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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 MARCH 31, 2004
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
May 10, 2004: 18,031,463
(excluding 567,330 shares held in Treasury).
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
PAGE
----
PART 1 - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (unaudited)
- ------
Consolidated Balance Sheets at March 31, 2004
and June 30, 2003 1
Consolidated Statements of Operations and Changes
in Retained Earnings for the Three and Nine Months
Ended March 31, 2004 and 2003 2
Consolidated Statements of Shareholders' Equity for the
Nine Months Ended March 31, 2004 3
Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2004 and 2003 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
- ------ Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market
- ------ Risk 30
Item 4. Controls and Procedures 30
- ------
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K 31
- -------
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
March 31, June 30,
2004 2003
--------- ---------
Assets
Cash and cash equivalents $ 24,342 $ 8,883
Restricted cash - customer deposits 18,263 15,065
Real estate held for development and sale:
Residential properties completed or under construction 165,614 109,895
Land held for development or sale and improvements 121,949 100,791
Inventory not owned - Variable Interest Entity 69,308 18,443
Property and equipment, at cost, less accumulated depreciation 2,612 1,257
Deferred taxes 233 233
Goodwill 7,216 4,180
Receivables, deferred charges and other assets 8,567 11,984
Land deposits and costs of future development 30,906 19,978
--------- ---------
Total Assets $ 449,010 $ 290,709
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ 23,899 $ 29,306
Accrued expenses 30,606 27,445
Customer deposits 23,559 16,539
Obligations related to inventory not owned 62,757 17,643
Mortgage and other note obligations primarily secured by real
estate held for development and sale 143,632 106,707
Notes payable - related parties 2,754 2,500
Other notes payable 1,087 31
--------- ---------
Total Liabilities 288,294 200,171
--------- ---------
Commitments and contingencies (See Note K)
Redeemable common stock 1,067 999
--------- ---------
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,
18,031,463 and 13,364,797 shares issued at
March 31, 2004 and June 30, 2003, respectively 1,803 1,337
Capital in excess of par value - common stock 68,575 18,659
Retained earnings 90,287 67,589
Treasury stock, at cost (567,232 and 727,232 shares held at
March 31, 2004 and June 30, 2003, respectively) (1,016) (1,046)
--------- ---------
Total Shareholders' Equity 159,649 89,539
--------- ---------
Total Liabilities and Shareholders' Equity $ 449,010 $ 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 Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
--------- --------- --------- ---------
Earned revenues
Residential properties $ 114,563 $ 76,991 $ 334,427 $ 249,219
Land sales 157 -- 614 --
Other income 1,226 1,100 4,055 3,440
--------- --------- --------- ---------
115,946 78,091 339,096 252,659
--------- --------- --------- ---------
Costs and expenses
Residential properties 86,940 59,835 256,919 193,093
Land sales 131 -- 621 --
Other 624 651 2,848 2,474
Selling, general and administrative 15,085 10,274 40,643 30,343
Interest
Incurred 2,357 1,448 6,659 4,487
Less capitalized (2,082) (1,297) (6,174) (4,253)
--------- --------- --------- ---------
103,055 70,911 301,516 226,144
--------- --------- --------- ---------
Income from operations before income taxes 12,891 7,180 37,580 26,515
Income tax expense 5,072 3,092 14,778 10,440
--------- --------- --------- ---------
Net income 7,819 4,088 22,802 16,075
========= ========= ========= =========
Net income 7,819 4,088 22,802 16,075
Preferred dividends -- 53 104 158
--------- --------- --------- ---------
Net income available for common shareholders 7,819 4,035 22,698 15,917
Retained earnings, at beginning of period 82,468 52,384 67,589 40,502
--------- --------- --------- ---------
Retained earnings, at end of period $ 90,287 $ 56,419 $ 90,287 $ 56,419
========= ========= ========= =========
Basic earnings per share $ 0.49 $ 0.32 $ 1.64 $ 1.29
========= ========= ========= =========
Diluted earnings per share $ 0.45 $ 0.25 $ 1.36 $ 0.97
========= ========= ========= =========
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
Shares Shares
Issued and Issued and
Outstanding Amount Outstanding Amount
------------------- -------------- ------------------- --------------
Balance at June 30, 2003 100,000 $ 3,000 13,364,797 $ 1,337
Redeemable common stock sold
Preferred stock converted to common stock (100,000) (3,000) 2,000,000 200
Shares issued upon conversion of a portion
of convertible subordinated 7% note 666,666 66
Fair market value of stock options issued
Issuance of common shares 2,000,000 200
Stock options exercised
Shares issued in connection with the
acquisition of Parker & Lancaster Corporation
Treasury stock sold
redeemable at $8 per share
Net income
Preferred dividends
------------------- -------------- ------------------- --------------
Balance at March 31, 2004 - $ - 18,031,463 $ 1,803
=================== ============== =================== ==============
[RESTUBBED TABLE]
Capital in
Excess of Treasury Stock
Par Value - Retained Share
Common Stock Earnings Held Amount Total
------------ -------- ------- ------- --------
Balance at June 30, 2003 $ 18,659 $ 67,589 727,232 $(1,046) $ 89,539
Redeemable common stock sold 171 171
Preferred stock converted to common stock 2,800 -
Shares issued upon conversion of a portion
of convertible subordinated 7% note 934 1,000
Fair market value of stock options issued 106 106
Issuance of common shares 45,906 46,106
Stock options exercised 70 (45,902) (120) (50)
Shares issued in connection with the
acquisition of Parker & Lancaster Corporation (107) (75,000) 107 -
Treasury stock sold
redeemable at $8 per share 36 (30,000) 43 79
Net income 22,802 22,802
Preferred dividends (104) (104)
------------ -------- ------- ------- --------
Balance at March 31, 2004 $ 68,575 $ 90,287 576,330 $(1,016) $159,649
============ ======== ======= ======= ========
See accompanying notes which are an integral part of the
consolidated financial statements.
- 3 -
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
March 31,
2004 2003
------------- --------------
Cash flows from operating activities:
Net income $ 22,802 $ 16,075
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 484 630
Stock based compensation expense 106 11
Changes in operating assets and liabilities:
Restricted cash - customer deposits (3,198) (4,595)
Real estate held for development and sale (60,122) (9,423)
Receivables, deferred charges and other assets 1,591 538
Land deposits and costs of future developments (14,443) (13,400)
Accounts payable and other liabilities (3,338) (276)
Customer deposits 4,099 5,341
--------- ---------
Net cash used in operating activities (52,019) (5,099)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (1,626) (1,030)
Acquisitions, net of cash acquired (5,420) (188)
--------- ---------
Net cash used in investing activities (7,046) (1,218)
--------- ---------
Cash flows from financing activities:
Borrowings from loans secured by real estate assets 271,745 178,285
Repayment of loans secured by real estate assets (245,725) (172,062)
Borrowings from other note obligations 2,837 -
Repayment of other note obligations (603) (1,436)
Issuance of common stock, net of expenses 46,106 -
Sale of treasury stock 240 -
Stock options exercised 28 37
Preferred stock dividend (104) (158)
--------- ---------
Net cash provided by financing activities 74,524 4,666
--------- ---------
Net increase (decrease) in cash and cash equivalents 15,459 (1,651)
Cash and cash equivalents at beginning of year 8,883 7,257
--------- ---------
Cash and cash equivalents at end of period $ 24,342 $ 5,606
========= =========
Supplemental disclosure of cash flow activities:
Interest paid, net of amounts capitalized $ 485 $ 83
========= =========
Income taxes paid $ 12,585 $ 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 March 31, 2004. The
Consolidated Balance Sheets include the accounts of Masterpiece as of March
31, 2004. 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
6
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").
The FASB issued a revised FIN 46 in December 2003 which modifies and
clarifies various aspects of the original interpretations. 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
7
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 was deferred to the end of the first
interim or annual period ending after March 15, 2004. The Company fully
adopted FIN 46 effective March 31, 2004.
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 deposit that is not unconditionally refundable, 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 Entity". The Company recorded
$69,308,000 in Inventory Not Owned - Variable Interest Entity as of March
31, 2004. Included in the balance is $13,421,000 which pertains to option
agreements to acquire land or lots that were executed prior to January 31,
2003 and recorded as VIE's as a result of the full adoption of FIN 46.
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
8
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.
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 $3,036,000 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 Nine Months Ended
March 31,
---------------------------------------------------
2004 2003 2004 2003
---------- -------- -------- --------
(in thousands, except share amounts)
Earned revenues $117,153 $86,175 $337,017 $271,911
Income from operations before
income taxes 13,130 7,430 37,727 26,671
Net income 7,970 4,510 22,900 16,189
Earnings per share:
Basic 0.50 0.35 1.65 1.31
Diluted 0.46 0.27 1.37 0.99
(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 March
31, 2004, 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.
(F) Common Stock:
On March 11, 2004, the Company completed a public offering of 2,000,000
newly issued shares of common stock at a public offering price of $24.75 per
share. The proceeds of the common stock offering net of the underwriting
discount and the offering expenses were approximately $46,106,000.
10
(G) 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 nine
months ended March 31, 2004 and 2003, respectively, are shown in the
following table:
Three Months Ended Nine Months Ended
March 31,
---------------------------------------------
2004 2003 2004 2003
------- ------- ------- -------
(in thousands)
Total common shares issued 16,493 13,365 14,429 12,915
Unconditional shares issuable 68 137 94 160
Less: Average treasury shares
Outstanding 597 707 645 753
------- ------- ------- -------
Basic EPS shares 15,964 12,795 13,878 12,322
Effect of assumed shares issued under
treasury stock method for stock options 578 519 568 517
Effect of December 29, 2003 partial
conversion of $3 million Convertible
Subordinated 7% Note (1) 667 1,333 1,105 1,783
Effect of December 29, 2003 conversion
of $3 million Series D Preferred Stock (2) - 2,000 1,316 2,000
------- ------- ------- -------
Diluted EPS shares 17,209 16,647 16,867 16,622
======= ======= ======= =======
Net income available for
common shareholders $ 7,819 $ 4,035 $22,698 $15,917
Effect of December 29, 2003 conversion
of $3 million Series D Preferred Stock (2) - 53 104 158
Effect of December 29, 2003 partial
conversion of $3 million Convertible
Subordinated 7% Note (1) 11 22 54 87
------- ------- ------- -------
Adjusted net income for diluted EPS $ 7,830 $ 4,110 $22,856 $16,162
======= ======= ======= =======
(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
(H) Supplemental Cash Flow Disclosure:
Non-cash assets acquired and liabilities assumed as a result of the
Masterpiece acquisition were approximately $17,269,000 and $15,119,000,
respectively.
(I) Residential Properties Completed or under Construction:
Residential properties completed or under construction consist of the
following:
March 31, June 30,
2004 2003
-------- --------
(in thousands)
Under contract for sale (backlog) $109,129 $ 76,303
Unsold 56,485 33,592
-------- --------
Total residential properties completed
or under construction $165,614 $109,895
======== ========
(J) 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.
(K) Commitments and Contingencies:
As of March 31, 2004, the Company owned or controlled approximately 12,218
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 $465,317,000 which is
expected to yield approximately 9,014 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.
Additionally, the totals include an agreement entered into in January 2004
to purchase undeveloped land expected to yield approximately 422 building
lots with a purchase price of approximately $25,500,000 and a non-refundable
deposit of $3,000,000 as of March 31, 2004.
12
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 March 31, 2004. 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
March 31, 2004, backlog was $436,710,000 representing 1,250 homes compared to a
backlog of $285,223,000 representing 778 homes at March 31, 2003. At March 31,
2004, the Company was selling in 80 communities and owned or controlled
approximately 12,218 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.
13
Results of Operations
- ---------------------
The following table sets forth certain details as to residential sales
activity. The information provided is for the three and nine months ended March
31, 2004 and 2003 in the case of revenues earned and new orders, and as of March
31, 2004 and 2003 in the case of backlog.
Nine Months Ended March 31,
2004 2003
------------------------------- ---------------------------------
(Dollars in thousands)
NORTHERN REGION Average Average
New Jersey and Pennsylvania: Amount Homes Price Amount Homes Price
Residential revenue earned $175,335 450 $390 $164,768 537 $307
New orders 218,096 488 447 201,354 545 369
Backlog 232,695 500 465 187,210 475 394
SOUTHERN REGION
North Carolina, South Carolina
and Virginia:
Residential revenue earned $116,827 376 $311 $84,451 301 $281
New orders 175,519 517 339 127,024 424 300
Backlog 154,525 431 359 98,013 303 323
FLORIDA REGION (1)
Residential revenue earned $ 42,265 306 $138 $ - - $ -
New orders 50,093 327 153 - - -
Backlog 49,490 319 155 - - -
COMBINED REGIONS
Residential revenue earned $334,427 1,132 $295 $249,219 838 $297
New orders 443,708 1,332 333 328,378 969 339
Backlog 436,710 1,250 349 285,223 778 367
(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 March 31, 2004.
14
Three Months Ended March 31,
2004 2003
-------------------------------- ---------------------------------
(Dollars in thousands)
NORTHERN REGION Average Average
New Jersey and Pennsylvania: Amount Homes Price Amount Homes Price
Residential revenue earned $ 57,798 133 $435 $ 46,392 147 $316
New orders 95,340 218 437 74,077 201 369
Backlog 232,695 500 465 187,210 475 394
SOUTHERN REGION
North Carolina, South Carolina
and Virginia:
Residential revenue earned $ 41,071 131 $314 $ 30,599 111 $276
New orders 67,034 200 335 56,306 185 304
Backlog 154,525 431 359 98,013 303 323
FLORIDA REGION (1)
Residential revenue earned $ 15,694 107 $147 $ - - $ -
New orders 20,575 124 166 - - -
Backlog 49,490 319 155 - - -
COMBINED REGIONS
Residential revenue earned $114,563 371 $309 $ 76,991 258 $298
New orders 182,949 542 338 130,383 386 338
Backlog 436,710 1,250 349 285,223 778 367
(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 March 31, 2004.
Three Months and Nine Months Ended March 31, 2004 and 2003
----------------------------------------------------------
Orders and Backlog
- ------------------
New orders for the nine months ended March 31, 2004 increased
$115,330,000 or 35.1%, to $443,708,000 on 1,332 homes, compared to $328,378,000
on 969 homes for the nine months ended March 31, 2003. The increase in new order
dollars was attributable to increases in the northern and southern region new
orders of $16,742,000, or 8.3%, and $48,495,000, or 38.2%, respectively, when
compared to the nine months ended March 31, 2003. In addition, the Company's
expansion into the Florida region through its acquisition of Masterpiece Homes
contributed $50,093,000 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 approximately 21% and 13%, respectively, compared with the
nine months ended March 31, 2003. The increase in the average price per home of
new orders on a regional basis was due to the Company's mix of product offerings
15
and price increases in the northern and southern region in those communities
open during the first nine months of fiscal 2004 when compared with the same
communities and products offered for sale in the first nine 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.
Overall, the number of new orders for the nine months ended March 31,
2004 increased to 1,332 from 969 homes for the nine months ended March 31, 2003,
an increase of 363 homes, or 37.5%. In the northern region, the number of new
orders for the nine months ended March 31, 2004 decreased to 488 homes from 545
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 nine
months ended March 31, 2004 increased to 517 homes from 424 homes in the nine
months ended March 31, 2003 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 327 new home orders for the nine months ended
March 31, 2004.
Overall, the number of new orders for the three months ended March 31,
2004 increased $52,566,000, or 40.3%, to $182,949,000 on 542 homes, compared to
$130,383,000 on 386 homes for the three months ended March 31, 2003. The
increase in new orders was attributable to increases in the northern and
southern region new orders of $21,263,000, or 28.7%, and $10,728,000, or 19.1%,
respectively, when compared to the three months ended March 31, 2003. In
addition, the Company's expansion into the Florida region through its
acquisition of Masterpiece Homes contributed $20,575,000 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 approximately 19% and 10%,
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 and price increases in the northern and southern region
in those communities open during the three months ended March 31, 2004 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 March
31, 2004 increased to 542 homes from 386 homes for the three months ended March
31, 2003, an increase of 150 homes, or 40.4%. In the northern region, the number
of new home orders for the three months ended March 31, 2004 increased to 218
homes from 201 homes for the three months ended March 31, 2003. In the southern
region, the number of new home orders for the three months ended March 31, 2004
increased to 200 homes from 185 homes for the three months ended March 31, 2003
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 124 new home orders for the three months ended March 31,
2004.
16
The backlog at March 31, 2004 increased $151,487,000, or 53.1%, to
$436,710,000 on 1,250 homes compared to the backlog at March 31, 2003 of
$285,223,000 on 778 homes. The increase in backlog was attributable to an
increase in new orders, the Company's obtaining additional backlog of
$49,490,000 and 319 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 nine months ended March 31, 2004
increased $86,437,000 to $339,096,000, or 34.2%, compared to $252,659,000 for
the nine months ended March 31, 2003. 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 1,132 homes totaling $334,427,000 during the nine
months ended March 31, 2004, as compared to 838 homes totaling $249,219,000
during the nine months ended March 31, 2003. The increase in residential revenue
was attributable to increases in the northern and southern region residential
revenue of $10,567,000, or 6.4%, and $32,376,000, or 38.3%, respectively, when
compared to the nine months ended March 31, 2003. In addition, the Company's
expansion into the Florida region through its acquisition of Masterpiece Homes
contributed $42,265,000 to the increase in residential revenue. The average
price per home delivered remains strong with increases in the northern region
and southern region of 27.0% and 10.7%, respectively, compared with the nine
months ended March 31, 2003. Contributing to the increase in the average price
per home for the northern and southern regions was an increase in revenue
attributable to customer-selected options, such as bonus rooms and flooring
upgrades for the nine months ended March 31, 2004 when compared to the nine
months ended Marched 31, 2003.
Overall, the number of homes delivered for the nine months ended March
31, 2004 increased by 294 homes, or 35.1%, to 1,132 homes compared to 838 homes
in the nine months ended March 31, 2003. In the northern region, the number of
homes delivered in the nine months ended March 31, 2004 decreased to 450 homes
from 537 homes in the nine months ended March 31, 2003. The decrease in the
northern region was attributable to the product mix of homes delivered.
Specifically, single family homes, which typically have a longer building cycle
than townhomes, comprised a larger percentage of the total homes delivered in
the northern region during the nine months ended March 31, 2004 than townhomes
when compared to the nine months ended March 31, 2003. 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
nine months ended March 31, 2004 increased to 376 homes from 301 homes in the
nine months ended March 31, 2003 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 306 homes delivered in the nine
months ended March 31, 2004.
17
Total earned revenues for the three months ended March 31, 2004
increased $37,855,000, to $115,946,000 or 48.5%, compared to $78,091,000 for the
three months ended March 31, 2003. Revenues from the sale of residential homes
included 371 homes totaling $114,563,000 during the three months ended March 31,
2004, as compared to 258 homes totaling $76,991,000 during the three months
ended March 31, 2003. The increase in residential revenue was attributable to
increases in the northern and southern region residential revenue of
$11,406,000, or 24.6%, and $10,472,000, or 34.2%, respectively, when compared to
the three months ended March 31, 2003. In addition, the Company's expansion into
the Florida region through its acquisition of Masterpiece Homes contributed
$15,694,000 to the increase in residential revenue. The average selling price
per home delivered in three months ended March 31, 2004 increased in the
northern region and southern region by approximately 37.7% and 13.7%,
respectively, compared with the three months ended March 31, 2003. Contributing
to the increase in the average price per home in the northern and southern
regions was an increase in revenue attributable to customer-selected options,
such as bonus rooms and flooring upgrades for the three months ended March 31,
2004 when compared to the three months ended Marched 31, 2003.
The number of homes delivered in the three months ended March 31, 2004
increased by 113 homes, or 43.8%, to 371 homes compared to 258 homes in the
three months ended March 31, 2003. The overall increase was attributable to an
increase in the number homes delivered in the southern region to 131 homes
compared to 111 homes in the three months ended March 31, 2003 as well as the
delivery of 107 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 133 homes from 147 homes in the three months ended March 31,
2003. The decrease in the number of homes delivered in the northern region was
attributable to the product mix of homes delivered during the three months ended
March 31, 2004 when compared to the three months ended March 31, 2003 and delays
in the opening of new communities as a result of increasingly restrictive
regulations and moratoriums by governments as noted above.
18
Costs and Expenses
- ------------------
Costs and expenses for the nine months ended March 31, 2004 increased
$75,372,000 to $301,516,000, or 33.3%, compared with the nine months ended March
31, 2003. The cost of residential properties for the nine months ended March 31,
2004 increased $63,826,000 to $256,919,000, or 33.1%, when compared with the
nine months ended March 31, 2003. The increase in cost of residential properties
was primarily attributable to the increased residential revenue in the southern
and Florida regions noted above. The consolidated gross profit margin for the
nine months ended March 31, 2004 increased 0.7% to 23.2% compared to 22.5% for
the nine months ended March 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 nine months ended March 31, 2004 and March 31, 2003 were
$4,999,000 and $5,881,000, respectively. The decrease in the interest included
in the costs and expenses of residential properties and land sold despite the
overall increase in the cost of residential property is attributable to
continuing low interest rates during the construction periods for both the site
improvements and the homes. The interest incurred during the construction
periods is expensed to the cost of residential property in the period in which
the unit settles.
For the nine months ended March 31, 2004, selling, general and
administrative expenses increased $10,300,000 to $40,643,000, or 33.9%, when
compared with the nine months ended March 31, 2003. The increase in selling,
general and administrative expenses was due to an increase in Florida region
expenses of $4,438,000 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 $2,821,000 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, incentive compensation and travel and entertainment
expenses in the northern and southern regions.
The selling, general and administrative expenses as a percentage of
residential revenue for the nine months ended March 31, 2004 of 12.2% is
consistent with the selling, general and administrative expenses as a percentage
of residential revenue for the nine months ended March 31, 2003 of 12.2%.
19
Costs and expenses for the three months ended March 31, 2004 increased
$32,144,000 to $103,055,000, or 45.3%, compared with the three months ended
March 31, 2003. The cost of residential properties for the three months ended
March 31, 2004 increased $27,105,000 to $86,940,000, or 45.3%, when compared
with the three months ended March 31, 2003. 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 March 31, 2004 increased 1.8% to 24.1% compared to 22.3%
for the three months ended March 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 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 March 31, 2004 and March 31, 2003 were
$1,664,000 and $1,558,000, respectively. The decrease in the interest included
in the costs and expenses of residential properties and land sold despite the
overall increase in the cost of residential property is attributable to
continuing low interest rates during the construction periods for both the site
improvements and the homes. The interest incurred during the construction
periods is expensed to the cost of residential property in the period in which
the unit settles.
For the three months ended March 31, 2004, selling, general and
administrative expenses increased $4,811,000 to $15,085,000, or 46.8%, when
compared with the three months ended March 31, 2003. The increase in selling,
general and administrative expenses was due to an increase in Florida region
expenses of $1,755,000 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 $814,000 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, incentive compensation and travel and entertainment
expenses in the northern and southern regions.
The selling, general and administrative expenses as a percentage of
residential revenue for the three months ended March 31, 2004 of 13.2% is
relatively consistent with the selling, general and administrative expenses as a
percentage of residential revenue for the three months ended March 31, 2003 of
13.3%.
20
Income Tax Expense
- ------------------
Income tax expense for the nine months ended March 31, 2004 increased
$4,338,000 to $14,778,000, or 41.6%, from $10,440,000 for the nine months ended
March 31, 2003. The increase in income tax expense for the nine months ended
March 31, 2004 is attributable to an increase in income from operations.
Income tax expense for the three months ended March 31, 2004 increased
$1,980,000 to $5,072,000, or 64.0% from $3,092,000 for the three months ended
March 31, 2003. The increase in income tax expense for the three months ended
March 31, 2004 is attributable to an increase in income from operations. The
increase was partially offset by a decrease in the Company's effective tax rate
for the three months ended March 31, 2004 to 39.3% from 43.0% for the three
months March 31, 2003. The decrease in the Company's effective tax rate was due
to the fact that the Company made a year to date tax adjustment during the third
quarter of the prior fiscal year as a the result of changes in state tax laws in
the states in which the Company operates.
Net Income
- ----------
Net income for the nine months ended March 31, 2004 increased
$6,781,000, or 42.6%, to $22,698,000, compared with $15,917,000 for the nine
months ended March 31, 2003. 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 the
Company.
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 nine month periods ended March 31,
2004 by $334,000 and $763,000 respectively.
Liquidity and Capital Resources
- -------------------------------
On March 11, 2004, the Company completed a public offering of 2,000,000
newly issued shares of common stock at a public offering price of $24.75 per
share. The offering raised approximately $46,106,000, net of the underwriter's
discount and offering expenses, of which approximately $37,064,000 was
immediately used to reduce the Company's outstanding mortgage and note
obligations. The remaining portion will be utilized to fund near term
construction costs in lieu of construction financing.
21
On an ongoing basis, 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 additional sources of capital include funds derived
from operations, sales of assets and various borrowings, most of which are
secured.
At March 31, 2004, the Company had approximately $211,861,000 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 March 31, 2004, the LIBOR and prime rates of
interest were 1.09% and 4.00%, respectively.
Generally, the Company finances its development and construction
activities on a community-by community basis so that, for each community the
Company builds, it has a separate credit facility. Accordingly, the Company has
numerous credit facilities. While the loan agreements relating to these
facilities contain certain covenants, they generally contain few, if any,
material financial covenants. Typically, the Company's loan agreements contain
covenants requiring it to:
o obtain agreements of sale for a specified number of homes within a
specified time period, with the number of homes and time period varying
by community;
o not distribute dividends greater than 5% of each year's net income;
o not permit a change in control of the Company or of any subsidiary that
is a party to the applicable loan agreement;
o complete any construction which is the subject of the loan agreement
without significant delay and in accordance with the previously
submitted construction plans;
o notify the lender, in writing, immediately if the Company receives a
claim of lien with respect to any services, labor, or material
furnished in connection with applicable construction, and to remove any
such lien within 10 days after the date the lien was filed;
o maintain certain minimum levels of insurance;
o when requested by lender, provide inventory status reports and
financial statements and other inventory and financial information
reasonably requested by lender;
22
o furnish the lender with copies of all notices received by the Company
claiming any breach or potential breach of any contracts related to the
construction, claiming or asserting a right to a lien for work
performed or materials provided in connection with construction, or
from any governmental authority asserting that the land or construction
which is the subject of the loan agreements may or does violate any law
or regulations;
o not enter into leases affecting the land or the construction which is
the subject if the applicable loan documents without the prior written
consent of the lender;
o not obtain subordinate financing on the land, construction or other
property granted as security under applicable loan documents with the
prior approval of the lender; and
o not sell or otherwise dispose of any of the land or the construction
which is the subject of the applicable loan documents.
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. In
December 2003, the unsecured line of credit with Mr. Orleans was completely
repaid.
Net cash used in operating activities for the nine months ended March
31, 2004 was $52,019,000, compared to net cash used by operating activities for
the prior fiscal year period of $5,099,000. The increase in net cash used in
operating activities during the nine months ended March 31, 2004 was primarily
attributable to the acquisition of undeveloped land and improved building lots
that will yield approximately 1,351 building lots with an aggregate purchase
price of approximately $60,862,000. The remaining increase in net cash used in
operating activities was attributable to increases in land deposits and costs of
future development as well as decreases in receivables, deferred charges and
other assets, accounts payable and other liabilities, and customer deposits
partially offset by an increase in net income when compared with the prior
fiscal year period. Net cash used in investing activities for the nine months
23
ended March 31, 2004 was $7,046,000, compared to $1,218,000 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 nine months ended March 31, 2004 was $74,524,000, compared to $4,666,000
for the prior fiscal year period. The increase in net cash provided by financing
activities is primarily attributable to proceeds of $46,106,000 received in
connection with the sale of 2,000,000 newly issued shares of the Company's
common stock and an increase in financing to support the increase in real estate
held for development as noted above.
Lot Positions
- -------------
As of March 31, 2004, the Company owned or controlled approximately
12,218 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 $465,317,000 that
are expected to yield approximately 9,014 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. Additionally, the totals
include an agreement entered into in January 2004 to purchase undeveloped land
expected to yield approximately 422 building lots with a purchase price of
approximately $25,500,000 and a non-refundable deposit of $3,000,000 as of March
31, 2004.
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 nine
months ended March 31, 2004, the Company forfeited approximately $125,000 in
land deposits related to the cancellation of purchase agreements of which
$100,000 related to contracts to purchase undeveloped land and $25,000 related
to contracts to purchase improved lots. Included in the balance sheet captions
Inventory not owned - Variable Interest Entity and Land deposits and costs of
future developments, at March 31, 2004 the Company had $30,689,000 invested in
45 parcels of undeveloped land, of which $14,453,000 is deposits, a portion of
which is non-refundable. The acquisition of undeveloped land is expected to
yield approximately 6,690 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
24
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. The Company intends 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 March 31, 2004, the Company had preliminary approval for all
of the parcels included in the balance sheet caption Land held for development
or sale and improvements.
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 March 31, 2004, the Company had contracted to purchase or had under
option approximately 2,324 improved building lots for an aggregate purchase
price of approximately $150,594,000, including $5,370,000 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.
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
25
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.
26
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"). The FASB issued a revised FIN 46 in December 2003 which modifies and
clarifies various aspects of the original interpretations. 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. For VIE's created before January 31, 2003, FIN 46 was
deferred to the end of the first interim or annual period ending after March 15,
2004. The Company fully adopted FIN 46 effective March 31, 2004.
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 deposit that is not unconditionally refundable, 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. The Company recorded $69,308,000 in Inventory Not
Owned - Variable Interest Entities as of March 31, 2004. Included in the balance
is $13,421,000 which pertains to option agreements to acquire land or lots that
were executed prior to January 31, 2003 and recorded as VIE's as a result of the
full adoption of FIN 46.
27
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:
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;
28
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. 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 $1,500,000 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.
Changes in the prices of commodities that are a significant component
of home construction costs, particularly lumber, may result in unexpected short
term increases in construction costs. Since the sales price of the Company's
homes is fixed at the time the buyer enters into a contract to acquire a home
and because the Company contracts to sell its homes before construction begins,
any increase in costs in excess of those anticipated may result in lower gross
margins for the homes in the Company's backlog. The Company attempts to mitigate
the market risks of price fluctuation of commodities by entering into
fixed-price contracts with its subcontractors and material suppliers for a
specified period of time, generally commensurate with the building cycle.
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.
30
PART II. OTHER INFORMATION
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 Nine Months Ending March 31, 2004 (incorporated by
reference to Exhibit 99.1 to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on
May 11, 2004).
(b) Reports on Form 8-K.
--------------------
On February 11, 2004 the Company filed a Current Report on
Form 8-K for the purpose of providing a press release dated February 9,
2004 related to the announcement of information relating to the
Company's fiscal 2004 second quarter and reaffirming its earnings
guidance for fiscal year 2004.
* Exhibits filed herewith electronically.
31
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)
May 13, 2004 Michael T. Vesey
-------------------------------------
Michael T. Vesey
President and Chief Operating Officer
May 13, 2004 Joseph A. Santangelo
-------------------------------------
Joseph A. Santangelo
Treasurer, Secretary and
Chief Financial Officer
32
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 Nine Months Ending March 31, 2004 (incorporated by
reference to Exhibit 99.1 to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on
May 11, 2004).
*Exhibits filed herewith electronically.
1