UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD__________ TO __________.
Commission File No. 1-6830
ORLEANS HOMEBUILDERS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 59-0874323
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. No.)
One Greenwood Square, Suite 101
3333 Street Road
Bensalem, PA 19020
----------------------------------------
(Address of principal executive offices)
Telephone: (215) 245-7500
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No _X_
Number of shares of common stock, par value $0.10 per share, outstanding as of
May 5, 2003: 12,667,565
(excluding 697,232 shares held in Treasury).
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
PAGE
----
PART 1 - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (unaudited)
- -------
Consolidated Balance Sheets at March 31, 2003
and June 30, 2002 1
Consolidated Statements of Operations and Changes
in Retained Earnings for the Three and Nine Months
Ended March 31, 2003 and 2002 2
Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2003 and 2002 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market
- ------- Risk 23
Item 4. Controls and Procedures 23
- -------
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K 24
- -------
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
(Unaudited)
March 31, June 30,
2003 2002
------------- -----------
Assets
Cash and cash equivalents $ 5,606 $ 7,257
Restricted cash - customer deposits 13,825 9,230
Real estate held for development and sale:
Residential properties completed or under construction 122,465 112,279
Land held for development or sale and improvements 81,936 82,699
Property and equipment, at cost, less accumulated depreciation 2,126 1,726
Intangible assets, net of amortization 3,906 3,718
Receivables, deferred charges and other assets 34,452 21,590
--------- ---------
Total Assets $ 264,316 $ 238,499
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ 24,139 $ 24,199
Accrued expenses 23,016 23,232
Customer deposits 15,116 9,775
Mortgage and other note obligations primarily secured by real
estate held for development and sale 119,281 113,058
Notes payable - related parties 2,500 3,750
Other notes payable 38 1,224
Deferred income taxes 618 618
--------- ---------
Total Liabilities 184,708 175,856
--------- ---------
Commitments and contingencies
Redeemable common stock 999 988
--------- ---------
Shareholders' Equity:
Preferred stock, $1 par, 500,000 shares authorized:
Series D convertible preferred stock, 7% cumulative annual
dividend, $30 stated value, issued and outstanding 100,000
shares ($3,000,000 liquidation preference) 3,000 3,000
Common stock, $.10 par, 20,000,000 shares authorized,
13,364,797 and 12,698,131 shares issued at
March 31, 2003 and June 30, 2002, respectively 1,337 1,270
Capital in excess of par value - common stock 18,659 17,726
Retained earnings 56,419 40,502
Treasury stock, at cost (697,232 and 812,232 shares held at
March 31, 2003 and June 30, 2002, respectively) (806) (843)
--------- ---------
Total Shareholders' Equity 78,609 61,655
--------- ---------
Total Liabilities and Shareholders' Equity $ 264,316 $ 238,499
========= =========
See notes to consolidated financial statements
- 1 -
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Statements of Operations
and Changes in Retained Earnings
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
---------- ---------- ---------- ---------
Earned revenues
Residential properties $ 76,991 $ 78,216 $ 249,219 $ 245,720
Land sales - 27 - 80
Other income 1,100 774 3,440 2,433
-------- -------- --------- ---------
78,091 79,017 252,659 248,233
-------- -------- --------- ---------
Costs and expenses
Residential properties 59,835 63,765 193,093 200,350
Land sales - 35 - 102
Other 651 655 2,474 1,912
Selling, general and administrative 10,274 8,921 30,343 27,352
Interest
Incurred 1,448 1,746 4,487 6,042
Less capitalized (1,297) (1,672) (4,253) (5,860)
-------- -------- --------- ---------
70,911 73,450 226,144 229,898
-------- -------- --------- ---------
Income from operations before income taxes 7,180 5,567 26,515 18,335
Income tax expense 3,092 2,128 10,440 7,029
-------- -------- --------- ---------
Net income 4,088 3,439 16,075 11,306
Preferred dividends 53 53 158 158
-------- -------- --------- ---------
Net income available for common shareholders 4,035 3,386 15,917 11,148
Retained earnings, at beginning of period 52,384 30,561 40,502 22,799
-------- -------- --------- ---------
Retained earnings, at end of period $ 56,419 $ 33,947 $ 56,419 $ 33,947
======== ======== ======== ========
Basic earnings per share $ 0.32 $ 0.29 $ 1.29 $ 0.96
======== ======== ======== ========
Diluted earnings per share $ 0.25 $ 0.21 $ 0.97 $ 0.69
======== ======== ======== ========
See notes to consolidated financial statements
- 2 -
Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended
March 31,
2003 2002
-------------- -------------
Cash flows from operating activities:
Net income $ 16,075 $ 11,306
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 630 365
Noncash compensation 11 34
Changes in operating assets and liabilities:
Restricted cash - customer deposits (4,595) (241)
Real estate held for development and sale (9,423) (30,079)
Receivables, deferred charges and other assets (12,862) (4,003)
Accounts payable and other liabilities (276) 933
Customer deposits 5,341 40
-------- --------
Net cash used in operating activities (5,099) (21,645)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,030) (936)
Acquisition of PLC, net of cash acquired (188) (775)
-------- --------
Net cash used in investing activities (1,218) (1,711)
-------- --------
Cash flows from financing activities:
Borrowings from loans secured by real estate assets 178,285 192,273
Repayment of loans secured by real estate assets (172,062) (167,868)
Borrowings from other note obligations - 17,632
Repayment of other note obligations (1,436) (24,274)
Stock options exercised 37 86
Preferred stock dividend (158) (158)
-------- --------
Net cash provided by financing activities 4,666 17,691
-------- --------
Net decrease in cash and cash equivalents (1,651) (5,665)
Cash and cash equivalents at beginning of period 7,257 13,560
-------- --------
Cash and cash equivalents at end of period $ 5,606 $ 7,895
======== ========
Supplemental disclosure of cash flow activities:
Interest paid, net of amounts capitalized $ 234 $ 182
======== ========
Income taxes paid $ 9,222 $ 5,880
======== ========
See notes to 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, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133" ,
SFAS No. 138, "Accounting for Certain Hedging Activities - an Amendment of
FASB No. 133" and SFAS No. 149 "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities". 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
4
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.
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
supersedes 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 supersedes 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 Parker & Lancaster Corporation ("PLC")
5
for which no impairment was required under SFAS No. 142. Upon adoption,
such intangibles, which were being amortized over ten years prior to
adoption, are no longer amortized, but continue to be subject to periodic
review for impairment. Amortization of such intangibles was $167,000 for
fiscal 2001.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which
establishes a single accounting model for the impairment or disposal of
long-lived assets, including discontinued operations. SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and APB Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions". The provisions of SFAS
No. 144 are effective in fiscal years beginning after December 15, 2001,
with early adoption permitted and, in general, are to be applied
prospectively. The Company adopted SFAS No. 144 effective July 1, 2002.
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
6
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.
In December 2002 the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure". SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation and amends the disclosure requirements
of SFAS No. 123. The transition provisions of this Statement are effective
for fiscal years ending after December 15, 2002, and the disclosure
requirements of the Statement are effective for interim periods beginning
after December 15, 2002. The Company adopted SFAS No. 148 effective July
1, 2002. The adoption of SFAS No. 148 did not have a material impact on
the financial position or results of operations of the Company.
In January 2003, FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an interpretation of ARB
51". FIN 46 provides guidance on identifying entities for which control is
achieved through means other than through voting rights ("variable
interest entities or "VIE") and how to determine when and which business
enterprise should consolidate the VIE. In addition, FIN 46 requires both
the primary beneficiary and all other enterprises with a significant
variable interest in a VIE to make additional disclosures. The
transitional disclosure requirements take effect immediately and are
required for all financial statements initially issued after January 31,
2003. Immediate consolidation is required for VIEs entered into or
modified after February 1, 2003 in which the Company is deemed the primary
beneficiary. For VIEs in which the Company entered into prior to February
1, 2003, consolidation will be required by the Company effective with the
Company's first quarter of fiscal 2004. The adoption of FIN 46 is not
expected to 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
weighted average number of common shares outstanding. Basic shares
outstanding includes the pro rata portion of unconditional shares issuable
as part of the purchase price of the PLC acquisition 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
7
earnings per common share and diluted earnings per common share, and a
reconciliation of the numerator and denominator used in the computation
for the three and nine months ended March 31, 2003 and 2002, respectively,
are shown in the following table.
Three Months Ended Nine Months Ended
March 31,
----------------------------------------------------
2003 2002 2003 2002
---------- ----------- ------------ ------------
(Unaudited)
(in thousands)
Weighted average shares issued:
Total common shares issued 13,365 12,698 12,915 12,698
Unconditional shares issuable 137 205 160 205
Less: Average treasury shares outstanding 707 1,252 753 1,266
------- ------- ------- -------
Basic EPS shares 12,795 11,651 12,322 11,637
Effect of assumed shares issued under
treasury stock method for stock options 519 934 517 812
Effect of assumed conversion of
Convertible Subordinated 7% Note(1) 1,333 2,000 1,783 2,000
Effect of assumed conversion of
$3 million Series D Preferred Stock 2,000 2,000 2,000 2,000
------- ------- ------- -------
Diluted EPS shares 16,647 16,585 16,622 16,449
======= ======= ======= =======
Net income available for common shareholders $ 4,035 $ 3,386 $ 15,917 $ 11,148
Effect of assumed conversion of $3 million
Series D Preferred Stock 53 53 158 158
Effect of assumed conversion of
Convertible Subordinated 7% Note(1) 22 33 87 98
------- ------- ------- -------
Adjusted net income for diluted EPS $ 4,110 $ 3,472 $ 16,162 $ 11,404
======= ======= ======= =======
(1) On January 1, 2003 the first annual installment of $1,000,000 was
converted into 666,666 shares of the Company's common stock. See Note D
for a further discussion.
(C) Residential Properties Completed or Under Construction:
Residential properties completed or under construction consist of the
following:
March 31, 2003 June 30, 2002
---------------- -----------------
(Unaudited)
(in thousands)
Under contract for sale $ 80,519 $ 76,885
Unsold 41,946 35,394
---------- ----------
$ 122,465 $ 112,279
========== ==========
8
(D) Mortgage and Other Note Obligations:
The Company holds a $3,000,000 Convertible Subordinated 7% Note dated
August 8, 1996 issued to Jeffrey P. Orleans, Chairman and Chief Executive
Officer of the Company. This note is included in the Notes payable -
related parties category of the balance sheet and is convertible into
Orleans Homebuilders, Inc. common stock at $1.50 per share. Interest is
payable quarterly and principal is due in annual installments of
$1,000,000 beginning January 1, 2003. With prior notice given, as of
January 1, 2003, Mr. Orleans converted the first annual installment of
$1,000,000 into 666,666 shares of the Company's common stock.
(E) Litigation:
In January 2003, a settlement in the amount of $9,000,000 was reached in
an action brought against the Company, as defendant, arising out of an
injury to a workman who was injured during the construction phase of a
home at a Company project located in Newtown, Bucks County, Pennsylvania.
The settlement was paid entirely by the Company's liability insurance
carrier as follows:
A lump sum payment of approximately $5,400,000 was paid to the plaintiff.
In addition, an annuity contract was purchased to cover a $5,000 per month
payment due through 2033, such payment increasing annually by 3%. Further,
a payment of approximately $2,100,000 was paid to a medical trust account.
The medical trust account will be used to fund, on an annual basis through
2033, a medical custodial account for the benefit of the plaintiff. The
medical custodial account was funded with an initial payment of $200,000.
During fiscal 2003, a class action lawsuit was filed against Orleans
Homebuilders, Inc. and certain of its unnamed affiliates, in Burlington
County, New Jersey. The Township of Mount Laurel intervened as a party in
the lawsuit. The lawsuit alleged, in part, that certain townhomes and
condominiums designed and constructed by Orleans Homebuilders, Inc. and
certain of its affiliates did not have sufficient combustion air in the
utility rooms, thereby causing a carbon monoxide build-up in the homes. In
January 2003, the Company reached a settlement of the lawsuit. The
pertinent terms of the settlement are as follows:
Approximately 3,600 homeowners will be given the opportunity to have their
homes inspected by the Township of Mount Laurel to determine whether the
utility room has adequate combustion air as required by the applicable
construction code in effect at the time the home was constructed. If the
inspection reveals inadequate combustion air, the Company, at its sole
cost, will repair the home. In addition, those homeowners given the
opportunity to have their homes inspected also will be given the
9
opportunity to receive a carbon monoxide detector at the Company's sole
cost and expense. The Township of Mount Laurel will act as administrator
and the Company has agreed to pay the township for the homes inspected, up
to an aggregate of $100,000. Further, approximately 1,700 homeowners will
be given a one time opportunity to have their gas-fired appliances
inspected and cleaned at the Company's sole cost and expense. The Company
has agreed to pay plaintiffs' attorneys' fees and costs of $445,000.
The Company has reached a settlement with its insurer to partially cover
the costs of the settlement. The Company has accrued estimated costs of
approximately $500,000, net of insurance proceeds, in connection with the
settlement agreement.
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.
10
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") 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 sets forth certain details as to residential sales activity
for the periods listed below. The backlog information is as of the end of each
period listed.
Nine Months Ended March 31,
2003 2002
---------------------------- ------------------------------
(Unaudited)
(Dollars in thousands)
Northern Region Average Average
New Jersey and Pennsylvania: Amount Homes Price Amount Homes Price
Revenues earned $ 164,768 537 $ 307 $ 158,855 581 $ 273
New orders 201,354 545 369 155,865 568 274
Backlog 187,210 475 394 141,650 464 305
Southern Region
North Carolina, South Carolina
and Virginia:
Revenues earned $ 84,451 301 $ 281 $ 86,865 362 $ 240
New orders 127,024 424 300 90,194 353 256
Backlog 98,013 303 323 59,534 204 292
Combined Regions
Revenues earned $ 249,219 838 $ 297 $ 245,720 943 $ 261
New orders 328,378 969 339 246,059 921 267
Backlog 285,223 778 367 201,184 668 301
11
Three Months Ended March 31,
2003 2002
---------------------------- ------------------------------
(Unaudited)
(Dollars in thousands)
Northern Region Average Average
New Jersey and Pennsylvania: Amount Homes Price Amount Homes Price
Revenues earned $ 46,392 147 $ 316 $ 50,964 192 $ 265
New orders 74,077 201 369 55,708 197 283
Backlog 187,210 475 394 141,650 464 305
Southern Region
North Carolina, South Carolina
and Virginia:
Revenues earned $ 30,599 111 $ 276 $ 27,252 119 $ 229
New orders 56,306 185 304 39,396 150 263
Backlog 98,013 303 323 59,534 204 292
Combined Regions
Revenues earned $ 76,991 258 $ 298 $ 78,216 311 $ 251
New orders 130,383 386 338 95,104 347 274
Backlog 285,223 778 367 201,184 668 301
Three Months and Nine Months Ended March 31, 2003 and 2002
----------------------------------------------------------
Orders and Backlog
- ------------------
The dollar value of new orders for the nine months ended March 31, 2003
increased $82,319,000, or approximately 33%, to $328,378,000 on 969 homes
compared to $246,059,000 on 921 homes for the nine months ended March 31, 2002.
The increase in the dollar value of new orders is a result of favorable
conditions in the homebuilding industry, most notably, favorable financing
conditions. In addition, the average price per unit of new orders in the
combined regions increased approximately 27%, to $339,000 per home for the first
nine months of fiscal 2003, compared to $267,000 per home for the first nine
months of fiscal 2002. This change in the average price per unit of new orders
is due to a change in the Company's product offerings, to more single family
homes, as well as an increase in unit sales prices due to favorable economic
conditions in the homebuilding industry. Unit sales prices have increased at the
majority of communities open during the first nine months of fiscal 2003, when
compared with the same communities and products offered for sale in the first
nine months of fiscal 2002. The number of new orders for the nine months ended
March 31, 2003 decreased in the northern region due to a change in the Company's
product offerings to more single family homes when compared with the prior
fiscal period. The number of new orders also decreased due to delays in the
opening of new communities during fiscal 2003, as a result of increasingly
restrictive regulations and moratoriums by governments which the Company
12
believes is due to the intensity of development in recent years. The number of
new orders for the nine months ended March 31, 2003 increased in the southern
region as the Company continues to expand in this region as a result of its
October 2000 acquisition of PLC. In addition, the Company has increased its
advertising and marketing in the southern region to support its expansion in
this market.
The dollar value of new orders for the three months ended March 31,
2003 increased $35,279,000, or approximately 37%, to $130,383,000 on 386 homes
compared to $95,104,000 on 347 homes for the three months ended March 31, 2002.
The dollar value of new orders increased due to favorable conditions in the
homebuilding industry and a change in the Company's product offerings to more
single family homes, as noted in the paragraph above. In addition, the number of
new orders for the three months ended March 31, 2003 increased approximately 11%
compared with the prior fiscal year period primarily due to activity in the
Company's southern region. The Company continues to expand in the southern
region as a result of its October 2000 acquisition of PLC. Furthermore, the
Company has increased its advertising and marketing in the southern region to
support its expansion in this market.
The dollar backlog at March 31, 2003, increased $84,039,000, or
approximately 42%, to $285,223,000 on 778 homes compared to the backlog at March
31, 2002 of $201,184,000 on 668 homes. The increase in backlog dollars is
primarily attributable to favorable economic conditions for the homebuilding
industry in the regions where the Company operates. These favorable economic
conditions, most notably favorable financing conditions, have resulted in
positive home pricing trends and consistent customer demand. In addition, harsh
winter weather conditions in the regions in which the Company operates
contributed to a decrease in deliveries for the third quarter of fiscal year
2003 when compared to the prior fiscal year period, and also played a role in
the increase in the backlog at March 31, 2003. As a result of the strong backlog
and due to the harsh winter weather conditions experienced in the third quarter,
which delayed deliveries at many projects, the Company expects an increase in
fourth quarter revenues. The fiscal 2003 fourth quarter revenue increase is
expected to be at least 25% when compared to the prior year fourth quarter
revenue of $105,340,000 as the backlog and delayed deliveries are realized
through actual closings during the quarter.
Operating Revenues
- ------------------
Earned revenues for the first nine months of fiscal 2003 increased
$4,426,000 to $252,659,000, or 1.8%, compared to the first nine months of fiscal
2002. Revenues from the sale of residential homes included 838 homes totaling
$249,219,000 during the first nine months of fiscal 2003, as compared to 943
homes totaling $245,720,000 during the first nine months of fiscal 2002. The
increase in residential revenue earned is due to an increase in northern region
residential revenue earned of approximately $5,913,000, partially offset by a
decrease in southern region residential revenue earned of approximately
$2,414,000, compared with the prior nine months ended March 31, 2002. The
decrease in southern region residential revenue earned is due to a shift in
homebuyer patterns to more pre-construction sales rather than pre-built
specification home sales. Fewer homes have been delivered in the southern region
in the first nine months of fiscal 2003 when compared with the same period in
fiscal 2002 as pre-construction new orders take longer to fulfill than new
orders for pre-built specification homes. In addition, harsh winter weather
conditions in the regions in which the Company operates have contributed to a
decrease in the number of homes delivered for the first nine months of fiscal
2003 compared to the first nine months of fiscal 2002. The overall increase in
residential revenue earned is attributable to an increase in the average selling
price per home for the first nine months of fiscal 2003, compared to the
13
comparable nine months of the prior fiscal year. This change in the average
selling price per home is due to a change in the Company's product offerings in
the northern region, to more single family homes, as well as an overall increase
in unit sales prices due to favorable economic conditions in the homebuilding
industry. Furthermore, a shortage of approved building lots in key markets has
resulted in additional favorable pricing conditions for homebuilders. The
overall average selling price per home delivered in the first nine months of
fiscal 2003 increased by approximately 13.8% to $297,000 per home, compared to
$261,000 per home for the first nine months of fiscal 2002. The overall average
sales price per home varies from year-to-year depending upon product offerings,
among other factors. Average sales prices have increased at the majority of
communities open during the first nine months of fiscal 2003, when compared with
the same communities and products offered for sale in the first nine months of
fiscal 2002.
Earned revenues for the third quarter ended March 31, 2003 decreased
$926,000, or 1.2%, to $78,091,000, compared to the third quarter ended March 31,
2002. Revenues from the sale of residential homes included 258 homes totaling
$76,991,000 during the third quarter of fiscal 2003, as compared to 311 homes
totaling $78,216,000 during the third quarter of fiscal 2002. The decrease in
residential revenue earned is due to a decrease in the number of homes delivered
in the third quarter of fiscal year 2003 compared to the prior fiscal year
quarter, partially offset by an increase in unit sales prices. A contributing
factor to the decrease in the number of homes delivered was the harsh winter
weather conditions in the regions in which the Company operates compared to the
relatively mild winter weather conditions of a year ago. In addition, the
decrease in the number of homes delivered in the northern region is due to a
change in the Company's product offerings to more single family homes, which
typically take longer to construct and deliver than multi-family homes. The
decrease in the number of homes delivered in the southern region is due to a
shift in homebuyer patterns to more pre-construction sales rather than pre-built
specification home sales. Fewer homes have been delivered in the southern region
in the third quarter of fiscal 2003 when compared with the same period in fiscal
2002 as pre-construction new orders take longer to fulfill than new orders for
pre-built specification homes. The impact of the decrease in the number of homes
delivered was offset by an increase in the average selling price per home for
the third 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 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 third
quarter of fiscal 2003 increased by approximately 18.7% to $298,000 per home,
compared to $251,000 per home for the third quarter of fiscal 2002. The overall
average sales price per home varies from year-to-year depending upon product
14
offerings, among other factors. Average sales prices have increased at the
majority of communities opened during the third quarter of fiscal 2003, when
compared with the same communities and units offered for sale in the third
quarter of fiscal 2002.
Costs and Expenses
- ------------------
Costs and expenses for the first nine months of fiscal 2003 decreased
$3,754,000, or 1.6%, to $226,144,000, compared with the first nine months of
fiscal 2002. The cost of residential properties for the first nine months of
fiscal 2003 decreased $7,257,000 to $193,093,000, or 3.6%, when compared with
the first nine months of fiscal 2002. The decrease in the cost of residential
properties compared to the increase in residential property revenue of
approximately 1.4% during the same time period is due to an increase in gross
profit margins for the first nine months of fiscal 2003 compared to the first
nine months of fiscal 2002. Gross profit margins on residential property
revenues were 22.5% for the first nine months of fiscal 2003, compared with
18.5% for the first nine months of fiscal 2002. The increase in gross profit
margin on residential property revenues for the first nine months of fiscal 2003
compared with the first nine months 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 decreased costs of construction
financing and the relatively stable costs for key building materials, when
compared to the prior fiscal year period.
For the first nine months of fiscal 2003, selling, general and
administrative expenses increased $2,991,000 to $30,343,000, or 10.9%, when
compared with the first nine months of fiscal 2002. The increase in selling,
general and administrative expenses is primarily attributable to an increase in
advertising costs of approximately $1,482,000. The increase in advertising costs
is primarily related to the southern region as the Company continues its efforts
to expand in this area and shift customers' buying patterns to more
pre-construction sales rather than pre-built specification homes. In addition,
the increase in selling, general and administrative expense is attributable to
an increase in sales commissions and incentive compensation of approximately
$944,000 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 12.2% for the first nine months of fiscal 2003 compared to 11.1%
for the first nine months of fiscal 2002. The increase in selling, general and
administrative expenses as a percentage of residential property revenue is
primarily attributable to the increase in fixed advertising costs, related to
the southern region as noted above, and an increase in incentive compensation as
a result of the overall increased profitability of the Company when compared
with the prior year comparable period.
15
Costs and expenses for the third quarter of fiscal 2003 decreased
$2,539,000 to $70,911,000, or 3.5%, compared with the third quarter of fiscal
2002. The cost of residential properties for the third quarter of fiscal 2003
decreased $3,930,000 to $59,835,000, or 6.2%, when compared with the third
quarter of fiscal 2002. This decrease in the cost of residential properties
compared to a lesser decrease in residential property revenue of approximately
1.6% during the same time period is due to an increase in gross profit margins
for the third quarter of fiscal 2003 compared to the third quarter of fiscal
2002. Gross profit margins on residential property revenues were 22.3% for the
third quarter of fiscal 2003, compared with 18.5% for the third quarter of
fiscal 2002. The increase in gross profit margin on residential property
revenues for the third quarter of fiscal 2003 compared with the third 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 decreased costs of construction financing and the relatively
stable costs for key building materials, when compared to the prior fiscal year
quarter.
For the third quarter of fiscal 2003, selling, general and
administrative expenses increased $1,353,000 to $10,274,000, or 15.2%, when
compared with the third quarter of fiscal 2002. The increase in selling, general
and administrative expenses is primarily attributable to an increase in selling
expense of approximately $802,000. The increase in selling expense is primarily
related to the southern region as the Company continues its efforts to expand in
this area and shift customers' buying patterns to more pre-construction sales
rather than pre-built specification homes. In addition, the increase in selling,
general and administrative expense is attributable to an increase in commissions
and incentive compensation of approximately $318,000 attributable to the
Company's increased profitability. 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 13.3% for the third quarter of fiscal 2003 compared to
11.4% for the third quarter of fiscal 2002. The increase in selling, general and
administrative expense as a percentage of residential property revenue is
primarily attributable to a decrease in earned revenues, an increase in fixed
advertising costs, related to the southern region as noted above, and an
increase in incentive compensation as a result of the overall increased
profitability of the Company when compared with the prior year comparable
period.
Income Tax Expense
- ------------------
As a result of changes in state tax laws in the states in which the
Company operates, during the third quarter of fiscal year 2003, the Company
adjusted its effective tax rate on a cumulative basis to 39.4% of income from
operations before income taxes for the nine months ending March 31, 2003. This
change results in an increase in income tax expense of $285,000 for the nine
months ending March 31, 2003 when compared with the effective tax rate of 38.3%
for the nine months ending March 31, 2002.
16
The cumulative change to the effective income tax rate for fiscal year
2003 results in an increase in income tax expense and an effective income tax
rate of 43.1% for the third quarter of fiscal year 2003 compared with a 38.2%
effective income tax rate for the third quarter of fiscal year 2002.
Net Income Available for Common Shareholders
- --------------------------------------------
Net income available for common shareholders for the first nine months
of fiscal 2003 increased $4,769,000, or 42.8%, to $15,917,000 ($1.29 basic and
$.97 diluted earnings per share), compared with $11,148,000 ($.96 basic and $.69
diluted earnings per share) for the first nine months of fiscal 2002. Net income
available for common shareholders for the third quarter of fiscal 2003 increased
$649,000, or 19.2%, to $4,035,000 ($.32 basic and $.25 diluted earnings per
share), compared with $3,386,000 ($.29 basic and $.21 diluted earnings per
share) for the third quarter of fiscal 2002. This increase in net income
available for common shareholders is primarily attributable to increased
residential property revenue in the northern region and favorable conditions in
the homebuilding industry resulting in strong customer demand, positive home
pricing trends and improved gross margins.
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 March 31, 2003, the
Company had approximately $116,931,000 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 used in operating activities for the first nine months of
fiscal 2003 was $5,099,000 compared to net cash used in operating activities for
the prior fiscal year period of $21,645,000. 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 customer deposits and net income,
partially offset by an increase in receivables, deferred charges and other
assets and a decrease in accounts payable and other liabilities when compared
with the prior fiscal year period. The decrease in real estate held for
development and sale is primarily due to the fact that in the prior year period
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 nine months of fiscal 2003 was $1,218,000, compared to
$1,711,000 for the prior fiscal year period. 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 nine months of fiscal 2003
was $4,666,000, compared to $17,691,000 for the prior fiscal year period. The
decrease in net cash provided by financing activities is partially due to the
17
fact that in the prior year period 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. Additionally, the reduction in the number of
units delivered has resulted in less financing activity in the first nine months
of the current fiscal year when compared with the same period in the prior
fiscal year.
During the nine months ended March 31, 2003, the Company acquired land
for future development that is expected to yield approximately 800 building
lots. The aggregate purchase price was approximately $30,148,000, including
approximately $27,846,000 for land purchases in North Carolina, South Carolina
and Virginia. In April 2003, the Company acquired approximately 410 additional
building lots for an aggregate purchase price of approximately $15,840,000.
As of March 31, 2003, excluding the lots purchased in April 2003, the
Company had contracted to purchase, or has under option, land and improved lots
for an aggregate purchase price of approximately $282,364,000 that are expected
to yield approximately 6,300 homes. Including the aforementioned lots,
subsequently purchased and those under option to purchase, the Company currently
controls approximately 9,100 building lots. As of March 31, 2003, the Company
had incurred costs associated with the acquisition and development of the
approximately 6,300 homes, aggregating $21,210,000, including $10,245,000 of
paid deposits. Generally, the Company structures its land acquisitions so that
it has the right to cancel its agreements to purchase undeveloped land and
improved lots by forfeiture of its deposit under the agreement. Furthermore,
generally the purchase of the properties is contingent upon obtaining all
governmental approvals and satisfaction of certain requirements by the Company
and the sellers. However, on occasion the Company obtains land without having
obtained all governmental approvals. In these circumstances, the Company
performs reasonable due diligence to ascertain the likelihood that governmental
approvals will be granted. The Company expects to utilize purchase money
mortgages, secured financings and existing capital resources to finance these
acquisitions. Contingent on the aforementioned, the Company anticipates
completing a majority of these acquisitions during the next several years.
The Company believes that funds generated from operations and financing
commitments from available lenders will provide the Company with sufficient
capital to meet its existing operating needs.
Off-Balance Sheet Arrangements, Contractual Obligations and Commitments
- -----------------------------------------------------------------------
For a discussion of the Company's off-balance sheet arrangements,
contractual obligations and commitments, please see the Off-Balance Sheet
Arrangements, Contractual Obligations and Commitments section under Item 7,
Management's Discussion and Analysis of Financial Conditions and Results of
Operations in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2002.
18
Critical Accounting Policies
- ----------------------------
For a discussion of the Company's critical accounting policies, please
see the Critical Accounting Policies section under Item 7, Management's
Discussion and Analysis of Financial Conditions and Results of Operations in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002.
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, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" , SFAS No. 138, "Accounting for Certain Hedging Activities -
an Amendment of FASB No. 133" and SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". 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.
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.
19
In June 2001, the FASB issued SFAS No. 141, which establishes standards
for reporting business combinations entered into after June 30, 2001 and
supersedes 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 supersedes 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 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
20
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.
In December 2002 the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation and amends the disclosure requirements of SFAS No. 123.
The transition provisions of this Statement are effective for fiscal years
ending after December 15, 2002, and the disclosure requirements of the Statement
are effective for interim periods beginning after December 15, 2002. The Company
adopted SFAS No. 148 effective July 1, 2002. The adoption of SFAS No. 148 did
not have a material impact on the financial position or results of operations of
the Company.
In January 2003, FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51". FIN
46 provides guidance on identifying entities for which control is achieved
through means other than through voting rights ("variable interest entities or
"VIE") and how to determine when and which business enterprise should
consolidate the VIE. In addition, FIN 46 requires both the primary beneficiary
and all other enterprises with a significant variable interest in a VIE to make
additional disclosures. The transitional disclosure requirements take effect
immediately and are required for all financial statements initially issued after
January 31, 2003. Immediate consolidation is required for VIEs entered into or
modified after February 1, 2003 in which the Company is deemed the primary
beneficiary. For VIEs in which the Company entered into prior to February 1,
2003, consolidation will be required by the Company effective with the Company's
first quarter of fiscal 2004. The adoption of FIN 46 is not expected to have a
material impact on the financial position or results of operations of the
Company.
21
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
- -------------------------------------------------------------------------
In addition to historical information, this report contains statements
relating to future events or our future results. These statements are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and are subject to the Safe Harbor provisions created by
statute. Generally words such as "may", "will", "should", "could", "anticipate",
"expect", "intend", "estimate", "plan", "continue", and "believe" or the
negative of or other variation on these and other similar expressions identify
forward-looking statements. These forward-looking statements are made only as of
the date of this report. The Company does not undertake to update or revise the
forward-looking statements, whether as a result of new information, future
events or otherwise.
Forward-looking statements are based on current expectations and
involve risks and uncertainties and the Company's future results could differ
significantly from those expressed or implied by the Company's forward-looking
statements.
Many factors, including those listed below, could cause the Company's
actual consolidated results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company:
o changes in consumer confidence due to perceived uncertainty of future
employment opportunities and other factors;
o competition from national and local homebuilders in the Company's
market areas;
o changes in price and availability of building materials;
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;
22
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.
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, President and Chief Operating
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.
23
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.
99.4 Press Release Announcing Results of Operations for the
Nine Months Ending March 31, 2003 and Outlook for the
Fourth Quarter.
(b) Reports on Form 8-K.
--------------------
None.
24
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORLEANS HOMEBUILDERS, INC.
(Registrant)
May 14, 2003 Michael T. Vesey
--------------------
Michael T. Vesey
President and Chief Operating Officer
May 14, 2003 Joseph A. Santangelo
------------------------
Joseph A. Santangelo
Treasurer, Secretary and
Chief Financial Officer
25
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 significant 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
26
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: May 14, 2003
Jeffrey P. Orleans
-------------------------------
Jeffrey P. Orleans
Chief Executive Officer
27
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 significant 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
28
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: May 14, 2003
Michael T. Vesey
----------------------------------
Michael T. Vesey
President and Chief Operating
Officer
29
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 significant 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
30
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: May 14, 2003
Joseph A. Santangelo
----------------------------------
Joseph A. Santangelo
Chief Financial Officer
31
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.
99.4* Press Release Announcing Results of Operations for the Nine Months
Ending March 31, 2003 and Outlook for the Fourth Quarter.
- --------------------------------------------------------------------------------
* Exhibits included with this filing.