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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD__________ TO __________.
Commission File No. 1-6830
ORLEANS HOMEBUILDERS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 59-0874323
- ------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
One Greenwood Square, Suite 101
3333 Street Road
Bensalem, PA 19020
(Address of principal executive offices)
Telephone: (215) 245-7500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No _X_
Number of shares of common stock, par value $0.10 per share, outstanding as of
February 2, 2004: 15,413,731
(excluding 617,732 shares held in Treasury).
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
PAGE
----
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at December 31, 2003
and June 30, 2003 1
Consolidated Statements of Operations and Changes
in Retained Earnings for the Three and Six Months
Ended December 31, 2003 and 2002 2
Consolidated Statements of Shareholders' Equity for the
Six Months Ended December 31, 2003 3
Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 2003 and 2002 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 30
Item 4. Controls and Procedures 30
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 6. Exhibits and Reports on Form 8-K 32
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
(Unaudited)
December 31, June 30,
2003 2003
------------ ---------
Assets
Cash and cash equivalents $ 13,698 $ 8,883
Restricted cash - customer deposits 16,032 15,065
Real estate held for development and sale:
Residential properties completed or under construction 150,021 109,895
Land held for development or sale and improvements 116,776 100,791
Inventory not owned - Variable Interest Entity 19,888 18,443
Property and equipment, at cost, less accumulated depreciation 1,390 1,257
Deferred taxes 233 233
Goodwill 6,848 4,180
Receivables, deferred charges and other assets 41,330 31,962
-------- --------
Total Assets $366,216 $290,709
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ 20,986 $ 29,306
Accrued expenses 25,625 27,445
Customer deposits 21,325 16,539
Obligations related to inventory not owned 19,167 17,643
Mortgage and other note obligations primarily secured by real
estate held for development and sale 169,302 106,707
Notes payable - related parties 2,879 2,500
Other notes payable 116 31
-------- --------
Total Liabilities 259,400 200,171
-------- --------
Commitments and contingencies (See Note J)
Redeemable common stock 1,147 999
-------- --------
Shareholders' Equity:
Preferred stock, $1 par, 500,000 shares authorized:
Series D convertible preferred stock, 7% cumulative annual
dividend, $30 stated value converted on December 29, 2003,
issued and outstanding 100,000 shares ($3,000,000
liquidation preference) at June 30, 2003 - 3,000
Common stock, $.10 par, 20,000,000 shares authorized,
16,031,463 and 13,364,797 shares issued at
December 31, 2003 and June 30, 2003, respectively 1,603 1,337
Capital in excess of par value - common stock 22,481 18,659
Retained earnings 82,468 67,589
Treasury stock, at cost (617,732 and 727,232 shares held at
December 31, 2003 and June 30, 2003, respectively) (883) (1,046)
-------- --------
Total Shareholders' Equity 105,669 89,539
-------- --------
Total Liabilities and Shareholders' Equity $366,216 $290,709
======== ========
See accompanying notes which are an integral part
of the consolidated financial statements.
- 1 -
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Statements of Operations
and Changes in Retained Earnings
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Earned revenues
Residential properties $ 121,481 $ 86,198 $ 219,864 $ 172,228
Land sales -- -- 457 --
Other income 1,234 1,252 2,829 2,340
--------- --------- --------- ---------
122,715 87,450 223,150 174,568
--------- --------- --------- ---------
Costs and expenses
Residential properties 95,170 67,207 169,979 133,258
Land sales -- -- 490 --
Other 1,001 827 2,224 1,823
Selling, general and administrative 14,110 10,277 25,558 20,069
Interest
Incurred 2,488 1,571 4,302 3,039
Less capitalized (2,350) (1,552) (4,092) (2,956)
--------- --------- --------- ---------
110,419 78,330 198,461 155,233
--------- --------- --------- ---------
Income from operations before income taxes 12,296 9,120 24,689 19,335
Income tax expense 4,831 3,467 9,706 7,348
--------- --------- --------- ---------
Net income 7,465 5,653 14,983 11,987
========= ========= ========= =========
Net income 7,465 5,653 14,983 11,987
Preferred dividends 51 52 104 105
--------- --------- --------- ---------
Net income available for common shareholders 7,414 5,601 14,879 11,882
Retained earnings, at beginning of period 75,054 46,783 67,589 40,502
--------- --------- --------- ---------
Retained earnings, at end of period $ 82,468 $ 52,384 $ 82,468 $ 52,384
========= ========= ========= =========
Basic earnings per share $ 0.57 $ 0.46 $ 1.16 $ 0.98
========= ========= ========= =========
Diluted earnings per share $ 0.45 $ 0.34 $ 0.90 $ 0.72
========= ========= ========= =========
See accompanying notes which are an integral part
of the consolidated financial statements.
- 2 -
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(unaudited)
(dollars in thousands)
Preferred Stock Common Stock Capital in
Shares Shares Excess of
Issued and Issued and Par Value -
Outstanding Amount Outstanding Amount Common Stock
----------- -------- ----------- -------- ------------
Balance at June 30, 2003 100,000 $ 3,000 13,364,797 $ 1,337 $ 18,659
Redeemable common stock sold 171
Preferred stock converted to common stock (100,000) (3,000) 2,000,000 200 2,800
Shares issued upon conversion of a portion
of convertible subordinated 7% note 666,666 66 934
Fair market value of stock options issued 67
Stock options exercised
Shares issued in connection with the
acquisition of Parker & Lancaster Corporation (107)
Treasury stock sold
redeemable at $8 per share (43)
Net income
Preferred dividends
------- ------- ---------- ------- --------
Balance at December 31, 2003 - $ - 16,031,463 $ 1,603 $ 22,481
======= ======= ========== ======= ========
[RESTUBBED]
Treasury Stock
Retained Share
Earnings Held Amount Total
---------- --------- -------- ----------
Balance at June 30, 2003 $ 67,589 727,232 $(1,046) $ 89,539
Redeemable common stock sold 171
Preferred stock converted to common stock -
Shares issued upon conversion of a portion
of convertible subordinated 7% note 1,000
Fair market value of stock options issued 67
Stock options exercised (4,500) 13 13
Shares issued in connection with the
acquisition of Parker & Lancaster Corporation (75,000) 107 -
Treasury stock sold
redeemable at $8 per share (30,000) 43 -
Net income 14,983 14,983
Preferred dividends (104) (104)
-------- ------- ------- --------
Balance at December 31, 2003 $ 82,468 617,732 $ (883) $105,669
======== ======= ======= ========
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Six Months Ended
December 31,
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 14,983 $ 11,987
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 292 319
Stock based compensation expense 67 11
Changes in operating assets and liabilities:
Restricted cash - customer deposits (967) (2,660)
Real estate held for development and sale (39,356) (7,237)
Receivables, deferred charges and other assets (8,879) (8,527)
Accounts payable and other liabilities (11,233) (4,410)
Customer deposits 1,866 3,024
-------- --------
Net cash used in operating activities (43,227) (7,493)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (212) (518)
Acquisitions, net of cash acquired (4,973) (156)
-------- --------
Net cash used in investing activities (5,185) (674)
-------- --------
Cash flows from financing activities:
Borrowings from loans secured by real estate assets 187,758 131,131
Repayment of loans secured by real estate assets (136,068) (121,899)
Borrowings from other note obligations 1,654 31
Repayment of other note obligations (266) (1,415)
Sale of treasury stock 240 -
Stock options exercised 13 -
Preferred stock dividend (104) (105)
-------- --------
Net cash provided by financing activities 53,227 7,743
-------- --------
Net increase (decrease) in cash and cash equivalents 4,815 (424)
Cash and cash equivalents at beginning of year 8,883 7,257
-------- --------
Cash and cash equivalents at end of period $ 13,698 $ 6,833
======== ========
Supplemental disclosure of cash flow activities:
Interest paid, net of amounts capitalized $ 210 $ 83
======== ========
Income taxes paid $ 12,461 $ 9,082
======== ========
See accompanying notes which are an integral part
of the consolidated financial statements.
- 4 -
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) Summary of Significant Accounting Policies:
The accompanying unaudited consolidated financial statements are
presented in accordance with the requirements for Form 10-Q and do not
include all the disclosures required by generally accepted accounting
principles for complete financial statements. Reference is made to Form
10-K as of and for the year ended June 30, 2003 for Orleans
Homebuilders, Inc. and subsidiaries (the "Company") for additional
disclosures, including a summary of the Company's accounting policies.
On July 28, 2003, the Company acquired all of the issued and
outstanding shares of Masterpiece Homes, Inc. ("Masterpiece Homes").
Unless otherwise indicated, the term the "Company" includes the
accounts of Masterpiece Homes. Masterpiece is engaged in residential
real estate development in central Florida. The Consolidated Statements
of Operations and Changes in Retained Earnings and the Consolidated
Statements of Cash Flows include the accounts of Masterpiece from July
28, 2003 through December 31, 2003. The Consolidated Balance Sheets
include the accounts of Masterpiece as of December 31, 2003. All
material intercompany transactions and accounts have been eliminated.
In the opinion of management, the consolidated financial statements
contain all adjustments, consisting only of normal recurring accruals,
necessary to present fairly the consolidated financial position of the
Company for the periods presented. The interim operating results of the
Company may not be indicative of operating results for the full year.
Certain prior year amounts have been reclassified to conform with the
fiscal 2004 presentation.
Recent accounting pronouncements:
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.
- 5 -
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 or with a group of other assets and for the reporting of
goodwill and other intangible assets acquired in a business acquisition
subsequent to initial accounting under SFAS No. 141. SFAS No. 142
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, at
the time, all such intangibles related to the Company's 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.
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 adoption did not 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.
- 6 -
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 SFAS No. 148 are effective for fiscal
years ending after December 15, 2002, and the disclosure requirements
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 to finance 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 at the
end of the first interim or annual period ending after March 15, 2004.
FIN 46 may apply to certain of our contracts to acquire land that we
entered into prior to January 31, 2003. We are in the process of
evaluating the applicability of FIN 46 to these contracts.
- 7 -
Based on the provisions of FIN 46, the Company has concluded that
whenever it enters into an option agreement to acquire 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
Entitity".
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 adopted
the provisions of this statement, as required, on July 1, 2003, and
adoption did not have a material impact on the financial position of
the Company.
(B) Acquisitions:
On July 28, 2003, the Company acquired all of the issued and
outstanding shares of Masterpiece Homes and entered into an employment
agreement with the president of Masterpiece Homes. Masterpiece Homes 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) stock options to purchase 45,000 shares of the
Company's common stock at $10.64 per share vesting equally on December
31, 2004, 2005 and 2006; and (v) contingent payments representing 25%
of the pre-tax profits of Masterpiece Homes for the calendar years
ended December 31, 2004, 2005 and 2006. The Company also incurred
approximately $297,000 in acquisition costs to complete this
transaction. The aforementioned costs are considered part of the
purchase price of Masterpiece Homes, except for the following items
that are considered part of, and contingent upon, the employment
agreement: (a) $710,000 of the $2,130,000 payable January 1, 2005; (b)
stock options to purchase 45,000 shares of the Company's common stock
at $10.64 per share; and (c) contingent payments representing 25% of
the pre-tax profits of Masterpiece Homes for the calendar years ended
December 31, 2004, 2005 and 2006.
- 8 -
The Company accounted for these transactions in accordance with SFAS
No. 141, "Business Combinations", whereby approximately $5,700,000 was
considered to be part of the purchase price of the business and the
remainder part of employee compensation. That portion related to
employee compensation will be charged to expense over the period to
which it relates. With respect to the amounts allocated to the
purchase, such amounts were allocated to the fair value of assets and
liabilities acquired with the excess of approximately $2,668,000
allocated to goodwill.
If the Masterpiece Homes acquisition occurred on July 1, 2002,
unaudited pro forma information for the company would have been as
follows:
Three Months Ended Six Months Ended
December 31,
---------------------------------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(in thousands, except share amounts)
Earned revenues $121,481 $92,983 $222,454 $185,736
Income from operations before
income taxes 12,272 9,180 24,588 19,252
Net income 7,450 5,692 14,925 11,936
Earnings per share:
Basic 0.58 0.47 1.16 0.98
Diluted 0.45 0.34 0.90 0.72
(C) Mortgage and Other Note Obligations:
On December 29, 2003 and in accordance with the terms of the Company's
Convertible Subordinated 7% Note issued to Jeffrey P. Orleans, Chairman
and Chief Executive Officer of the Company, the second annual
installment due of $1,000,000 was converted, at $1.50 per share, into
666,666 shares of the Company's common stock. Interest on the remaining
principal balance of $1,000,000 is payable quarterly and the final
installment of principal is due on January 1, 2005.
- 9 -
(D) Redeemable Common Stock:
In connection with the Company's acquisition of PLC on October 13,
2000, the Company issued 300,000 shares of common stock of the Company
to the former shareholders of PLC. The former shareholders of PLC have
the right to cause the Company to repurchase the common stock
approximately five years after the closing of the acquisition at a
price of $3.33 per share. As of December 31, 2003 a former shareholder
of PLC sold 51,502 shares of the Company's Common Stock thereby
reducing the number of shares of redeemable common stock in connection
with the PLC acquisition to 248,498 shares.
In connection with the Company's acquisition of Masterpiece Homes on
July 28, 2003 (see Note B), the Company sold 30,000 shares of common
stock of the Company to the president of Masterpiece Homes at $8 per
share. The president of Masterpiece Homes has the right to cause the
Company to repurchase the common stock at $8 per share by giving notice
to the Company no later than the earlier of December 31, 2006 or 30
days after termination of his employment, as specified in his
employment agreement.
(E) Preferred Stock:
On December 29, 2003 and in accordance with the conversion features of
the Company-issued Series D Preferred Stock, liquidation value of
$3,000,000, held by Mr. Orleans, the Series D Preferred Stock was
converted, at $1.50 per share, into 2,000,000 shares of the Company's
common stock.
- 10 -
(F) Earnings Per Share:
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 and six months ended December 31, 2003 and 2002,
respectively, are shown in the following table:
Three Months Ended Six Months Ended
December 31,
---------------------------------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(Unaudited)
(in thousands)
Total common shares issued 13,452 12,698 13,408 12,698
Unconditional shares issuable 77 137 107 137
Less: Average treasury shares
outstanding 632 737 669 737
---------- ---------- ---------- ----------
Basic EPS shares 12,897 12,098 12,846 12,098
Effect of assumed shares issued under
treasury stock method for stock options 627 552 605 551
Effect of December 29, 2003 partial
conversion of $3 million Convertible
Subordinated 7% Note (1) 1,312 2,000 1,322 2,000
Effect of December 29, 2003 conversion
of $3 million Series D Preferred Stock (2) 1,935 2,000 1,967 2,000
---------- ---------- ---------- ----------
Diluted EPS shares 16,771 16,650 16,740 16,649
========== ========== ========== ==========
Net income available for
common shareholders $ 7,414 $ 5,601 $ 14,879 $ 11,882
Effect of December 29, 2003 conversion
of $3 million Series D Preferred Stock (2) 51 52 104 105
Effect of December 29, 2003 partial
conversion of $3 million Convertible
Subordinated 7% Note (1) 22 33 43 65
---------- ---------- ---------- ----------
Adjusted net income for diluted EPS $ 7,487 $ 5,686 $ 15,026 $ 12,052
========== ========== ========== ==========
- -------------------
(1) Refer to Note (C) for a discussion of the December 29, 2003 conversion of
the $3 million Convertible Subordinated 7% Note.
(2) Refer to Note (E) for a discussion of the December 29, 2003 conversion of
the $3 million Series D Preferred Stock.
- 11 -
(G) Supplemental Cash Flow Disclosure:
Non-cash assets acquired and liabilities assumed as a result of the
Masterpiece acquisition were approximately $17,378,000 and $15,035,000,
respectively.
(H) Residential Properties Completed or under Construction:
Residential properties completed or under construction consist of the
following:
December 31, June 30,
2003 2003
------------ -------------
(Unaudited)
(in thousands)
Under contract for sale (backlog) $ 92,416 $ 76,303
Unsold 57,605 33,592
---------- -----------
Total residential properties completed
or under construction $ 150,021 $ 109,895
========== ===========
(I) 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
liability that could arise with respect to currently pending actions
cannot be accurately predicted, in the opinion of the Company any such
liability will not have a material adverse effect on the financial
position, operating results or cash flows of the Company.
(J) Commitments and Contingencies:
As of December 31, 2003 the Company owned or controlled approximately
11,045 building lots. As part of the aforementioned building lots, the
Company had contracted to purchase, or has under option, undeveloped
land and improved lots for an aggregate purchase price of approximately
$403,622,000 which is expected to yield approximately 8,024 building
lots. Included in these totals is an agreement entered into in December
2003 to purchase approximately 300 acres of undeveloped land expected
to yield approximately 400 building lots with a purchase price of
approximately $60,000,000.
- 12 -
(K) Subsequent Events:
On January 14, 2004, the Company filed a Form S-2 Registration
Statement under the Securities Act of 1993 for an offering of 2,000,000
shares of the Company's common stock, plus an additional 300,000 shares
issuable upon underwriters' exercise of an over-allotment option
granted to the underwriters. The Company's common stock is traded on
the American Stock Exchange under the symbol "OHB". On January 13,
2004, the last reported sale price of the Company's stock was $24.25
per share. The effective date of this registration statement is unknown
as of this time and there can be no assurances that the Company will
complete this offering.
On January 15, 2004, the Company signed an agreement to purchase
undeveloped land expected to yield approximately 422 building lots with
a purchase price of approximately $25,500,000. The Company has
deposited in escrow $250,000 which is refundable through the end of the
60 day due diligence period. At the end of the due diligence period, if
the Company determines to proceed, it must deposit an additional
$2,750,000 and this deposit along with the initial $250,000 deposit
shall be released to the seller and be substantially non-refundable at
that time.
- 13 -
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Orleans Homebuilders, Inc. and its subsidiaries (collectively, the
"Company", "OHB" or "Orleans") are currently engaged in residential real estate
development in the following nine markets: Southeastern Pennsylvania; Central
New Jersey, Southern New Jersey; Charlotte; Raleigh and Greensboro, North
Carolina; Richmond and Tidewater, Virginia; and Orlando, Florida. The Company's
Charlotte, North Carolina market also includes operations in adjacent counties
in South Carolina. The Company has operated in its Pennsylvania and New Jersey
markets for over 80 years and began operations in its North Carolina and
Virginia markets in fiscal 2001 through the acquisition of Parker & Lancaster
Corporation, a privately-held residential homebuilder. On July 28, 2003, the
Company began operations in Florida through the acquisition of Masterpiece
Homes, Inc. ("Masterpiece Homes"), an established privately-held homebuilder
located in Orange City, Florida. The Results of Operations include the activity
of Masterpiece Homes from July 28, 2003 through December 31, 2003. Unless
otherwise indicated, the term the "Company" includes the accounts of Masterpiece
Homes. References to a given fiscal year in this Quarterly Report on Form 10-Q
are to the fiscal year ending June 30th of that year. For example, the phrases
"fiscal 2003" or "2003 fiscal year" refer to the fiscal year ended June 30,
2003. When used in this report, "northern region" refers to the Company's
Pennsylvania and New Jersey markets, "southern region" refers to the Company's
North Carolina and Virginia markets. The Company considers its Orlando, Florida
market to be a separate market.
The Company believes it is well positioned for continued growth. At
December 31, 2003 backlog was $368,324,000 representing 1,079 homes compared to
a backlog of $231,831,000 representing 650 homes at December 31, 2002. At
December 31, 2003 the Company was selling in 81 communities and owned or
controlled approximately 11,045 building lots.
The Company has entitled and developed lots in the highly regulated
Pennsylvania and New Jersey markets for over 40 years. As a result, the Company
believes it has expertise in all aspects of the site selection, land planning,
entitlement and land development processes which can be leveraged across all
markets in which the Company operates. In addition, the Company believes that it
holds attractive land positions in the Pennsylvania and New Jersey markets and
that the market value of these land positions will continue to grow due to the
highly regulated environment in these markets.
The Company develops, builds and markets high-quality single-family
homes, townhomes and condominiums to serve various homebuyer segments, including
first-time, move-up, luxury, empty nester and active adult. The Company believes
this broad range of home designs allows it to capitalize on favorable economic
and demographic trends within its markets.
- 14 -
Results of Operations
The following table sets forth certain details as to residential sales
activity. The information provided is for the three and six months ended
December 31, 2003 and 2002 in the case of revenues earned and new orders, and as
of December 31, 2003 and 2002 in the case of backlog.
Six Months Ended December 31,
2003 2002
------------------------------ ------------------------------
(Dollars in thousands)
Average Average
Amount Homes Price Amount Homes Price
-------- ----- ------- -------- ----- -------
Northern Region
New Jersey and Pennsylvania:
Residential revenue earned $117,537 317 $371 $118,376 390 $304
New orders 122,756 270 455 127,277 344 370
Backlog 195,153 415 470 159,525 421 379
Southern Region
North Carolina, South Carolina
and Virginia:
Residential revenue earned $ 75,756 245 $309 $ 53,852 190 $283
New orders 108,485 317 342 70,718 239 296
Backlog 128,562 362 355 72,306 229 316
Florida Region (1)
Residential revenue earned $ 26,571 199 $134 $ - - $ -
New orders 29,518 203 145 - - -
Backlog 44,609 302 148 - - -
Combined Regions
Residential revenue earned $219,864 761 $289 $172,228 580 $297
New orders 260,759 790 330 197,995 583 340
Backlog 368,324 1,079 341 231,831 650 357
- -------------------
(1) Information on residential revenue earned and new orders is for the
period beginning July 28, 2003, the date the Company entered this
market through its acquisition of Masterpiece Homes, through
December 31, 2003.
- 15 -
Three Months Ended December 31,
2003 2002
------------------------------ ------------------------------
(Dollars in thousands)
Average Average
Amount Homes Price Amount Homes Price
-------- ----- ------- -------- ----- -------
Northern Region
New Jersey and Pennsylvania:
Residential revenue earned $ 64,517 177 $365 $ 56,307 185 $304
New orders 60,201 124 485 52,627 131 402
Backlog 195,153 415 470 159,525 421 379
Southern Region
North Carolina, South Carolina
and Virginia:
Residential revenue earned $ 41,340 134 $309 $ 29,891 99 $302
New orders 52,447 150 350 34,445 113 305
Backlog 128,562 362 355 72,306 229 316
Florida Region (1)
Residential revenue earned $ 15,624 115 $136 $ - - $ -
New orders 17,069 115 148 - - -
Backlog 44,609 302 148 - - -
Combined Regions
Residential revenue earned $121,481 426 $285 $ 86,198 284 $304
New orders 129,717 389 333 87,072 244 357
Backlog 368,324 1,079 341 231,831 650 357
- -----------------------
(1) Information on residential revenue earned and new orders is for the period
beginning July 28, 2003, the date the Company entered this market through its
acquisition of Masterpiece Homes, through December 31, 2003.
Three Months and Six Months Ended December 31, 2003 and 2002
Orders and Backlog
New orders for the six months ended December 31, 2003 increased
$62,764,000 or 31.7%, to $260,759,000 on 790 homes, compared to $197,995,000 on
583 homes for the six months ended December 31, 2002. The increase in new order
dollars was attributable to an increase in southern region new orders of
$37,767,000, or approximately 53.4% when compared to the six months ended
December 31, 2002 and an increase in Florida region new orders of $29,518,000
due to the Company's expansion into the Florida region through its acquisition
of Masterpiece Homes. This increase was partially offset by a decrease in
northern region new orders of $4,521,000. New orders decreased in the northern
region due to delays in the opening of new communities as a result of
increasingly restrictive regulations and moratoriums by governments which the
Company believes is due to the intensity of development in recent years. The
average price per home of new orders remains strong with increases in the
northern region and southern region of approximately 23.0% and 15.5%,
respectively, compared with the six months ended December 31, 2002. Although the
increase in the average price per home of new orders on a regional basis was
due, in part, to the Company's mix of product offerings, it was also due to
overall sales price increases in the majority of communities open during the
first six months of fiscal 2004 when compared with the same communities and
products offered for sale in the first six months of fiscal 2003. The Company
believes sales price increases are due to the strong demand for new homes as a
result of the growing population, fueled in part by immigration. In addition,
historically low interest rates have made housing more affordable for lower
income households thereby increasing the overall demand for housing. The
aforementioned, coupled with the limited supply of entitled lots for residential
housing in Pennsylvania and New Jersey due to increased governmental regulations
has positively impacted home pricing trends.
- 16 -
Overall the number of new orders for the six months ended December 31,
2003 increased by 207 homes, or 35.5%, compared to 583 homes for the six months
ended December 31, 2002. In the northern region, the number of new orders for
the six months ended December 31, 2003 decreased to 270 homes from 344 homes in
the comparable prior year period due to delays in the opening of new communities
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 the six
months ended December 31, 2003 increased to 317 homes from 239 homes in the six
months ended December 31, 2002 as the Company continues to expand in this
region. In addition, the Company's expansion into Florida through the
acquisition of Masterpiece Homes accounted for an increase of 203 new home
orders for the six months ended December 31, 2003.
New orders for the for the three months ended December 31, 2003
increased $42,645,000 or 49.0%, to $129,717,000 on 389 homes, compared to
$87,072,000 on 244 homes for the three months ended December 31, 2002. The
increase in new orders was attributable to increases in the northern and
southern region new orders of $7,574,000, or 14.4% and $18,002,000, or 52.3%,
respectively when compared to the three months ended December 31, 2002. In
addition, the Company's expansion into the Florida region through its
acquisition of Masterpiece Homes contributed $17,069,000 to the increase in new
orders. The average price per home of new orders remains strong with increases
in the northern region and southern region of 20.6% and 14.8%, respectively,
compared to the comparable prior year period. This increase in the average price
per home of new orders on a regional basis is due to the Company's mix of
product offerings as well as sales price increases in the majority of
communities open during the three months ended December 31, 2003 when compared
with the same communities and products offered for sale in the comparable prior
year period.
Overall the number of new home orders for the three months ended
December 31, 2003 increased by 145 homes to 389 homes, or 59.4%, compared to 244
homes for the three months ended December 31, 2002. In the northern region, the
number of new home orders for the three months ended December 31, 2003 decreased
to 124 homes from 131 homes for the three months ended December 31, 2002 due to
delays in the opening of new communities as a result of increasingly restrictive
regulations and moratoriums by governments which the Company believes was due to
the intensity of development in recent years. In the southern region, the number
of new home orders for the three months ended December 31, 2003 increased to 150
homes from 113 homes for the three months ended December 31, 2002 as the Company
continues to expand in this region. In addition, the Company's expansion into
Florida through the acquisition of Masterpiece Homes accounted for an increase
of 115 new home orders for the three months ended December 31, 2003.
- 17 -
The backlog at December 31, 2003 increased $136,493,000, or 58.9%, to
$368,324,000 on 1,079 homes compared to the backlog at December 31, 2002 of
$231,831,000 on 650 homes. The increase in backlog was attributable to an
increase in new orders, the Company's obtaining additional backlog of
$41,662,000 and 298 homes through its acquisition of Masterpiece Homes on July
28, 2003 and favorable economic conditions for the homebuilding industry in the
regions where the Company operates. These favorable economic conditions have
resulted in positive home pricing trends and consistent customer demand.
Total Earned Revenues
Total earned revenues for the six months ended December 31, 2003
increased $48,582,000 to $223,150,000 or 27.8%, compared to $174,568,000 for the
six months ended December 31, 2002. Total earned revenues principally consist of
residential revenue, but also include revenues from land sales, interest income,
property management fees and mortgage processing income. Revenues from the sale
of homes included 761 homes totaling $219,864,000 during the six months ended
December 31, 2003, as compared to 580 homes totaling $172,228,000 during the six
months ended December 31, 2002. The increase in residential revenue was
attributable to an increase in southern region residential revenue of
$21,904,000, or 40.7% when compared to the six months ended December 31, 2002
and an increase in Florida region residential revenue of $26,571,000 due to the
Company's expansion into the Florida region through its acquisition of
Masterpiece Homes. The average price per home delivered remains strong with
increases in the northern region and southern region of 22.0% and 9.2%,
respectively, compared with the six months ended December 31, 2002. Although the
average price per home delivered on a regional basis was impacted, in part, by
the Company's mix of product offerings, sales prices increased in the majority
of communities open during the six months ended December 31, 2003 when compared
with the same communities and products offered for sale in the six months ended
December 31, 2002. The Company believes sales price increases are due to the
strong demand for new homes as a result of the growing population, fueled in
part by immigration. In addition, historically low interest rates have made
housing more affordable for lower income households thereby increasing the
overall demand for housing. The aforementioned, coupled with the limited supply
of entitled lots for residential housing in Pennsylvania and New Jersey due to
increased governmental regulations has positively impacted home pricing trends.
- 18 -
Overall, the number of homes delivered for the six months ended
December 31, 2003 increased by 181 homes, or 31.2%, to 761 homes compared to 580
homes in the six months ended December 31, 2002. In the northern region, the
number of homes delivered in the six months ended December 31, 2003 decreased to
317 homes from 390 homes in the six months ended December 31, 2002. The decrease
in the northern region was due to weather related construction delays for new
orders received during the three months ended June 30, 2003. Construction delays
were the result of an unusually rainy Spring and Summer season with reported
precipitation amounts that were significantly above normal. In addition, the
number of homes delivered also decreased due to delays in the opening of new
communities as a result of increasingly restrictive regulations and moratoriums
by governments. In the southern region, the number of homes delivered in the six
months ended December 31, 2003 increased to 245 homes from 190 homes in the six
months ended December 31, 2002 as the Company continues to expand in this
region. Further, the Company's expansion into Florida through the acquisition of
Masterpiece Homes accounted for an increase of 199 homes delivered in the six
months ended December 31, 2003.
Total earned revenues for the three months ended December 31, 2003
increased $35,265,000, to $122,715,000 or 40.3% compared to $87,450,000 for the
three months ended December 31, 2002. Revenues from the sale of residential
homes included 426 homes totaling $121,481,000 during the three months ended
December 31, 2003, as compared to 284 homes totaling $86,198,000 during the
three months ended December 31, 2002. The increase in residential revenue was
attributable to increases in the northern and southern region residential
revenue of $8,210,000, or 14.6% and $11,449,000, or 38.3%, respectively when
compared to the three months ended December 31, 2002. In addition, the Company's
expansion into the Florida region through its acquisition of Masterpiece Homes
contributed $15,624,000 to the increase in residential revenue. The average
selling price per home delivered in three month ended December 31, 2003
increased in the northern region and southern region by approximately 20.1% and
2.3%, respectively, compared with the three months ended December 31, 2002.
Although the average price per home delivered on a regional basis was impacted,
in part, by the Company's mix of product offerings, sales prices increased in
the majority of communities open during the three months ended December 31, 2003
when compared with the same communities and products offered for sale in the
three months ended December 31, 2002. The Company believes the sales price
increases are due to the strong demand for new homes as a result of the growing
population, fueled in part by immigration. In addition, historically low
interest rates have made housing more affordable for lower income households
thereby increasing the overall demand for housing. The aforementioned, coupled
with the limited supply of entitled lots for residential housing in Pennsylvania
and New Jersey due to increase governmental regulations has positively impacted
home pricing trends.
- 19 -
The number of homes delivered in the three months ended December 31,
2003 increased by 142 homes, or 50.0%, to 426 homes compared to 284 homes in the
three months ended December 31, 2002. The overall increase was attributable to
an increase in the number homes delivered in the southern region to 134 homes
compared to 99 homes in the three months ended December 31, 2002 as well as the
delivery of 115 homes in the Florida region due to the Company's expansion into
the Florida region through its acquisition of Masterpiece Homes. This increase
was partially offset by a decrease in the number of homes delivered in the
northern region to 177 homes from 185 homes in the three months ended December
31, 2002. The decrease in the number of homes delivered in the northern region
was attributable to weather related construction delays and delays in the
opening of new communities as a result of increasingly restrictive regulations
and moratoriums by governments as noted above.
Costs and Expenses
Costs and expenses for the six months ended December 31, 2003 increased
$43,228,000 to $198,461,000, or 27.8%, compared with the six months ended
December 31, 2002. The cost of residential properties for the six months ended
December 31, 2003 increased $36,721,000 to $169,979,000, or 27.6%, when compared
with the six months ended December 31, 2002. The increase in cost of residential
properties was primarily attributable to increased residential revenue in the
southern and Florida regions noted above. The consolidated gross profit margin
for the six months ended December 31, 2003 increased 0.1% to 22.7% compared to
22.6% for the six months ended December 31, 2002. The consolidated gross profit
margin excluding the Florida region was 23.7% for the six months ended December
31, 2003. The increase in gross profit margins is primarily a result of the
average selling price per home increasing at a greater rate than the average
cost per home. Increased costs of land, insurance and certain building
materials, primarily lumber, have been outpaced by an increase in the average
selling price per home and a decrease in the cost of borrowing thereby
positively impacting gross profit margin. The Company sells a variety of home
types in various communities and regions, each yielding a different gross profit
margin. As a result, depending on the mix of both communities and of home types
delivered, the consolidated gross profit margin may fluctuate up or down on a
periodic basis and periodic profit margins may not be representative of the
consolidated gross profit margin for the year.
Interest included in the costs and expenses of residential properties
and land sold for the six months ended December 31, 2003 and December 31, 2002
were $3,336,000 and $4,323,000, respectively.
For the six months ended December 31, 2003, selling, general and
administrative expenses increased $5,489,000 to $25,558,000, or 27.4%, when
compared with the six months ended December 31, 2002. The increase in selling,
general and administrative expenses was due to an increase in Florida region
expenses of $2,683,000 due to increased sales volume resulting from the
Company's expansion into Florida through its acquisition of Masterpiece Homes on
July 28, 2003, and an increase in sales commissions and selling costs in the
southern region of approximately $2,007,000 as a result of the Company's
continued expansion in this region. The remaining increase in selling, general
and administrative expenses was primarily attributable to increases in general
and administrative payroll and incentive compensation in the northern and
southern regions.
- 20 -
The selling, general and administrative expenses as a percentage of
residential revenue for the six months ended December 31, 2003 of 11.6% is
relatively consistent with the selling, general and administrative expenses as a
percentage of residential revenue for the six months ended December 31, 2002 of
11.7%.
Costs and expenses for the three months ended December 31, 2003
increased $32,089,000 to $110,419,000, or 41.0%, compared with the three months
ended December 31, 2002. The cost of residential properties for the three months
ended December 31, 2003 increased $27,963,000 to $95,170,000, or 41.6%, when
compared with the three months ended December 31, 2002. The increase in cost of
residential properties was primarily attributable to increased residential
revenue in the northern and southern regions as noted above as well as the
increase in residential revenue resulting from the Company's expansion into
Florida through its acquisition of Masterpiece Homes. The consolidated gross
profit margin for the three months ended December 31, 2003 decreased 0.3% to
21.7% compared to 22.0% for the three months ended December 31, 2002. The
consolidated gross profit margin excluding the Florida region was 22.5% for the
three months ended December 31, 2003. The increase in gross profit margins,
excluding the Florida region, is primarily a result of the average selling price
per home increasing at a greater rate than the average cost per home. Increased
costs of land, insurance and certain building materials, primarily lumber, have
been outpaced by an increase in the average selling price per home and a
decrease in the cost of borrowing thereby positively impacting gross profit
margin. The Company sells a variety of home types in various communities and
regions, each yielding a different gross profit margin. As a result, depending
on the mix of both communities and of home types delivered, the consolidated
gross profit margin may fluctuate up or down on a quarterly basis and quarterly
profit margins may not be representative of the consolidated gross profit margin
for the year.
Interest included in the costs and expenses of residential properties
and land sold for the three months ended December 31, 2003 and December 31, 2002
were $1,763,000 and $2,051,000, respectively.
For the three months ended December 31, 2003, selling, general and
administrative expenses increased $3,833,000 to $14,110,000, or 37.3%, when
compared with the three months ended December 31, 2002. The increase in selling,
general and administrative expenses was due to an increase in Florida region
expenses of $1,797,000 due to increased sales volume resulting from the
Company's expansion into Florida through its acquisition of Masterpiece Homes on
July 28, 2003, and an increase in sales commissions and selling costs in the
southern region of approximately $1,022,000 as a result of the Company's
continued expansion in this region. The remaining increase in selling, general
and administrative expenses was primarily attributable to increases in general
and administrative payroll and incentive compensation in the northern and
southern regions.
The selling, general and administrative expenses as a percentage of
residential property revenue for the three months ended December 31, 2003
decreased 0.3% to 11.6% from 11.9% for the three months ended December 31, 2002.
The decrease in selling, general and administrative expenses as a percentage of
residential property revenue was primarily attributable to an increase in
revenues in excess of an increase in the fixed portion of selling, general and
administrative expenses when compared with the three months ended December 31,
2002.
- 21 -
Income Tax Expense
As a result of changes in state tax laws in the states in which the
Company operates and the Company's expansion into Florida, the Company adjusted
its effective tax rate to 39.3% of income from operations before income taxes
for fiscal year 2004. This change resulted in an increase in income tax expense
of $324,000 for the six months ended December 31, 2003 when compared with the
effective tax rate of 38.0% for the six months ended December 31, 2002.
The change to the effective income tax rate for fiscal year 2004
resulted in an increase in income tax expense of $159,000 and an effective
income tax rate of 39.3% for the three months ended December 31, 2003 compared
with a 38.0% effective income tax rate for the three months ended December 31,
2002.
Net Income
Net income for the six months ended December 31, 2003 increased
$2,996,000, or 25.0%, to $14,983,000, compared with $11,987,000 for the six
months ended December 31, 2002. This increase in net income was attributable to
an increase in residential revenue primarily as a result of favorable conditions
in the homebuilding industry, resulting in strong customer demand and positive
home pricing trends. The Company believes the primary factors resulting in
favorable conditions in the homebuilding industry include: the strong demand
for new homes as a result of an increase in immigration and new household
formation; historically low interest rates which enhance the affordability of
homes; and the limited supply of entitled lots for residential housing due to
increased governmental regulation, which increases the value of lots already
owned by companies such as us.
The Company's expansion into Florida through its acquisition of
Masterpiece Homes on July 28, 2003 also contributed to the increase in net
income.
Costs resulting from the acquisition of Masterpiece reduced the
consolidated net income for the three and six month periods ended December 31,
2003 by $205,000 and $430,000 respectively.
Liquidity and Capital Resources
The Company requires capital to purchase and develop land, to construct
units, to fund related carrying costs and overhead and to fund various
advertising and marketing programs to facilitate sales. These expenditures
include site preparation, roads, water and sewer lines, impact fees and
earthwork, as well as the construction costs of the homes and amenities. The
Company's sources of capital include funds derived from operations, sales of
assets and various borrowings, most of which are secured. At December 31, 2003,
the Company had approximately $163,746,000 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. A majority of
the Company's debt is variable rate, based on LIBOR or the prime rate, and
therefore, the Company is exposed to market risk in the area of interest rate
changes. At December 31, 2003, the LIBOR and prime rates of interest were 1.13%
and 4.0%, respectively. 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 $1,475,000 in a fiscal year, a portion of which will be
capitalized and included in cost of sales as homes are delivered. The Company
believes that reasonably possible near-term interest rate changes will not
result in a material negative effect on future earnings, fair values or cash
flows of the Company. Generally the Company has been able to recover any
increased costs of borrowing 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 any increase in near-term interest rates.
- 22 -
On July 28, 2003, the Company acquired all of the issued and
outstanding shares of Masterpiece Homes and entered into an employment agreement
with the president of Masterpiece Homes, Robert Fitzsimmons. Masterpiece Homes
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 to the selling shareholders at closing; and (ii) $2,130,000 to the
selling shareholders payable January 1, 2005, unless prior to that date Mr.
Fitzsimmons 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 an option for Mr. Fitzsimmons to
require the Company to repurchase the shares at the same price; (iv) an option
in favor of Mr. Fitzsimmons to purchase 45,000 shares of the Company's common
stock at $10.64 per share vesting equally on December 31, 2004, 2005 and 2006;
and (v) contingent payments to Mr. Fitzsimmons representing 25% of Masterpiece
Home's pre-tax profits for the calendar years ended December 31, 2004, 2005 and
2006. To fund the acquisition, the Company borrowed $2,000,000, at an annual
rate of LIBOR plus 4%, from Jeffrey P. Orleans, Chairman and Chief Executive
Officer of the Company, under the Company's existing unsecured line of credit
agreement and used funds from operations to fund the remaining payments due. As
of December 31, 2003 the unsecured line of credit with Mr. Orleans has been
completely repaid.
Net cash used in operating activities for the six months ended December
31, 2003 was $43,227,000, compared to net cash used by operating activities for
the prior fiscal year period of $7,493,000. The increase in net cash used in
operating activities was primarily attributable to the acquisition of
approximately 818 building lots for future development with an aggregate
purchase price of approximately $42,981,000 during the six months ended December
31, 2003. The remaining increase in net cash used in operating activities was
attributable to increases in receivables, deferred charges and other assets as
well as a decrease in accounts payable and other liabilities, partially offset
by an increase in customer deposits and net income when compared with the prior
fiscal year period. Net cash used in investing activities for the six months
ended December 31, 2003 was $5,185,000, compared to $674,000 for the prior
fiscal year period. This increase was primarily related to the acquisition of
Masterpiece Homes on July 28, 2003. Net cash provided by financing activities
for the six months ended December 31, 2003 was $53,227,000, compared to
$7,743,000 for the prior fiscal year period. The increase in net cash provided
by financing activities is primarily attributable to an increase in financing to
support the increase in real estate held for development as noted above.
Lot Positions
As of December 31, 2003 the Company owned or controlled approximately
11,045 building lots. Included in the aforementioned lots, the Company had
contracted to purchase, or has under option, undeveloped land and improved
building lots for an aggregate purchase price of approximately $403,622,000 that
are expected to yield approximately 8,024 building lots.
- 23 -
Undeveloped Land Acquisitions
In recent years, the process of acquiring desirable undeveloped land
has become extremely competitive particularly in the northern region, mostly due
to the lack of available parcels suitable for development. In addition,
expansion of regulation in the housing industry has increased the time it takes
to acquire undeveloped land with all of the necessary governmental approvals
required to begin construction. Generally, the Company structures its land
acquisitions so that it has the right to cancel its agreements to purchase
undeveloped land by forfeiture of its deposit under the agreement. For the six
months ended December 31, 2003 the Company forfeited approximately $75,000 in
land deposits related to the cancellation of contracts to purchase undeveloped
land. Included in the balance sheet caption Receivables, deferred charges and
other assets at December 31, 2003 the Company had $29,179,000 invested in 43
parcels of undeveloped land, of which $13,140,000 is deposits, a portion of
which is non-refundable. The acquisition of these parcels is expected to yield
approximately 5,632 building lots. The Company attempts to mitigate the risks
involved in acquiring undeveloped land by structuring its undeveloped land
acquisitions so that the deposits required under the agreements coincide with
certain benchmarks in the governmental approval process, thereby limiting the
amount at risk. This process allows the Company to periodically review the
approval process and make a decision on the viability of developing the acquired
parcel based upon expected profitability. In some circumstances the Company may
be required to make deposits solely due to the passage of time. This structure
still provides the Company an opportunity to periodically review the viability
of developing the parcel of land. In addition, the Company primarily structures
its agreements to purchase undeveloped land contingent upon obtaining all
governmental approvals necessary for construction. Under most agreements, the
Company secures the responsibility for obtaining the required governmental
approvals as the Company believes that it has significant expertise in this
area. It's the Company's intent to complete the acquisition of undeveloped land
after all governmental approvals are in place. In certain circumstances however,
when all extensions have been exhausted, the Company must make a decision on
whether to proceed with the purchase even though all governmental approvals have
not yet been received. In these circumstances, the Company performs reasonable
due diligence to ascertain the likelihood that the necessary governmental
approvals will be granted. At December 31, 2003, the Company had preliminary
approval for all of the parcels included in the balance sheet caption Land held
for development or sale and improvements.
In December 2003, the Company signed an agreement to purchase
approximately 300 acres of undeveloped land expected to yield approximately 400
building lots for a purchase price of approximately $60,000,000.
In January 2004, the Company signed an agreement to purchase
undeveloped land expected to yield approximately 422 building lots for a
purchase price of approximately $25,500,000. The Company has deposited in escrow
$250,000 which is refundable through the end of the 60 day due diligence period.
At the end of the due diligence period, if the Company determines to proceed, it
must deposit an additional $2,750,000 and this deposit along with the initial
$250,000 deposit shall be released to the seller and be substantially
non-refundable at that time.
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Improved Lot Acquisitions
The process of acquiring improved building lots from developers is
extremely competitive. The Company competes with many national homebuilders to
acquire improved building lots, some of which have greater financial resources
than the Company. The acquisition of improved lots is usually less risky than
the acquisition of undeveloped land as the contingencies and risks involved in
the land development process are borne by the developer. In addition,
governmental approvals are generally in place when the improved building lots
are acquired.
At December 31, 2003, the Company had contracted to purchase or had
under option approximately 2,392 improved building lots for an aggregate
purchase price of approximately $142,102,000, including $5,651,000 of deposits.
The Company expects to utilize purchase money mortgages, secured
financings and existing capital resources to finance the acquisitions described
above. Contingent on the aforementioned, the Company anticipates completing a
majority of these acquisitions during the next several years.
Other
On January 14, 2004, the Company filed a Form S-2 Registration
Statement under the Securities Act of 1993 for an offering of 2,000,000 shares
of the Company's common stock, plus an additional 300,000 shares issuable upon
underwriters' exercise of an over-allotment option granted to the underwriters.
The Company intends to repay debt, primarily mortgage facilities secured by real
estate held for development, with the net proceeds of this offering. These
mortgage facilities will continue to be available to the Company after
repayment. The Company's common stock is traded on the American Stock Exchange
under the symbol "OHB". On January 13, 2004, the last reported sale price of the
Company's stock was $24.25 per share. The effective date of this registration
statement is unknown as of this time and there can be no assurances that the
Company will complete this offering.
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Recent Accounting Pronouncements
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 or with a
group of other assets and for the reporting of goodwill and other intangible
assets acquired in a business acquisition subsequent to initial accounting under
SFAS No. 141. SFAS No. 142 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, at the time, all such intangibles related to the Company's
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.
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 adoption did not
have a material impact on its consolidated results of operations and financial
position.
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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.
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
SFAS No. 148 are effective for fiscal years ending after December 15, 2002, and
the disclosure requirements 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 to finance 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 at the end of the first
interim or annual period ending after March 15, 2004. FIN 46 may apply to
certain of our contracts to acquire land that we entered into prior to January
31, 2003. We are in the process of evaluating the applicability of FIN 46 to
these contracts.
- 27 -
Based on the provisions of FIN 46, the Company has concluded that
whenever it enters into an option agreement to acquire 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 adopted the provisions of this statement, as required, on
July 1, 2003, and adoption did not have a material 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 Exchange Act of 1934, as amended
(the "Exchange Act"), and are subject to the Safe Harbor provisions created by
statute. Generally words such as "may", "will", "should", "could", "anticipate",
"expect", "intend", "estimate", "plan", "continue", and "believe" or the
negative of or other variation on these and other similar expressions identify
forward-looking statements. These forward-looking statements are made only as of
the date of this report. The Company does not undertake to update or revise the
forward-looking statements, whether as a result of new information, future
events or otherwise.
Forward-looking statements are based on current expectations and
involve risks and uncertainties and the Company's future results could differ
significantly from those expressed or implied by the Company's forward-looking
statements.
Many factors, including those listed below, could cause the Company's
actual consolidated results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company:
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o changes in consumer confidence due to perceived uncertainty of
future employment opportunities and other factors;
o competition from national and local homebuilders in the
Company's market areas;
o changes in price and availability of building material;
o changes in mortgage interest rates charged to buyers of the
Company's homes;
o changes in the availability and cost of financing for the
Company's operations, including land acquisitions;
o revisions in federal, state and local tax laws which provide
incentives for home ownership;
o inability to successfully integrate acquired businesses;
o delays in obtaining land development permits as a result of
(i) federal, state and local environmental and other land
development regulations, (ii) actions taken or failed to be
taken by governmental agencies having authority to issue such
permits, and (iii) opposition from third parties;
o increased cost of suitable development land; and
o possible liabilities relating to environmental laws or other
applicable regulatory provisions.
- 29 -
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company, due to adverse
changes in financial and commodity market prices and interest rates. The
Company's principal market risk exposure continues to be interest rate risk. A
majority of the Company's debt is variable based on LIBOR and prime rate, and,
therefore, affected by changes in market interest rates. There have been no
material adverse changes to the Company's (1) exposure to risk and (2)
management of these risks, since June 30, 2003.
Item 4. 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 Chief Financial Officer concluded that the Company's disclosure controls and
procedures are functioning effectively to provide reasonable assurance that
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.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On December 5, 2003, the Company held its Annual Meeting of
Stockholders pursuant to a notice dated October 22, 2003. Definitive proxy
materials were filed with the Securities and Exchange Commission prior to the
meeting. A total of 11,717,791 shares were voted at the meeting constituting
92.0% of the 12,742,565 shares entitled to vote.
At the Annual Meeting, the ten nominees (Benjamin D. Goldman, Jerome
S. Goodman, Robert N. Goodman, Andrew N. Heine, David Kaplan, Lewis Katz,
Jeffrey P. Orleans, Robert M. Segal, John W. Temple and Michael T.Vesey) for
election to the Company's Board of Directors were all elected. The results of
the vote were as follows:
Shares for Which
Share Voted For Vote was Withheld
--------------- -----------------
Benjamin D. Goldman 11,408,613 309,178
Jerome S. Goodman 11,665,261 52,530
Robert N. Goodman 11,665,261 52,530
Andrew N. Heine 11,642,070 75,721
David Kaplan 11,409,773 308,018
Lewis Katz 11,408,383 309,408
Jeffrey P. Orleans 11,409,778 308,013
Robert M. Segal 11,408,383 309,408
John W. Temple 11,665,261 52,530
Michael T. Vesey 11,421,113 296,678
In addition, approval of the Company's Amended and Restated Incentive
Compensation Plan was voted upon as follows: shares voted for - 10,641,046;
shares voted against - 37,621; abstentions - 2,962; and broker non-votes -
1,036,162.
Approval of the Company's Stock Award Plan was also voted upon as
follows: shares voted for - 10,625,896; shares voted against - 51,971;
abstentions - 3,762; and broker non-votes - 1,036,162.
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Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits.
31.1 Certification of Jeffrey P. Orleans pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Michael T. Vesey pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.3 Certification of Joseph A. Santangelo pursuant to
Section 302 Sarbanes-Oxley Act of 2002.
32.1 Certification of Jeffrey P. Orleans pursuant to
Section 906 Sarbanes-Oxley Act of 2002.
32.2 Certification of Michael T. Vesey pursuant to Section
906 Sarbanes-Oxley Act of 2002.
32.3 Certification of Joseph A. Santangelo pursuant to
Section 906 Sarbanes-Oxley Act of 2002.
99.1 Press Release Announcing Results of Operations for
the Three and Six Months Ending December 31, 2003.
All Exhibits filed herewith electronically.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORLEANS HOMEBUILDERS, INC.
(Registrant)
February 13, 2004 Michael T. Vesey
--------------------------------------
Michael T. Vesey
President and Chief Operating Officer
February 13, 2004 Joseph A. Santangelo
--------------------------------------
Joseph A. Santangelo
Treasurer, Secretary and Chief
Financial Officer
- 33 -
EXHIBIT INDEX
31.1 Certification of Jeffrey P. Orleans pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Michael T. Vesey pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.3 Certification of Joseph A. Santangelo pursuant to Section 302
Sarbanes-Oxley Act of 2002.
32.1 Certification of Jeffrey P. Orleans pursuant to Section 906
Sarbanes-Oxley Act of 2002.
32.2 Certification of Michael T. Vesey pursuant to Section 906
Sarbanes-Oxley Act of 2002.
32.3 Certification of Joseph A. Santangelo pursuant to Section 906
Sarbanes-Oxley Act of 2002.
99.1 Press Release Announcing Results of Operations for the Three
and Six Months Ending December 31, 2003.
All Exhibits filed herewith electronically.
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