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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number 1-6830
ORLEANS HOMEBUILDERS, INC.
(formerly FPA Corporation)
(Exact name of registrant as specified in its charter)
Delaware 59-0874323 One Greenwood Square, #101
(State or other jurisdiction of (I.R.S. Employer 3333 Street Road
incorporation or organization) Identification No.) Bensalem, PA 19020
(Address of Principal Executive Office)
(215) 245-7500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title on which Registered
----- ---------------------
Common Stock, $.10 Par Value Per Share
(also formerly registered under
Section 12(g) of the Act............... American
14 1/2% Subordinated Debentures due
September 1, 2000...................... American
Securities Registered Pursuant to Section
12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES _X_ No___
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _X_
The aggregate market value of voting stock held by non-affiliates of the
registrant as of September 10, 1999 was approximately $4,406,000.
Number of shares of outstanding Common Stock as of September 10, 1999 was
11,357,893 shares (excluding 1,340,238 shares held in Treasury).
Part III (except for information included under Part I relating to executive
officers of the registrant) is incorporated by reference from the proxy
statement for the annual meeting of Stockholders scheduled to be held in
December, 1999.
TABLE OF CONTENTS
PART I
PAGE
----
ITEM 1. Business. 1
General 1
Residential Development 2
Operating Policies and Construction 4
Sales and Customer Financing and Land Policy 5
Joint Ventures and Government Regulation 6
Environmental Regulation and Litigation 7
Competition and Employees 7
Economic Conditions 8
ITEM 2. Properties.
Lease of Executive Offices 8
ITEM 3. Legal Proceedings 8
ITEM 4. Submission of Matters to a Vote of Security Holders 8
ITEM 4A. Executive Officers of the Registrant 8
PART II
ITEM 5. Market for Registrant's Common Stock and
Related Stockholder Matters 10
ITEM 6. Selected Financial Data 11
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
ITEM 7A. Quantitative and Qualitative Disclosures About
Market Risk 19
ITEM 8. Financial Statements and Supplementary Data 20
ITEM 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 43
PART III
ITEM 10. Directors and Executive Officers of Registrant 43
ITEM 11. Executive Compensation 43
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management 43
ITEM 13. Certain Relationships and Related Transactions 43
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 43
Item l. Business.
General
Effective July 1998, the Registrant changed its name from FPA
Corporation to Orleans Homebuilders, Inc. ("OHB") (the "Company"). The Company
develops residential communities in Southeastern Pennsylvania and Central and
Southern New Jersey. The Company's operations in Pennsylvania and New Jersey are
in the Philadelphia metropolitan area, primarily in Bucks, Chester and Delaware
Counties in Pennsylvania and in Burlington, Camden and Gloucester Counties in
New Jersey.
During fiscal 1997, the Company commenced development of communities in
Chester and Delaware Counties in Southeastern Pennsylvania and Mercer County in
Central New Jersey. During fiscal 1998 and fiscal 1999, the Company continued
its regional expansion through the purchase of land in Hunterdon County and
Somerset County in Central New Jersey, and Chester County in Southeastern
Pennsylvania. As of June 30, 1999, the Company has commenced development of
communities on this purchased land. The Company continues to look for
opportunities in the counties in which it is currently active, as well as all
adjoining counties.
The Company operates as both a developer and builder. The Company
builds and sells condominiums, townhouses and single-family homes; and sells
land and developed homesites. During the fiscal year ended June 30, 1999, the
Company delivered 718 residential units, as compared to 589 units in fiscal
1998. Revenues earned from residential property activities during fiscal 1999
were $143,827,000, as compared to $106,246,000 in fiscal 1998. At June 30, 1999,
the Company's backlog was $101,065,000, representing 425 units, compared to
$70,995,000 and 340 units, at June 30, 1998. In addition, as of June 30, 1999,
there were reservation deposits relating to 25 units at the Company's various
developments which had an aggregate sales value of $6,862,000, as compared to 37
units aggregating $7,162,000 at June 30, 1998.
The Company's predecessor, Florida Palm-Aire Corporation, was formed in
1959 and was merged into Orleans Homebuilders, Inc., a Delaware corporation
formed on September 4, 1969. In 1965, the late Marvin Orleans and Orleans
Construction Co., a general partnership substantially owned and controlled by
Marvin Orleans and his late father, A.P. Orleans, acquired the controlling
interest in the Company. In 1993, the Company acquired Orleans Construction
Corp. ("OCC") from Jeffrey P. Orleans. Unless otherwise indicated, the terms the
"Company" and "OHB" include Orleans Homebuilders, Inc. and all of its
Subsidiaries.
1
Jeffrey P. Orleans, the son of Marvin Orleans and Chairman of the Board
and Chief Executive Officer of the Company, owns, directly or indirectly,
approximately 7,232,708 shares of Common Stock, par value $.10 per share
("Common Stock"), which represents approximately 63.7% of the outstanding
shares, excluding treasury shares, as of September 10, 1999. In addition, if Mr.
Orleans were to convert his Convertible Subordinated 7% Note (See Note 8 of
Notes to Consolidated Financial Statements) and his Series D Preferred Stock
(See Note 10 of Notes to Consolidated Financial Statements) into common shares,
he would then own 73.1% of the then outstanding shares.
Residential Development
The Company's activities in developing residential communities include
the sale of residential properties and the sale of land and developed homesites
to independent builders. The Company occasionally participates in joint ventures
in certain of these activities.
The following table sets forth certain information at June 30, 1999
with respect to land holdings, active communities of the Company under
development and those where construction is expected to commence in the near
future.
2
RESIDENTIAL DEVELOPMENTS AS OF JUNE 30, 1999
No. of Total Units Total Units Total Units Reservation Unit Price Remaining
------ ----------- ----------- ----------- ----------- ---------- ---------
State Communities Approved Delivered Under Contract Deposits Range(1) Approved Units(2)
- ----- ----------- -------- --------- -------------- -------- -------- -----------------
PA 12 971 543 87 9 $110,000 332
$450,000
NJ 25 2,855 1,254 338 16 $ 90,000 1,247
-- ----- ----- --- -- $555,000 -----
37 3,826 1,797 425 25 1,579
== ===== ===== === == =====
1. Range of base prices of residential dwelling units currently being offered
for sale by the Company. In addition, the Company sells homesites from time
to time at its various developments to unaffiliated builders at prices
substantially lower than its dwelling units.
2. Although zoning and certain preliminary master plan approvals have been
received for these units, final plans are subject to substantial review and
approval by appropriate governmental agencies. No assurance can be given
that the Company will be able to obtain the required final approvals for the
indicated units or will ultimately elect to develop the properties in
accordance with presently anticipated development plans.
3
The following table sets forth certain detail as to residential sales activity.
The information provided is for the twelve months ended June 30, 1999, 1998 and
1997 in the case of revenues earned and new orders, and as of June 30, 1999,
1998 and 1997 in the case of backlog.
Year Ended June 30,
--------------------------------------------
1999* 1998* 1997*
-------- -------- --------
(Dollars in Thousands)
Revenues earned $143,827 $106,246 $ 96,104
Units 718 589 562
Average price per unit $ 200 $ 180 $ 171
New orders $173,897 $139,129 $ 94,158
Units 803 719 553
Average price per unit $ 217 $ 194 $ 170
Backlog $101,065 $ 70,995 $ 38,260
Units 425 340 210
Average price per unit $ 238 $ 209 $ 182
* Included in revenues earned and new order data for fiscal 1999 are four low
income housing units purchased by Jeffrey P. Orleans, Chairman and Chief
Executive Officer of the Company. The units had an aggregate sales value of
$176,000. In addition, included in new order data for fiscal 1997 are 31 low
income housing units purchased by Mr. Orleans, with an aggregate sales value of
$1.8 million. Five of those units were delivered in fiscal 1997 and the
remaining 26 units, with an aggregate sales value of $1.4 million, are included
in backlog data at June 30, 1997 and fiscal 1998 revenues. The selling price of
all units, which are determined by state statute, are the same as if the units
had been sold to unaffiliated third parties. These transactions will satisfy, in
part, the Company's low income housing requirements in Mount Laurel Township,
New Jersey.
Operating Policies
Construction
The Company has historically designed its own products with the
assistance of unaffiliated architectural firms as well as supervised the
development and building of its communities. When the Company constructs units,
it acts as a general contractor and employs subcontractors at specified prices
for the installation of site improvements and construction of its residential
units. Agreements with subcontractors provide for a fixed price for work
performed or materials supplied and are generally short-term.
The Company does not manufacture any of the materials or other items
used in the development of its communities, nor does the Company maintain
substantial inventories of materials. Standard building materials, appliances
and other components are purchased in volume. The Company has not experienced
significant delays in obtaining materials needed by it to date and has
4
long-standing relationships with many of its major suppliers and contractors.
None of the Company's suppliers accounted for more than 10% of the Company's
total purchases in the fiscal year ended June 30, 1999.
Sales and Customer Financing
The Company conducts a marketing program that is directed to purchasers
of primary residences. In Pennsylvania and New Jersey, A.P. Orleans Inc., a
wholly-owned subsidiary of the Company, is the exclusive sales agent.
Model homes and sales centers are constructed to promote sales. A
variety of custom changes are permitted at the request of purchasers. The
Company advertises extensively using newspapers, billboards, the internet and
other types of media. The Company also uses brochures to describe each
community.
The Company's customers generally require mortgage financing to
complete their purchases. The Company has a mortgage department to assist its
home buyers in obtaining financing from unaffiliated lenders. The Company
receives a fee for its services.
The Company applies for project financing approvals from the Federal
Housing Administration, the Veterans Administration and the Federal National
Mortgage Association for many of its moderately priced communities. These
approvals assist customers in their ability to obtain competitive fixed and
adjustable rate mortgages with moderate down payments and liberal underwriting
requirements. The Company has obtained approvals for most projects and
anticipates additional approvals during fiscal 2000; however, there can be no
assurance that additional approvals will be obtained.
Land Policy
The Company acquires land in order to provide an adequate and
well-located supply for its residential building operations. In evaluating
possible opportunities to acquire land, the Company considers such factors as
the feasibility of development, proximity to developed areas, population growth
patterns, customer preferences, estimated cost of development and availability
and cost of financing.
As of June 30, 1999, the Company had contracted to acquire fifteen
additional parcels of land in its existing markets, totaling approximately 2,500
residential lots for an aggregate purchase price of approximately $59,721,000.
The Company anticipates completing a majority of these acquisitions during
fiscal 2000 and 2001.
The Company will continue to monitor economic and market conditions for
residential units in each of its various communities in assessing the relative
desirability of constructing units or selling parcels to other builders.
The Company engages in many phases of development activity, including
land and site planning, obtaining environmental and other regulatory approvals,
construction of roads, sewer, water and drainage facilities, recreation
facilities and other amenities.
5
Joint Ventures
From time to time, the Company has developed and owned projects through
joint ventures with other parties.
As discussed in Note 1 of Notes to Consolidated Financial Statements,
the Company, through a wholly owned subsidiary, is the General Partner in
Versailles Associates, L.P., a limited partnership comprised of private
investors, formed to purchase and develop a 102 multi-family unit community in
Cherry Hill, New Jersey. As of June 30, 1998, all units have been delivered and
final distributions for the partnership occurred during fiscal 1999.
Also discussed in Note 1 of Notes to Consolidated Financial Statements,
OCC has entered into a joint venture with Bridlewood Associates, L.P. OCC is the
general partner in this limited partnership formed to develop an 85 acre parcel
of land in Mount Laurel, New Jersey. As of June 30, 1999, all units have been
delivered. Final distribution and liquidation of the partnership are expected to
occur in fiscal 2000.
Determinations by the Company to enter into joint ventures have
traditionally been based upon a number of factors, including principally an
alternative source for land acquisition financing. At the present time joint
venture activities do not constitute a material portion of the Company's
operations.
Government Regulation
The Company and its subcontractors are subject to continuing compliance
requirements of various federal, state and local statutes, ordinances, rules and
regulations regarding zoning, plumbing, heating, air conditioning and electrical
systems, building permits and similar matters. The intensity of development in
recent years in areas in which the Company is actively developing real estate
has resulted in increased restrictive regulation and moratoriums by governments
with respect to density, sewer, water, ecological and similar matters. Further
expansion and development will require prior approval of federal, state and
local authorities and may result in delay or curtailment of development
activities and costly compliance programs.
In January 1983, the New Jersey Supreme Court rendered a decision known
as the "Mount Laurel II" decision, which has the effect of requiring certain
municipalities in New Jersey to provide housing for persons of low and moderate
income. In order to comply with such requirements, municipalities in that state
may require developers, including the Company, in connection with the
development of residential communities, to contribute funds, on a per unit
basis, or otherwise assist in the achievement of a fair share of low or moderate
housing in such municipalities.
6
In recent years, regulation by federal and state authorities relating
to the sale and advertising of condominium interests and residential real estate
has become more restrictive and intense. In order to advertise and sell
condominiums and residential real estate in many jurisdictions, including
Pennsylvania and New Jersey, the Company has been required to prepare a
registration statement or other disclosure document and, in some cases, to file
such materials with a designated regulatory agency.
Despite the Company's past ability to obtain necessary permits and
authorizations for its projects, more stringent requirements may be imposed on
developers and home builders in the future. Although the Company cannot predict
the effect of such requirements, they could result in time-consuming and
expensive compliance programs and substantial expenditures for environmental
controls which could have a material adverse effect on the results of operations
of the Company. In addition, the continued effectiveness of permits already
granted is subject to many factors, including changes in policies, rules and
regulations and their interpretation and application, which are beyond the
Company's control.
Environmental Regulation and Litigation
Development and sale of real property creates a potential for
environmental liability on the part of the developer, owner, or any mortgage
lender for its own acts or omissions as well as those of current or prior owners
of the subject property or adjacent parcels. If hazardous substances are
discovered on or emanating from any of the Company's properties, the owner or
operator of the property (including the prior owners) may be held liable for
costs and liabilities relating to such hazardous substances. Environmental
studies are undertaken in connection with property acquisitions by the Company.
Further governmental regulation on environmental matters affecting residential
development could impose substantial additional expense to the Company, which
could adversely affect the results of operations of the Company or the value of
properties owned, or under contract to purchase by the Company. (See Note 13 of
Notes to Consolidated Financial Statements for a discussion of specific
environmental litigation.)
Competition
The real estate industry is highly competitive. The Company competes on
the basis of its reputation, location, design, price, financing programs,
quality of product and related amenities, with regional and national home
builders in its areas of development, some of which have greater sales,
financial resources and geographical diversity than the Company. Numerous local
residential builders and individual resales of residential units and homesites
provide additional competition.
Employees
The Company, as of June 30, 1999, employed 57 executive, administrative
and clerical personnel, 49 sales personnel, 75 construction supervisory
personnel and laborers, for a total of 181 employees.
7
The level of construction and sales employees varies throughout the
year in relation to the level of activities at the Company's various
developments. The Company has had no work stoppages and considers its relations
with employees to be good.
Economic Conditions
The Company's business is affected by general economic conditions in
the United States and its related regions and particularly by the level of
interest rates. The Company cannot predict whether interest rates will be at
levels attractive to prospective home buyers or whether mortgage and
construction financing will continue to be available.
Item 2. Properties.
Lease of Executive Offices
Except as noted below, the Company's real property assets are
described generally under Item 1 -- Business.
The Company is currently leasing office space comprising approximately
12,000 square feet at One Greenwood Square at 3333 Street Road, Bensalem,
Pennsylvania. The annual rent is approximately $200,000 and the lease expires in
December, 2001.
Item 3. Legal Proceedings.
The Company is a plaintiff or defendant in various cases arising out of
its usual and customary business. The Company believes that it has adequate
reserves, insurance or meritorious defenses in all pending cases in which it is
a defendant and that adverse decisions in any or all of the cases would not have
a material effect upon the Company. (See Note 13 of Notes to Consolidated
Financial Statements for a discussion of specific litigation).
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders.
Item 4A. Executive Officers of the Registrant.
The following list contains certain information relative to executive
officers of the Company. There are no family relationships among any executive
officers. The term of each executive officer expires at the next annual meeting
of the Board of Directors following the Annual Meeting of Stockholders scheduled
to be held in December, 1999 or until their successors are duly elected and
qualified.
8
Position Principal occupation and offices
Name Age or office past 5 years
- ---------- --- --------- --------------------------------
Jeffrey P. 53 Chairman of the Board Served as Chairman of the Board and
Orleans and Chief Executive Officer Chief Executive Officer since September 1986.
Benjamin D. 53 Vice Chairman and Director Elected Vice Chairman in April 1998.
Goldman Served as President from May 1992 to April 1998.
Has served as a Director of the Company since
May 1992.
Michael T. 40 President and Chief Elected President and Chief Operating
Vesey Operating Officer Officer in April 1998. Served as Executive
Vice President from July 1994 through
April 1998. Prior to July 1994, he was
responsible for project management of the
Company's Pennsylvania communities.
Joseph A. 45 Chief Financial Officer, Elected Chief Financial Officer of the
Santangelo Treasurer and Secretary Company in July 1994. He was
elected Secretary of the Company in
May 1992 and has been Treasurer since
joining the Company in March 1987.
9
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
The principal market on which the Company's Common Stock is traded is
the American Stock Exchange, Inc. Effective July 1998, in conjunction with the
Company's name change to Orleans Homebuilders, Inc., the Company's ticker symbol
was changed from "FPO" to "OHB". (Symbol: OHB)
The high and low sales prices on the Exchange for the periods indicated
are as follows:
Fiscal year
ended June 30, High Low
---------------------- ------ ------
1998 First Quarter $1.125 $ .750
Second Quarter 1.625 .813
Third Quarter 1.438 .938
Fourth Quarter 2.938 1.125
1999 First Quarter $2.688 $1.375
Second Quarter 2.688 1.375
Third Quarter 2.563 1.750
Fourth Quarter 2.188 1.625
The number of common stockholders of record of the Company as of
September 10, 1999 was approximately 309.
The Company has not paid a cash dividend since December 1982. Payment
of dividends will depend upon the earnings of the Company, its funds derived
from operations, its working capital needs, its debt service requirements, its
general financial condition and other factors (including, without limitation,
certain agreements). No assurance can be given that the Company will pay
dividends in the future.
10
Item 6. Selected Financial Data
The following table sets forth selected financial data for the Company
and should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included under Item 8 of the Form 10-K.
Year Ended June 30,
(In thousands, except per share data)
Operating Data 1999 1998 1997 1996 1995
- --------------- -------- -------- -------- ------- --------
Earned revenues $150,573 $108,998 $101,996 $94,359 $107,840
Income from continuing operations 5,367 1,668 1,615 1,235 1,201
Income per share from
continuing operations:
Basic 0.46 0.15 0.14 0.11 0.10
Diluted 0.36 0.14 0.14 0.10 0.10
Balance at June 30,
(In thousands)
Balance Sheet Data 1999 1998 1997 1996 1995
- ------------------- -------- -------- -------- ------- --------
Residential properties $ 51,800 $ 47,209 $ 35,355 $34,263 $ 35,757
Land and improvements 59,763 64,044 60,067 46,654 52,921
Total assets 136,537 130,525 107,613 92,866 102,274
Mortgage obligations
secured by real estate 67,129 65,136 53,637 42,524 40,721
Senior notes - - - - 371
Subordinated debentures - 601 601 618 2,231
Other notes payable 8,951 14,970 13,618 12,782 13,112
Shareholders' equity 25,942 17,719 16,051 13,949 12,146
The Company has not paid a cash dividend since December 1982.
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
The Company requires capital to purchase and develop land, to construct
units, to fund related carrying costs and overhead and to fund various
advertising and marketing programs to facilitate sales. These expenditures
include site preparation, roads, water and sewer lines, impact fees and
earthwork, as well as the construction costs of the homes and amenities. The
Company's sources of capital include funds derived from operations, sales of
assets and various borrowings, most of which are secured. At June 30, 1999, the
Company had approximately $60,235,000 available to be drawn under existing
secured revolving and construction loans for planned development expenditures.
The Company believes that the funds generated from operations and financing
commitments from commercial lenders will provide the Company with sufficient
capital to meet its operating needs through fiscal 2000.
The Company has continued its ongoing land acquisition efforts during
fiscal 1999. During this period, the Company acquired, in its existing markets,
seven additional parcels of land totaling approximately 250 residential lots for
an aggregate purchase price of approximately $8,543,000. Marketing activities
had commenced on a majority of these communities as of June 30, 1999 and the
remaining communities will commence marketing activities in fiscal 2000.
As of June 30, 1999, the Company had contracted to purchase fifteen
additional parcels of land, in its existing markets, for an aggregate purchase
price of approximately $59,721,000. These purchase agreements are subject to due
diligence review and are contingent upon the receipt of governmental approvals.
The Company expects to utilize purchase money mortgages, secured financings and
existing capital resources to finance these acquisitions. The Company
anticipates completing a majority of these acquisitions during fiscal 2000 and
2001.
Overview of Operations
The tables included in "Item 1 - Business" summarize the Company's
revenues, new orders and backlog data for the year ended June 30, 1999 with
comparable data for fiscal 1998 and 1997.
New orders for fiscal 1999 increased by approximately 25% to
$173,897,000 on 803 units compared to $139,129,000 on 719 units during fiscal
1998. The increase in new orders can be attributed to adequate available
financing for home buyers as a result of the overall favorable economic climate
throughout the region in which the Company sells homes. In addition, the Company
facilitated such growth by the opening of new communities in Hunterdon, Somerset
12
and Burlington Counties in New Jersey, and Bucks and Chester Counties in
Pennsylvania. The average price per unit of new orders increased due to an
increase in the number and percentage of highly priced single family homes sold
in fiscal 1999 compared to fiscal 1998. Single family homes sold in fiscal 1999
accounted for approximately 46% of total unit sales compared with approximately
38% during fiscal 1998. In addition, the average unit sales price increased for
the majority of communities open during fiscal 1999 compared with the same units
offered for sale in fiscal 1998.
The dollar backlog at June 30, 1999 increased approximately 42% to
$101,065,000 on 425 homes, as compared to the backlog at June 30, 1998 of
$70,995,000 on 340 homes. The Company's continued geographic expansion with its
new communities, coupled with favorable economic conditions and consumer
sentiment, resulted in the increased backlog level. The Company anticipates
delivering substantially all of its backlog units during fiscal 2000.
Inflation
Inflation can have a significant impact on the Company's liquidity.
Rising costs of land, materials, labor, interest and administrative costs have
generally been recoverable in prior years through increased selling prices.
However, there is no assurance the Company will be able to continue to increase
prices to cover the effects of inflation in the future.
Year 2000
The Company began assessing its Year 2000 ("Y2K") compliance issues at
the beginning of fiscal 1998 and at that time determined that its primary
internal computer hardware and software were not Y2K compliant. Subsequently,
the Company determined that it would be more cost efficient to install a new Y2K
compliant software package than to modify the existing software package. During
fiscal 1999, the Company contracted to purchase a new software package,
including several specific enhancements to modify the software to meet the
Company's needs. In addition, during fiscal 1999, the Company upgraded its
primary computer hardware system and installed the base software package of its
new computer system for testing. The Company then began intensive testing of the
new base software package. At the same time, the Company began working closely
with the software vendor to complete the specifications for its required
enhancements to the software. During the fourth quarter of fiscal 1999, the
enhancements were completed and the Company completed its testing of the base
software and the modifications. In addition, during the fourth quarter of fiscal
1999, the Company completely converted to the new enhanced Y2K compliant
software package.
Through June 30, 1999, the Company has incurred approximately $600,000
in connection with Y2K readiness, of which approximately $300,000 has been
13
capitalized in connection with the purchase of new software and hardware and
will be amortized over its useful life. The remainder was expensed as incurred.
Cost incurred includes new hardware and software, consulting fees, internal
staff costs and other expenses. The Company expects to incur nominal additional
expenditures on this project through the end of calendar 1999.
The Company is also investigating the Y2K compliance status of its
vendors, subcontractors and suppliers through the Company's own internal vendor
compliance effort. This investigation began in early fiscal 1999 and will
continue through calendar 1999 as the Company continues to assess the Y2K
readiness of its vendors, subcontractors and suppliers. Any non-response or
inadequate response from such business partner may cause the Company to
re-evaluate its relationship with such partner. Since the Company does not rely
on any individual vendor, subcontractor or supplier for a significant portion of
its operations, the potential impact of Y2K non-compliance risks by any
individual vendor, subcontractor or supplier is not expected to have any
material effect on the Company.
While the Company believes it is taking all appropriate steps to
achieve internal Y2K compliance, any potential future business interruptions,
costs, damages or losses related thereto, are also dependent upon the Y2K
compliance of third parties. In the event that the Company or a combination of
the Company's vendors, subcontractors or suppliers experience disruptions due to
the Y2K issue, the Company's operations could be adversely affected. The Y2K
issue is universal and complex, as virtually every computer operation will be
affected in some way. Consequently, no assurance can be given that complete Y2K
compliance can be achieved without significant additional costs.
Forward Looking Statement
The Company's estimates of completion dates for its Y2K readiness
program represent management's best estimates. These estimates are based upon
many assumptions, including the availability of external resources to assist
with systems remediation and replacement efforts, key third party suppliers,
vendors and customers being Y2K compliant. If any of the assumptions ultimately
prove to have been incorrect, the completion dates set forth above could be
substantially and adversely affected.
Fiscal Years Ended June 30, 1999 and 1998
Results of Operations
Operating Revenues
Earned revenues for fiscal 1999 increased $41,575,000 to $150,573,000,
or 38.1%, compared to fiscal 1998. Revenues from the sale of residential homes
included 718 homes totaling $143,827,000 during fiscal 1999, as compared to 589
homes totaling $106,246,000 during fiscal 1998. Revenues from related parties
14
for fiscal 1999 included four low income homes with a sales value of $176,000,
as compared to 27 low income homes with a sales value of $1,472,000 for fiscal
1998. These sales have satisfied, in part, the Company's low income housing
requirements in Mount Laurel Township, New Jersey. The selling prices of these
homes, which is determined by state statute, were the same as if the homes had
been sold to unaffiliated third parties. The increase in revenues for fiscal
1999, as compared to fiscal 1998, is primarily attributable to the number of
units sold which is the result of expanding the Company's operations in the
Delaware Valley, as well as Central New Jersey, and favorable economic
conditions affecting unit sales volume and price. The average selling price per
unit increased to approximately $200,000 during fiscal 1999, as compared to
approximately $180,000 during fiscal 1998. The increase in average selling price
is partially due to an increase in the base price per unit, option revenue per
unit, and an increase over the prior comparable period in the percentage of
single family homes delivered when compared to total homes delivered for the
period. Fiscal 1999 revenue from land sales increased approximately $3,510,000,
or four times the land sales revenue from fiscal 1998. This increase is
primarily due to an increase in the number and size of developed homesites sold
during fiscal 1999 compared with fiscal 1998.
Costs and Expenses
Costs and expenses for fiscal 1999 increased $35,608,000, or 33.5%,
compared with fiscal 1998. The fiscal 1999 cost of residential properties
increased $30,411,000 to $120,815,000, or 33.6% when compared with fiscal 1998.
Residential property costs increased as a result of the increased residential
property revenues. Overall profit margins on residential properties improved due
to increased sales volume and prices as a result of strong customer demand. The
cost of residential properties as a percentage of residential property revenues
was 84.0% for fiscal 1999 compared with 85.1% for fiscal 1998. In addition, the
cost of land sales for fiscal 1999 increased $2,990,000 when compared with
fiscal 1998. The increase in the cost of land sales is due to the overall
increase in land sale revenues. The cost of land sales as a percentage of land
sale revenues was 84.0% for fiscal 1999 compared with 80.3% for fiscal 1998.
For fiscal 1999, selling, general and administrative expenses increased
$1,942,000 to $15,515,000, or 14.3% when compared with fiscal 1998. The fiscal
1999 increase in selling, general and administrative expenses is attributable to
an increase in the number of communities, residential property revenues and
sales incentives. In addition, the Company's advertising costs increased due to
the overall increase in communities open during fiscal 1999 when compared with
the prior fiscal year. Although advertising costs increased, the percentage
increase in advertising costs was significantly less than the percentage
increase in residential property revenues as the Company contained costs by
combined advertising for many new communities located within the Philadelphia
15
Metropolitan Area. The selling, general and administrative expenses as a
percentage of residential property revenues decreased to 10.8% during fiscal
1999, compared to 12.8% in the prior fiscal year.
Net Income Available for Common Shareholders
Net income available for common shareholders for fiscal 1999 was
$5,220,000 ($.46 basic and $.36 diluted earnings per share), compared with
$1,668,000 ($.15 basic and $.14 diluted earnings per share) for fiscal 1998.
This increase in net income available for common shareholders is primarily
attributable to an increase in residential revenues as a result of unit sales
volume, combined with a decrease in selling, general and administrative costs as
a percentage of residential property revenues.
Fiscal Years Ended June 30, 1998 and 1997
Results of Operations
Operating Revenues
Earned revenues for fiscal 1998 increased $7,002,000, or 6.9% compared
with fiscal 1997. Residential property revenues (including related party
amounts) for fiscal 1998 increased $10,142,000, or 10.6% compared with fiscal
1997. Revenues from the sale of residential homes included 589 homes totaling
$106,246,000 compared to 562 homes totaling $96,104,000 during fiscal 1997. The
increase in revenues for fiscal 1998 is attributed to an increase in the number
of units sold which is the result of the expanding geographic scope of the
Company's operations and favorable economic conditions affecting unit sale
volume. In addition, the average selling price per unit has increased to
approximately $180,000 per unit during fiscal 1998 from $171,000 per unit during
fiscal 1997. The increase in average selling price is due to a change in product
mix towards larger townhouse and single family homes and fewer condominiums than
in the previous year, as well as price increases at certain existing
communities.
Fiscal 1998 related party residential property revenues included 26 low
income homes with an aggregate sales value of approximately $1,400,000, sold to
Jeffrey P. Orleans, Chairman and Chief Executive Officer of the Company. These
transactions satisfied, in part, the Company's low income housing requirements
in Mount Laurel Township, New Jersey. The selling prices for these homes, which
are determined by state statute, are the same as if the homes had been sold to
unaffiliated third parties.
Fiscal 1998 revenue from land sales decreased approximately $2,742,000,
or 71.2%, compared with fiscal 1997. This decrease is primarily due to a
decrease in the number and size of developed homesites sold during fiscal 1998
compared with fiscal 1997. Also, other income for fiscal 1998 decreased
$398,000, or 19.5%, compared with fiscal 1997. This decrease is primarily due to
the fact that fiscal 1997 other income included non-recurring income items
totaling approximately $632,000 from the final distribution of a joint venture
partnership and insurance proceeds in excess of expenses incurred from a 1995
fire which destroyed the Company's corporate offices.
16
Costs and Expenses
Costs and expenses for fiscal 1998 increased $6,369,000, or 6.4%,
compared with fiscal 1997. This increase is primarily due to an increase in the
cost of residential properties sold and selling, general and administrative
expenses totaling $9,088,000, partially offset by a decrease in the cost of land
sales of $2,775,000. The fiscal 1998 cost of residential properties increased
$7,895,000, or 9.6%, when compared with fiscal 1997. This increase in
residential property costs is slightly less than the overall percentage increase
in residential property revenues when compared with fiscal 1997. Overall profit
margins on residential properties improved nominally, due to increased selling
prices, as the cost of residential properties as a percentage of residential
property revenues was 85.1% in fiscal 1998, compared with 85.9% in fiscal 1997.
The decrease in the cost of land sales of $2,775,000, or 75.7% when compared to
fiscal 1997, is consistent with the overall decrease in fiscal 1998 revenue from
land sales. Profit margins on land sales during fiscal 1998 improved to 19.7%
from 4.8% during fiscal 1997.
Fiscal 1998 selling, general and administrative expenses increased
$1,193,000, or 9.6%, when compared with fiscal 1997. The fiscal 1998 increase in
selling, general and administrative expenses is attributable to start-up costs
associated with the opening of communities in new regions, along with having
more overall communities open throughout fiscal 1998 when compared with the
prior year. The selling, general and administrative expenses as a percentage of
residential property revenues is relatively consistent with the prior year.
Income Before Income Taxes
Income before income taxes increased $633,000, or 30.8%, to $2,690,000
for fiscal 1998 compared with $2,057,000 during fiscal 1997. This increase is
primarily due to an increase in gross profit as a result of higher residential
property revenues, partially offset by an increase in selling, general and
administrative expenses necessary to support the increased revenues.
Income Tax Expense
The Company's effective tax rate for fiscal 1998 increased to 38.0%
from 21.5% during fiscal 1997. The increase is due to the fact that fiscal 1997
income tax expense was reduced as a result of the elimination of a valuation
allowance on certain tax assets. (See Note 11 of Notes to Consolidated Financial
Statements for more information.)
17
Income From Operations Before Extraordinary Income and Net Income
Income from operations before extraordinary items was $1,668,000 or
$.15 basic earnings per share for fiscal 1998, compared with $1,615,000 or $.14
basic earnings per share during fiscal 1997. The current year increase in income
from operations before extraordinary item was offset by a higher effective
income tax rate in fiscal 1998 when compared with fiscal 1997.
Income from extraordinary items, net of tax expense, was $594,000 or
$.05 per share during fiscal 1997. Net income was $1,668,000 or $.15 basic
earnings per share for fiscal 1998, compared with $2,209,000 or $.19 basic
earnings per share during fiscal 1997. The fiscal 1997 extraordinary gain, net
of tax expense and the change in effective tax rate, accounts for substantially
all of the decrease in net income during fiscal 1998 when compared with fiscal
1997.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995.
The following important factors, among others, in some cases have affected, and
in the future could affect, the Company's actual consolidated results and 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 Orleans
Homebuilders, Inc.:
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 building material price fluctuations;
o changes in mortgage interest rates charged to buyers of the
Company's units;
o changes in the availability and cost of financing for the Company's
operations, including land acquisition;
o revisions in federal, state and local tax laws which provide
incentives for home ownership;
o 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; and
o increased cost of suitable development land.
18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company, due to adverse
changes in financial and commodity market prices and interest rates. The Company
is exposed to market risk in the area of interest rate changes. A majority of
the Company's debt is variable based on LIBOR and prime rate, and, therefore,
affected by changes in market interest rates. Based on current operations, an
increase in interest rates of 100 basis points will increase cost of sales and
interest expense by approximately $450,000. Historically, the Company has been
able to increase prices to cover portions of any increase in interest rates. As
a result, the Company believes that reasonably possible near-term changes in
interest rates will not result in a material effect on future earnings, fair
values or cash flows of the Company.
19
Item 8. Financial Statements and Supplementary Data.
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Reports of independent accountants 21-22
Consolidated balance sheets at June 30, 1999 23
and June 30, 1998
Consolidated statements of operations and retained 24
earnings for the years ended June 30, 1999,
1998 and 1997
Consolidated statements of cash flows for the
years ended June 30, 1999, 1998 and 1997 25
Notes to consolidated financial statements 26
All other schedules have been omitted because they are not applicable
or the required information is shown in the consolidated financial statements or
notes thereto.
The individual financial statements of the Registrant's subsidiaries
have been omitted since the Registrant is primarily an operating company and all
subsidiaries included in the consolidated financial statements, in the
aggregate, do not have minority equity interest and/or indebtedness to any
person other than the Registrant or its consolidated subsidiaries in amounts
which together exceed 5 percent of total consolidated assets at June 30, 1999,
excepting indebtedness incurred in the ordinary course of business.
20
Independent Auditors' Report
The Board of Directors and Shareholders
of Orleans Homebuilders, Inc.
We have audited the accompanying consolidated balance sheet of Orleans
Homebuilders, Inc. and subsidiaries as of June 30, 1999, and the related
consolidated statements of operations and retained earnings, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Orleans Homebuilders, Inc. and subsidiaries as of June 30, 1999, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepting accounting principles.
KPMG LLP
Philadelphia, Pennsylvania
October 11, 1999
21
Report of Independent Accountants
To the Board of Directors and Shareholders
of Orleans Homebuilders, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Orleans Homebuilders, Inc. and its subsidiaries at June 30, 1998 and the results
of their operations and their cash flows for each of the two years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Orleans
Homebuilders, Inc. for any period subsequent to June 30, 1998.
PricewaterhouseCoopers LLP
September 14, 1998
22
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
June 30, June 30,
1999 1998
--------- ---------
Assets
Cash $ 6,738 $ 2,833
Restricted cash - customer deposits 6,128 3,902
Real estate held for development and sale:
Residential properties completed or under construction 51,800 47,209
Land held for development or sale and improvements 59,763 64,044
Property and equipment, at cost, less accumulated depreciation 1,948 1,892
Receivables, deferred charges and other assets 10,160 10,645
-------- --------
Total Assets $136,537 $130,525
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ 15,530 $ 15,378
Accrued expenses 10,277 9,312
Customer deposits 6,128 3,902
Mortgage and other note obligations primarily secured by real
estate held for development and sale 67,129 65,136
Subordinated debentures - 601
Notes payable - related parties 5,999 12,052
Other notes payable 2,952 2,918
Deferred income taxes 2,504 2,961
Minority interests in consolidated joint venture 76 546
-------- --------
Total Liabilities 110,595 112,806
-------- --------
Commitments and contingencies
Shareholders' Equity:
Preferred stock, $1 par, 500,000 shares authorized:
Series D convertible preferred stock, 7% cumulative annual
dividend, $30 stated value, issued and outstanding at
June 30, 1999, 100,000 shares ($3,000,000 liquidation preference) 3,000 -
Common stock, $.10 par, 20,000,000 shares authorized,
12,698,131 shares issued at June 30, 1999 and
June 30, 1998 1,270 1,270
Capital in excess of par value - common stock 17,726 17,726
Retained earnings (deficit) 4,921 (299)
Treasury stock, at cost (1,340,238 shares and 1,342,113 shares
held at June 30, 1999 and June 30, 1998, respectively) (975) (978)
-------- --------
Total Shareholders' Equity 25,942 17,719
-------- --------
Total Liabilities and Shareholders' Equity $136,537 $130,525
======== ========
See notes to consolidated financial statements
23
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Statements of Operations
and Retained Earnings
For the year ended June 30,
1999 1998 1997
-------- -------- --------
(In thousands, except per share data)
Earned revenues
Residential properties $143,827 $106,246 $ 96,104
Land sales 4,619 1,109 3,851
Other income 2,127 1,643 2,041
-------- -------- --------
150,573 108,998 101,996
-------- -------- --------
Costs and expenses
Residential properties 120,815 90,404 82,509
Land sales 3,881 891 3,666
Other 1,098 784 603
Selling, general and administrative 15,515 13,573 12,380
Interest
Incurred 7,597 7,564 6,465
Less capitalized (6,990) (6,786) (5,664)
Minority interests in consolidated joint venture - (122) (20)
-------- -------- --------
141,916 106,308 99,939
-------- -------- --------
Income from operations before income taxes 8,657 2,690 2,057
Income tax expense 3,290 1,022 442
-------- -------- --------
Income from operations before extraordinary items 5,367 1,668 1,615
Extraordinary items, net - - 594
-------- -------- --------
Net income 5,367 1,668 2,209
Preferred dividends 147 - -
-------- -------- --------
Net income available for common shareholders 5,220 1,668 2,209
Retained deficit, at beginning of year (299) (1,967) (4,176)
-------- -------- --------
Retained earnings (deficit), at end of year $ 4,921 $ (299) $ (1,967)
======== ======== ========
Basic earnings per share:
Income before extraordinary items $ 0.46 $ 0.15 $ 0.14
Extraordinary items - - 0.05
-------- -------- --------
Total $ 0.46 $ 0.15 $ 0.19
======== ======== ========
Diluted earnings per share:
Income before extraordinary items $ 0.36 $ 0.14 $ 0.14
Extraordinary items - - 0.05
-------- -------- --------
Total $ 0.36 $ 0.14 $ 0.19
======== ======== ========
See notes to consolidated financial statements
24
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
For the year ended June 30,
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net income $ 5,367 $ 1,668 $ 2,209
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Extraordinary gains - - (594)
Reduction in deferred tax asset valuation allowance - - (528)
Depreciation and amortization 326 214 128
Changes in operating assets and liabilities:
Restricted cash - customer deposits (2,226) (1,978) 667
Real estate held for development and sale (310) (15,831) (14,505)
Receivables, deferred charges and other assets 485 (2,467) (1,905)
Accounts payable and other liabilities 646 6,415 1,908
Customer deposits 2,226 1,978 (667)
------- ------- -------
Net cash provided by (used in) operating activities 6,514 (10,001) (13,287)
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment (382) (1,599) (167)
------- ------- -------
Net cash used in investing activities (382) (1,599) (167)
------- ------- -------
Cash flows from financing activities:
Borrowings from loans secured by real estate assets 107,463 86,537 83,861
Repayment of loans secured by real estate assets (105,470) (75,038) (72,748)
Repayment of subordinated debentures (601) - (17)
Borrowings from other note obligations 1,521 3,752 10,826
Repayment of other note obligations (4,540) (2,400) (9,396)
Preferred stock dividend (147) - -
Stock options exercised 3 - -
Distribution to minority interests in consolidated joint venture (456) - (107)
------- ------- -------
Net cash provided by (used in) financing activities (2,227) 12,851 12,419
------- ------- -------
Net increase (decrease) in cash 3,905 1,251 (1,035)
Cash at beginning of year 2,833 1,582 2,617
------- ------- -------
Cash at end of year $ 6,738 $ 2,833 $ 1,582
======= ======= =======
See notes to consolidated financial statements
25
Orleans Homebuilders, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
During fiscal 1998, the Company changed its name to Orleans Homebuilders, Inc.
("OHB") from FPA Corporation. Orleans Homebuilders, Inc. and its subsidiaries
(the Company) are currently engaged in residential real estate development in
Pennsylvania and New Jersey. A summary of the significant accounting principles
and practices used in the preparation of the consolidated financial statements
is as follows:
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. The financial statements
include the consolidated financial position and results of operations of
Versailles Associates, L.P., and Bridlewood Associates, L.P., joint ventures in
which a subsidiary of the Company is the sole General Partner. The outside
limited partners have been allocated their portion of the income or loss and
equity. These amounts are presented as minority interests in the financial
statements. All material intercompany transactions and accounts have been
eliminated.
Earned revenues from real estate transactions
The Company recognizes revenues from sales of residential properties at the time
of closing. The Company also sells developed and undeveloped land in bulk and
under option agreements. Revenues from sales of land and other real estate are
recognized when the Company has received an adequate cash down payment and all
other conditions necessary for profit recognition have been satisfied. To the
extent that certain sales or portions thereof do not meet all conditions
necessary for profit recognition, the Company uses other methods to recognize
profit, including cost recovery and the deposit methods. These methods of profit
recognition defer a portion or all of the profit to the extent it is dependent
upon the occurrence of future events.
Real estate capitalization and cost allocation
Residential properties completed or under construction are stated at cost or
estimated net realizable value, whichever is lower. Costs include land and land
improvements, direct construction costs, construction overhead costs, interest
on indebtedness and real estate taxes. Selling and advertising costs are
expensed as incurred. Total estimated costs of multi-unit developments are
allocated to individual units based upon specific identification methods.
Land and improvement costs include land, land improvements, interest on
indebtedness and real estate taxes. Appropriate costs are allocated to projects
on the basis of acreage, dwelling units and relative sales value. Land held for
development and sale and improvements are stated at cost or estimated net
realizable value, whichever is lower.
Land and land improvements applicable to condominiums, townhomes and
single-family homes, are transferred to construction in progress when
construction commences.
Interest costs included in Costs and Expenses of residential properties and land
sold for fiscal years 1999, 1998 and 1997 were $7,564,000, $5,373,000 and
$5,617,000, respectively.
26
Advertising costs
The total amount of advertising costs charged to expense was $2,377,000,
$2,163,000 and $1,747,000 for the three years ended June 30, 1999, 1998 and
1997, respectively.
Depreciation, amortization and maintenance expense
Depreciation and amortization is primarily provided on the straight-line method
at rates calculated to amortize the cost of the assets over their estimated
useful lives. Expenditures for maintenance, repairs and minor renewals are
expensed as incurred; major renewals and betterments are capitalized. At the
time depreciable assets are retired or otherwise disposed of, the cost and the
accumulated depreciation of the assets are eliminated from the accounts and any
profit or loss is recognized.
Leases
The Company's leasing arrangements as lessee include the leasing of certain
office space and equipment. These leases have been classified as operating
leases. Rent expense for fiscal 1999, 1998 and 1997 was approximately $200,000,
respectively.
Income taxes
The Company and its subsidiaries file a consolidated federal income tax return.
See Note 11 for an additional discussion of income tax matters.
Earnings per share
Basic earnings per common share are computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
include additional common shares that would have been outstanding if the
dilutive potential common shares had been issued. The weighted average number of
shares used to compute basic earnings per common share and diluted earnings per
common share, and a reconciliation of the numerator and denominator used in the
computation for the three years ended June 30, 1999, 1998 and 1997,
respectively, are shown in the following table.
27
For Year Ended June 30,
1999 1998 1997
----------- ----------- -----------
Total common shares issued 12,698,131 12,698,131 12,698,131
Less: Average treasury shares outstanding (1,340,783) (1,342,113) (1,342,113)
----------- ----------- -----------
Basic EPS shares 11,357,348 11,356,018 11,356,018
Effect of assumed shares issued under
treasury stock method for stock options 465,983 209,750 148,048
Effect of assumed conversion of $3 million
Convertible Subordinated 7% Note 2,000,000 - -
Effect of assumed conversion of $3 million
Series D Preferred Stock 1,386,301 - -
----------- ----------- -----------
Diluted EPS shares 15,209,633 11,565,768 11,504,066
=========== =========== ===========
Net income available for common shareholders $ 5,220,000 $ 1,668,000 $ 2,209,000
Effect of assumed conversion of $3 million
Convertible Subordinated 7% Note 130,200 - -
Effect of assumed conversion of $3 million
Series D Preferred Stock 147,000 - -
----------- ----------- -----------
Adjusted net income for diluted EPS $ 5,497,200 $ 1,668,000 $ 2,209,000
=========== =========== ===========
Disclosures about fair value of financial instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
the Company to disclose the estimated fair market value of its financial
instruments. The Company believes that the carrying value of its financial
instruments (primarily mortgages receivable and mortgage notes payable)
approximates fair market value and that any differences are not significant.
This assessment is based upon substantially all of the Company's debt
obligations being based upon LIBOR or the prime rate of interest which are
variable market rates.
Reclassifications
Certain amounts in the accompanying financial statements have been reclassified
for comparative purposes.
Segment reporting
Since the Company operates primarily in a single extended geographical market
with similar products at its various development projects, it is considered to
represent a single operating segment for financial reporting purposes.
28
Management's estimates and assumptions
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Consolidated statements of cash flows
For purposes of reporting cash flows, short-term investments with original
maturities of ninety days or less are considered cash equivalents. Interest
payments, net of amounts capitalized, for fiscal 1999, 1998 and 1997, were
$440,000, $459,000 and $-0-, respectively. Income taxes paid were $3,451,000,
$377,000 and $109,000 for fiscal 1999, 1998 and 1997, respectively.
On October 20, 1998, the Company issued 100,000 shares of Series D Preferred
Stock (the "Series D Stock") to Jeffrey P. Orleans in exchange for an aggregate
amount of $3,000,000 in Company notes held by Mr. Orleans.
Comprehensive income
On July 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income consists of items such as net income,
foreign currency translations and minimum pension liabilities. The Company's
comprehensive income and net income are the same for fiscal 1999, 1998 and 1997.
Recent accounting pronouncements
In June, 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133 - an amendment of SFAS No. 133". SFAS No. 133
provides new accounting and reporting standards for use of derivative
instruments. Management intends to have the Company adopt this statement, as
required by the provisions of SFAS No. 137, effective July 1, 2000. Although not
precluded from doing so, the Company and its subsidiaries have not historically
used such instruments extensively and, accordingly, management does not believe
adoption of SFAS No. 133 will have a material impact on the Company's financial
statements.
Note 2. Extraordinary Items
In July, 1996, the Company completed a transaction to fully satisfy notes
payable with an outstanding balance of approximately $1,650,000 and reacquired
183,177 shares of Common Stock in exchange for a cash payment of approximately
$1,061,000. These shares have been retained by the Company as Treasury Stock.
This transaction resulted in an extraordinary gain of $594,000, net of income
tax expense of approximately $100,000 in fiscal 1997.
29
Note 3. Joint Ventures
During fiscal 1997, the Company received approximately $319,000 from a final
non-recurring distribution in excess of basis from a joint venture partnership.
The Company will have no future obligations or operating activities with respect
to this entity.
In October, 1992, a wholly owned subsidiary of the Company, Versailles at
Europa, Inc. was established to act as the General Partner in a newly formed
Versailles Associates, L.P. (the "Partnership"). The financial statements of the
Partnership are included in the consolidated financial statements of the
Company. The limited partner's share of the income and capital from this entity
has been presented as minority interest in the accompanying consolidated
financial statements. As of June 30, 1998, all units have been delivered and
final distribution to the partners and liquidation of the partnership occurred
in fiscal 1999.
Orleans Construction Corp. ("OCC"), a subsidiary of the Company, entered into a
joint venture agreement with Bridlewood Associates, L.P., a limited partnership
formed to develop an 85 acre parcel of land in Mount Laurel, New Jersey. OCC is
the managing general partner. OCC and the limited partner share equally in the
profits or losses of the entity. The financial statements of the Partnership are
included in the consolidated financial statements of the Company. The limited
partner's share of the income and capital from this entity has been presented as
minority interest in the accompanying consolidated financial statements. As of
June 30, 1999, all units have been delivered and final distribution to the
partners and liquidation of the partnership is expected to occur in fiscal 2000.
Note 4. Certain Transactions with Related Parties
During fiscal 1999, 1998 and 1997, Jeffrey P. Orleans, Chairman and Chief
Executive Officer of the Company, purchased four (4), twenty-six (26) and five
(5) low income homes, respectively, with an aggregate sales value of
approximately $176,000, $1,400,000 and $400,000, respectively. These
transactions satisfied, in part, the Company's low income housing requirements
in Mount Laurel Township, New Jersey. The selling prices for these homes, which
are determined by state statute, are the same as if the homes had been sold to
unaffiliated third parties.
Under the terms of an existing option agreement, the Company has exercised its
final option during fiscal 1997 to purchase sections of land from Orleans
Builders and Developers ("OB&D"), a limited partnership whose partners include
Jeffrey P. Orleans and the Trust of Selma Orleans. This parcel was subsequently
sold to an unaffiliated third party for a purchase price of $763,000 during
fiscal 1997. This transaction resulted in a profit to the Company before income
taxes of $178,000. See Note 8 to the consolidated financial statements for a
discussion of other related party transactions.
30
Note 5. Real Estate Held for Development and Sale
Residential properties completed or under construction consist of the following:
June 30,
--------------------
1999 1998
------- -------
(In thousands)
Condominiums and townhomes $23,848 $26,539
Single-family homes 27,952 20,670
------- -------
$51,800 $47,209
======= =======
Sales status of above properties is as follows:
June 30,
--------------------
1999 1998
------- -------
(In thousands)
Under contract for sale $41,144 $32,102
Unsold 10,656 15,107
------- -------
$51,800 $47,209
======= =======
Note 6. Mortgage Subsidiary
The Company has a wholly-owned financing subsidiary which had been involved,
through unaffiliated companies, in issuing mortgage-collateralized bonds.
Condensed financial information for the finance subsidiary is as follows:
June 30,
--------------------
1999 1998
------- -------
(In thousands)
Total assets, principally mortgage notes receivable $262 $290
Total liabilities, principally bonds payable 200 230
---- ----
Advances from parent company $ 62 $ 60
==== ====
Net income for the year ended $ 4 $ 2
==== ====
Note 7. Property and Equipment
June 30,
--------------------
1999 1998
------- -------
(In thousands)
Property and equipment consists of the following:
Equipment and fixtures $2,963 $2,581
Less accumulated depreciation (1,015) (689)
------ ------
$1,948 $1,892
====== ======
31
During fiscal 1998, a subsidiary of the Company used approximately $1,555,000 of
the proceeds from a 1997 Chester County Industrial Development Authority
Wastewater Treatment Revenue Bond Offering to construct and operate a waste
water spray irrigation facility. See Note 8 for additional information on the
revenue bonds.
Depreciation expense, included in Other Costs and Expenses on the Company's
Consolidated Statements of Operations and Retained Earnings, was $326,000,
$214,000 and $128,000 during fiscal 1999, 1998 and 1997, respectively.
Note 8. Mortgage and Other Note Obligations
The maximum balance outstanding under construction and inventory loan agreements
at any month end during fiscal 1999, 1998 and 1997 was $56,308,000, $48,461,000
and $38,178,000, respectively. The average month end balance during fiscal 1999,
1998 and 1997 was approximately $49,980,000, $39,916,000 and $30,608,000,
respectively, bearing interest at an approximate average annual rate of 8.35%,
8.95% and 9.25%, respectively. At June 30, 1999, the Company had approximately
$60,235,000 available to be drawn under existing secured revolving and
construction loans for planned development expenditures. Mortgage obligations
secured by land held for development and sale and improvements aggregating
$10,820,000 and $21,203,000 at June 30, 1999 and 1998, respectively, are due in
varying installments through fiscal 2003 with annual interest ranging from LIBOR
plus 2% to the prime rate of interest plus 3/4%. The LIBOR and prime rate of
interest at June 30, 1999 were 5.1675% and 7.75%, respectively.
Maturities of land and improvement mortgage obligations, other than residential
property construction loans, are as follows: 2000 - $8,221,000; 2001 -
$1,885,000; 2002 - $467,0000; and 2003 - $247,000. Obligations under residential
property and construction loans amounted to $56,309,000 and $43,933,000 at June
30, 1999 and 1998, respectively, and are repaid at a predetermined percentage
(approximately 85% on average) of the selling price of a unit when a sale is
completed. The repayment percentage varies significantly from community to
community and over time within the same community.
Included in the Notes Payable - Related Parties balance at June 30, 1999 and
1998 is a $3,000,000 Convertible Subordinated 7% Note dated August 8, 1996
issued to Jeffrey P. Orleans which matures January 1, 2002. This note is
convertible into Orleans Homebuilders, Inc. common stock at $1.50 per share.
Interest is payable quarterly and principal is due in annual installments of
$1,000,000 beginning January 1, 2000.
During fiscal 1999, the Company entered into a $4,000,000 unsecured line of
credit agreement with Mr. Orleans. This agreement provides for an annual review
for a one-year extension and currently expires June 30, 2002 with annual
interest at LIBOR plus 4% payable monthly. The total outstanding principal and
interest is $650,000 at June 30, 1999.
At June 30, 1998, the Company had a $2,000,000 Variable Rate Note and a
$1,746,000 Demand Note due to Mr. Orleans with interest at prime plus 2%,
payable quarterly. In October, 1998, the Company issued 100,000 shares of Series
D Preferred Stock in exchange for the $2,000,000 Variable Rate Note and
$1,000,000 of the Demand Note. See Note 10 for additional information on the
Series D Preferred Stock. The remaining portion of the Demand Note was paid in
full in November, 1998.
At June 30, 1998, the Company had a $750,000 Revolving Working Capital Note due
to Mr. Orleans with interest at the prime rate, payable monthly. The Revolving
Working Capital Note was paid in full in June, 1999. The Company has the right
to reborrow under this facility.
32
In December 1997, the Company purchased land from Mr. Orleans in exchange for a
$500,000 Purchase Money Mortgage ("PMM"). Subsequently, during fiscal 1998, the
Company repaid $200,000 of the PMM and began development of the land. The
remaining balance of $300,000 will be repaid from the proceeds of units sold at
this development. The PMM bears interest at 7% annually and is due no later than
60 months from the date of issuance.
Prior to October 22, 1993, the date of acquisition by the Company of Orleans
Construction Corp., a real estate company which was wholly owned by Jeffrey P.
Orleans, Chairman and Chief Executive Officer of the Company, OCC had advanced
funds to, borrowed funds from, and paid expenses and debt obligations on behalf
of Orleans Builders and Developers, L.P., a partnership in which Jeffrey P.
Orleans owns a majority interest. At June 30, 1999 and 1998, amounts owed by the
Company to the partnership aggregated $2,049,000 and $2,256,000, respectively.
These advances are payable on demand and bear interest at 7% annually. Interest
incurred on these advances amounted to $149,000, $176,000 and $201,000 for the
years ended June 30, 1999, 1998 and 1997, respectively.
Also included in the aggregate Notes Payable - Related Parties balance at June
30, 1998 are Series B Notes Payable held by Mr. Orleans of approximately
$650,000 with annual interest at prime plus 2% payable quarterly. The Series B
Notes were paid in full in November, 1998. At June 30, 1998, the Company had
$1,350,000 of Deferred Series A and Series B Notes due to Mr. Orleans with
annual interest at prime plus 2% payable quarterly. The Deferred Series A and
Series B Notes were paid in full in June, 1999.
In June, 1997, the Chester County Industrial Development Authority issued bonds
in the amount of $1,855,000 and loaned the proceeds thereof to a subsidiary of
the Company. The bonds mature November 1, 2006 and bear interest at 7% annually.
The bonds will be repaid at a predetermined amount from settlement proceeds for
each home sold with minimum annual repayments of approximately $200,000
commencing on November 1, 1998. The proceeds from this obligation were used to
construct and operate a waste water spray irrigation facility which is servicing
the Company's Willistown Chase community in Chester County, Pennsylvania.
Included in Other Assets on the Company's Consolidated Balance Sheet at June 30,
1999 is $745,000 of restricted cash to be used for completion of the facility
and repayment of the bonds. The total principal and accrued interest of
$1,674,000 is included in Other Notes Payable at June 30, 1999.
In addition, the Company has various working capital and property and equipment
note obligations which require various monthly repayment terms with maturity
dates from fiscal 2000 through 2004.
33
The following table summarizes the components of Other Notes Payable, including
related party amounts.
Outstanding
Maturity Interest Balance
Note Date Rate as of June 30,
- ---- -------- -------- ----------------------------
1999 1998
------ -------
(In thousands)
Convertible Subordinated 7% Note 1/2002 7% $3,000 $ 3,000
Unsecured Line of Credit 6/2002 LIBOR +4% 650 -
Variable Rate Note(1) - Prime + 2% - 2,000
Demand Note(1) - Prime +2% - 1,746
Deferred Series A and B Notes - Prime +2% - 1,350
Series B Notes - Prime +2% - 650
Revolving Working Capital Note - Prime - 750
Purchase Money Mortgage 12/2002 7% 300 300
Unsecured advance On demand 7% 2,049 2,256
------ -------
Subtotal - related party notes payable(2) 5,999 12,052
------ -------
Property & Equipment 2000-2004 9 1/2%-11 1/2% 1,078 811
Bonds Payable (secured
by mortgage receivables) 2000-2017 10%-12% 200 230
Quaker Sewer Bonds 11/2006 7% 1,674 1,877
------ -------
Subtotal - other notes payable 2,952 2,918
------ -------
$8,951 $14,970
====== =======
Maturities of these obligations during the next five fiscal years are (in
thousands):
2000(3) $4,464
2001 1,517
2002 1,436
2003 401
2004 273
Thereafter 860
------
$8,951
======
- -------
(1) As more fully described in Note 10, during fiscal 1999 the Variable Rate
Note and a portion of the Demand Note were exchanged for Company preferred
stock.
(2) The holders of the related party notes payable are Jeffrey P. Orleans or
Orleans Builders and Developers, L.P.
(3) Includes all demand notes and unsecured advances payable on demand.
34
Note 9. Subordinated Debentures
On September 8, 1980, the Company sold 25,000 Units, each consisting of a $1,000
debenture bearing interest at 14 l/2% per annum and 5 shares of Common Stock.
The debentures, which are unsecured obligations, require semi-annual interest
payments each September and March with the principal balance due on September 1,
2000. Given that optional prepayments may be made at 100% of the principal
amount thereof, the Company repaid the debentures in full in March, 1999. No
gain or loss was recognized on the repayment.
Note 10. Preferred Stock
On October 20, 1998, the Company issued 100,000 shares of Series D Stock to
Jeffrey P. Orleans in exchange for an aggregate amount of $3,000,000 in company
notes held by Mr. Orleans. (See Note 8 for additional information on the notes.)
The Series D Stock was issued from an aggregate of 500,000 shares of Preferred
Stock authorized. The Series D Stock has a liquidation value of $3,000,000, or
$30.00 per share, and requires annual dividends of 7% of the liquidation value.
The dividends are cumulative and are payable quarterly on the first day of
March, June, September and December. The Series D Stock may be redeemed by the
Company at any time after December 31, 2003, in whole or in part, at a cash
redemption price equal to the liquidation value plus all accrued and unpaid
dividends on such shares to the date of redemption. The Series D Stock is
currently convertible into 2,000,000 shares of Common Stock.
Note 11. Income Taxes
The provision (benefit) for income taxes is summarized as follows:
For Year Ended June 30,
----------------------------
1999 1998 1997
------- ------ -----
(In Thousands)
Continuing operations
Current $3,747 $ 896 $271
Deferred (457) 126 171
------ ------ ----
$3,290 $1,022 $442
====== ====== ====
Extraordinary Item
Current $ - $ - $100
Deferred - - -
------ ------ ----
$ - $ - $100
====== ====== ====
35
The differences between taxes computed at federal income tax rates and amounts
provided for continuing operations are as follows:
For Year Ended June 30,
----------------------------
1999 1998 1997
------- ------ -----
(In Thousands)
Amount computed at statutory rate $2,944 $ 914 $597
State income taxes, net of federal
tax benefit 346 162 59
Unrealized (realized) benefits from
net operating loss carry forwards
and other tax credits net of
changes in related valuation reserves - (54) (276)
------ ------ ----
$3,290 $1,022 $380
====== ====== ====
Deferred income taxes reflect the impact of "temporary differences" between the
amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws in accordance with the provisions of SFAS No.
109, "Accounting for Income Taxes". The principal components of the Company's
deferred tax liability of $2,504,000 and $2,961,000 at June 30, 1999 and 1998,
respectively, are temporary differences arising from interest and real estate
taxes incurred prior to commencing active construction being capitalized for
financial reporting purposes while being expensed for tax purposes. In addition,
temporary differences arise from net realizable value adjustments recognized for
financial reporting purposes, but not for tax purposes. These temporary
differences reverse ratably as the communities sellout. The principal items
making up the deferred income tax provisions (benefits) from continuing
operations are as follows:
For Year Ended June 30,
----------------------------
1999 1998 1997
------- ------ -----
(In Thousands)
Interest and real estate taxes $(253) $246 $172
Difference in tax accounting for
land and property sales (net) (6) (8) 13
Unrealized (realized) tax net
operating loss carryforwards
and other tax credits, net of
changes in related valuation
reserves - (122) 223
Reserves 80 12 (173)
Gain (loss) from joint ventures (7) 15 (109)
Deferred compensation (305) (35) (7)
Depreciation and other (47) 18 (10)
State taxes 81 - -
----- ---- ----
$(457) $126 $109
===== ==== ====
36
Temporary differences represent the cumulative taxable or deductible amounts
recorded in the financial statements in different years than recognized in the
tax returns. SFAS No. 109 requires the Company to record a valuation allowance
when it is "more likely than not that some portion or all of the deferred tax
assets will not be realized." It further states that "forming a conclusion that
a valuation allowance is not needed is difficult when there is negative evidence
such as cumulative losses in recent years." The ultimate realization of certain
tax assets depends on the Company's ability to generate sufficient taxable
income in the future, including the effects of future anticipated
arising/reversing temporary differences. Due to the fact that the Company had
substantial capital and operational restructurings and significant losses in
years prior to 1995, it was appropriate to record a valuation allowance at June
30, 1995, equal to 100% of the total deferred income tax assets which were
dependent upon future income for realization in certain tax jurisdictions.
As of June 30, 1996, due to positive earnings and a strong backlog, the Company
reduced its valuation allowance from 100% to 50% on certain tax assets which
were dependent on future taxable income for realization. The deferred tax assets
for which the Company previously provided (prior to June 30, 1996) a 100%
valuation allowance consisted of $199,000 of state net operating loss
carryforwards and federal alternative minimum tax credits aggregating $856,000
at June 30, 1996. As of June 30, 1997, due to continued positive results, the
Company believed it appropriate to further adjust the valuation allowance to
zero on its remaining tax assets as of June 30, 1997.
The components of net deferred taxes payable consisted of the following:
June 30,
-------------------
1999 1998
------- -------
(In Thousands)
Capitalized interest and real estate taxes $2,499 $2,825
State income taxes 1,250 1,136
Other 21 75
------ ------
Gross deferred tax liabilities 3,770 4,036
------ ------
Reserves for books ( 52) ( 146)
Partnership income ( 168) ( 167)
Related party interest ( 50) ( 98)
Executive bonus ( 342) -
Employment contracts ( 316) ( 353)
Vacation accrual ( 73) ( 73)
Inventory adjustment ( 165) ( 160)
Fixed assets ( 86) ( 78)
Other ( 14) -
------ ------
Gross deferred tax assets (1,266) (1,075)
------ ------
Net deferred tax liabilities $2,504 $2,961
====== ======
As of June 30, 1999, the Company had no remaining federal net operating loss or
alternative minimum tax credit carryforwards.
37
Note 12. Stock Option Plan
In December 1992, the Board of Directors adopted (i) the 1992 Stock Incentive
Option Plan and (ii) the Non- Employee Directors Stock Option Plan. The 1992
Plan allows for the grant of options to purchase up to 1,210,000 shares
(increased in December 1998 from 910,000 shares) of Common Stock of the Company.
The Non-Employee Directors Stock Option Plan allows for the grant of options to
purchase up to 100,000 shares of Common Stock of the Company. During fiscal
1999, 10,625 options were granted at an exercise price of $2.06 per share.
During fiscal 1998, 170,000 options were granted at an exercise price of $1.19
per share. The aforementioned options vest 25% per year beginning on the date of
grant. During fiscal 1997, 200,000 options were granted at an exercise price of
$1.50 per share.
In February, 1995, the Board of Directors adopted the 1995 Stock Option Plan for
Non-Employee Directors (the "1995 Directors Plan"), which allows for the grant
of options to purchase up to 100,000 shares of Common Stock of the Company.
During fiscal 1998, 50,000 options were granted at an exercise price of $1.19
per share, subject to shareholder approval of an amendment to the 1995 Directors
Plan increasing the number of options authorized for grant to 125,000 and
certain other related amendments to the 1995 Directors Plan. The options vest
25% per year beginning on the date of grant. On February 28, 1995, 75,000
options were granted under this plan to three non-employee Directors.
The option price per share under all plans is established at the fair market
value on the date of each grant. Total outstanding options under all three plans
aggregated 1,188,125 options to purchase shares of Common Stock of the Company
at prices ranging from $.69 to $2.81 per share. All options expire between
December 2002 and December 2008.
Effective in fiscal 1997, the Company was required to adopt the provisions of
SFAS No. 123 "Accounting for Stock Based Compensation". As permitted, the
Company has elected to continue to utilize the intrinsic value method and not to
charge the fair value of such options as earned directly to the financial
statements but to disclose the effects of such a charge. Had compensation costs
for the option plans been determined based on the fair value at the grant date
for awards and recognized over the related vesting period in 1999, 1998 and
1997, consistent with the provisions of SFAS No. 123, the Company's net income
and earnings per share for the three years ended June 30, 1999 would have been
reduced to the pro forma amounts indicated below:
For Year Ended June 30
-----------------------------------
1999 1998 1997
-----------------------------------
(In thousands, except for EPS data)
Net Income - as reported $5,220 $1,668 $2,209
Net Income - pro forma 5,148 1,641 2,186
Diluted EPS - as reported .36 .14 .19
Diluted EPS - pro forma .35 .14 .19
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes Option - Pricing Model with the following weighted average
assumptions used for options granted in fiscal 1997 through fiscal 1999:
dividend yield of 0% for all years; expected volatility of 73.9%; risk free
interest rates for treasuries of comparable duration and expected lives of 10
years for all grants. The weighted average fair value of grants per share for
fiscal 1999, 1998 and 1997 was $1.67, $.98 and $1.03 per share, respectively.
The fiscal 1998 option grants were included in the pro forma calculation for
fiscal 1999, as they were not approved by the shareholders until December 1998.
38
The pro forma disclosures above may not be indicative of the effects on reported
net income and net income per share for future years, as the pro forma
disclosures include the effects of only those awards granted on or after July 1,
1995.
The following summarizes stock option activity for the three plans during the
three years ended June 30, 1999:
1999 1998 1997
---- ---- ----
Weighted- Weighted- Weighted-
Number of Average Number of Average Number of Average
Options Exercise Price Options Exercise Price Options Exercise Price
--------- -------------- --------- -------------- --------- --------------
Outstanding,
beginning of year 967,500 $1.21 967,500 $1.21 792,500 $1.13
Granted 230,625 1.23 - - 200,000 1.50
Exercised ( 1,875) 1.19 - - - -
Canceled ( 8,125) 1.19 - - (25,000) 0.69
--------- ----- ------- ----- ------- -----
Outstanding,
end of year 1,188,125 1.22 967,500 1.21 967,500 1.21
========= ===== ======= ===== ======= =====
Exercisable,
end of year 884,531 1.15 708,750 1.10 640,000 1.06
========= ===== ======= ===== ======= =====
Available for grant,
end of year 245,000 92,500 92,500
========= ===== ======= ===== ======= =====
The fiscal 1999 grants include 220,000 options granted in fiscal 1998 subject to
shareholder approval, which was obtained during fiscal 1999.
The following table summarizes information about stock options outstanding at
June 30, 1999.
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (in yrs) Price Exercisable Price
- -------- ----------- ------------- --------- ----------- --------
$ .69 - $ .81 480,000 3.5 $ .75 480,000 $ .75
$1.19 - $1.63 562,500 7.6 1.31 297,500 1.27
$2.00 - $2.81 145,625 6.5 2.42 107,031 2.57
--------- -------
$ .69 - $2.81 1,188,125 6.8 $1.22 884,531 $1.15
========= =======
39
Note 13. Commitments and Contingencies
General
At June 30, 1999, the Company had outstanding bank letters of credit, surety
bonds and financial security agreements amounting to $36,483,000 as collateral
for completion of improvements at various developments of the Company.
At June 30, 1999 the Company had agreements to purchase land and approved
homesites aggregating approximately 2,500 building lots with purchase prices
totaling approximately $59,721,000 at fifteen locations. Purchase of the
properties is contingent upon obtaining all governmental approvals and
satisfaction of certain requirements by the Company and the Sellers. The Company
expects to utilize purchase money mortgages, secured financings and existing
capital resources to finance these acquisitions. Subsequent to year-end, but
prior to September 30, 1999, the Company entered into agreements to purchase 335
building lots with an aggregate purchase price of approximately $20,000,000.
The Company anticipates completing a majority of these acquisitions in fiscal
2000 and 2001. As of June 30, 1999 and 1998, the Company had paid deposits and
incurred other costs associated with the acquisition and development of these
parcels aggregating $4,141,000 and $2,653,000, respectively, which are included
in Other Assets.
Environmental Liability Exposure
Development and sale of real property creates a potential for environmental
liability on the part of the developer, owner or any mortgage lender for its own
acts or omissions as well as those of current or prior owners of the subject
property or adjacent parcels. If hazardous substances are discovered on or
emanating from any of the Company's properties, the owner or operator of the
property (including the prior owners) may be held strictly liable for all costs
and liabilities relating to such hazardous substances. Environmental studies are
undertaken in connection with property acquisitions by the Company.
Pursuant to an Order dated February 6, 1996 issued by the New Jersey Department
of Environmental Protection ("NJDEP"), the Company submitted a
Closure/Post-Closure Plan ("Plan") and Classification Exception Area ("CEA") for
certain affected portions of Colts Neck Estates, a single family residential
development built by the Company in Washington Township, Gloucester County, New
Jersey. The affected areas include those portions of Colts Neck where solid
waste allegedly was deposited. NJDEP approved the Plan and CEA on July 22, 1996.
The Plan, in part, requires the Company to (i) perform gas monitoring for
methane on a quarterly basis for a period of one year; (ii) vegetate and cover
with clean fill affected areas; and (iii) deed restrict portions of the affected
open space owned by it. NJDEP's approval of the CEA imposes restrictions on the
use of ground water within the affected area. Neither the implementation of the
Plan nor CEA is expected to have a material adverse effect on the Company's
results of operations or its financial position although NJDEP as a standard
condition of its approval of the Plan and CEA reserves the right to amend its
approval to require additional remediation measures if warranted.
Approximately 145 homeowners at Colts Neck instituted three lawsuits against the
Company, which were separately filed in state and Federal courts between April
and November, 1993. These suits were consolidated in the United States District
Court for the District of New Jersey and were subject to court- sponsored
mediation. Asserting a variety of state and federal claims, the plaintiffs in
the consolidated action alleged that the Company and other defendants built and
sold them homes which had been constructed on and adjacent to land which had
been used as a municipal waste landfill and a pig farm. The complaints asserted
claims under the federal Comprehensive Environmental Response, Compensation and
Liability Act,
40
the Federal Solid Waste Disposal Act, the New Jersey Sanitary Landfill Facility
Closure and Contingency Act, the New Jersey Spill Compensation and Control Act,
as well as under theories of private nuisance, public nuisance, common law
fraud, latent defects, negligent misrepresentation, consumer fraud, negligence,
strict liability, vendor liability, and breach of warranty, among others.
The Company, in turn, asserted third-party claims against the former owners and
operators of the Colts Neck property as well as claims against the generator of
the municipal waste allegedly disposed on the property.
In September, 1993 the Company brought an action in New Jersey state court
against more than 30 of its insurance companies seeking indemnification and
reimbursement of costs of defense in connection with the three Colts Neck
actions referred to above.
As a result of the court sponsored mediation, the Company and the plaintiffs in
the consolidated litigation entered into a settlement agreement. Under that
agreement, which has been approved by the Court, a $6,000,000 Judgment was
entered against the Company in favor of a class comprising most of the current
and former homeowners. The Company, which has paid $650,000 on August 28, 1996
to the class, has no liability for the remainder of the Judgment. The remainder
of the Judgment is to be paid solely from the proceeds of the state court
litigation against the Company's insurance companies. Although, under the
settlement agreement the Company is obligated to prosecute and fund the
litigation against its insurance companies, the Company is entitled to obtain
some reimbursement of those expenses. Specifically, under the settlement
agreement, the Company may obtain reimbursement of its aggregate litigation
expenses in excess of $100,000 incurred in connection with its continued
prosecution of the insurance claims to the extent that settlements are reached
and to the extent that the portion of those settlement funds designated to fund
the litigation are not exhausted. The Company's right to reimbursement may,
under certain circumstances, be limited to a total of $300,000.
The Company is currently prosecuting the litigation against its insurance
companies in state court. Prosecution of those claims was pursued in federal
court between 1994 and 1996, but has since been remanded to state court on
jurisdictional grounds. The state court insurance litigation is being actively
pursued. To date, settlements totaling $577,500 have been reached with seven
defendants, half of which have been or will be paid to the plaintiff class, and
half of which has been or will be used to fund the continued litigation. The
likelihood of a favorable judgment or additional settlements in the litigation
is uncertain.
In addition, the Company has reached a $215,000 tentative settlement of its
third party claims in the above-mentioned federal litigation. One-half of the
proceeds of any such settlement will be payable to the plaintiff class under the
1995 settlement agreement with the class.
The Company has accrued estimated costs of environmental testing as well as all
other reasonably estimable future investigatory, engineering, legal and
litigation costs and expenses. The Company believes that neither the
implementation of the settlement agreement nor the resolution of the insurance
claims through further litigation will have a material effect on its results of
operations or its financial position.
The Company is not aware of any other environmental liabilities associated with
any of its other projects.
41
Other Significant Litigation
During fiscal 1998, a judgment in the amount of $2,500,000 was rendered against
the Company and in the amount of $1,250,000 against the Estate of Marvin Orleans
and Jeffrey P. Orleans, trading as Orleans Construction Company, by the Court of
Common Pleas of Bucks County, in an action brought against the Company, Orleans
Construction Company and an unrelated party arising out of injuries to two
workmen at the Company's project during its construction phase. In May 1999, a
settlement was reached. The settlement, including delay damages, was completely
satisfied from insurance proceeds. The insurance carrier paid $3,250,000 on
behalf of the Company and $1,625,000 on behalf of Orleans Construction Company.
From time to time, the Company is named as a defendant in legal actions arising
from its normal business activities. Although the amount of any liability that
could arise with respect to currently pending actions cannot be accurately
predicted, in the opinion of the Company any such liability will not have a
material adverse effect on the financial position or operating results of the
Company.
Note 14. Quarterly Financial Data (Unaudited)
Unaudited summarized financial data by quarter for 1999 and 1998 are as follows
(in thousands, except per share data):
Three Months Ended
Fiscal 1999 September 30 December 31 March 31 June 30
- ----------- ------------ ----------- -------- -------
Earned revenues $35,461 $39,920 $30,829 $42,236
Gross profit 5,344 6,051 4,887 7,468
Net income available for
common shareholders 1,026 1,443 859 1,892
Net earnings per share:
Basic .09 .13 .08 .16
Diluted .08 .10 .06 .12
Fiscal 1998
- -----------
Earned revenues $25,061 $21,013 $23,893 $37,388
Gross profit 3,718 2,977 3,458 5,907
Net income available for
common shareholders 275 62 69 1,262
Net earnings per share:
Basic .02 .01 .01 .11
Diluted .02 .01 .01 .10
42
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
As reported in the Company's Form 8-K dated September 13, 1999, the
Company's former independent accountants resigned on such date. As reported in
the Company's Form 8-K dated October 5, 1999, the Company has engaged KPMG LLP
("KPMG") as its new independent accountants for the Fiscal 1999 audit. The
decision to engage KPMG was approved by the Audit Committee of the Board of
Directors of the Company. A meeting of the Audit Committee will be held during
the year, at which time a recommendation will be made as to the selection of the
Company's auditors for Fiscal 2000. Representatives of KPMG will be present at
the 1999 Annual Meeting and they will be given an opportunity to make a
statement if they desire to do so and will be available to respond to any
appropriate questions from stockholders.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Incorporated herein by reference from the Company's definitive proxy
statement for its Annual Meeting of Stockholders to be held in December, 1999.
Information concerning the executive officers is included under the separate
caption Item A. "Executive Officers of the Registrant" under Part I of this Form
10-K.
Item 11. Executive Compensation.
Incorporated herein by reference from the Company's definitive proxy
statement for its Annual Meeting of Stockholders to be held in December, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated herein by reference from the Company's definitive proxy
statement for its Annual Meeting of Stockholders to be held in December, 1999.
Item 13. Certain Relationships and Related Transactions.
Incorporated herein by reference from the Company's definitive proxy
statement for its Annual Meeting of Stockholders to be held in December, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements and Financial Statement Schedules
43
1. Financial Statements
The financial statements listed in the index on the first page under
Item 8 are filed as part of this Form 10-K.
2. Financial Statement Schedules None.
3. Exhibits
Exhibit Number
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3.l Certificate of Incorporation of the Company dated September 4, 1969
(incorporated by reference to Exhibit 2.l of the Company's Registration
Statement on Form S-7, filed with the Securities and Exchange
Commission (S.E.C. File No. 2-68662) (herein referred to as "Form
S-7")).
3.2 Amendment to Certificate of Incorporation of the Company filed July 25,
1983 (incorporated by reference to Exhibit 3.2 of Amendment No. 2 to
the Company's Registration Statement on Form S-2 filed with the
Securities and Exchange Commission (S.E.C. File No. 2-84724)).
3.3 Amendment to Certificate of Incorporation of the Company filed May 27,
1992 (incorporated by reference to Exhibit 3.6 of Amendment No. 2 to
the Company's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission (S.E.C. File No. 33-43943) (the
"Form S-1")).
3.4 Agreement and Plan of Merger dated as of October 22, 1993, by and among
the Company, FPA Merger Subsidiary, Inc. a Pennsylvania corporation;
Orleans Construction Corp. ("OCC"); and Jeffrey P. Orleans, including
the Certificate of Designation respecting the Series C Preferred Stock
incorporated by reference to Exhibit 3.5 to the Company's Form 8-K
dated October 22, 1993 filed with the Securities and Exchange
Commission (the "1993 Form 8-K").
3.5 Certificate of Designation filed by the Company on September 6, 1991
with the Secretary of State of Delaware respecting the Series A
Preferred Stock and Series B Junior Preferred Stock (incorporated by
reference to Exhibit 4.4 of the Company's Form 8-K dated September 11,
1991 ("1991 Form 8-K")).
3.6 Subsequent Certificate to Certificate of Designations, Preferences and
Rights of Series A Preferred Stock and Series B Junior Preferred Stock
of FPA Corporation adopted September 14, 1992 and filed with the
Secretary of State of Delaware. (incorporated by reference to Exhibit
4.19 to Registrant's Form 10-K for the fiscal year ended June 30,
1994.)
3.7 Subsequent Certificate to Certificate of Designations, Preferences and
Rights of Series A Preferred Stock and Series B Junior Preferred Stock
of FPA Corporation filed on September 2, 1993 with the Secretary of
State of Delaware.
44
3.8 Certificate of Designations, Preferences and Rights of Series C
Preferred Stock filed by the Company on October 21, 1993 with the
Secretary of State of Delaware respecting the Series C Preferred Stock.
(incorporated by reference to Exhibit 2.1 to the Company's Form 8-K
dated October 22, 1993).
3.9 Certificate of Elimination to Certificate of Designations, Preferences
and Rights of Series C Preferred Stock of FPA Corporation filed on
October 18, 1996 with the Secretary of State of Delaware (incorporated
by reference to Exhibit 3.9 to the 1998 Form 10-K).
3.10 Amendment to Certificate of Incorporation filed with the Secretary of
State of Delaware on July 13, 1998 (incorporated by reference to
Exhibit 3.10 to the 1998 Form 10-K).
3.11 By-Laws, as last amended on April 20, 1998 (incorporated by reference
to Exhibit 3.11 to the 1998 Form 10-K).
4.l Form of the Company's 14 l/2% Subordinated Debentures due September l,
2000 (contained in, and beginning on page 12 of, Exhibit 4.2).
4.2 Form of Indenture dated September l, 1980, between the Company and The
Fidelity Bank (the "Debenture Indenture"), relating to the Company's 14
l/2% Subordinated Debentures due September l, 2000 (incorporated by
reference to Exhibit 2.3 of Amendment No. 2 to the Company's Form S-7).
4.3 Form of Second Supplemental Indenture dated March 30, 1990 to the
Debenture Indenture (incorporated by reference to Exhibit 4.3 to the
1990 Form 8-K).
4.4 Note Exchange Agreement, dated September 11, 1991, respecting the
issuance of $5,032,935.38 aggregate principal amount of 12 5/8% Senior
Notes due February 15, 1996, with the form of the Company's 12 5/8%
Senior Notes due February 15, 1996 attached as Exhibit A thereto
(incorporated by reference to Exhibit 4.5 to the 1991 Form 8-K).
4.5 Debenture Exchange Agreement, dated September 11, 1991, respecting the
issuance of $2,356,282.50 aggregate principal amount of 1991 14 1/2%
Subordinated Debentures due September 1, 2000 with the form of the
Company's 1991 14 1/2% Subordinated Debentures due September 1, 2000
attached as Exhibit A thereto (incorporated by reference to Exhibit 4.6
to the 1991 Form 8-K).
4.6 Form of Note Purchase Agreement dated as of October 22, 1993, together
with form of Series A Variable Rate Notes due September 15, 1998 issued
by the Company attached thereto (incorporated by reference to Exhibit
4.2 to the 1993 Form 8-K).
4.7 Form of Note Purchase Agreement dated October 22, 1993, together with
form of Series B Variable Rate Mortgage Notes due September 15, 1998
issued by the Company attached thereto (incorporated by reference to
Exhibit 4.24 to the 1993 Form 8-K).
4.8 Form of Note Purchase Agreement, dated as of August 1, 1996, together
with form of $2,000,000 Variable Rate Note due September 30, 2000
(incorporated by reference to Exhibit 4.8 to the 1996 Form 10-K).
45
4.9 Form of Note Purchase Agreement, dated as of August 1, 1996, together
with form of $3,000,000 Convertible Subordinated 7% Note due January 1,
2002 (incorporated by reference to Exhibit 4.9 to the 1997 Form 10-K).
10.1 Form of Indemnity Agreement executed by the Company with Directors of
the Company (incorporated by reference to Exhibit B to the Company's
Proxy Statement respecting its 1986 Annual Meeting of Stockholders).
10.2 Employment Agreement between the Company and Jeffrey P. Orleans, dated
June 26, 1987 (incorporated by reference to Exhibit 10.2 to the Form
S-1.)
10.3 Mortgage dated March 17, 1992 granted by the Company to Jeffrey P.
Orleans, respecting property in Washington Township, Gloucester County,
New Jersey (incorporated by reference to Exhibit 10.3 to the 1992 Form
8-K).
10.4* $4,000,000 Unsecured Line of Credit Agreement with Jeffrey P. Orleans,
dated as of June 30, 1999.
22. Subsidiaries of Registrant (incorporated by reference to Exhibit 22 to
the 1998 Form 10-K.)
23.* Consents of Experts and Counsel.
25.* Power of Attorney (included on Signatures page).
27.* Financial Data Schedule (included in electronic filing format only).
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* Exhibits included with this filing.
(b) Reports on Form 8-K
None.
46
SIGNATURES
and
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Jeffrey P. Orleans, Benjamin D. Goldman and Joseph A.
Santangelo and each of them, his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or each of them, of their or his
substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
s/Jeffrey P. Orleans October 11, 1999
- --------------------------------------
Jeffrey P. Orleans
Chairman of the Board and
Chief Executive Officer
s/Benjamin D. Goldman October 11, 1999
- --------------------------------------
Benjamin D. Goldman
Vice Chairman and Director
s/Sylvan M. Cohen October 11, 1999
- --------------------------------------
Sylvan M. Cohen
Director
s/Robert N. Goodman October 11, 1999
- --------------------------------------
Robert N. Goodman
Director
s/Andrew N. Heine October 11, 1999
- --------------------------------------
Andrew N. Heine
Director
s/David Kaplan October 11, 1999
- --------------------------------------
David Kaplan
Director
s/Lewis Katz October 11, 1999
- --------------------------------------
Lewis Katz
Director
s/Michael T. Vesey October 11, 1999
- --------------------------------------
Michael T. Vesey
President and Chief Operating Officer
s/Joseph A. Santangelo October 11, 1999
- --------------------------------------
Joseph A. Santangelo
Chief Financial Officer,
Treasurer and Secretary
47