ORLEANS HOMEBUILDERS, INC
ONE GREENWOOD SQUARE - SUITE 101
3333 STREET ROAD
BENSALEM, PA 19020
215-245-7500
November 1, 2004
VIA EDGAR AND COURIER
- ---------------------
John Hartz
Senior Assistant Chief Accountant
United States Security and Exchange Commission
Division of Corporation Finance
450 Fifth Street, NW
Mail Stop 4-4
Washington, D.C. 20549-0404
Re: Orleans Homebuilders, Inc. (the "Company")
Form 10-K for FYE June 30, 2004
Form 8-K, filed August 19, 2004
Form 8-K/A, filed October 12, 2004
Dear Mr. Hartz:
This letter responds to the comments in your letter to the Company,
dated October 18, 2004. The comments in your letter relate to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2004, Current
Report on Form 8-K filed on August 19, 2004, and Current Report on Form 8-K/A
filed on October 12, 2004.
Form 10-K
- ---------
New Orders and Backlog
1. We note your emphasis on new orders and ending backlog in the
description of your business and in your MD&A analysis. Given the
importance of theses measures to your business, we believe that you
should provide some additional information to your readers including,
but not limited, to the following items:
o Tell us, and disclose in future filings, at what point a sales
contract or potential sale is classified as a "new order" for
backlog purposes.
RESPONSE: The Company classifies a sales contract or potential
sale as a "new order" for backlog purposes at the time a
homebuyer executes a contract to purchase a home from the
Company.
The above disclosure will be included in future filings with
the Securities and Exchange Commission.
o Tell us how many home sales were cancelled in fiscal years
2002, 2003, and 2004 and the average lag time between when a
contract is included in backlog and when it is cancelled.
RESPONSE: For the fiscal years ended June 30, 2002, 2003, and
2004, the Company cancelled 189, 170, and 316 home sales,
respectively, representing 13%, 11%, and 15% of gross new
orders for those years. The average number of days elapsed
between when a contract was included in backlog and when it
was cancelled for the fiscal years ended June 30, 2002, 2003,
and 2004 was 102, 95, and 107, respectively.
o Given the significant growth in your company over the past
three years, we assume that you had a significant increase in
cancellations. Tell us how you determined that it was not
necessary to discuss the impact if these changes in
cancellations when analyzing the changes in new orders, net of
cancellations, from year to year.
RESPONSE: As noted in the response to point two above, the
Company's cancellations have increased over the past three
years as the Company has expanded organically as well as
through acquisitions. The Company's decision not to discuss
the impact of the increase in the cancellations when analyzing
the changes in new orders, net of cancellations, from year to
year was based on two factors. First, the Company's
cancellations as a percentage of gross new orders have not
increased significantly from year to year over the past three
years. Second, the Company has been able to quickly resell
cancelled homes and these homes are usually resold at
increased sales prices.
o Tell us how many of the contracts included in the ending
backlog at June 30, 2004 you would expect to be cancelled,
based on trends noted from historical experience and based on
the timing of your sales. If there are a significant number
that you expect to be cancelled, we believe that you should
disclose the information in the MD&A in future filings to
provide your readers with better insight into management's
expectations for the company. Also tell us, and disclose in
future filings, the amount of backlog you expect to fill in
the next twelve months. Refer to Item 101(c)(viii) of
Regulation S-K.
RESPONSE: Based on historical trends and the timing of sales,
the Company anticipates that approximately 6% to 7% of the
contracts included in the backlog at June 30, 2004 will be
cancelled prior to settlement. The Company does not consider
the expected cancellation percentage of the backlog at June
30, 2004 to be significant but the Company will continue to
monitor cancellations. In the event of significant increases
in cancellation rates or other significant changes relating to
cancellations, the Company will disclose in future filings the
impact of expected cancellations on the backlog or other
material information relating to cancellations or backlog.
The Company expects to deliver substantially all of the
remaining 93% to 94% of the backlog at June 30, 2004 in the
fiscal year ending June 30, 2005. The Company will disclose in
future filings on Form 10-K, the backlog expected to be
delivered in the subsequent twelve months in accordance with
the requirements of Item 101(c)(viii) of Regulation S-K.
Form 8-K
- --------
2. We read that you signed a letter of intent to acquire Peachtree
Residential Properties, Inc. Tell us the status of the acquisition. We
remind you that once a definitive agreement is signed relating to this
acquisition, you should file an Item 1.01 on Form 8-K. We also remind
you that you should file a Form 8-K to update your investors if the
acquisition proceedings are terminated.
RESPONSE: We are still in the due diligence and negotiation stages of
the acquisition of Peachtree Residential Properties, Inc. We understand
that once a definitive agreement is signed relating to this acquisition
that we must file an Item 1.01 Form 8-K. We intend to file a Form 8-K
to update our investors if the acquisition is terminated.
Form 8-K/A
- ----------
3. We note that your pro forma financial statements do not reflect any
acquired intangible assets other than goodwill. We assume that you
acquired the backlog of Realen Homes. Tell us how you determined that
you did not need to reflect backlog or any other acquired intangible
assets in your purchase accounting. Refer to paragraph A19 of SFAS 141.
RESPONSE: The backlog was evaluated and valued as part of the
fair-market-value inventory valuation process. The backlog was
evaluated under the provisions of paragraph 39, A14 and A19 for
intangible assets and order backlog and we concluded that the primary
value of the asset was in the tangible production inventory itself, and
not in the customer backlog. The Company observes that in the current
market environment that any value of contracted backlog would be in
part, offset by the ability to charge a higher price in some cases.
Based on this, Management determined the intangible value of the
backlog by estimating the approximate difference in timing of cash
flows between a unit under construction subject to a contract and one
that is not. The Company believes this roughly approximates the cost to
carry the backlog for a one month period as it is estimated that in
today's market it may take one more month to deliver a home acquired
that is not in backlog as compared to a home acquired that is in
backlog. The intangible value of the backlog was calculated at less
than $500,000 and Management determined that the intangible portion of
the backlog was immaterial to the balance sheet as a whole for the
purposes of the pro forma financial statements and this amount was
included in inventory in the pro forma balance sheet financial
statements. For purposes of the statement of operations, management
observes that the intangible value would be amortized into cost of
sales as the inventory is delivered in the same fashion as if it were
reflected as part of the inventory.
As for other acquired intangible assets, the Company evaluated the
criteria for the recognition apart from goodwill for intangible assets
and concluded that it did not acquire any marketing- related intangible
assets as the Company intends to re-name the acquired company. In
addition, the Company concluded that it did not acquire any
customer-related, artistic-related or technology-based intangible
assets. As for contract-based intangible assets, the Company acquired
several purchase agreements for the acquisition of land. This land is
expected to be acquired before the end of the current fiscal year. The
Company evaluated the provisions of the purchase agreements and
completed a fair-market evaluation of the land to be acquired which
resulted in a write-up of approximately $3,427,000. This amount was
included in the write-up of the fair value of inventory at the date of
acquisition as the land is expected to be acquired in the current
fiscal year.
In response to the Staff's comment, the Company will reflect the
intangible value of the backlog acquired as intangible assets in its
future filings with the Securities and Exchange Commission.
4. We note that a portion of your consideration to acquire Realen Homes is
a 3% note payable due in 2006. It appears that the interest rate on
this note payable may be below market. Tell us what consideration you
have given to imputing a different interest rate in accordance with APB
21. Tell us what interest rate was used for this note payable in
computing pro forma interest expense in your pro forma financial
statements.
RESPONSE: As part of the acquisition consideration, the Company issued
a $5,000,000, 3% promissory note due on July 28, 2006. The Company
evaluated this note in accordance with APB 21 and determined that it
was a below market rate note. In accordance with APB 21, management
estimated, based on current market conditions that the Company would
likely have been able to obtain similar fixed-rate financing from a
third party at approximately 150 basis points higher than the note
actually obtained. This interest rate assumes 200 basis points over the
two year treasury rate at the time of the acquisition. The Company
determined that the overall impact on the pro forma balance sheet at
June 30, 2004 and the pro forma statement of operations for the period
ending June 30, 2004 was immaterial to the pro forma financial
statements. The pro forma interest expense was calculated on an annual
average borrowing rate of 3.7% which is consistent with the Company's
average annual interest rate as disclosed in Note 6 to its Notes to
Consolidated Financial Statements in its Form 10-K for the fiscal year
ended June 30, 2004. It was determined that the overall impact on the
pro forma statement of operations was approximately $24,000 - (0.8% x
$5.0 million less taxes at 40%),after tax, for the period ending June
30, 2004, which would be further reduced for any capitalized amounts
remaining in inventory at year end.
In response to the Staff's comment, the Company will reflect the
revised note payable and imputed interest under the provision of APB 21
in future filings with the Securities and Exchange Commission.
5. We note adjustment (e) to your pro forma income statement, which
removes the effect of duplicate services from selling, general, and
administrative expense. Tell us how you quantified the amounts in this
adjustment and how you determined that the items in this adjustment
meet the criteria of Rule 11-02(b) of Regulation S-X.
RESPONSE: Adjustment (e) to the pro forma income statement was applied
on the basis of Rule 11-02(b) paragraph (6)(ii) of Regulation S-X for
adjustments which give effect to events that are expected to have a
continuing impact on the Company. These adjustments include a reduction
of salaries primarily for the marketing department of the acquired
company. The marketing department of the acquired company was
eliminated immediately following the acquisition. Actual salaries and
benefits paid in the previous year were used to calculate this amount.
Additionally, concurrent with the acquisition, the acquired Company's
general liability policy was cancelled and the acquired Company's
general liability coverage was picked up under the Company's self
insurance plan at no additional cost. The cost of the acquired
company's general liability policy in the previous year was eliminated.
The management agreement with the former partners of Realen Homes was
terminated at the acquisition date. Management fees paid to the former
partners of Realen Homes have been eliminated as they would no longer
occur under the umbrella of the Company. Actual management fees
recorded as expense in the twelve months ending June 30, 2004 were used
to quantify this amount. Finally, due to the elimination of the
marketing department, the previous office space occupied by these
individuals was eliminated.
6. We remind you of the requirements of paragraphs 51-53 of SFAS 141.
Confirm to us that you will provide these disclosures in your September
30, 2004 Form 10-Q.
RESPONSE: We are aware of the requirements of paragraphs 51-53 of SFAS
141 and will incorporate these disclosures in our September 30, 2004
Form 10-Q.
The Company acknowledges that:
o The Company is responsible for the adequacy and accuracy of
the disclosure in the filings;
o Staff comments or changes to disclosure in response to staff
comments in the filings reviewed by the staff do not foreclose
the Commission from taking any action with respect to the
filing; and
o The Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
Closing Comments
- ----------------
The Company believes that the above fully responds to your questions
and comments. If you have any additional questions or comments, please contact
me at you earliest convenience. Thank you very much.
Sincerely,
/s/ Joseph A. Santangelo
----------------------------------------
Joseph A. Santangelo
Treasurer and Chief Financial Officer
Enclosures
cc: Nathan Cheney
Jennifer Thompson