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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD__________ TO __________.
Commission File No. 1-6830
ORLEANS HOMEBUILDERS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 59-0874323
- -------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
One Greenwood Square, Suite 101
3333 Street Road
Bensalem, PA 19020
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(Address of principal executive offices)
Telephone: (215) 245-7500
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(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 X No ___
Indicate by check mark whether the registrant is a shell company (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, 2005: 18,561,220
(excluding 136,911 shares held in Treasury).
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
PAGE
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PART 1 - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 2005
and June 30, 2005 1
Consolidated Statements of Operations for the
Three Months Ended September 30, 2005 and 2004 2
Consolidated Statements of Shareholders' Equity for the
Three Months Ended September 30, 2005 3
Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2005 and 2004 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 25
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits 26
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, June 30,
2005 2005
-------------- --------------
(Unaudited)
Assets:
Cash and cash equivalents $ 30,150 $ 62,576
Restricted cash - due from title company 5,940 28,785
Restricted cash - customer deposits 24,109 20,100
Real estate held for development and sale:
Residential properties completed or under construction 228,084 190,855
Land held for development or sale and improvements 434,552 398,290
Inventory not owned - Variable Interest Entities 126,478 88,252
Property and equipment, at cost, less accumulated depreciation 3,401 3,420
Deferred taxes 3,106 2,802
Intangible assets - 6
Goodwill 20,514 20,514
Receivables, deferred charges and other assets 18,667 18,532
Land deposits and costs of future development 27,959 27,408
------------ ------------
Total Assets $ 922,960 $ 861,540
============ ============
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ 32,753 $ 47,689
Accrued expenses 35,733 65,253
Customer deposits 33,616 27,738
Obligations related to inventory not owned 115,539 79,585
Mortgage and other note obligations primarily secured by real
estate held for development and sale 455,649 399,030
Other notes payable 9,273 9,400
------------ ------------
Total Liabilities 682,563 628,695
------------ ------------
Commitments and contingencies (See Note I)
Redeemable common stock 870 889
------------ ------------
Shareholders' Equity:
Common stock, $.10 par, 23,000,000 shares authorized,
18,698,131 shares issued at September 30, 2005 1,870 1,870
and June 30, 2005 70,439 70,450
Capital in excess of par value - common stock 167,814 160,407
Retained earnings
Treasury stock, at cost (136,911 and 176,911 shares held at (596) (771)
September 30, 2005 and June 30, 2005, respectively)
------------ ------------
Total Shareholders' Equity 239,527 231,956
------------ ------------
Total Liabilities and Shareholders' Equity $ 922,960 $ 861,540
============ ============
See accompanying notes which are an integral part of the
consolidated financial statements.
1
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
September 30,
2005 2004
------------ ------------
Earned revenues
Residential properties $ 157,963 $ 138,312
Land sales - 49
Other income 1,678 1,801
----------- -----------
159,641 140,162
----------- -----------
Costs and expenses
Residential properties 123,285 109,591
Land sales - 48
Other 1,609 937
Selling, general and administrative 21,347 16,095
Interest
Incurred 6,816 2,730
Less capitalized (6,816) (2,716)
----------- -----------
146,241 126,685
----------- -----------
Income from operations before income taxes 13,400 13,477
Income tax expense 5,622 5,275
----------- ------------
Net income $ 7,778 $ 8,202
=========== ============
Basic earnings per share $ 0.42 $ 0.47
=========== ============
Diluted earnings per share $ 0.41 $ 0.44
=========== ============
See accompanying notes which are an integral part of the
consolidated financial statements.
2
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Common Stock Capital in
Shares Excess of Treasury Stock
Issued and Par Value - Retained Shares
Outstanding Amount Common Stock Earnings Held Amount Total
----------- ----------- ------------- ------------ ------- ----------- ---------
Balance at June 30, 2005 18,698,131 $ 1,870 $ 70,450 $ 160,407 176,911 $ (771) $ 231,956
Redeemable common stock sold 18 18
Fair market value of stock options issued 34 34
Stock options exercised (115) (40,000) 175 60
Shares awarded under Stock Award Plan 52 52
Dividends declared - $.02 per share (371) (371)
Net income 7,778 7,778
---------- ----------- ----------- ----------- ------- ----------- ---------
Balance at September 30, 2005 18,698,131 $ 1,870 $ 70,439 $ 167,814 136,911 $ (596) $ 239,527
========== =========== =========== =========== ======= =========== =========
See accompanying notes which are an integral part of the
financial statements.
3
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended
September 30,
2005 2004
----------- ------------
Cash flows from operating activities:
Net income $ 7,778 $ 8,202
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 311 350
Amortization of note discount 17 -
Deferred taxes (304) (89)
Stock based compensation expense 115 30
Changes in operating assets and liabilities:
Restricted cash - due from title company 22,845 -
Restricted cash - customer deposits (4,009) (596)
Real estate held for development and sale (73,491) (66,225)
Receivables, deferred charges and other assets (135) 115
Land deposits and costs of future developments (2,823) (8,862)
Accounts payable and other liabilities (44,856) (15,214)
Customer deposits 5,878 2,280
---------- -----------
Net cash used in operating activities (88,674) (80,009)
---------- -----------
Cash flows from investing activities:
Purchases of property and equipment (287) (195)
Acquisitions, net of cash acquired - (56,848)
---------- -----------
Net cash used in investing activities (287) (57,043)
---------- -----------
Cash flows from financing activities:
Borrowings from loans secured by real estate assets 88,000 70,262
Repayment of loans secured by real estate assets (31,381) (59,195)
Borrowings from unsecured line of credit - 103,448
Borrowings from other note obligations - 5,070
Repayment of other note obligations (144) (4)
Proceeds from stock options exercised 60 -
---------- -----------
Net cash provided by financing activities 56,535 119,581
---------- -----------
Net decrease in cash and cash equivalents (32,426) (17,471)
Cash and cash equivalents at beginning of year 62,576 32,962
---------- -----------
Cash and cash equivalents at end of period $ 30,150 $ 15,491
========== ===========
Supplemental disclosure of cash flow activities:
Interest paid, net of amounts capitalized $ - $ 14
========== ===========
Income taxes paid $ 15,582 $ 9,817
========== ===========
See accompanying notes which are an integral part of the
consolidated financial statements.
4
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) Summary of Significant Accounting Policies:
The accompanying unaudited consolidated financial statements are presented
in accordance with the requirements for Form 10-Q and do not include all
the disclosures required by generally accepted accounting principles for
complete financial statements. Reference is made to Form 10-K as of and for
the year ended June 30, 2005 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.
Accounting for variable interest entities:
In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46").
The FASB issued a revised FIN 46 in December 2003 which modifies and
clarifies various aspects of the original interpretations. A Variable
Interest Entity ("VIE") is created when (i) the equity investment at risk
is not sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties or (ii) equity
holders either (a) lack direct or indirect ability to make decisions about
the entity, (b) are not obligated to absorb expected losses of the entity
or (c) do not have the right to receive expected residual returns of the
entity if they occur. If an entity is deemed to be a VIE, pursuant to FIN
46, an enterprise that absorbs a majority of the expected losses of the VIE
is considered the primary beneficiary and must consolidate the VIE. For
VIEs created before January 31, 2003, FIN 46 was deferred to the end of the
first interim or annual period ending after March 15, 2004. The Company
fully adopted FIN 46 effective March 31, 2004.
Based on the provisions of FIN 46, the Company has concluded that whenever
it enters into an option agreement to acquire land or lots from an entity
and pays a significant deposit that is not unconditionally refundable, a
VIE is created under condition (ii) (b) of the previous paragraph. The
Company has been deemed to have provided subordinated financial support,
which refers to variable interests that will absorb some or all of an
entity's expected theoretical losses if they occur. For each VIE created
the Company will compute expected losses and residual returns based on the
probability of future cash flows as outlined in FIN 46. If the Company is
deemed to be the primary beneficiary of the VIE it will consolidate the VIE
on its balance sheet. The fair value of the VIEs inventory will be reported
as "Inventory Not Owned - Variable Interest Entities."
5
At September 30, 2005, the Company consolidated twenty VIEs as a result of
its options to purchase land or lots from the selling entities. The Company
paid cash or issued letters of credit deposits to these twenty VIEs
totaling $8,514,000 and incurred additional pre-acquisition costs totaling
$2,424,000. The Company's deposits and any costs incurred prior to
acquisition of the land or lots, represent the Company's maximum exposure
to loss. The fair value of the VIEs inventory will be reported as
"Inventory Not Owned - Variable Interest Entities." The Company recorded
$126,478,000 in Inventory Not Owned - Variable Interest Entities as of
September 30, 2005. The fair value of the property to be acquired less cash
deposits and pre-acquisition costs, which totaled $115,539,000 at September
30, 2005, was reported on the balance sheet as "Obligations related to
inventory not owned." Creditors, if any, of these VIEs have no recourse
against the Company.
The Company will continue to secure land and lots using options. Including
the deposits and other costs capitalized in connection with the VIEs above,
the Company had total costs incurred to acquire land and lots at September
30, 2005 of approximately $38,846,000, including $25,697,000 of cash
deposits. The total purchase price under these cancelable contracts or
options is approximately $614,838,000. The maximum exposure to loss is
limited to the deposits, although some deposits are refundable, and costs
incurred prior to the acquisition of the land or lots.
Recent accounting pronouncements:
In December 2004, the FASB revised FAS No. 123 through the issuance of FAS
No. 123-R "Share Based Payment", revised ("FAS 123-R"). FAS 123-R is
effective for the Company commencing July 1, 2005. FAS 123-R, among other
things, eliminates the alternative to use the intrinsic value method of
accounting for stock based compensation and requires entities to recognize
the cost of employee services received in exchange for awards of equity
instruments based on the grant-date fair value of those awards (with
limited exceptions). The fair value based method in FAS 123-R is similar to
the fair-value-based method in FAS No. 123 in most respects, subject to
certain key differences. As the Company previously adopted the fair value
recognition provisions of FAS No. 123 prospectively for all stock awards
granted, commencing on July 1, 2002, the impact of adopting FAS 123-R did
not have a significant impact on the financial position or results of
operations of the Company. For the three months ended September 30, 2005,
the Company recorded pretax compensation expense associated with stock
awards of $86,000. Total compensation cost related to nonvested awards not
yet recognized of $4,051,000 will be recognized according to vesting
schedules through March 2015. The Company utilizes the Black-Scholes option
pricing model to calculate the compensation expense associated with stock
options.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, for
the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004" (FSP FAS 109-1). FSP FAS 109-1
clarifies that the deduction will be treated as a "special deduction" as
described in Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." As such, the special deduction has no effect
on deferred tax assets and liabilities existing at the date of enactment.
The impact of the deduction will be reported in the period in which the
deduction is claimed. The Company files a consolidated return on a calendar
year. Accordingly, the Company began reflecting the special deduction with
respect to its operations effective January 1, 2005. Its expected impact
was and will be to lower the effective tax provision in the periods in
which the deduction may be claimed and that this benefit will increase as
the deduction is phased in under the statute.
6
(B) Acquisitions - for Fiscal Year 2005:
PEACHTREE ACQUISITION:
On December 23, 2004, pursuant to an Asset Purchase Agreement of the same
date, the Company acquired, through a wholly-owned subsidiary, the real
estate assets described below (the "Assets") from Peachtree Residential
Properties, LLC, a North Carolina limited liability company and Peachtree
Townhome Communities, LLC, a North Carolina limited liability company,
which at the time the Company acquired the assets were wholly-owned
subsidiaries of Peachtree Residential Properties, Inc., a Georgia
corporation (collectively, "Peachtree Residential Properties").
The Assets include: (a) improved and unimproved real property, (b) rights
to acquire real estate under options or agreements, (c) equipment, (d)
rights under certain contracts for the sale of homes to be sold and leases
for real property, (e) rights to certain tradenames and other intangibles,
including contract backlog, (f) homes and other improvements under
construction as of the closing, (g) certain plans, drawings,
specifications, permits and rights under warranties and (h) governmental
approvals and books and records associated with, or relating to the
foregoing.
The Company paid $29,300,000 in cash, to acquire the Assets. The Company
also assumed certain liabilities of Peachtree Residential Properties, less
$200,000 to be retained by the Company and applied towards the
administration of certain home warranty claims.
REALEN ACQUISITION:
On July 28, 2004, pursuant to a Purchase Agreement of the same date, the
Company completed its acquisition of all of the issued and outstanding
partnership interests in Realen Homes L.P., a Pennsylvania limited
partnership ("Realen Homes"), from Realen General Partner, LLC, a
Pennsylvania limited liability company, and DB Homes Venture L.P., a
Pennsylvania limited partnership. The Company acquired the limited
partner's interest in Realen Homes and a subsidiary of the Company, RHGP
LLC, acquired the general partner's interest and serves as the general
partner of Realen Homes.
In accordance with the Purchase Agreement, the consideration paid by the
Company consisted of: (i) $53,348,000 in cash delivered at closing, (ii) a
promissory note of the Company in the aggregate principal amount of $5
million, payable over a period of up to two years, with an interest rate of
3% per year and (iii) a warranty holdback of $1.5 million retained by the
Company to be applied toward the administration of any warranty claims made
against Realen Homes in excess of certain predetermined amounts. The
purchase price was determined based on Realen Homes' book value at June 30,
2004, its management personnel, its profitability, its backlog and its land
position.
The Company evaluated the $5,000,000 3% note in accordance with APB 21 and
determined that it was a below market rate note. In accordance with APB 21,
the Company 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. The Company imputed interest on the note at 4.5% and reduced the
carrying value of the note from $5,000,000 to $4,863,000. The discount of
$137,000 will be recorded as interest expense over the life of the note.
7
The acquisition included, subject to specified exceptions, all assets and
liabilities of Realen Homes, including land owned or under contract, homes
under construction but not sold or sold but not delivered, sales offers and
reservations, and model homes and furnishings. The acquired assets were
used by Realen Homes in the homebuilding business in Pennsylvania and
Illinois. The Company intends to continue to use the acquired assets in the
homebuilding business.
The Company accounted for the acquisition as a purchase in accordance with
SFAS No. 141, "Business Combinations." The purchase price was allocated to
goodwill for $13,327,000 which is defined as the fair value of assets and
liabilities acquired in excess of the purchase price and to intangible
assets for $500,000. The intangible assets represent the intangible value
of the backlog acquired from Realen Homes. The intangible value of the
backlog will be amortized into cost of sales as the acquired backlog is
delivered. The Company amortized the remaining $6,000 of the intangible
value of the backlog acquired from Realen Homes during the three months
ended September 30, 2005.
MASTERPIECE ACQUISITION:
On July 28, 2003, the Company acquired all of the issued and outstanding
shares of Masterpiece Homes and entered into an employment agreement with
the president of Masterpiece Homes. Masterpiece Homes is an established
homebuilder located in Orange City, Florida. The terms of the stock
purchase agreement and employment agreement are as follows: (i) $3,900,000
in cash, at closing; and (ii) $2,130,000 payable January 1, 2005, unless
prior to that date the president is terminated for cause or terminates his
employment without good reason, as defined in the employment agreement;
(iii) sale of 30,000 shares of the Company's common stock at $8 per share
with a put option at the same price, (iv) stock options to purchase 45,000
shares of the Company's common stock at $10.64 per share vesting equally on
December 31, 2004, 2005 and 2006; and (v) contingent payments representing
25% of the pre-tax profits of Masterpiece Homes for the calendar years
ended December 31, 2004, 2005 and 2006. The Company also incurred
approximately $405,000 in acquisition costs to complete this transaction.
The aforementioned costs are considered part of the purchase price of
Masterpiece Homes, except for the following items that are considered part
of, and contingent upon, the employment agreement: (a) $710,000 of the
$2,130,000 paid January 10, 2005; (b) stock options to purchase 45,000
shares of the Company's common stock at $10.64 per share; and (c)
contingent payments representing 25% of the pre-tax profits of Masterpiece
Homes for the calendar years ended December 31, 2004, 2005 and 2006.
The Company accounted for these transactions in accordance with SFAS No.
141, "Business Combinations", whereby approximately $5,700,000 was
considered to be part of the purchase price of the business and the
remainder part of employee compensation. That portion related to employee
compensation will be charged to expense over the period to which it
relates. With respect to the amounts allocated to the purchase, such
amounts were allocated to the fair value of assets and liabilities acquired
with the excess of approximately $3,007,000 allocated to goodwill.
8
(C) Residential Properties Completed or under Construction:
Residential properties completed or under construction consist of the
following:
September 30, June 30,
2005 2005
-------- --------
(in thousands)
Under contract for sale (backlog) $167,728 $128,137
Unsold 60,356 62,718
-------- --------
Total residential properties completed
or under construction $228,084 $190,855
======== ========
(D) Mortgage, Other Note Obligations, and Revolving Credit Facility:
The $455,649,000 at September 30, 2005 consists of $423,000,000 which is
discussed below, plus $30,000,000 pursuant to the sale and issuance of
trust preferred securities discussed below, and $2,649,000 under mortgage
obligations secured by land held for development and sale and improvements.
The maximum balance outstanding under construction and inventory loan
agreements at any month end during the three months ended September 30,
2005 was $455,649,000. The average month end balance during the three
months ended September 30, 2005 was $412,237,000. At September 30, 2005,
the Company had approximately $39,810,000 of borrowing capacity of which
approximately $25,360,000 was then available to be drawn under the
Revolving Credit Facility discussed below.
At September 30, 2005, there was $423,000,000 outstanding under the
Revolving Credit Facility. In addition, approximately $37,190,000 of
letters of credit and other assurances of the availability of funds have
been provided under the Revolving Credit Facility.
On December 22, 2004, Greenwood Financial, Inc., a wholly-owned subsidiary
of the Company and other wholly-owned subsidiaries of the Company, as
borrowers, and Orleans Homebuilders, Inc. as guarantor, entered into a
Revolving Credit and Loan Agreement (the "Credit Agreement") for a
$500,000,000 Senior Secured Revolving Credit and Letter of Credit Facility
(the "Revolving Credit Facility") with various banks as lenders. The
Revolving Credit Facility may be increased to $650,000,000 under certain
circumstances. Under and subject to the terms of the Revolving Credit
Facility, the borrowers may borrow and re-borrow for the purpose of
financing the acquisition and development of real estate, the construction
of homes and improvements, for investment in joint ventures, for working
capital and for such other appropriate purposes as may be approved by the
lenders. Capitalized terms used below and not otherwise defined have the
meanings set forth in the Revolving Credit Agreement.
The Revolving Credit Facility has a three-year term and borrowings and
advances bear interest on a per annum basis equal to the LIBOR Market Index
Rate plus a non-default variable spread ranging from 175 basis points to
237.5 basis points, depending upon the Company's leverage ratio. During the
term of the Revolving Credit Facility, interest is payable monthly in
arrears. The September 30, 2005 interest rate was 6.24% which includes the
237.5 basis point spread.
9
The Company is required to maintain certain financial ratios and customary
covenants as set forth in the Revolving Credit Facility.
The Company issued $30,000,000 of trust preferred securities which mature
on September 30, 2035 and are callable, in whole or in part, at par after
five years. For the first ten years, the securities have a fixed interest
rate of 8.52% per annum. Thereafter, the securities have a floating
interest rate equal to three-month LIBOR plus 380 basis points per annum,
resetting quarterly. The securities were placed in a private transaction
exempt from registration under the Securities Act of 1933, as amended, and
may not be offered or sold in the United States absent registration under
the Securities Act of 1933, as amended, or an applicable exemption there
from. The transaction was treated as debt for financial statement purposes.
The Company used the proceeds from the sale of these securities for land
purchases and general corporate purposes. The obligations relating to the
trust preferred securities are subordinated to the Revolving Credit
Facility.
On December 21, 2004 and in accordance with the terms of the Company's
Convertible Subordinated 7% Note issued to Jeffrey P. Orleans, Chairman and
Chief Executive Officer of the Company, the third and final installment due
of $1,000,000 was converted, at $1.50 per share, into 666,668 shares of the
Company's common stock.
(E) Redeemable Common Stock:
In connection with the Company's acquisition of Parker and Lancaster
Corporation on October 13, 2000, the Company issued 300,000 shares of
common stock of the Company to the former shareholders of Parker and
Lancaster Corporation. The former shareholders of Parker and Lancaster
Corporation have the right to cause the Company to repurchase the common
stock approximately five years after the closing of the acquisition at a
price of $3.33 per share. Through September 30, 2005, a former shareholder
of Parker and Lancaster Corporation sold 110,708 shares of the Company's
Common Stock thereby reducing the number of shares of redeemable common
stock in connection with the Parker and Lancaster Corporation acquisition
to 189,292 shares.
In connection with the Company's acquisition of Masterpiece Homes on July
28, 2003 (see Note B), the Company sold 30,000 shares of common stock of
the Company to the president of Masterpiece Homes at $8 per share. The
president of Masterpiece Homes has the right to cause the Company to
repurchase the common stock at $8 per share by giving notice to the Company
no later than the earlier of December 31, 2006 or 30 days after termination
of his employment, as specified in his employment agreement.
10
(F) Earnings Per Share:
The weighted average number of shares used to compute basic earnings per
common share and diluted earnings per common share and a reconciliation of
the numerator and denominator used in the computation for the three months
ended September 30, 2005 and 2004 are shown in the following table:
Three Months Ended
September 30,
-----------------------
2005 2004
-------- --------
(Unaudited)
(in thousands)
Weighted average common shares issued 18,698 18,031
Unconditional shares issuable - 68
Less: Average treasury shares
Outstanding (152) (576)
-------- --------
Basic EPS shares 18,546 17,523
Effect of assumed shares issued under
treasury stock method for stock options 347 565
Effect of partial conversion of $3 million
Convertible Subordinated 7% Note - 667
-------- --------
Diluted EPS shares 18,893 18,755
======== ========
Net income available for
common
Shareholders $ 7,778 $ 8,202
Effect of partial conversion of $3 million
Convertible Subordinated 7% Note 11
-------- --------
Adjusted net income for diluted EPS $ 7,778 $ 8,213
======== ========
(G) Restricted Stock Award:
On March 4, 2005, the Compensation Committee of the Company resolved to
grant Michael T. Vesey, the Company's President, Chief Operating Officer
and a member of the Company's Board of Directors, 125,000 restricted shares
of the Company's common stock pursuant to the terms of the Company's Stock
Award Plan. The award was subject to Mr. Vesey's execution of a Restricted
Stock Award Agreement which he has executed. The Compensation Committee
also approved the payment of bonus compensation to Mr. Vesey sufficient to
allow Mr. Vesey to pay the income tax liability triggered on each vesting
date.
The shares of restricted stock granted to Mr. Vesey will vest at a rate of
10,000 per year on the first through fifth anniversaries of the date of
grant and 15,000 per year on the sixth through tenth anniversaries of the
date of the grant, with all shares being fully vested by or on the tenth
anniversary of the date of grant, assuming Mr. Vesey's continued employment
with the Company. In addition, in the event of a change of control as
defined in the Stock Award Plan, any shares of restricted stock not vested
at that time will vest, assuming Mr. Vesey is then employed by the Company.
Any shares that are not vested are subject to forfeiture in the event Mr.
Vesey's employment with the Company terminates for any reason.
11
On a monthly basis, the Company records compensation expense for the
portion of the award earned along with additional compensation expense
sufficient to cover the taxes Mr. Vesey will have to pay on the award.
(H) 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.
(I) Commitments and Contingencies:
As of September 30, 2005, the Company owned or controlled approximately
18,000 building lots. As part of the aforementioned building lots, the
Company had contracted to purchase, or has under option, undeveloped land
and improved lots for an aggregate purchase price of approximately
$614,838,000 which is expected to yield approximately 10,148 building lots.
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 usually contingent upon obtaining all
governmental approvals and satisfaction of certain requirements by the
Company and the sellers.
12
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Orleans Homebuilders, Inc. and its subsidiaries (collectively, the "Company",
"OHB" or "Orleans") develop, market and build high-quality, single-family homes,
townhomes and condominiums to serve various homebuilder segments, including
first-time, first move-up, second move-up, luxury and active adult. The Company
believes this broad range of home designs allows it to capitalize on favorable
economic and demographic trends within its markets. The Company is currently
engaged in residential real estate development in the following thirteen
markets: southeastern Pennsylvania; central New Jersey; southern New Jersey;
Orange County, New York; Charlotte, Raleigh and Greensboro, North Carolina;
Richmond and Tidewater, Virginia; Orlando, Palm Coast, and Palm Bay, Florida;
and Chicago, Illinois. The Company's Charlotte, North Carolina market also
includes operations in adjacent counties in South Carolina. The Company has
operated in its Pennsylvania and New Jersey markets for over 85 years and began
operations in its North Carolina and Virginia markets in fiscal 2001 through the
acquisition of Parker & Lancaster Corporation, a privately-held residential
homebuilder. The Company entered the Orlando and Palm Coast Florida markets on
July 28, 2003 through its acquisition of Masterpiece Homes, Inc. ("Masterpiece
Homes"), a privately-held residential homebuilder. On July 28, 2004, the Company
entered the Chicago, Illinois market through the acquisition of Realen Homes,
L.P. ("Realen Homes"), an established privately-held homebuilder with operations
in southeastern Pennsylvania and Chicago, Illinois. On December 23, 2004,
pursuant to an Asset Purchase Agreement of the same date, the Company acquired,
through a wholly-owned subsidiary, certain real estate assets from Peachtree
Residential Properties, LLC, a North Carolina limited liability company and
Peachtree Townhome Communities, LLC, a North Carolina limited liability company
which, at the time the Company acquired the assets, were wholly-owned
subsidiaries of Peachtree Residential Properties, Inc., a Georgia corporation
(collectively, "Peachtree Residential Properties"). The Results of Operations
include the activity of Realen Homes since July 28, 2004 as well as the revenue
and expenses associated with certain real estate assets acquired from Peachtree
Residential Properties since December 22, 2004. Unless otherwise indicated, the
term the "Company" includes the accounts of Realen Homes.
References to a given fiscal year in this Quarterly Report on Form 10-Q are to
the fiscal year ended June 30th of that year. For example, the phrases "fiscal
2006" or "2006 fiscal year" refer to the fiscal year ended June 30, 2006. When
used in this report, "northern region" refers to the Company's markets in
Pennsylvania, New Jersey and New York markets, which includes the southeastern
Pennsylvania operations of Realen Homes that were acquired on July 28, 2004;
"southern region" refers to the Company's markets in North Carolina and
Virginia; "Florida region" refers to the Company's market in Florida, and
"midwestern region" refers to the Company's market in Illinois.
The Company believes it is well positioned for continued growth. At September
30, 2005, backlog was $656,623,000 representing 1,571 homes compared to a
backlog of $594,097,000 representing 1,643 homes at September 30, 2004. The
Company generally considers a community active and open for sale if it has five
or more lots available for sale in that community. At September 30, 2005, the
Company was selling in 85 active communities and owned or controlled
approximately 18,000 building lots compared to 82 active communities and 15,930
owned or controlled building lots at September 30, 2004.
Over the past 40 years, the Company has developed an expertise in all aspects of
site selection, land planning, entitlement and land development through its
experience in the highly regulated southeastern Pennsylvania and New Jersey
markets. The Company has experienced land acquisition professionals with local
market expertise and maintains oversight of land acquisitions at the corporate
level. The Company's development and local market expertise has allowed it to
assemble an attractive land position. Approximately 9,400 of the Company's lots
are located in the supply-constrained southeastern Pennsylvania and New Jersey
markets. The Company believes the restrictions on the development of new lots in
these markets contribute to its land position having a market value
significantly higher than its contract purchase price.
13
Results of Operations
- ---------------------
The following table sets forth certain details as to residential sales activity.
The information provided is for the three months ended September 30, 2005 and
2004 in the case of residential revenue earned and new orders, and as of
September 30, 2005 and 2004 in the case of backlog.
A sales contract or potential sale is classified as a new order and, therefore,
becomes a part of backlog, at the time a homebuyer executes a contract to
purchase a home from the Company.
Three Months Ended September 30,
2005 2004
------------------------------- ----------------------------------
(Dollars in thousands)
NORTHERN REGION (1) Average Average
Pennsylvania and New Jersey: Amount Homes Price Amount Homes Price
Residential revenue earned $ 59,053 137 $ 431 $ 67,283 155 $ 434
New orders 92,164 176 524 77,437 164 472
Backlog 283,632 574 494 292,973 669 438
SOUTHERN REGION(2)
North Carolina, South Carolina
and Virginia:
Residential revenue earned $ 59,800 156 $ 383 $ 40,448 116 $ 349
New orders 113,660 258 441 47,428 130 365
Backlog 212,151 475 447 135,247 351 385
FLORIDA REGION
Residential revenue earned $ 17,879 79 $ 226 $ 14,403 89 $ 162
New orders 32,039 100 320 21,729 106 205
Backlog 100,362 380 264 60,174 336 179
MIDWESTERN REGION (3)
Residential revenue earned $ 21,231 52 $ 408 $16,178 45 $ 360
New orders 23,486 55 427 24,203 66 367
Backlog 60,478 142 426 105,703 287 368
COMBINED REGIONS
Residential revenue earned $ 157,963 424 $ 373 $138,312 405 $ 342
New orders 261,349 589 444 170,797 466 367
Backlog 656,623 1,571 418 594,097 1,643 362
14
(1) Information on residential revenue earned and new orders for the three
months ending September 30, 2004 includes the acquired operations of Realen
Homes' Southeastern Pennsylvania region from the date of acquisition, July 28,
2004, through September 30, 2004.
(2) Information on residential revenue earned and new orders for the three
months ending September 30, 2005 includes amounts acquired from Peachtree
Residential Properties for the period beginning December 23, 2004, the date the
Company acquired the assets, through September 30, 2005.
(3) Information on residential revenue earned and new orders is for the period
beginning July 28, 2004, the date the Company entered this market through its
acquisition of Realen Homes, through September 30, 2005.
Three Months Ended September 30, 2005
-------------------------------------
Orders and Backlog
- ------------------
New orders for the three months ended September 30, 2005 increased $90,552,000,
or 53.0%, to $261,349,000 on 589 homes, compared to $170,797,000 on 466 homes
for the three months ended September 30, 2004. The average price per home of new
orders increased by approximately 21.0% to $444,000 for the three months ended
September 30, 2005 compared to $367,000 for the three months ended September 30,
2004.
The backlog at September 30, 2005 increased $62,526,000, or 10.5%, to
$656,623,000 on 1,571 homes compared to the backlog at September 30, 2004 of
$594,097,000 on 1,643 homes. The increase in backlog was attributable to an
increase in the average sales price per new home, favorable economic conditions
and demographics for the homebuilding industry in the regions where the Company
operates. These favorable economic conditions, including historically low
interest rates, have resulted in positive home pricing trends and consistent
customer demand. The average price per home included in the Company's backlog
increased 15.5% to $418,000 at September 30, 2005 compared to $362,000 at
September 30, 2004.
NORTHERN REGION:
New orders for the three months ended September 30, 2005 increased $14,727,000
to $92,164,000, or 19.0%, on 176 homes, compared to $77,437,000 on 164 homes for
the three months ended September 30, 2004. This improvement was the result of a
7% increase in the number of new orders coupled with an 11% increase in the
average sales price per home. The average price per home of new orders increased
to $524,000 for the three months ended September 30, 2005 compared to $472,000
for the three months ended September 30, 2004. The Company believes that it has
been able to increase sales prices due to the strong demand for new homes
resulting from the growing population, fueled in part by immigration, and
historically low interest rates which have made housing more affordable. The
limited supply of entitled lots for residential housing in Pennsylvania and New
Jersey due to significant governmental regulations imposed on developers and
land builders has also positively impacted home pricing trends.
The Company had 26 active selling communities in the northern region as of
September 30, 2005 compared to 28 active selling communities as of September 30,
2004.
15
SOUTHERN REGION:
New orders for the three months ended September 30, 2005 increased $66,232,000
to $113,660,000, or 139.7%, on 258 homes, compared to $47,428,000 on 130 homes
for the three months ended September 30, 2004. The increase in new orders was
attributable to a 20.8% increase in the average sales price per home for the
three months ended September 30, 2005 when compared to the three months ended
September 30, 2004. In addition, the number of new orders nearly doubled from
130 to 258 as a result of operating 7 additional communities.
The Company had 46 active selling communities in the southern region as of
September 30, 2005 compared to 39 active selling communities as of September 30,
2004.
FLORIDA REGION:
New orders for the three months ended September 30, 2005 increased $10,310,000
to $32,039,000, or 47.5%, on 100 homes, compared to $21,729,000 on 106 homes for
the three months ended September 30, 2004. The increase was attributable to an
increase in the average selling price per home and a change in the product mix
toward more homes for move-up buyers. The Company did not experience any
significant impact on new orders as a result of the hurricanes that struck
Florida.
The average price per home of new orders increased by 56.1% to $320,000 for the
three months ended September 30, 2005 compared to $205,000 for the three months
ended September 30, 2004. The increase in the average selling price per home in
the Florida region is primarily due to the increased demand for new housing.
The Company is continuing to expand its operations in the Florida region. As of
September 30, 2005, the Company owns or controls 2,233 lots compared to 1,513
lots at September 30, 2004.
MIDWESTERN REGION:
The Company entered the midwestern region through the acquisition of Realen
Homes on July 28, 2004. For the three months ended September 30, 2005, the
midwestern region accounted for $23,486,000 in new orders on 55 homes, compared
to $24,203,000 on 66 homes for the three months ended September 30, 2004. New
orders were flat compared to last year as we have closed several existing
communities while our new communities are operating in a pre-construction mode.
As of September 30, 2005 and September 30, 2004, the midwestern region had 7
active selling communities.
Total Earned Revenues
- ---------------------
Total earned revenues for the three months ended September 30, 2005 increased
$19,479,000, to $159,641,000, or 13.9%, compared to $140,162,000 for the three
months ended September 30, 2004. Residential revenue earned from the sale of
residential homes included 424 homes totaling $157,963,000 during the three
months ended September 30, 2005, as compared to 405 homes totaling $138,312,000
during the three months ended September 30, 2004. The average selling price per
home delivered in the three months ended September 30, 2005 increased by
approximately 9.1% to $373,000 for the three months ended September 30, 2005
compared to $342,000 for the three months ended September 30, 2004.
16
NORTHERN REGION:
Residential revenue earned for the three months ended September 30, 2005
decreased $8,230,000 to $59,053,000, or 12.2%, on 137 homes delivered as
compared to $67,283,000 on 155 homes delivered during the three months ended
September 30, 2004. The decrease resulted from unforeseen delays in completing
homes scheduled for delivery during the first quarter.
The average selling price per home delivered in the three months ended September
30, 2005 decreased less than 1% to $431,000 for the three months ended September
30, 2005 compared to $434,000 for the three months ended September 30, 2004.
This decrease in the average selling price per home delivered is due to the mix
of homes.
SOUTHERN REGION:
Residential revenue earned for the three months ended September 30, 2005
increased $19,352,000 to $59,800,000, or 47.8%, on 156 homes delivered as
compared to $40,448,000 on 116 homes delivered during the three months ended
September 30, 2004. The increase was due to a 34% increase in the number of
homes delivered as a result of operating 7 new communities.
In addition, the average price per home delivered increased 10.0% to $383,000
for the three months ended September 30, 2005 compared to $349,000 for the three
months ended September 30, 2004. The change in the product mix of homes
delivered during the three months ended September 30, 2005 compared to the three
months ended September 30, 2004 contributed to the increase in the average price
per home delivered. Specifically, the Company delivered a larger percentage of
luxury and move-up homes during the three months ended September 30, 2005 than
during the three months ended September 30, 2004.
FLORIDA REGION:
Residential revenue earned for the three months ended September 30, 2005
increased $3,476,000 to $17,879,000, or 24.1%, on 79 homes, compared to
$14,403,000 on 89 homes for the three months ended September 30, 2004. The
increase is primarily attributable to a 39.5% increase in the average selling
price per home delivered to $226,000 for the three months ended September 30,
2005 compared to $162,000 for the three months ended September 30, 2004.
The increase in the average selling price per home delivered is attributable to
the demand for new housing. The Company did not experience any significant
construction delays as a result of the hurricanes that struck Florida.
MIDWESTERN REGION:
The Company entered the midwestern region on July 28, 2004 through the
acquisition of Realen Homes. Residential revenue for the three months ended
September 30, 2005, increased $5,053,000 to $21,231,000, or 31.2%, on 52 homes,
compared to $16,178,000 on 45 homes for the three months ended September 30,
2004. The increase is primarily attributable to a 13.3% increase in the average
selling price per home to $408,000 for the three months ended September 30, 2005
compared to $360,000 for the three months ended September 30, 2004 and a greater
percentage of single family homes delivered during the three months ended
September 30, 2005 as compared to the three months ended September 30, 2004.
17
Other Income
- ------------
Other income consists primarily of property management fees and mortgage
processing income. Other income for the three months ended September 30, 2005
decreased $123,000 to $1,678,000, or 6.8%, compared to $1,801,000 for the three
months ended September 30, 2004. The decrease is due to lower miscellaneous
income recorded in the first quarter of fiscal 2006.
Costs and Expenses
- ------------------
Costs and expenses for the three months ended September 30, 2005 increased
$19,556,000 to $146,241,000, or 15.4%, compared with the three months ended
September 30, 2004. The cost of residential properties for the three months
ended September 30, 2005 increased $13,694,000 to $123,285,000, or 12.5%, when
compared with the three months ended September 30, 2004. The increase in cost of
residential properties was primarily attributable to the overall increase in
residential revenue as noted above. The consolidated gross profit margin for the
three months ended September 30, 2005 increased 1.2% to 22.0% compared to 20.8%
for the three months ended September 30, 2004.
Interest included in the costs and expenses of residential properties and land
sold for the three months ended September 30, 2005 and September 30, 2004 was
$2,219,000 and $2,120,000, respectively. The interest incurred during the
construction periods is capitalized to inventory and then expensed to the cost
of residential properties in the period in which the home settles.
The increase in gross profit margin is attributable to the change in product mix
toward more homes for move-up buyers and the introduction of Orleans models at
the communities the Company acquired from Realen Homes. In addition, the gross
profit margin is favorably affected by the reduced inventory step-up
amortization related to acquisition accounting for the acquired Realen Homes'
inventory delivered during the three months ended September 30, 2005 as compared
to the three months ended September 30, 2004. The additional costs recognized in
connection with the deliveries of the acquired Realen Homes inventory as a
result of the fair market value write-up of the acquired inventory was
approximately $124,000 and $1,676,000 for the three months ended September 30,
2005 and September 30, 2004, respectively. The additional costs recognized in
connection with the amortization of the intangible value of the acquired Realen
Homes backlog delivered during the three months ended September 30, 2005 and
September 30, 2004 was approximately $6,000 and $103,000, respectively. The
additional costs recognized in connection with the deliveries of the acquired
Peachtree inventory as a result of the fair market value write-up of the
acquired inventory was approximately $190,000 for the three months ended
September 30, 2005.
The Company sells a variety of home types in various communities and regions,
each yielding a different gross profit margin. As a result, depending on the mix
of both communities and of home types delivered, the consolidated gross profit
margin may fluctuate up or down on a periodic basis and periodic profit margins
may not be representative of the consolidated gross profit margin for the year.
Hurricanes Katrina and Wilma and the resulting gas price increases may have an
adverse impact on the economy and the availability of labor and materials, which
could result in higher construction costs or delays in obtaining materials in
the future. The Company has not noticed a significant increase in costs and
expenses to date.
18
Selling, General & Administrative Expenses
- ------------------------------------------
For the three months ended September 30, 2005, selling, general and
administrative expenses increased $5,252,000 to $21,347,000, or 32.6%, when
compared with the three months ended September 30, 2004. The percentage of
variable selling expense to residential revenue for the three months ended
September 30, 2005 is consistent with that for the three months ended September
30, 2004. Fixed selling, general and administrative expenses for the three
months ended September 30, 2005 are higher than that for the three months ended
September 30, 2004 due to increased advertising and payroll expense. However,
selling, general and administrative expense for the three months ended September
30, 2005 are consistent with those for the three months ended June 30, 2005 and
we believe that selling, general and administrative expense as a percentage of
residential revenue is expected to be under 11% for fiscal 2006.
The selling, general and administrative expenses as a percentage of residential
revenue earned for the three months ended September 30, 2005 increased 1.9% to
13.5% as compared to the 11.6% for the three months ended September 30, 2004.
The increased percentage is primarily due to the increased fixed selling,
general and administrative expenses discussed above.
Income Tax Expense
- ------------------
Income tax expense for the three months ended September 30, 2005 increased
$347,000 to $5,622,000, or 6.6%, from $5,275,000 for the three months ended
September 30, 2004. The increase in income tax expense for the three months
ended September 30, 2005 is attributable to a higher effective tax rate.
Additionally, income tax expense as a percentage of income from operations
before income taxes was 42.0% and 39.1% for the three months ended September 30,
2005 and 2004, respectively. The increase in the effective tax rate is due to a
decrease in favorable permanent differences from previous acquisitions,
partially offset by the inclusion of tax credits for the tax deduction of
qualified production activities provided by the American Jobs Creation Act of
2004.
Net Income
- ----------
Net income for the three months ended September 30, 2005 decreased $424,000, or
5.2%, to $7,778,000, compared with $8,202,000 for the three months ended
September 30, 2004. The decrease in net income was attributable to lower
deliveries in the northern region where the Company has higher gross margins for
the three months ended September 30, 2005 compared to the three months ended
September 30, 2004, as well as a one time profit item of approximately $765,000
recorded during the three months ended September 30, 2004 which is offset by a
reduction in acquisition accounting of $895,000. The $765,000 relates to an item
that was previously deferred pending the resolution of outstanding issues
associated with one of the Company's closed communities. In addition, the higher
effective tax rate for the three months ended September 30, 2005 versus the
three months ended September 30, 2004 accounted for approximately $400,000 of
the reduced fiscal 2006 net income.
Liquidity and Capital Resources
- -------------------------------
On an ongoing basis, the Company requires capital to purchase and develop land,
to construct units, to fund related carrying costs and overhead and to fund
various advertising and marketing programs to facilitate sales. These
expenditures include site preparation, roads, water and sewer lines, impact fees
and earthwork, as well as the construction costs of the homes and amenities. The
Company's sources of capital include funds derived from operations, sales of
assets and various borrowings, most of which are collateralized. The Company
believes that funds generated from operations and financial commitments from
available lenders will provide sufficient capital for the Company to meet its
existing operating needs.
19
Trust Preferred Securities
- --------------------------
The Company issued $30,000,000 of trust preferred securities which mature on
September 30, 2035 and are callable, in whole or in part, at par after five
years. For the first ten years, the securities have a fixed interest rate of
8.52% per annum. Thereafter, the securities have a floating interest rate equal
to three-month LIBOR plus 380 basis points per annum, resetting quarterly. The
securities were placed in a private transaction exempt from registration under
the Securities Act of 1933, as amended, and may not be offered or sold in the
United States absent registration under the Securities Act of 1933, as amended,
or an applicable exemption there from. The transaction was treated as debt for
financial statement purposes. The Company used the proceeds from the sale of
these securities for land purchases and general corporate purposes. The
obligations relating to the trust preferred securities are subordinated to the
Revolving Credit Facility.
Revolving Credit Facility
- -------------------------
At September 30, 2005, the Company had $39,810,000 of borrowing capacity under
its secured revolving credit facility discussed below, of which approximately
$25,360,000 was available to be drawn based upon the Company's borrowing base. A
majority of the Company's debt is variable rate, based on 30-day LIBOR or the
prime rate, and therefore, the Company is exposed to market risk in connection
with interest rate changes. At September 30, 2005, the 30-day LIBOR and prime
rates of interest were 3.86% and 6.75%, respectively.
Share Repurchase Program
- ------------------------
In September 2005, our Board of Directors authorized the repurchase of up to one
million shares of our common stock. The repurchases, which represent
approximately 5% of our 18.8 million shares of common stock currently
outstanding, will be made from time to time through open market purchases or
privately negotiated transactions at our discretion and in accordance with the
rules of the Securities and Exchange Commission. The amount and timing of the
repurchases will depend on market conditions and other factors.
Cash Flow Statement
- -------------------
Net cash used in operating activities for the three months ended September 30,
2005 was $88,674,000, compared to net cash used by operating activities for the
prior year three month period of $80,009,000. The increase in net cash used in
operating activities during the three months ended September 30, 2005 was
primarily attributable to the acquisition of undeveloped land and improved
building lots that will yield approximately 800 building lots with an aggregate
purchase price of approximately $54,028,000. Net cash used in investing
activities for the three months ended September 30, 2005 was $287,000, compared
to $57,043,000 for the prior fiscal period. This decrease was primarily related
to the acquisition of Realen Homes on July 28, 2004. Net cash provided by
financing activities for the three months ended September 30, 2005 was
$56,535,000, compared to $119,581,000 for the prior fiscal period. The decrease
in net cash provided by financing activities is primarily attributable to
borrowings used to acquire Realen Homes during the three months ended September
30, 2004.
20
Lot Positions
- -------------
As of September 30, 2005, the Company owned or controlled approximately 18,000
building lots. Included in the aforementioned lots, the Company had contracted
to purchase, or had under option, undeveloped land and improved building lots
for an aggregate purchase price of approximately $614,838,000 that are expected
to yield approximately 10,148 building lots.
Undeveloped Land Acquisitions
- -----------------------------
In recent years, the process of acquiring desirable undeveloped land has become
extremely competitive, particularly in the northern region, mostly due to the
lack of available parcels suitable for development. In addition, expansion of
regulation in the housing industry has increased the time it takes to acquire
undeveloped land with all of the necessary governmental approvals required to
begin construction. Generally, the Company structures its land acquisitions so
that it has the right to cancel its agreements to purchase undeveloped land by
forfeiture of its deposit under the agreement. As of September 30, 2005,
substantially all of the Company's agreements to purchase undeveloped land were
structured in this manner. For the three months ended September 30, 2005, the
Company forfeited $62,000 of land deposits related to the cancellation of
purchase agreements. Included in the balance sheet captions "Inventory not owned
- - Variable Interest Entities" and "Land deposits and costs of future
development," at September 30, 2005 the Company had $33,029,000 invested in 76
parcels of undeveloped land, of which $20,130,000 is deposits, a portion of
which is non-refundable. Overall undeveloped parcels of land under contract have
an aggregate purchase price of approximately $511,870,000 and are expected to
yield approximately 8,933 building lots.
The Company attempts to further mitigate the risks involved in acquiring
undeveloped land by structuring its undeveloped land acquisitions so that the
deposits required under the agreements coincide with certain benchmarks in the
governmental approval process, thereby limiting the amount at risk. This process
allows the Company to periodically review the approval process and make a
decision on the viability of developing the acquired parcel based upon expected
profitability. In some circumstances the Company may be required to make
deposits solely due to the passage of time. This structure still provides the
Company an opportunity to periodically review the viability of developing the
parcel of land. In addition, the Company primarily structures its agreements to
purchase undeveloped land to be contingent upon obtaining all governmental
approvals necessary for construction. Under most agreements, the Company secures
the responsibility for obtaining the required governmental approvals as the
Company believes that it has significant expertise in this area. The Company
intends to complete the acquisition of undeveloped land after all governmental
approvals are in place. In certain circumstances, however, when all extensions
have been exhausted, the Company must make a decision on whether to proceed with
the purchase even though all governmental approvals have not yet been received.
In these circumstances, the Company performs reasonable due diligence to
ascertain the likelihood that the necessary governmental approvals will be
granted.
Improved Lot Acquisitions
- -------------------------
The process of acquiring improved building lots from developers is extremely
competitive. The Company competes with many national homebuilders to acquire
improved building lots, some of which have greater financial resources than the
Company. The acquisition of improved lots is usually less risky than the
acquisition of undeveloped land as the contingencies and risks involved in the
land development process are borne by the developer. In addition, governmental
approvals are generally in place when the improved building lots are acquired.
21
At September 30, 2005, the Company had contracted to purchase or had under
option approximately 1,215 improved building lots for an aggregate purchase
price of approximately $102,968,000. At September 30, 2005, the Company had
$5,817,000 invested in these improved building lots, of which $5,567,000 was
deposits, a portion of which is non-refundable. There were no deposits forfeited
during the three months ended September 30, 2005 with respect to improved
building lots.
The Company expects to utilize primarily its Revolving Credit Facility as well
as other existing capital resources, to finance the acquisitions of undeveloped
land and improved lots described above. The Company anticipates completing a
majority of these acquisitions during the next several years.
Critical Accounting Policies
- ----------------------------
For a discussion the Company's critical accounting policies, see "Critical
Accounting Policies" under Item 7 of the Company's Annual Report on Form 10-K
for fiscal year ended June 30, 2005 filed with the Securities and Exchange
Commission.
Recent Accounting Pronouncements
- --------------------------------
In December 2004, the FASB revised FAS 123 through the issuance of FAS No. 123
"Share Based Payment", revised ("FAS 123-R"). FAS 123-R is effective for the
Company commencing July 1, 2005. FAS 123-R, among other things, eliminates the
alternative to use the intrinsic value method of accounting for stock based
compensation and requires entities to recognize the cost of employee services
received in exchange for awards of equity instruments based on the grant-date
fair value of those awards (with limited exceptions). The fair value based
method in FAS 123-R is similar to the fair-value-based method in FAS 123 in most
respects, subject to certain key differences. As the Company previously adopted
the fair value recognition provisions of FAS No. 123 prospectively for all stock
awards granted, commencing on July 1, 2002, the impact of adopting FAS 123-R did
not have a significant impact on the financial position or results of operations
of the Company. For the three months ended September 30, 2005, the Company
recorded pretax compensation expense associated with stock awards of $86,000.
Total compensation cost related to nonvested awards not yet recognized of
$4,051,000 will be recognized according to vesting schedules through March 2015.
The Company utilizes the Black-Scholes option pricing model to calculate the
compensation expense associated with stock options.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, for the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" (FSP FAS 109-1). FSP FAS 109-1 clarifies that the
deduction permitted under the Jobs Creation Act of 2004 will be treated as a
"special deduction" as described in Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes." As such, the special deduction has no
effect on deferred tax assets and liabilities existing at the date of enactment.
The impact of the deduction will be reported in the period in which the
deduction is claimed. The Company files a consolidated return on a calendar
year. Accordingly, the Company began reflecting the special deduction with
respect to its operations effective January 1, 2005. Its expected impact was and
will be to lower the effective tax provision in the periods in which the
deduction may be claimed and that this benefit will increase as the deduction is
phased in under the statute.
See Note A for discussion regarding the accounting for VIEs.
22
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
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Private Securities Litigation Reform Act of 1995
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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 Future increases in interest rates, a decrease in the availability of
mortgage financing and other economic factors outside of the Company's
control, such as consumer confidence and declines in employment
levels, could lead to fewer home sales, which could adversely affect
the Company's total earned revenues and earnings.
o The Company is subject to substantial risks with respect to the land
and home inventories it maintains and fluctuations in market
conditions may affect the Company's ability to sell its land and home
inventories at expected prices, if at all, which could reduce the
Company's total earned revenues and earnings.
o The Company's business is subject to governmental regulations that may
delay, increase the cost of, prohibit or severely restrict the
Company's development and homebuilding projects and reduce its total
earned revenues and growth.
o States, cities and counties in which the Company operates have
adopted, or may adopt, slow or no growth initiatives which would
reduce the Company's ability to build and sell homes in these areas
and could adversely affect the Company's total earned revenues and
earnings.
o The Company may not be successful in its effort to identify, complete
or integrate acquisitions, or to enter new markets through start-up
operations, which could disrupt the activities of the Company's
current business, adversely affect the Company's results of operations
and future growth or cause losses.
o The Company is dependent on the services of certain key employees and
the loss of their services could harm the Company's business.
o The Company may not be able to acquire suitable land at reasonable
prices, which could result in cost increases the Company is unable to
recover and reduce the Company's total earned revenues and earnings.
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o The competitive conditions in the homebuilding industry could increase
the Company's costs, reduce its total earned revenues and earnings and
otherwise adversely affect its results of operations or limit its
growth.
o The Company may need additional financing to fund its operations or to
expand its business, and if the Company is unable to obtain sufficient
financing or such financing is obtained on adverse terms, the Company
may not be able to operate or expand its business as planned, which
could adversely affect the Company's results of operations and future
growth.
o Shortages of labor or materials and increases in the price of
materials can harm the Company's business by delaying construction,
increasing costs, or both.
o The Company depends on the continued availability and satisfactory
performance of its subcontractors which, if unavailable, could have a
material adverse effect on the Company's business by limiting its
ability to build and deliver homes.
o The Company is subject to construction defect, product liability and
warranty claims arising in the ordinary course of business that could
adversely affect its results of operations.
o The Company may be subject to mold litigation and mold claims arising
in the ordinary course of business for which the Company has no
insurance that could adversely affect the Company's results of
operations.
o The Company's business, total earned revenues and earnings may be
adversely affected by adverse weather conditions or natural disasters.
o The Company may be subject to environmental liabilities that could
adversely affect its results of operations or the value of its
properties.
o Increases in taxes or government fees could increase the Company's
costs and adverse changes in tax laws could reduce customer demand for
the Company's homes, either of which could reduce the Company's total
earned revenues or profitability.
o Jeffrey P. Orleans, Chairman and Chief Executive Officer and the
Company's majority shareholder, can cause the Company to take certain
actions or preclude the Company from taking actions without the
approval of the other shareholders and may have interests that could
conflict with the interests of other shareholders.
o The Company has entered into several transactions with related
parties, including entities controlled by Mr. Jeffrey P. Orleans,
which may create conflicts of interest.
o Acts of war or terrorism may seriously harm the Company's business.
o The Company's substantial indebtedness could adversely affect its
financial condition and prevent it from fulfilling its debt service
obligations.
o To service the Company's indebtedness, the Company requires a
significant amount of cash. The Company's ability to generate cash
depends on many factors beyond its control.
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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 or the prime rate, and, therefore,
affected by changes in market interest rates. Based on current operations, an
increase or decrease in interest rates of 100 basis points will result in a
corresponding increase or decrease in cost of sales and interest charges
incurred by the Company of approximately $4,200,000 in a fiscal year, a portion
of which will be capitalized and included in cost of sales as homes are
delivered. The Company believes that reasonably possible near-term interest rate
changes will not result in a material negative effect on future earnings, fair
values or cash flows of the Company. Generally, the Company has been able to
recover any increased costs of borrowing through increased selling prices;
however, there is no assurance the Company will be able to continue to increase
selling prices to cover the effects of any increase in near-term interest rates.
Changes in the prices of commodities that are a significant component of home
construction costs, particularly lumber, may result in unexpected short term
increases in construction costs. Since the sales price of the Company's homes is
fixed at the time the buyer enters into a contract to acquire a home and because
the Company generally contracts to sell its homes before construction begins,
any increase in costs in excess of those anticipated may result in gross margins
lower than anticipated for the homes in the Company's backlog. The Company
attempts to mitigate the market risks of price fluctuation of commodities by
entering into fixed-price contracts with its subcontractors and material
suppliers for a specified period of time, generally commensurate with the
building cycle.
There have been no material adverse changes to the Company's (1) exposure to
risk and (2) management of these risks, since June 30, 2005.
Item 4. Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer, President and Chief Operating Officer, and Chief Financial
Officer, evaluated the effectiveness of the Company's disclosure controls and
procedures as of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer, President and Chief Operating Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed by the Company in reports filed under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Security and Exchange Commission's rules and
forms. There has been no change in the Company's internal control over financial
reporting during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
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PART II. OTHER INFORMATION
Item 6. Exhibits.
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(a) Exhibits.
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10.1 Form of Restricted Stock Award Agreement (Incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K filed with
the Commission on October 26, 2005).
31.1* Certification of Jeffrey P. Orleans pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2* Certification of Michael T. Vesey pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.3* Certification of Joseph A. Santangelo pursuant to Section 302
Sarbanes-Oxley Act of 2002.
32.1* Certification of Jeffrey P. Orleans pursuant to Section 906
Sarbanes-Oxley Act of 2002.
32.2* Certification of Michael T. Vesey pursuant to Section 906
Sarbanes-Oxley Act of 2002.
32.3* Certification of Joseph A. Santangelo pursuant to Section 906
Sarbanes-Oxley Act of 2002.
* Exhibits filed herewith electronically.
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SIGNATURES
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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 4, 2005 Michael T. Vesey
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Michael T. Vesey
President and Chief Operating Officer
November 4, 2005 Joseph A. Santangelo
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Joseph A. Santangelo
Treasurer, Secretary and Chief
Financial Officer
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EXHIBIT INDEX
31.1 Certification of Jeffrey P. Orleans pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Michael T. Vesey pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.3 Certification of Joseph A. Santangelo pursuant to Section 302
Sarbanes-Oxley Act of 2002.
32.1 Certification of Jeffrey P. Orleans pursuant to Section 906
Sarbanes-Oxley Act of 2002.
32.2 Certification of Michael T. Vesey pursuant to Section 906
Sarbanes-Oxley Act of 2002.
32.3 Certification of Joseph A. Santangelo pursuant to Section 906
Sarbanes-Oxley Act of 2002.