UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _________ TO _________.
Commission File No. l-6830
ORLEANS HOMEBUILDERS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 59-0874323
- -------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
One Greenwood Square, Suite #101
3333 Street Road
Bensalem, Pennsylvania 19020
----------------------------------------
(Address of principal executive offices)
Telephone: (215) 245-7500
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No_____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes _____ No__X__
Number of shares of common stock, par value $0.10 per share, outstanding as of
November 4, 2002: 11,960,899
(excluding 737,232 shares held in Treasury).
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
PAGE
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PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 2002
and June 30, 2002 1
Consolidated Statements of Operations and Changes
in Retained Earnings for the Three Months
Ended September 30, 2002 and 2001 2
Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 2002 and 2001 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K 17
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
(Unaudited)
September 30, June 30,
2002 2002
------------- ------------
Assets
Cash and cash equivalents $ 9,978 $ 7,257
Restricted cash - customer deposits 10,398 9,230
Real estate held for development and sale:
Residential properties completed or under construction 112,139 112,279
Land held for development or sale and improvements 84,445 82,699
Property and equipment, at cost, less accumulated depreciation 1,843 1,726
Intangible assets, net of amortization 3,701 3,718
Receivables, deferred charges and other assets 25,572 21,590
--------- ---------
Total Assets $ 248,076 $ 238,499
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ 23,027 $ 24,199
Accrued expenses 23,593 23,232
Customer deposits 11,180 9,775
Mortgage and other note obligations primarily secured by real
estate held for development and sale 115,724 113,058
Notes payable - related parties 3,765 3,750
Other notes payable 1,234 1,224
Deferred income taxes 618 618
--------- ---------
Total Liabilities 179,141 175,856
--------- ---------
Commitments and contingencies
Redeemable common stock 999 988
--------- ---------
Shareholders' Equity:
Preferred stock, $1 par, 500,000 shares authorized:
Series D convertible preferred stock, 7% cumulative annual
dividend, $30 stated value, issued and outstanding 100,000
shares ($3,000,000 liquidation preference) 3,000 3,000
Common stock, $.10 par, 20,000,000 shares authorized,
12,698,131 shares issued 1,270 1,270
Capital in excess of par value - common stock 17,726 17,726
Retained earnings 46,783 40,502
Treasury stock, at cost (812,232 shares held at
September 30, 2002 and June 30, 2002) (843) (843)
--------- ---------
Total Shareholders' Equity 67,936 61,655
--------- ---------
Total Liabilities and Shareholders' Equity $ 248,076 $ 238,499
========= =========
See accompanying notes which are an integral part of the
consolidated financial statements.
1
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Statements of Operations
and Changes in Retained Earnings
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended
September 30,
2002 2001
-------- ---------
Earned revenues
Residential properties $ 86,030 $ 80,260
Other income 1,088 794
--------- ---------
87,118 81,054
--------- ---------
Costs and expenses
Residential properties 66,051 65,895
Other 996 517
Selling, general and administrative 9,792 8,476
Interest
Incurred 1,362 1,971
Less capitalized (1,298) (1,932)
--------- ---------
76,903 74,927
--------- ---------
Income from operations before income taxes 10,215 6,127
Income tax expense 3,881 2,350
--------- ---------
Net income 6,334 3,777
Preferred dividends 53 53
--------- ---------
Net income available for common shareholders 6,281 3,724
Retained earnings, at beginning of period 40,502 40,502
--------- ---------
Retained earnings, at end of period $ 46,783 $ 44,226
========= =========
Basic earnings per share $ 0.52 $ 0.32
========= =========
Diluted earnings per share $ 0.38 $ 0.23
========= =========
See accompanying notes which are an integral part of the
consolidated financial statements.
2
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended
September 30,
2002 2001
-------- ---------
Cash flows from operating activities:
Net income $ 6,334 $ 3,777
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 164 95
Noncash compensation 11 11
Changes in operating assets and liabilities:
Restricted cash - customer deposits (1,168) (835)
Real estate held for development and sale (1,606) (22,006)
Receivables, deferred charges and other assets (3,997) 557
Accounts payable and other liabilities (796) 491
Customer deposits 1,405 640
-------- --------
Net cash provided by (used in) operating activities 347 (17,270)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (281) (343)
Acquisition of PLC, net of cash acquired 17 (359)
-------- --------
Net cash used in investing activities (264) (702)
-------- --------
Cash flows from financing activities:
Borrowings from loans secured by real estate assets 64,489 59,629
Repayment of loans secured by real estate assets (61,823) (44,029)
Borrowings from other note obligations 35 493
Repayment of other note obligations (10) (393)
Preferred stock dividend (53) (53)
-------- --------
Net cash provided by financing activities 2,638 15,647
-------- --------
Net increase (decrease) in cash and cash equivalents 2,721 (2,325)
Cash and cash equivalents at beginning of year 7,257 13,560
-------- --------
Cash and cash equivalents at end of period $ 9,978 $ 11,235
======== ========
Supplemental disclosure of cash flow activities:
Interest paid, net of amounts capitalized $ 64 $ 131
======== ========
Income taxes paid $ 4,060 $ 230
======== ========
See accompanying notes which are an integral part of the
consolidated financial statements.
3
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) Summary of Significant Accounting Policies:
The accompanying unaudited consolidated financial statements are presented
in accordance with the requirements for Form 10-Q and do not include all
the disclosures required by generally accepted accounting principles for
complete financial statements. Reference is made to Form 10-K as of and for
the year ended June 30, 2002 for Orleans Homebuilders, Inc. and
subsidiaries (the "Company") for additional disclosures, including a
summary of the Company's accounting policies.
In the opinion of management, the consolidated financial statements contain
all adjustments, consisting only of normal recurring accruals, necessary to
present fairly the consolidated financial position of the Company for the
periods presented. The interim operating results of the Company may not be
indicative of operating results for the full year.
Certain amounts for fiscal year 2002 have been reclassified to conform to
the fiscal year 2003 presentation.
Recent accounting pronouncements:
In June 1998, the FASB issued SFAS No. 133. On June 23, 1999, the FASB
voted to defer the effectiveness of SFAS No. 133 for one year. SFAS No. 133
is now effective for fiscal years beginning after June 15, 2000. SFAS No.
133 establishes accounting and reporting standards for use of derivative
financial instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as
(i) a hedge of the exposure to changes in the fair value of a recognized
asset or liability of an unrecognized firm commitment; (ii) a hedge of the
exposure to variable cash flows of a forecasted transaction; or (iii) in
certain circumstances, a hedge of a foreign currency exposure. On July 1,
2000, the Company adopted this pronouncement, as amended by SFAS No. 137
and Statement of Financial Accounting Standards No. 138, "Accounting for
Certain Hedging Activities - an Amendment of FASB No. 133". The adoption of
SFAS No. 133 did not have a material financial impact on the financial
position and results of operations of the Company because the Company has
not entered into any freestanding derivatives and has no embedded
derivatives that require bifurcation and separate treatment. However,
should the Company change its use of such derivatives, the adoption of SFAS
No. 133 could have a more significant effect on the Company prospectively.
4
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements ("SAB 101"). In June 2000, the SEC staff amended SAB 101 to
provide registrants with additional time to implement SAB 101. The Company
has adopted SAB 101, as required, in the fourth quarter of fiscal 2001. The
adoption of SAB 101 did not have a material financial impact on the
financial position or results of operations of the Company.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"). The Company
was required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee
status that occur on or after that date. FIN 44 addresses practice issues
related to the application of Accounting Practice Bulletin Opinion No. 25,
"Accounting for Stock Issued to Employees". The initial adoption of FIN 44
by the Company did not have a material financial impact on its consolidated
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 141, which establishes standards for
reporting business combinations entered into after June 30, 2001 and
supercedes APB Opinion No. 16, "Business Combinations" and SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises".
Among other things, SFAS No. 141 requires that all business combinations be
accounted for as purchase transactions and provides specific guidance on
the definition of intangible assets which require separate treatment. The
statement is applicable for all business combinations entered into after
June 30, 2001 and also requires that companies apply its provisions
relating to intangibles from pre-existing business combinations.
In June 2001, the FASB also issued SFAS No. 142, which establishes
standards for financial accounting and reporting for intangible assets
acquired individually or with a group of other assets and for the reporting
of goodwill and other intangible assets acquired in a business acquisition
subsequent to initial accounting under SFAS No. 141. SFAS No. 142
supercedes APB Opinion No.17, "Intangible Assets" and related
interpretations. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001; however, companies with fiscal years beginning after
March 15, 2001 may elect to adopt the provision of SFAS No. 142 at the
beginning of its new fiscal year. Accordingly, the Company elected to early
adopt SFAS No. 142 effective with the beginning of its fiscal year on July
1, 2001. The Company did not recognize any charge to earnings for the
cumulative effect upon adoption because all such intangibles relate to the
Company's recent acquisition of PLC for which no impairment was required
under SFAS No. 142. Upon adoption, such intangibles, which were being
amortized over ten years prior to adoption, are no longer amortized, but
continue to be subject to periodic review for impairment. Amortization of
such intangibles was $167,000 for fiscal 2001.
5
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which
establishes a single accounting model for the impairment or disposal of
long-lived assets, including discontinued operations. SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions". The provisions of SFAS No. 144 are
effective in fiscal years beginning after December 15, 2001, with early
adoption permitted and, in general, are to be applied prospectively. The
Company adopted SFAS No. 144 effective July 1, 2002. The adoption of SFAS
No. 144 did not have a material impact on the financial position or results
of operations of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145"). SFAS No. 145 rescinds both SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt" ("SFAS No. 4"),
and the amendments to SFAS No. 4, SFAS No. 64, "Extinguishments of Debt
made to Satisfy Sinking-Fund Requirements" ("SFAS No. 64"). Through this
rescission, SFAS No. 145 eliminates the requirement (in both SFAS No. 4 and
SFAS No. 64) that gains and losses from the extinguishment of debt be
aggregated and, if material, classified as an extraordinary item, net of
the related income tax effect. An entity is not prohibited from classifying
such gains and losses as extraordinary items, so long as they meet the
criteria in paragraph 20 of APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB No. 30"). However, due to the nature of the Company's
operations, it is not expected that such treatment will be available to the
Company. Any gains or losses on extinguishments of debt that were
previously classified as extraordinary items in prior periods presented
that do not meet the criteria in APB No. 30 for classification as an
extraordinary item will be reclassified to income from continuing
operations. The provisions of SFAS No. 145 are effective for financial
statements issued for fiscal years beginning after May 15, 2002. The
Company adopted SFAS No. 145 effective July 1, 2002. The adoption of SFAS
No. 145 did not have a material impact on the financial position or results
of operations of the Company.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"), which is effective for
exit or disposal activities initiated after December 31, 2002, with earlier
application encouraged. SFAS No. 146 addresses the accounting for costs
6
associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". The Company adopted SFAS No. 146
effective July 1, 2002. The adoption of SFAS No. 146 did not have a
material impact on the financial position or results of operations of the
Company.
(B) Earnings Per Share:
Basic earnings per common share are computed by dividing net income by the
weighted average number of common shares outstanding. Basic shares
outstanding includes the pro rata portion of unconditional shares issuable
as part of the purchase price of the Parker & Lancaster Corporation
acquisition on October 13, 2000. Diluted earnings per share include
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. The weighted average number of
shares used to compute basic earnings per common share and diluted earnings
per common share, and a reconciliation of the numerator and denominator
used in the computation for the three months ended September 30, 2002 and
2001, respectively, are shown in the following table.
Three Months Ended
September 30,
2002 2001
------ ------
(Unaudited)
(in thousands)
Total common shares issued 12,698 12,698
Shares not issued, but
unconditionally issuable 205 273
Less: Average treasury shares outstanding (812) (1,340)
------- -------
Basic EPS shares 12,091 11,631
Effect of assumed shares issued under
treasury stock method for stock options 553 674
Effect of assumed conversion of $3 million
Convertible Subordinated 7% Note 2,000 2,000
Effect of assumed conversion of $3 million
Series D Preferred Stock 2,000 2,000
------- -------
Diluted EPS shares 16,644 16,305
======= =======
Net income available for common shareholders $ 6,281 $ 3,724
Effect of assumed conversion of $3 million
Convertible Subordinated 7% Note 33 33
Effect of assumed conversion of $3 million
Series D Preferred Stock 53 53
------- -------
Adjusted net income for diluted EPS $ 6,367 $ 3,810
======= =======
7
(C) Residential Properties Completed or under Construction:
Residential properties completed or under construction consist of the
following:
September 30, June 30,
2002 2002
------------- ---------
(Unaudited)
(in thousands)
Under contract for sale $ 75,691 $ 76,885
Unsold 36,448 35,394
--------- ---------
$ 112,139 $ 112,279
========= =========
(D) Litigation:
From time to time the Company is named as a defendant in legal actions
arising from its normal business activities. Although the amount of
liability that could arise with respect to currently pending actions cannot
be accurately predicted, in the opinion of the Company any such liability
will not have a material adverse effect on the financial position,
operating results or cash flows of the Company.
8
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Orleans Homebuilders, Inc. and its subsidiaries (collectively, the
"Company", "OHB" or "Orleans") are currently engaged in residential real estate
development in New Jersey, North Carolina, Pennsylvania, South Carolina and
Virginia. The Company has operated in the Pennsylvania and New Jersey areas for
over 80 years and began operations in North Carolina, South Carolina and
Virginia in fiscal 2001 through the acquisition of Parker & Lancaster
Corporation ("PLC"), a privately-held residential homebuilder. References to a
given fiscal year in this Quarterly Report on Form 10-Q are to the fiscal year
ending June 30th of that year. For example, the phrases "fiscal 2002" or "2002
fiscal year" refer to the fiscal year ended June 30, 2002.
Results of Operations
The following table (unaudited) sets forth certain details as to
residential sales activity. The information provided is for the three months
ended September 30, 2002 and 2001 in the case of revenues earned and new orders,
and as of September 30, 2002 and 2001 in the case of backlog.
Three Months Ended September 30,
2002 2001
-----------------------------------------------------------------------
(Dollars in thousands)
Northern Region Average Average
New Jersey and Pennsylvania: Amount Homes Price Amount Homes Price
Revenues earned $ 62,069 205 $ 303 $ 51,804 189 $ 274
New orders 74,650 213 350 51,616 195 265
Backlog 163,205 475 344 144,451 483 299
Southern Region
North Carolina, South Carolina
and Virginia:
Revenues earned $ 23,961 91 $ 263 $ 28,456 118 $ 241
New orders 36,273 126 288 28,889 119 243
Backlog 67,752 215 315 56,638 214 265
Combined Regions
Revenues earned $ 86,030 296 $ 291 $ 80,260 307 $ 261
New orders 110,923 339 327 80,505 314 256
Backlog 230,957 690 335 201,089 697 289
9
Three Months Ended September 30, 2002 and 2001
Orders and Backlog
The dollar value of new orders for the three months ended September 30,
2002 increased $30,418,000, or 37.8%, to $110,923,000 on 339 homes, compared to
$80,505,000 on 314 homes for the three months ended September 30, 2001. The
increase in new order dollars is primarily attributable to an increase in
northern region new order dollars of $23,034,000, or 44.6% when compared to the
comparable quarter of the prior fiscal year. Southern region new order dollars
increased $7,384,000, or approximately 25.6% when compared to the comparable
quarter of the prior fiscal year. The increase in new order dollars is a result
of favorable conditions in the homebuilding industry, most notably, favorable
financing conditions. In addition, the average price per unit of new orders in
the combined regions increased approximately 27.7%, to $327,000 per home for the
first quarter of fiscal 2003, compared to $256,000 per home for the first
quarter of fiscal 2002. This change in the average price per unit of new orders
is due to a change in the Company's current product offerings, to more single
family homes, as well as an increase in unit sales prices due to favorable
economic conditions in the homebuilding industry. Overall, unit sales prices
have increased at the majority of communities opened during the first quarter of
fiscal 2003, when compared with the same communities and units offered for sale
in the first quarter of fiscal 2002.
The dollar backlog at September 30, 2002 increased $29,868,000, or
14.9%, to $230,957,000 on 690 homes compared to the backlog at September 30,
2001 of $201,089,000 on 697 homes. The increase in backlog and backlog dollars
is primarily attributable to favorable economic conditions for the homebuilding
industry in the regions where the Company operates. These favorable economic
conditions, most notably favorable financing conditions, have resulted in strong
customer demand and positive home pricing trends.
Operating Revenues
Earned revenues for the first quarter ended September 30, 2002
increased $6,064,000 to $87,118,000, or 7.5%, compared to the first quarter
ended September 30, 2001. Revenues from the sale of residential homes included
296 homes totaling $86,030,000 during the first quarter of fiscal 2003, as
compared to 307 homes totaling $80,260,000 during the first quarter of fiscal
2002. The increase in residential revenue earned is due to an increase in
northern region residential revenue earned of approximately $10,265,000,
partially offset by a decrease in southern region residential revenue earned of
approximately $4,495,000, compared with the prior year comparable quarter. The
overall increase in residential revenue earned is attributable to an increase in
the average selling price per home for the first quarter of fiscal 2003,
compared to the comparable quarter of the prior fiscal year. This change in the
average selling price per home is due to a change in the Company's current
10
product offerings, to more single family homes, as well as an increase in unit
sales prices due to favorable economic conditions in the homebuilding industry.
Furthermore, a shortage of approved building lots in key markets has resulted in
additional favorable pricing conditions for homebuilders. The overall average
selling price per home delivered in the first quarter of fiscal 2003 increased
by approximately 11.5% to $291,000 per home, compared to $261,000 per home for
the first quarter of fiscal 2002. The overall average sales price per home
varies from year-to-year depending upon current product offerings, among other
factors. Average sales prices have increased at the majority of communities
opened during the first three months of fiscal 2003, when compared with the same
communities and units offered for sale in the first three months of fiscal 2002.
Costs and Expenses
Costs and expenses for the first three months of fiscal 2003 increased
$1,976,000 to $76,903,000, or 2.6%, compared with the first three months of
fiscal 2002. The cost of residential properties for the first three months of
fiscal 2003 increased $156,000 to $66,051,000, or less than 1%, when compared
with the first three months of fiscal 2002. The increase in the cost of
residential properties of less than 1% compared to the increase in residential
property revenue of approximately 7.5% during the same time period is due to an
increase in gross profit margins for the first quarter of fiscal 2003 compared
to the first quarter of fiscal 2002. Gross profit margins on residential
property revenues were 23.2% for the first three months of fiscal 2003, compared
with 17.9% for the first three months of fiscal 2002. The increase in gross
profit margin on residential property revenues for the first quarter of fiscal
2003 compared with the first quarter of fiscal 2002 is a result of favorable
conditions in the homebuilding industry, resulting in strong customer demand and
positive home pricing trends. Also contributing to the increase in gross profit
margin on residential property revenue was the increase in units sales prices,
the decreased costs of construction financing and the relatively stable costs
for key building materials, when compared to the prior fiscal year.
For the first three months of fiscal 2003, selling, general and
administrative expenses increased $1,316,000 to $9,792,000, or 15.5%, when
compared with the first three months of fiscal 2002. The increase in selling,
general and administrative expenses is due to an increase in advertising of
approximately $611,000 and sales commissions and incentive compensation of
approximately $416,000 attributable to the Company's growth in residential
revenue and profit. The Company has a bonus compensation plan for its executive
officers and key employees calculated at a predetermined percentage of certain
of its consolidated pretax earnings. In addition, certain regional employees not
participating in the bonus compensation plan are awarded bonuses based upon the
pretax earnings of the respective regions. The selling, general and
administrative expenses as a percentage of residential property revenue
increased to 11.4% for the first quarter of fiscal 2003 compared to 10.6% for
the first quarter of fiscal 2002. The increase in selling, general and
administrative expenses as a percentage of residential property revenue is
partially attributable to the increase in fixed advertising costs of
approximately $611,000 when compared with the prior year quarter. In addition,
although selling, general and administrative costs in the southern region
11
remained relatively consistent with the prior year period, residential property
revenue decreased resulting in an increase in selling, general and
administrative expenses as a percentage of residential property revenue for the
first quarter of fiscal 2003.
Net Income Available for Common Shareholders
Net income available for common shareholders for the first three months
of fiscal 2003 increased $2,557,000, or 68.7%, to $6,281,000 ($.52 basic and
$.38 diluted earnings per share), compared with $3,724,000 ($.32 basic and $.23
diluted earnings per share) for the first three months of fiscal 2002. This
increase in net income available for common shareholders is attributable to
increased residential property revenue in the northern region and favorable
conditions in the homebuilding industry resulting in strong customer demand,
positive home pricing trends and improved gross margins.
Liquidity and Capital Resources
The Company requires capital to purchase and develop land, to construct
units, to fund related carrying costs and overhead and to fund various
advertising and marketing programs to facilitate sales. These expenditures
include site preparation, roads, water and sewer lines, impact fees and
earthwork, as well as the construction costs of the homes and amenities. The
Company's sources of capital include funds derived from operations, sales of
assets and various borrowings, most of which are secured. At September 30, 2002,
the Company had approximately $127,750,000 available under existing secured
revolving and construction loans for planned development expenditures. In
addition, the Company had $4,000,000 available under an existing unsecured line
of credit and working capital arrangement with Jeffrey P. Orleans, Chairman,
Chief Executive Officer and majority shareholder of the Company.
Net cash provided by operating activities for the first quarter of
fiscal 2003 was $347,000 compared to net cash used in operating activities for
the prior fiscal year period of $17,270,000. The decrease in net cash used in
operating activities is primarily attributable to a decrease in real estate held
for development and sale and an increase in net income, partially offset by an
increase in receivables, deferred charges and other assets when compared with
the prior year quarter. The decrease in real estate held for development and
sale is primarily due to the fact that in the prior year quarter the Company
purchased substantially all of the assets of Rottlund Homes of New Jersey, Inc.,
for approximately $15,800,000. Net cash used in investing activities for the
first quarter of fiscal 2003 was $264,000, compared to $702,000 for the prior
fiscal year quarter. This decrease is primarily related to a decrease in
investing activities related to the acquisition of PLC. Net cash provided by
financing activities for the first quarter of fiscal 2003 was $2,638,000,
compared to $15,647,000 for the prior fiscal year period. The decrease in net
cash provided by financing activities is primarily due to the fact that in the
prior year quarter the Company obtained financing of approximately $15,116,000
for the purchase of substantially all of the assets of Rottlund Homes of New
Jersey, Inc.
During the three months ended September 30, 2002, the Company acquired
land for future development that should yield approximately 170 building lots.
The aggregate purchase price was approximately $6,902,000, including
approximately $5,010,000 for land purchases in North Carolina, South Carolina
and Virginia.
12
As of September 30, 2002, the Company had contracted to purchase, or
has under option, land and improved lots for an aggregate purchase price of
approximately $241,497,000 that would yield approximately 6,200 homes. Including
the aforementioned lots, the Company currently controls approximately 8,500
building lots. As of September 30, 2002, the Company had incurred costs
associated with the acquisition and development of these parcels aggregating
$15,779,000, including $6,892,000 of paid deposits. Generally, the Company
structures its land acquisitions so that it has the right to cancel its
agreements to purchase undeveloped land and improved lots by forfeiture of its
deposit under the agreement. Furthermore, purchase of the properties is
contingent upon obtaining all governmental approvals and satisfaction of certain
requirements by the Company and the sellers. The Company expects to utilize
purchase money mortgages, secured financings and existing capital resources to
finance these acquisitions. Contingent on the aforementioned, the Company
anticipates completing a majority of these acquisitions during the next several
years.
The Company believes that funds generated from operations and financing
commitments from available lenders will provide the Company with sufficient
capital to meet its existing operating needs.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133. On June 23, 1999, the FASB voted to
defer the effectiveness of SFAS No. 133 for one year. SFAS No. 133 is now
effective for fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for use of derivative financial
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (i) a hedge of the exposure
to changes in the fair value of a recognized asset or liability of an
unrecognized firm commitment; (ii) a hedge of the exposure to variable cash
flows of a forecasted transaction; or (iii) in certain circumstances, a hedge of
a foreign currency exposure. On July 1, 2000, the Company adopted this
pronouncement, as amended by SFAS No. 137 and Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Hedging Activities - an Amendment of
FASB No. 133". The adoption of SFAS No. 133 did not have a material financial
impact on the financial position and results of operations of the Company
because the Company has not entered into any freestanding derivatives and has no
embedded derivatives that require bifurcation and separate treatment. However,
should the Company change its use of such derivatives, the adoption of SFAS No.
133 could have a more significant effect on the Company prospectively.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements ("SAB
101"). In June 2000, the SEC staff amended SAB 101 to provide registrants with
additional time to implement SAB 101. The Company has adopted SAB 101, as
required, in the fourth quarter of fiscal 2001. The adoption of SAB 101 did not
have a material financial impact on the financial position or results of
operations of the Company.
13
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"). The Company was
required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after that date. FIN 44 addresses practice issues related to
the application of Accounting Practice Bulletin Opinion No. 25, "Accounting for
Stock Issued to Employees". The initial adoption of FIN 44 by the Company did
not have a material financial impact on its consolidated financial position or
results of operations.
In June 2001, the FASB issued SFAS No. 141, which establishes standards for
reporting business combinations entered into after June 30, 2001 and supercedes
APB Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises". Among other things, SFAS
No. 141 requires that all business combinations be accounted for as purchase
transactions and provides specific guidance on the definition of intangible
assets which require separate treatment. The statement is applicable for all
business combinations entered into after June 30, 2001 and also requires that
companies apply its provisions relating to intangibles from pre-existing
business combinations.
In June 2001, the FASB also issued SFAS No. 142, which establishes standards for
financial accounting and reporting for intangible assets acquired individually
or with a group of other assets and for the reporting of goodwill and other
intangible assets acquired in a business acquisition subsequent to initial
accounting under SFAS No. 141. SFAS No. 142 supercedes APB Opinion No.17,
"Intangible Assets" and related interpretations. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001; however, companies with fiscal
years beginning after March 15, 2001 may elect to adopt the provision of SFAS
No. 142 at the beginning of its new fiscal year. Accordingly, the Company
elected to early adopt SFAS No. 142 effective with the beginning of its fiscal
year on July 1, 2001. The Company did not recognize any charge to earnings for
the cumulative effect upon adoption because all such intangibles relate to the
Company's recent acquisition of PLC for which no impairment was required under
SFAS No. 142. Upon adoption, such intangibles, which were being amortized over
ten years prior to adoption, are no longer amortized, but continue to be subject
to periodic review for impairment. Amortization of such intangibles was $167,000
for fiscal 2001.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), which establishes a single
accounting model for the impairment or disposal of long-lived assets, including
discontinued operations. SFAS No. 144 supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions". The provisions of SFAS No. 144
are effective in fiscal years beginning after December 15, 2001, with early
14
adoption permitted and, in general, are to be applied prospectively. The Company
adopted SFAS No. 144 effective July 1, 2002. The adoption of SFAS No. 144 did
not have a material impact on the financial position or results of operations of
the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS No. 145"). SFAS No. 145 rescinds both SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt" ("SFAS No. 4"), and the amendments to SFAS
No. 4, SFAS No. 64, "Extinguishments of Debt made to Satisfy Sinking-Fund
Requirements" ("SFAS No. 64"). Through this rescission, SFAS No. 145 eliminates
the requirement (in both SFAS No. 4 and SFAS No. 64) that gains and losses from
the extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. An entity is not
prohibited from classifying such gains and losses as extraordinary items, so
long as they meet the criteria in paragraph 20 of APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB No. 30"). However, due to the nature of the Company's
operations, it is not expected that such treatment will be available to the
Company. Any gains or losses on extinguishments of debt that were previously
classified as extraordinary items in prior periods presented that do not meet
the criteria in APB No. 30 for classification as an extraordinary item will be
reclassified to income from continuing operations. The provisions of SFAS No.
145 are effective for financial statements issued for fiscal years beginning
after May 15, 2002. The Company adopted SFAS No. 145 effective July 1, 2002. The
adoption of SFAS No. 145 did not have a material impact on the financial
position or results of operations of the Company.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"), which is effective for exit or
disposal activities initiated after December 31, 2002, with earlier application
encouraged. SFAS No. 146 addresses the accounting for costs associated with exit
or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)". The
Company adopted SFAS No. 146 effective July 1, 2002. The adoption of SFAS No.
146 did not have a material impact on the financial position or results of
operations of the Company.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
In addition to historical information, this report contains statements
relating to future events or our future results. These statements are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and are subject to the Safe Harbor provisions created by
statute. Generally words such as "may", "will", "should", "could", "anticipate",
"expect", "intend", "estimate", "plan", "continue", and "believe" or the
negative of or other variation on these and other similar expressions identify
15
forward-looking statements. These forward-looking statements are made only as of
the date of this report. The Company does not undertake to update or revise the
forward-looking statements, whether as a result of new information, future
events or otherwise.
Forward-looking statements are based on current expectations and
involve risks and uncertainties and the Company's future results could differ
significantly from those expressed or implied by the Company's forward-looking
statements.
Many factors, including those listed below, could cause the Company's
actual consolidated results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company:
o changes in consumer confidence due to perceived uncertainty of future
employment opportunities and other factors;
o competition from national and local homebuilders in the Company's
market areas;
o changes in price and availability of building material;
o changes in mortgage interest rates charged to buyers of the Company's
homes;
o changes in the availability and cost of financing for the Company's
operations, including land acquisitions;
o revisions in federal, state and local tax laws which provide incentives
for home ownership;
o inability to successfully integrate acquired businesses;
o delays in obtaining land development permits as a result of (i)
federal, state and local environmental and other land development
regulations, (ii) actions taken or failed to be taken by governmental
agencies having authority to issue such permits, and (iii) opposition
from third parties;
o increased cost of suitable development land; and
o possible liabilities relating to environmental laws or other applicable
regulatory provisions.
16
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company, due to adverse
changes in financial and commodity market prices and interest rates. The
Company's principal market risk exposure continues to be interest rate risk. A
majority of the Company's debt is variable based on LIBOR and prime rate, and,
therefore, affected by changes in market interest rates. There have been no
material adverse changes to the Company's (1) exposure to risk and (2)
management of these risks, since June 30, 2002.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Within 90 days prior to the date of this report (the "Evaluation
Date"), the Company's Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and
15d-14(c)). Based on that evaluation, these officers have concluded that, as of
the Evaluation Date, the Company's disclosure controls and procedures were
effective.
Changes in internal controls
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the Evaluation Date.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits.
---------
99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.3 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
--------------------
None.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORLEANS HOMEBUILDERS, INC.
(Registrant)
November 12, 2002 /s/ Michael T. Vesey
--------------------
Michael T. Vesey
President and Chief Operating Officer
November 12, 2002 /s/ Joseph A. Santangelo
------------------------
Joseph A. Santangelo
Treasurer, Secretary and
Chief Financial Officer
18
CERTIFICATIONS
I, Jeffrey P. Orleans, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Orleans
Homebuilders, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All signification deficiencies in the design or operation
of internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Jeffrey P. Orleans
----------------------------------------
Jeffrey P. Orleans
Chief Executive Officer
19
CERTIFICATIONS
I, Michael T. Vesey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Orleans
Homebuilders, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All signification deficiencies in the design or operation
of internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Michael T. Vesey
----------------------------------------
Michael T. Vesey
President and Chief Operating Officer
20
CERTIFICATIONS
I, Joseph A. Santangelo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Orleans
Homebuilders, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All signification deficiencies in the design or operation
of internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Joseph A. Santangelo
-----------------------------------------
Joseph A. Santangelo
Chief Financial Officer
21
EXHIBIT INDEX
99.1* Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2* Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3* Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------------
* Exhibits included with this filing.