company is deemed to be the primary
beneficiary of the VIE it will consolidate the VIE on its balance sheet. The
fair value of the VIE's inventory will be reported as "Inventory Not Owned -
Variable Interest Entities".
At June 30, 2003 the Company consolidated five VIE's created from February 1,
2003 to June 30, 2003 as a result of its option to purchase land or lots from
the selling entities. The Company paid cash or issued letters of credit deposits
to these five VIE's totaling $800,000. The Company's deposits and any costs
incurred prior to acquisition of the land or lots, represent our maximum
exposure to loss. The fair value of the property owned by the VIE's was
$18,443,000. Since the Company could not get the selling entities to provide us
with any financial information, the fair value of the property to be acquired
less cash deposits, which totaled $17,643,000, was reported on the balance sheet
as Obligations related to inventory not owned. Creditors, if any, of these VIE's
have no recourse against the Company.
53
The Company will continue to secure land and lots using options. Including the
deposits with the five VIE's above, at June 30, 2003, the Company has total
costs incurred to acquire land and lots of approximately $20,778,000, including
$10,556,000 of cash and letters of credit deposits. The total purchase price
under these contracts is approximately $301,208,000. Not all deposits are with
VIE's. The maximum exposure to loss is limited to deposits, although some
deposits are refundable, and costs incurred prior to the acquisition of the land
or lots. The Company is in the process of evaluating all option purchase
agreements in effect as of January 31, 2003. Options with VIE's where the
Company is the primary beneficiary will be consolidated when the transition
period provisions are adopted.
Sales status of residential properties completed or under construction is as
follows:
Balance at June 30,
2003 2002
----------- -----------
(in thousands)
Under contract for sale $ 76,303 $ 76,885
Unsold 33,592 35,394
----------- -----------
Total residential properties
completed or under construction
$ 109,895 $112,279
=========== ===========
Note 5. Property and Equipment
Property and equipment consists of the following:
Balance at June 30,
2003 2002
----------- -----------
(in thousands)
Property and equipment $ 4,640 $ 3,967
Less: accumulated depreciation (2,212) (2,241)
-------- ---------
Total property and equipment, net $ 2,428 $ 1,726
======== =========
Depreciation expense, included in Other Costs and Expenses on the Company's
Consolidated Statements of Operations and Retained Earnings, was $449,000,
$526,000 and $340,000 during fiscal 2003, 2002 and 2001, respectively.
54
Note 6. Mortgage and Other Note Obligations
The maximum balance outstanding under construction and inventory loan agreements
at any month end during fiscal 2003, 2002 and 2001 was $133,018,000,
$123,497,000 and $102,103,000, respectively. The average month end balance
during fiscal 2003, 2002 and 2001 was approximately $115,490,000, $114,491,000
and $83,875,000, respectively, bearing interest at an approximate average annual
rate of 4.51%, 5.63% and 7.85%, respectively. At June 30, 2003, the Company had
approximately $145,112,000, available to be drawn under existing secured
revolving and construction loans for planned development expenditures.
Obligations under residential property and construction loans amounted to
$103,797,000 and $107,551,000 at June 30, 2003 and 2002, respectively, and are
repaid at a predetermined percentage (approximately 85% on average) of the
selling price of a unit when a sale is completed. The repayment percentage
varies from community to community and over time within the same community.
Mortgage obligations secured by land held for development and sale and
improvements aggregating $2,910,000 and $5,507,000 at June 30, 2003 and 2002,
respectively, are due in varying installments through fiscal 2004 with annual
interest at variable rates based on LIBOR or the prime rate of interest plus a
spread. The LIBOR and prime rate of interest at June 30, 2003 were 1.3% and
4.0%, per annum, respectively.
As partial consideration for the October 13, 2000 acquisition of PLC, the
Company issued $1,000,000 of subordinated promissory notes to certain former PLC
shareholders. The Company, via certain employment agreements entered into as a
result of the acquisition, currently employs a majority of the former PLC
shareholders. The subordinated promissory notes of $500,000 and $750,000 are
included in Notes Payable - Related Parties at June 30, 2003 and 2002,
respectively. The promissory notes bear interest, payable quarterly, at the
prime rate, subject to a cap of 10% and a floor of 8% (currently incurring
interest subject to the 8% floor at June 30, 2003) with principal payable on the
anniversary date of the note in four equal installments.
Included in Notes Payable - Related Parties at June 30, 2003 and 2002 is a
balance due of $2,000,000 and $3,000,000, respectively under a Convertible
Subordinated 7% Note dated August 8, 1996 issued to Jeffrey P. Orleans. This
note is convertible into Orleans Homebuilders, Inc. common stock at $1.50 per
share. As of January 1, 2003, Mr. Orleans converted the first annual installment
of $1,000,000 into 666,666 shares of the Company's common stock. Interest is
payable quarterly and the remaining principal is due in annual installments of
$1,000,000 beginning on January 1, 2004 and 2005.
The Company has a $4,000,000 unsecured line of credit agreement with Mr.
Orleans. This agreement provides for an annual review for a one-year extension
and currently expires June 30, 2004 with annual interest at LIBOR plus 4% per
annum which is payable monthly. There were no principal and interest balances
outstanding under this unsecured line of credit agreement at June 30, 2003 and
2002.
Prior to October 22, 1993, the date of acquisition by the Company of Orleans
Construction Corp.("OCC"), a real estate company which was wholly owned by Mr.
Orleans, OCC had advanced funds to, borrowed funds from, and paid expenses and
debt obligations on behalf of Orleans Builders and Developers, L.P., a
partnership in which Mr. Orleans owns a majority interest. During fiscal 2002
the Company repaid the entire outstanding principal balance and accrued interest
of approximately $900,000. These advances bear interest at 7% annually. Interest
incurred on these advances amounted to $31,000 and $90,000 for the years ended
June 30, 2002 and 2001, respectively.
In June, 1997, the Chester County Industrial Development Authority issued bonds
in the amount of $1,855,000 and loaned the proceeds thereof to a subsidiary of
the Company. The proceeds from this obligation were used to construct and
operate a waste water spray irrigation facility which is servicing the Company's
Willistown Chase community in Chester County, Pennsylvania. In November 2002,
the
55
Company repaid the entire outstanding principal balance of the bonds plus
accrued interest. In connection with the repayment, the Company incurred a loss
of approximately $61,000 as a result of the write-off of the remaining
unamortized loan costs. Such amount is included in Interest Incurred on the
Company's Consolidated Statement of Operations for the fiscal year 2003.
Included in Other Notes Payable is the total principal and accrued interest of
$1,115,000 related to the bonds at June 30, 2002.
The following table summarizes the components of Other Notes Payable, including
related party amounts.
Final Annual Outstanding
Maturity Interest Balance at June 30,
Date Rate 2003 2002
-------------- ------------------- -------- --------
(in thousands)
Convertible Subordinated 7% Note January 2005 7% $ 2,000 $ 3,000
Subordinated Promissory Note October 2004 8%-10% 500 750
-------- --------
Subtotal notes payable related parties 2,500 3,750
-------- --------
Property and Equipment 2004-2005 7 1/4%-10% 31 63
Bonds Payable
(secured by mortgage receivables) 2003 10%-12% - 46
Quaker Sewer Bonds November 7% - 1,115
2002 -------- --------
Subtotal other notes payable 31 1,224
-------- --------
Total notes payable related parties
and other notes payable $ 2,531 $ 4,974
======== ========
56
Maturities of these obligations are (in thousands):
2004 $ 1,559
2005 1,496
---------
Total notes payable related
parties and other notes payable $ 2,531
=========
Note 7. Preferred Stock
On October 20, 1998, the Company issued 100,000 shares of Series D Preferred
Stock to Jeffrey P. Orleans in exchange for an aggregate amount of $3,000,000 in
Company notes formerly held by Mr. Orleans. The Series D Preferred Stock was
issued from an aggregate of 500,000 shares of Preferred Stock authorized. The
Series D Preferred Stock has a liquidation value of $3,000,000, or $30.00 per
share, and requires annual dividends of 7% of the liquidation value. The
dividends are cumulative and are payable quarterly on the first day of March,
June, September and December. The Series D Preferred Stock may be redeemed by
the Company at any time after December 31, 2003, in whole or in part, at a cash
redemption price equal to the liquidation value plus all accrued and unpaid
dividends on such shares to the date of redemption. The Series D Preferred Stock
is convertible into 2,000,000 shares of Common Stock.
Note 8. Income Taxes
The provision (benefit) for income taxes is summarized as follows:
For the Year Ended June 30,
---------------------------------
2003 2002 2001
---------- --------- --------
(in thousands)
Continuing operations:
Current $ 18,609 $ 12,307 $ 6,853
Deferred (851) (1,500) (79)
-------- ---------- ---------
Total provision (benefit) for
income taxes $ 17,758 $ 10,807 $ 6,774
======== ========== =========
The differences between taxes computed at federal income tax rates and amounts
provided for continuing operations are as follows:
For the Year Ended June 30,
---------------------------------
2003 2002 2001
---------- --------- --------
(in thousands)
Amount computed as statutory rate $ 15,319 $ 9,765 $ 5,961
State income taxes, net of federal 2,529 1,132 756
tax benefit
Other, net (90) (90) 57
-------- ---------- ---------
Total provision (benefit) for
income taxes $ 17,758 $ 10,807 $ 6,774
======== ========== =========
Deferred income taxes reflect the impact of "temporary differences" between the
amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws in accordance with the provisions of SFAS No.
109, "Accounting for Income Taxes". The principal components of the Company's
deferred tax asset of $233,000 at June 30, 2003 and deferred tax liability of
$618,000 at June 30, 2002, are temporary differences arising from interest and
real estate taxes incurred prior to commencing active construction being
capitalized for financial reporting purposes while being expensed for tax
purposes. In addition, temporary differences arise from net realizable value
adjustments recognized for financial reporting purposes, but not for tax
purposes. These temporary differences reverse ratably as the communities
sellout. The principal items making up the deferred income tax provisions
(benefits) from continuing operations are as follows:
57
For the Year Ended June 30,
2003 2002 2001
--------- ---------- -------
(in thousands)
Deferred provision (benefit) for income taxes:
Interest and real estate taxes $ (528) $ 298 $ (371)
Difference in tax accounting for land
and property sales, net (182) (876) 107
Accrued expenses (168) (223) 56
Gain from joint ventures 5 25 3
Deferred compensation (231) (784) (19)
Depreciation and other 272 41 53
State taxes (19) 19 92
------- -------- ------
Total benefit for income taxes $ (851) $ (1,500) $ (79)
======= ======== ======
The components of net deferred taxes payable consisted of the following:
Balance at June 30,
2003 2002
--------- ----------
(in thousands)
Gross deferred tax liabilities:
Capitalized interest and real estate taxes $ (2,263) $ (2,791)
State income taxes (1,300) (1,319)
Other (415) (144)
--------- ---------
Total gross deferred tax liabilities (3,978) (4,254)
--------- ---------
Less gross deferred tax assets:
Reserve for books, not for tax 557 389
Partnership income 134 139
Executive bonus 1,796 1,515
Employment contracts 113 133
Vacation accrual 98 128
Inventory adjustment 1,502 1,320
Other 11 12
--------- ---------
Total gross deferred tax assets 4,211 3,636
--------- ---------
Net deferred tax assets (liabilities) $ 233 $ (618)
========= =========
Temporary differences represent the cumulative taxable or deductible amounts
recorded in the financial statements in different years than recognized in the
tax returns. SFAS No. 109 requires the Company to record a valuation allowance
when it is "more likely than not that some portion or all of the deferred tax
assets will not be realized." It further states that "forming a conclusion that
58
a valuation allowance is not needed is difficult when there is negative evidence
such as cumulative losses in recent years." The Company does not have a
valuation allowance for deferred tax assets at June 30, 2003. The ultimate
realization of certain tax assets depends on the Company's ability to generate
sufficient taxable income in the future, including the effects of future
anticipated arising/reversing temporary differences.
Note 9. Stock Option Plan and Employee Compensation
Stock Based Compensation
In December 1992, the Board of Directors adopted (i) the 1992 Stock Incentive
Option Plan and (ii) the Non-Employee Directors Stock Option Plan. The 1992 Plan
allows for the grant of options to purchase up to 1,210,000 shares of Common
Stock of the Company. The options generally vest 25% per year beginning on the
date of grant. The Non-Employee Directors Stock Option Plan allows for the grant
of options to purchase up to 100,000 shares of Common Stock of the Company. All
Non-Employee Directors Stock Options have been issued. No options were granted
under either plan during the last three fiscal years.
In February, 1995, the Board of Directors adopted the 1995 Stock Option Plan for
Non-Employee Directors (the "1995 Directors Plan"). The 1995 Directors Plan
allowed for the grant of options to purchase up to 125,000 shares of Common
Stock of the Company. All 1995 Directors Plan options have been issued. The
options vest 25% per year beginning on the date of grant. No options were
granted under the 1995 Directors Plan during the last three fiscal years.
The option price per share under all plans is established at the fair market
value on the date of each grant. Total outstanding options under all three plans
as of June 30, 2003 aggregated 637,500 options to purchase shares of Common
Stock of the Company at prices ranging from $1.19 to $2.81 per share. All
options expire between March 2004 and December 2008.
At June 30, 2003, the Company has three stock-based compensation plans as
described more fully above. Prior to July 1, 2002, the Company accounted for
those plans under the recognition and measurement provisions of APB Opinion No.
25, "Accounting for Stock Issued to Employees", and related Interpretations.
Effective in fiscal 1997 the Company adopted the provisions of SFAS No. 123,
"Accounting for Stock Based Compensation" and, as permitted, the Company elected
to continue to utilize the intrinsic value method and not to charge the fair
value of such options as earned directly to the financial statements but to
disclose the effects of such a charge. In December 2002 the FASB issued SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
("SFAS No. 148") which 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. Thus, the
Company adopted the fair value recognition provisions of SFAS No. 123
prospectively to all stock awards granted, modified, or settled after July 1,
2002. Awards under the Company's plans generally have an exercise price equal to
the fair market value of the underlying common stock on the date of grant, and
generally vest over a four year period. The Company has not granted any awards
since fiscal 1999. Given the aforementioned, the Company's net income available
for common shareholders as reported and on a pro forma basis is the same for the
fiscal year ended June 30, 2003. In addition, under the intrinsic value method
of measurement as permitted by SFAS No. 123, for the fiscal years ended June 30,
2002 and 2001, net income available for common shareholders as reported is
$30,000 and $44,000 higher, respectively, than net income available for common
shareholders on a pro forma basis, resulting in no difference to Basic or
Diluted EPS as reported for the respective fiscal years. Thus, the Company
believes the tabular presentation of information required under SFAS No. 148 is
not meaningful and therefore is excluded.
59
The following summarizes stock option activity for the three plans during the
three years ended June 30, 2003:
2003 2002
---- ----
Weighted- Weighted-
Number of Average Number of Average
Options Exercise Price Options Exercise Price
---------- -------------- ---------- ---------------
Outstanding, 677,500 $1.49 1,185,625 $1.22
beginning of year
Granted - - -
Exercised (40,000) .92 (500,625) .86
Canceled - (7,500) 1.19
------- ---------
Outstanding, end 637,500 1.53 677,500 1.49
of year ======= =========
Exercisable, 637,500 1.53 626,875 1.49
end of year ======= =========
Available for grant, 255,000
end of year ======= 255,000
=========
[RESTUBBED]
2001
----
Weighted-
Number of Average
Options Exercise Price
--------- --------------
Outstanding, 1,188,125 $1.22
beginning of year
Granted - -
Exercised - -
Canceled (2,500) 2.06
----------
Outstanding, end 1,185,625 1.22
of year ==========
Exercisable, 1,092,969 1.20
end of year ==========
Available for grant,
end of year 247,500
The following table summarizes information about stock options outstanding at
June 30, 2003:
Options Outstanding
-------------------
Weighted-
Average Weighted
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Lives (in yrs) Price
- --------------------------------------------------------------------------------
$1.19 - $1.63 520,000 3.5 $1.34
$2.00 - $2.81 117,500 1.6 $2.38
-------
$1.19 - $2.81 637,500 3.1 $1.53
=======
[RESTUBBED]
Options Exercisable
-------------------
Weighted
Average
Number Exercise
Exercisable Price
- ------------------------------
520,000 $1.34
117,500 $2.38
-------
637,500 $1.53
=======
60
Employee Compensation
The Company has a bonus compensation plan for its executive officers and key
employees calculated at eight percent (8%) of its consolidated operating profits
before taxes and excluding nonrecurring items, income or loss arising from
extraordinary items, discontinued operations, debt repurchase at a discount, and
the amount of awards under the bonus compensation plan ("Pre-Tax Profits").
Three percent (3%) of the Pre-Tax Profits are awarded as an incentive to the
Chairman and approximately one and one-half percent (1.5%) is awarded to the
President and Chief Operating Officer. The remaining approximately 3.5% of the
Pre-Tax Profits is awarded at the discretion of the Chairman in consultation
with the President to other executive officers and key employees whose
performance merits recognition under goals and policies established by the Board
of Directors. These bonus awards are approved by the Compensation Committee of
the Board of Directors. In addition certain regional employees not participating
in the bonus compensation plan are awarded bonuses calculated at up to eight
percent (8%) of operating profits before taxes at a regional level. The total
amount of bonus compensation charged to selling, general and administrative
expense under these plans was $4,364,000, $3,789,000 and $1,863,000 for the
three years ended June 30, 2003, 2002 and 2001, respectively.
In connection with the acquisition of PLC on October 13, 2000, contingent
payments representing an aggregate of 50% of PLC's pretax profits in excess of
$1,750,000 for each of the fiscal years ended June 30, 2001, 2002 and 2003, are
payable to certain of the former PLC shareholders. The contingent payments are
subject to an aggregate cumulative pay-out limitation of $2,500,000. Contingent
payments of approximately $577,000, $1,529,000 and $394,000, were earned and
accrued for in fiscal 2003, 2002 and 2001, respectively. Contingent payments
charged to intangible assets and goodwill amounted to $462,000, $1,405,000 and
$183,000 for fiscal 2003, 2002 and 2001, respectively. The remaining portion of
the contingent payments was charged to selling, general and administrative
expense.
401(k) Plan
The Company has a savings and retirement plan (the "401(k) Plan"), which is a
voluntary, defined contribution plan. All employees in the northern region are
eligible to participate in the 401(k) Plan after attaining age 21 and completing
one year of continuous service with the Company. At the discretion of the Board
of Directors, the Company may make matching contributions on the participant's
behalf of up to thirty-three percent (33%) of the participant's eligible annual
contribution. The Company made gross contributions of approximately $217,000,
$194,000 and $152,000 to the 401(k) Plan for the three years ended June 30,
2003, 2002, and 2001, respectively. All employer contributions are immediately
vested.
In addition, as part of the PLC acquisition, the Company assumed the PLC savings
and retirement plan (the "PLC 401(k) Plan"), which is a voluntary, defined
contribution plan. All employees in the southern region are eligible to
participate in the PLC 401(k) Plan after attaining age 21 and completing one
year of continuous service with the Company. At the discretion of the Board of
Directors, the Company may make matching contributions on the participant's
behalf of up to fifty percent (50%) of the participant's eligible annual
contribution. The Company made gross contributions of approximately $69,000,
$71,000 and $40,000 to the PLC 401(k) Plan for the years ended June 30, 2003,
2002, and 2001, respectively. Employer contributions vest at 20% per year after
the second year.
61
Note 10. Earnings Per Share Computation
The weighted average number of shares used to compute basic earnings per common
share and diluted earnings per common share, and a reconciliation of the
numerator and denominator used in the computation for the three years ended June
30, 2003, 2002, and 2001, respectively, are shown in the following table.
For Year Ended June 30,
----------------------------------------
2003 2002 2001
----------- ----------- ---------
(in thousands)
Total common shares issued 13,029 12,698 12,698
Shares not issued, but
unconditionally issuable (1) 154 205 194
Less: Average treasury shares outstanding 742 1,158 1,340
----------- ----------- ---------
Basic EPS 12,441 11,745 11,552
Effect of assumed shares issued under
treasury stock method for stock options 542 823 615
Effect of assumed shares
issued in PLC acquisition (1) - - 79
Effect of assumed conversion of $3,000,000
Convertible Subordinated 7% Note 1,669 2,000 2,000
Effect of assumed conversion of
$3,000,000 Series D Preferred Stock 2,000 2,000 2,000
=========== ----------- ---------
Diluted EPS shares 16,652 16,568 16,246
=========== =========== =========
Net income available for
common shareholders $ 27,087 $ 17,703 $ 10,549
Effect of assumed conversion of $3,000,000
Convertible Subordinated 7% Note 109 130 130
Effect of assumed conversion of
$3,000,000 Series D Preferred Stock 210 210 210
----------- ----------- ---------
Adjusted net income for diluted EPS $ 27,406 $ 18,043 $ 10,889
=========== =========== =========
(1) Represents portion of 273,000 shares unconditionally issuable in
connection with the October 13, 2000 acquisition of PLC, not yet
issued. The shares issuable in connection with the PLC acquisition are
issuable in equal installments on each of the first four anniversaries
of the date of the acquisition.
Note 11. Commitments and Contingencies
General
At June 30, 2003, the Company had outstanding bank letters of credit, surety
bonds and financial security agreements amounting to $73,280,000 as collateral
for completion of improvements at various developments of the Company.
62
At June 30, 2003 the Company had agreements to purchase land and approved
homesites aggregating approximately 6,860 building lots with purchase prices
totaling approximately $301,208,000. 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, 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. As of
June 30, 2003 and 2002, the Company had paid deposits and incurred other costs
associated with the acquisition and development of these parcels aggregating
$20,778,000 and $13,116,000, respectively, which are included in Other Assets.
The Company currently has a commitment with various municipalities for
affordable housing contributions totaling approximately $2,885,000, payable in
installments through June 2008.
Personal Injury
- ---------------
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, Pennsylvania. The settlement, which
was further amended in June 2003, will be paid entirely by the Company's
liability insurance carrier.
In connection with the settlement, a lump sum payment of approximately
$5,600,000 was paid to the plaintiff. In addition, payment in the amount of
approximately $1,300,000 is to be placed in a structured settlement annuity
which shall tender payments to the plaintiff, or the plaintiff's designated
beneficiary in the event of the death of the plaintiff, in the amount of $5,000
per month through 2033, such payment increasing annually by 3%. Further, a
payment of approximately $2,100,000 is to be placed, by the insurance carrier,
in a structured settlement annuity which shall tender payments to the plaintiff
in the amount of $120,000 per year beginning September 2003 and annually
thereafter until the death of the plaintiff.
Carbon Monoxide Litigation
- --------------------------
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. The pertinent terms of the settlement are as follows:
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
63
Company has agreed to pay plaintiffs' attorneys' fees and costs of $445,000. 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.
Colts Neck Litigation
- ---------------------
Pursuant to an Order dated February 6, 1996 issued by the New Jersey Department
of Environmental Protection ("NJDEP"), the Company submitted a
Closure/Post-Closure Plan ("Plan") and Classification Exception Area ("CEA") for
certain affected portions of Colts Neck Estates, a single family residential
development built by the Company in Washington Township, Gloucester County, New
Jersey. The affected areas include those portions of Colts Neck where solid
waste allegedly was deposited. NJDEP approved the Plan and CEA on July 22, 1996
and the Company carried it out thereafter. NJDEP as a standard condition of its
approval of the Plan and CEA reserves the right to amend its approval to require
additional remediation measures if warranted. Neither the implementation of the
Plan nor CEA is expected to have a material adverse effect on the Company's
results of operations or its financial position.
Approximately 145 homeowners at Colts Neck instituted three lawsuits against the
Company, which were separately filed in state and Federal courts between April
and November 1993. These suits were consolidated in the United States District
Court for the District of New Jersey and were subject to court-sponsored
mediation. Asserting a variety of state and federal claims, the plaintiffs in
the consolidated action alleged that the Company and other defendants built and
sold them homes which had been constructed on and adjacent to land which had
been used as a municipal waste landfill and a pig farm. The complaints asserted
claims under the federal Comprehensive Environmental Response, Compensation and
Liability Act, the Federal Solid Waste Disposal Act, the New Jersey Sanitary
Landfill Facility Closure and Contingency Act, the New Jersey Spill Compensation
and Control Act, as well as under state common law and other statutory law.
In September 1993, the Company brought an action in New Jersey state court
against more than 30 of its insurance companies seeking indemnification and
reimbursement of costs of defense in connection with the three Colts Neck
actions referred to above.
As a result of the court sponsored mediation, the Company and the plaintiffs in
the consolidated federal litigation entered into a settlement agreement. Under
that agreement, which was approved by the Court, a $6,000,000 judgment was
entered against the Company in favor of a class comprising most of the current
and former homeowners. The Company, which had paid $650,000 on August 28, 1996
to the plaintiff class, has no liability for the remainder of the judgment,
which is to be paid solely from the proceeds of the state court litigation
against the Company's insurance carriers. Although, under the settlement
agreement the Company is obligated to prosecute and fund the litigation against
its insurance companies, the Company is entitled to obtain some reimbursement of
those expenses. Specifically, under the settlement agreement, the Company may
obtain reimbursement of its aggregate litigation expenses in excess of $100,000
incurred in connection with its continued prosecution of the insurance claims to
the extent that settlements are reached and to the extent that the portion of
those settlement funds designated to fund the litigation are not exhausted. The
Company's right to reimbursement may, under certain circumstances, be limited to
a total of $300,000.
In August, 2002, settlement agreements were reached with all remaining insurance
company defendants to settle the Colts Neck insurance litigation. Under the
terms of the settlement agreement between the Company and the plaintiffs, the
proceeds from the insurance settlements were paid to the plaintiffs. The
Company, in turn, is relieved of all further obligations to prosecute the Colts
Neck insurance litigation.
64
The Company is not aware of any other significant environmental liabilities
associated with any of its other projects.
Other Litigation
From time to time, the Company is named as a defendant in legal actions arising
from its normal business activities. Although the amount of any 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 or operating results of the
Company.
Note 12. Quarterly Financial Data (Unaudited)
Unaudited summarized financial data by quarter for 2003 and 2002 are as follows
(in thousands, except per share data):
Three Months Ended
------------------
Fiscal 2003 September 30 December 31 March 31 June 30
- ------------------------- --------------- --------------- --------------- ------------
Net sales $86,030 $86,198 $ 76,991 $134,095
Gross profit 19,979 18,991 17,156 32,247
Net income available for 11,170
common shareholders 6,281 5,601 4,035
Net earnings per share:
Basic .52 .46 .32 .88
Diluted .38 .34 .25 .68
Fiscal 2002
- -------------------------
Net sales $80,260 $87,297 $ 78,243 $105,340
Gross profit 14,504 16,679 14,582 21,680
Net income available for
common shareholders 3,724 4,038 3,386 6,555
Net earnings per share:
Basic .32 .35 .29 .55
Diluted .23 .26 .20 .40
Note 13.Subsequent Event
On July 28, 2003, the Company acquired all of the issued and outstanding shares
of Masterpiece Homes, Inc. ("Masterpiece), and entered into an employment
agreement with the president of Masterpiece. Masterpiece is an established
homebuilder located in Orange City, Florida. The terms of the stock purchase
agreement and employment agreement are as follows: (i) $3,900,000 in cash, at
closing; and (ii) $2,130,000 payable January 1, 2005, unless prior to that date
the president is terminated for cause or terminates his employment without good
reason, as defined in the employment agreement; (iii) sale of 30,000 shares of
the Company's common stock at $8 per share with a put option at the same price,
(iv) the right to purchase 15,000 shares of the Company's common stock at $10.64
per share on December 31, 2004, 2005 and 2006; and (v) contingent payments
representing 25% of Masterpiece's pre-tax profits for the calendar years ended
December 31, 2004, 2005 and 2006.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ Financial Disclosure.
---------------------------------------------------------------
There are no matters required to be reported hereunder.
65
Item 9A. Controls and Procedures.
- -------- ------------------------
The Company's management, with the participation of 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 of the end of the period covered
by this report. Based upon that evaluation, the Chief Executive
Officer, President and Chief Operating Officer and the Chief Financial
Officer concluded that the Company's disclosure controls and
procedures, as of the end of the period covered by this report, were
designed and are functioning effectively to provide reasonable
assurance that the information required to be disclosed by the Company
in reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. There has been no change in
the Company's internal control over financial reporting during the
Company's most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------- ---------------------------------------------------
Incorporated herein by reference from the Company's definitive proxy
statement for its Annual
Meeting of Stockholders to be held in December, 2003.
Item 11. Executive Compensation.
- -------- -----------------------
Incorporated herein by reference from the Company's definitive proxy
statement for its Annual
Meeting of Stockholders to be held in December, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
- -------- Related Stockholder Matters.
------------------------------------------------------------------
Incorporated herein by reference from the Company's definitive proxy
statement for its Annual
Meeting of Stockholders to be held in December, 2003.
Item 13. Certain Relationships and Related Transactions.
- -------- -----------------------------------------------
Incorporated herein by reference from the Company's definitive proxy
statement for its Annual
Meeting of Stockholders to be held in December, 2003.
66
Item 14. Principal Accountant Fees and Services.
- -------- ---------------------------------------
Incorporated herein by reference from the Company's definitive proxy
statement for its Annual
Meeting of Stockholders to be held in December, 2003.
PART IV
-------
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- -------- -----------------------------------------------------------------
(a) Financial Statements and Financial Statement Schedules
1. Financial Statements
--------------------
The financial statements listed in the index on the first page
under Item 8 are filed as part of this Form 10-K.
2. Financial Statement Schedules
-----------------------------
None.
3. Exhibits
--------
Exhibit Number
- --------------
2.1 Stock Purchase Agreement dated as of October 12, 2000, by and among the
Company, Parker & Lancaster Corporation, and the selling stockholders
party thereto (incorporated by reference to Exhibit 2 to the Company's
Form 8-K filed with the Securities and Exchange Commission on October
27, 2000).
3.l Certificate of Incorporation of the Company filed with the Secretary
of State of Delaware on September 4, 1969 (incorporated by reference to
Exhibit 2.l of the Company's Registration Statement on Form S-7, filed
with the Securities and Exchange Commission (S.E.C. File No. 2-68662)).
3.2 Amendment to Certificate of Incorporation of the Company filed with the
Secretary of State of Delaware on July 25, 1983 (incorporated by
reference to Exhibit 3.2 of Amendment No. 2 to the Company's
Registration Statement on Form S-2 filed with the Securities and
Exchange Commission (S.E.C. File No. 2-84724)).
3.3 Amendment to Certificate of Incorporation of the Company filed with the
Secretary of State of Delaware on December 18, 1986.
3.4 Amendment to Certificate of Incorporation of the Company filed with
the Secretary of State of Delaware on May 27, 1992 (incorporated by
reference to Exhibit 3.6 of Amendment No. 2 to the Company's
Registration Statement on Form S-1 filed with the Securities and
Exchange Commission (S.E.C. File No. 33-43943) (the "Form S-1")).
67
3.5 Amendment to Certificate of Incorporation filed with the Secretary of
State of Delaware on July 13, 1998 (incorporated by reference to
Exhibit 3.10 to the 1998 Form 10-K).
3.6 Certificate of Designations, Preferences and Rights of Series D
Preferred Stock filed with the Secretary of State of Delaware on
October 14, 1998 (incorporated by reference to Exhibit 3.1 to the
Company's Form 10-Q for the period ended September 30, 1998).
3.7 By-Laws, as last amended on April 20, 1998 (incorporated by reference
to Exhibit 3.11 to the 1998 Form 10-K).
4.1 Form of Note Purchase Agreement, dated as of August 1, 1996, together
with form of $3,000,000 Convertible Subordinated 7% Note due January 1,
2002 (incorporated by reference to Exhibit 4.9 to the Company's Form
10-K for the fiscal year ended June 30, 1997).
4.2 Deferral Agreement to $3,000,000 Convertible Subordinated 7% Note dated
December 14, 1999.
4.3 Deferral Agreement to $3,000,000 Convertible Subordinated 7% Note dated
June 13, 2001.
4.4 Deferral Agreement to $3,000,000 Convertible Subordinated 7% Note dated
December 11, 2001.
10.1** Form of Indemnity Agreement executed by the Company with Directors
of the Company (incorporated by reference to Exhibit B to the Company's
Proxy Statement respecting its 1986 Annual Meeting of Stockholders).
10.2** Employment Agreement between the Company and Jeffrey P. Orleans, dated
June 26, 1987 (incorporated by reference to Exhibit 10.2 to the Form
S-1.)
10.3** $4,000,000 Unsecured Line of Credit Agreement with Jeffrey P. Orleans
dated as of June 30, 1999 (incorporated by reference to Exhibit 10.4 to
the Company's 1999 Form 10-K for the fiscal year ended June 30, 1999).
10.4** 1992 Incentive Stock Option Plan (incorporated by reference to the
Company's Registration Statement on Form S-8 filed with the S.E.C. on
December 15, 1998).
10.5** 1992 Non-Employee Directors Stock Option Plan (incorporated by
reference to the Company's Information Statement filed with the
S.E.C. on November 5, 1995 (SEC File No. 1-6803)).
10.7** 1995 Stock Option Plan for Non-Employee Directors (incorporated by
reference to the Company's Registration Statement on Form S-8 filed
with the S.E.C. on December 15, 1998).
10.8 Employment Agreement between the Company and J. Russell Parker, III,
President of the Company's subsidiary, PLC
10.9 Employment Agreement between the Company and L. Anthony Piccola,
Division Manager, Raleigh, NC
10.10 Employment Agreement between the Company and Thomas Gancsos, Division
Manager, Richmond, VA
21.* Subsidiaries of Registrant.
68
23.* Consents of PricewaterhouseCoopers LLP
31.1* Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002.
31.2* Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002.
31.3* Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002.
32.1* Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002.
32.2* Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002.
32.3* Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002.
______________
* Exhibits included with this filing.
** Denotes a management contract or compensatory plan or arrangement required to
be filed as an exhibit.
(b) Reports on Form 8-k
-------------------
None.
69
SIGNATURES
and
POWER OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/Jeffrey P. Orleans September 18, 2003
-----------------------------
Jeffrey P. Orleans,
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
/s/ Jeffrey P. Orleans September 18, 2003
- ----------------------------
Jeffrey P. Orleans
Chairman of the Board and
Chief Executive Officer
/s/ Benjamin D. Goldman September 18, 2003
- ----------------------------
Benjamin D. Goldman
Vice Chairman and Director
/s/ Jerome Goodman September 18, 2003
- ----------------------------
Jerome Goodman
Director
/s/ Robert N. Goodman September 18, 2003
- ----------------------------
Robert N. Goodman
Director
/s/ Andrew N. Heine September 18, 2003
- ----------------------------
Andrew N. Heine
Director
/s/ David Kaplan September 18, 2003
- ----------------------------
David Kaplan
Director
/s/ Lewis Katz September 18, 2003
- ----------------------------
Lewis Katz
Director
/s/ Robert M. Segal September 18, 2003
- ----------------------------
Robert M. Segal
Director
70
/s/ John W. Temple September 18, 2003
- ----------------------------
John W. Temple
Director
/s/ Michael T. Vesey September 18, 2003
- ----------------------------
Michael T. Vesey
President and Chief Operating Officer
/s/ Joseph A. Santangelo September 18, 2003
- ----------------------------
Joseph A. Santangelo
Chief Financial Officer,
Treasurer and Secretary
71
INDEX TO EXHIBITS
Exhibit
Number
- -------
21. Subsidiaries of Registrant.
23. Consents of PricewaterhouseCoopers LLP
31.1 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
31.3 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
32.1 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
32.2 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
32.3 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
72