10-K 1 tenk.txt 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-6830 ORLEANS HOMEBUILDERS, INC. (formerly FPA Corporation) ------------------------------------------------------ (Exact name of registrant as specified in its charter)
One Greenwood Square, #101 3333 Street Road Delaware 59-0874323 Bensalem, PA 19020 ------------------------------- ------------------- -------------------------------------- (State or other jurisdiction of (I.R.S. Employer (Address of Principal Executive Office) incorporation or organization) Identification No.)
(215) 245-7500 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on which Registered -------------------------------------- ----------------------- Common Stock, $.10 Par Value Per Share American Stock Exchange (also formerly registered under Section 12(g) of the Act) Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ____ The aggregate market value of the registrant's Common Stock held by nonaffiliates of the registrant as of August 29, 2003 was approximately $25,364,000. Number of shares of the registrant's outstanding Common Stock as of August 29, 2003 was 12,667,565 shares (excluding 697,232 shares held in Treasury). Documents incorporated by reference: Part III is incorporated by reference to the proxy statement for the annual meeting of Stockholders scheduled to be held in December, 2003.
TABLE OF CONTENTS PART I ------ PAGE ---- ITEM 1. Business 1 ITEM 2. Properties 10 ITEM 3. Legal Proceedings 10 ITEM 4. Submission of Matters to a Vote of Security Holders 14 PART II ------- ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters 14 ITEM 6. Selected Financial Data 16 ITEM 7. Management's Discussion and Analysis of Financial 17 Condition and Results of Operations ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 38 ITEM 8. Financial Statements and Supplementary Data 39 ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 65 ITEM 9A. Controls and Procedure 66 PART III -------- ITEM 10. Directors and Executive Officers of Registrant 66 ITEM 11. Executive Compensation 66 ITEM 12. Security Ownership of Certain Beneficial Owners 66 and Management ITEM 13. Certain Relationships and Related Transactions 66 ITEM 14. Principal Accountant Fees and Services 67 PART IV ------- ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 67
Item l. Business. ------- --------- General ------- Orleans Homebuilders, Inc. and its subsidiaries (collectively, the "Company", "OHB" or "Orleans") primarily develops residential communities in Southeastern Pennsylvania, Central and Southern New Jersey, and the metropolitan areas of Richmond, Virginia and Charlotte, Greensboro and Raleigh, North Carolina. The Company has operated in the Pennsylvania and New Jersey areas for over 85 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 (see Note 2 of Notes to Consolidated Financial Statements for further details on the acquisition). In July 2003, the Company entered the central Florida market through its acquisition of Masterpiece Homes, Inc. ("Masterpiece"), an established homebuilder located in Orange City, Florida. Masterpiece reported revenues for the calendar year ended 2002 and the six months ended June 30, 2003 of approximately $26,300,000 and $20,000,000, respectively. Except as specifically indicated, information in this report does not include the operations of Masterpiece. The Company operates as a land developer, primarily for its own use, and as a builder. The Company builds and sells condominiums, townhouses and single-family homes to first-time homebuyers, first and second-time move-up homebuyers, luxury homebuyers, empty nesters and active adult homebuyers. During the fiscal year ended June 30, 2003 ("fiscal 2003"), the Company delivered 1,243 homes, as compared to 1,322 homes in the fiscal year ended June 30, 2002 ("fiscal 2002"). Revenues earned from residential property activities increased by 9% during fiscal 2003 to $382,570,000 as compared to $351,060,000 in fiscal 2002. The Company's backlog at June 30, 2003 was $285,767,000, representing 752 homes, which was 38.7% greater than the backlog of $206,064,000, representing 647 homes, at June 30, 2002. Jeffrey P. Orleans, Chairman of the Board and Chief Executive Officer of the Company, owns directly or indirectly approximately 7,940,794 shares of common stock, par value $.10 per share ("Common Stock"), which represents approximately 62.7% of the outstanding shares, excluding treasury shares, as of August 29, 2003. In addition, if Mr. Orleans were to convert his Convertible Subordinated 7% Note (see Note 6 of Notes to Consolidated Financial Statements) and his Series D Preferred Stock (see Note 7 of Notes to Consolidated Financial Statements) into Common Stock, he would then own 70.5% of the then outstanding Common Stock. The Company makes available free of charge through the Company's website (orleanshomes.com) its annual reports on Form 10-K, quarterly reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material, or furnishers it to, the Securities and Exchange Commission. 1 Residential ----------- The Company's activities in developing residential communities include the sale of residential properties and the sale of land and developed homesites to independent builders. The Company occasionally participates in joint ventures in certain of these activities. The following table sets forth certain information at June 30, 2003 with respect its residential developments.
RESIDENTIAL DEVELOPMENTS AS OF JUNE 30, 2003 ---------------------------------------------------------------------------------------------------------------- Total Units Total Units Remaining Under Under Number of Lots Contract Purchase State Communities Unit Price Range Owned of Sale Agreements ---------- ----------------- ------------------------- ------------- ------------ --------------- NC 31 $132,000 - $404,000 820 116 690 NJ 16 $168,000 - $758,000 941 327 2,700 PA 7 $276,000 - $698,000 505 135 2,250 SC 3 $186,000 - $318,000 39 17 120 VA 22 $213,000 - $533,000 258 157 1,100 ----------------- ------------- ------------ --------------- 79 2,563 752 6,860 ================= ============= ============ ===============
2 The following table sets forth certain details as to residential sales activity. The information provided is for the twelve months ended June 30, 2003, 2002, and 2001 in the case of revenues earned and new orders, and as of June 30, 2003, 2002, and 2001 in the case of backlog.
Year Ended June 30, -------------------------------- (in thousands, except Home data) -------------------------------- 2003 2002 2001 -------------------------------- Northern Region New Jersey and Pennsylvania Revenues earned $247,035 $223,987 $200,108 Homes 766 808 739 Average Price $ 323 $ 277 $ 271 New Orders $286,345 $229,971 $203,102 Homes 761 798 740 Average Price $ 376 $ 288 $ 274 Backlog $189,934 $150,624 $130,893 Homes 462 467 410 Average Price $ 411 $ 323 $ 319 Southern Region (1) North Carolina, South Carolina and Virginia Revenues earned $135,535 $127,073 $ 82,276 Homes 477 514 346 Average Price $ 284 $ 247 $ 238 New Orders $175,928 $126,308 $109,991 Homes 587 481 443 Average Price $ 300 $ 263 $ 248 Backlog $ 95,833 $ 55,440 $ 56,205 Homes 290 180 213 Average Price $ 330 $ 308 $ 264 Combined Regions Revenues earned $382,570 $351,060 $282,384 Homes 1,243 1,322 1,085 Average Price $ 308 $ 266 $ 260 New Orders $462,273 $356,279 $313,093 Homes 1,348 1,279 1,183 Average Price $ 343 $ 279 $ 265 Backlog $285,767 $206,064 $187,098 Homes 752 647 623 Average Price $ 380 $ 318 $ 300
(1) For the year ended June 30, 2001 ("Fiscal 2001") information on revenue earned and new orders is for the period beginning October 13, 2000, the date the Company entered this market through its acquisition of PLC. 3 Operating Policies ------------------ Construction ------------ The Company has historically designed its own products with the assistance of unaffiliated architectural firms as well as supervised the development and building of its communities. When the Company constructs units, it acts as a general contractor and employs subcontractors at specified prices for the installation of site improvements and construction of its residential units. Agreements with subcontractors provide for a fixed price for work performed or materials supplied and are generally short-term. The Company generally begins construction of condominium and townhouse buildings after commitments for at least 50% of the homes in that building. In addition, a majority of the single family detached homes are constructed after contracts are signed and mortgage approval has been obtained. Depending on the market conditions and the specific community, the Company may also build speculative homes. Speculative homes are homes that are under construction or completed, but for which the Company does not have a signed sales contract. These homes are often marketed to individuals who are relocating and have immediate housing needs. Many of these homes are sold while under construction. The Company monitors its speculative inventory to determine adequate return on investment. The Company does not manufacture any of the materials or other items used in the development of its communities, nor does the Company maintain substantial inventories of materials. Standard building materials, appliances and other components are purchased in volume. The Company has not experienced significant delays in obtaining materials needed by it to date and has long-standing relationships with many of its major suppliers and contractors. However, prices for these goods and services may fluctuate due to various factors, including supply and demand shortages which may be beyond the control of the Company or its suppliers and contractors. None of the Company's suppliers accounted for more than 10% of the Company's total purchases in the fiscal 2003. Sales and Customer Financing ---------------------------- The Company conducts a marketing program that is directed to purchasers of primary residences. In New Jersey and Pennsylvania, A.P. Orleans, Inc., a wholly owned subsidiary of the Company, is the exclusive sales agent. In this region, residential communities are sold principally through on-site sales offices utilizing the Company's own sales team as well as outside sales brokers. In May 2003, the Company opened an 8,000 square foot design center, conveniently located for most of its New Jersey and Pennsylvania residential developments, in Bensalem, Pennsylvania. The design center concept provides a large display of 4 numerous options and upgrades offered for sale by the Company. Thus, instead of making selections from a small sample of items located at each community, the homebuyer now has the opportunity to view numerous options and upgrades as if they were already installed. In addition, homebuyers have the opportunity to work one-on-one with a design consultant when making their selections. The Company believes that these benefits to the customer will increase the options and upgrades sold on a per home basis and also give the Company further insight into buyer preferences. In North Carolina, South Carolina and Virginia, the Company utilizes a combination of outside sales brokers, on-site sales office staff and inside sales coordinators. The outside sales brokers and, in select communities, on-site sales office staff, are responsible for the initial customer contact and sale of the homes and are generally compensated on a commission basis. The inside sales coordinators are responsible for managing the customer through the new home orientation and selection process. The inside sales coordinators are generally compensated with both salary and commission. Fully furnished and landscaped model homes and sales centers are constructed to promote sales. A variety of custom changes are permitted at the request of the homebuyers. The Company advertises extensively using newspapers, radio, billboards, direct mail advertising, illustrated brochures and via the internet, through its own website as well as websites of others. The Company's websites, orleanshomes.com and parkerorleans.com, are designed to provide a visitor with information regarding the Company's communities, including model type and elevation, floor plan layout and price range, as well as a multimedia gallery offering panoramic video tours or streaming video presentations of some of its homes. The Company also has a Preferred Buyer Program, a special discount program which makes it easy for anyone living in an Orleans home to move into another Orleans community. The Company's customers generally require mortgage financing to complete their purchases. The Company has a mortgage subsidiary to assist its homebuyers in obtaining financing from unaffiliated lenders and the mortgage subsidiary receives a fee for this service. In addition, the Company offers numerous special mortgage programs designed to attract the homebuyer. Land Policy ----------- The Company acquires land in order to provide an adequate and well-located supply for its residential building operations. The Company's strategy for land acquisition and development is dictated by specific market conditions where the Company conducts its operations. In general, the Company seeks to minimize the overall risks associated with acquiring undeveloped land by structuring purchase agreements that allow the Company to control the process of obtaining environmental and other regulatory approvals, but defer the 5 acquisition of such land until the approval process has been completed and the Company is ready to commence construction. In certain regions, primarily the southern region, the Company acquires improved lots from land developers on a lot takedown basis. Under a typical agreement with a land developer, a minimal number of lots are purchased initially, and the remaining lot takedowns are subject to the terms of an option agreement. In evaluating possible opportunities to acquire land, the Company considers a variety of factors including feasibility of development, proximity to developed areas, population growth patterns, customer preferences, estimated cost of development and availability and cost of financing. The Company engages in many phases of development activity, including land and site planning, obtaining environmental and other regulatory approvals, and the construction of roads, sewer, water and drainage facilities, recreation facilities and other amenities. The Company considers economic and market conditions for residential lots in each of its various communities in assessing the relative desirability of constructing homes or selling lots to other builders. As of June 30, 2003, the Company had contracted to acquire 42 parcels of undeveloped land and approximately 1,910 improved lots in its existing markets, totaling approximately 6,860 residential building lots for an aggregate purchase price of approximately $301,208,000. 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. As of June 30, 2003, the Company had incurred costs associated with the acquisition and development of these parcels aggregating $20,778,000, including $10,556,000 of paid deposits. Furthermore, the agreements are generally subject to obtaining the required regulatory approval. Contingent on the aforementioned, the Company anticipates completing a majority of these acquisitions during the next several years. Cost Sharing Arrangements and Joint Ventures: --------------------------------------------- From time to time, the Company has developed and owned projects through joint ventures with other parties. More recently, in the northern region, the Company has partnered with other homebuilders and developers to acquire land and/or to develop or improve common off-site facilities, such as sewer treatment plants. Most of these agreements are set up as cost sharing arrangements whereby the homebuilders and developers share in the cost of acquiring the parcel or improving the off-site facility. Determinations by the Company to enter into these agreements have been based upon a number of factors, including the opportunity to limit the financial exposure involved on the acquisition of larger parcels of land and the ability to pool resources with other homebuilders 6 and developers with respect to completion of the regulatory approval process for a particular parcel. Once the approval process is complete and the land has been acquired, each Company will typically take ownership of a segment of the parcel and begin its own land development and construction process. In some communities in the southern region, as an alternative to land acquisition financing, the Company has partnered with developers to construct and sell homes on the developers' lots. At the time of settlement, the developer receives a fixed amount for the cost of the lot and a portion of the profits from the sale of the home. The Company will continue to evaluate all opportunities related to cost sharing agreements and joint ventures; however, at the present time, this does not constitute a material portion of the Company's operations. Government Regulation --------------------- The Company and its subcontractors are subject to continuing compliance requirements of various federal, state and local statutes, ordinances, rules and regulations regarding zoning, plumbing, heating, air conditioning and electrical systems, building permits and similar matters. The intensity of development in recent years in areas in which the Company is actively developing real estate has resulted in increasingly restrictive regulation and moratoriums by governments due to density, sewer and water, ecological and similar factors. Further expansion and development will require prior approval of federal, state and local authorities and may result in delay or curtailment of development activities and costly compliance programs. In January 1983, the New Jersey Supreme Court rendered a decision known as the "Mount Laurel II" decision, which has the effect of requiring certain municipalities in New Jersey to provide housing for persons of low and moderate income. In order to comply with such requirements, municipalities in New Jersey may require developers, including the Company, in connection with the development of residential communities, to contribute funds or otherwise assist in the achievement of a fair share of low or moderate income housing in such municipalities. To satisfy these requirements, these municipalities generally approve additional lots within the residential communities the Company is developing and require the Company to build low and moderate income housing on those lots. The Company's gross profit on homes built on the lots approved for low and moderate income housing is usually substantially less than the gross profit the Company recognizes on other homes in those communities. The Company had residential property revenue for low and moderate income housing units totaling approximately $617,000 and $1,780,000 in fiscal 2003 and 2002, respectively. The Company had no residential property revenue for low and moderate income housing units in fiscal 2001. In addition, the Company 7 contributed $200,000, $815,000 and $242,000 to municipalities in fiscal 2003, 2002, and 2001, respectively, in order to satisfy low and moderate income housing requirements for municipalities in which it builds. Further, the Company currently has commitments with four municipalities for affordable housing contributions totaling approximately $2,885,000, payable in installments through June 2008. In recent years, regulation by federal and state authorities relating to the sale and advertising of condominium interests and residential real estate has become more restrictive and extensive. In order to advertise and sell condominiums and residential real estate in many jurisdictions, including Pennsylvania and New Jersey, the Company has been required to prepare a registration statement or other disclosure document and, in some cases, to file such materials with a designated regulatory agency. Despite the Company's past ability to obtain necessary permits and authorizations for its projects, more stringent requirements may be imposed on developers and home builders in the future. Although the Company cannot determine the effect of such requirements, they could result in time-consuming and expensive compliance programs and substantial expenditures for environmental controls which could have a material adverse effect on the results of operations of the Company. In addition, the continued effectiveness of permits already granted is subject to many factors which are beyond the Company's control, including changes in policies, rules and regulations and their interpretation and application. Environmental Regulation and Litigation --------------------------------------- Development and sale of real property creates a potential for environmental liability on the part of the developer, owner, or any mortgage lender for its own acts or omissions as well as those of prior owners of the subject property or adjacent parcels. If hazardous substances are discovered on or emanating from any of the Company's properties, the Company as well as any prior owners or operators may be held liable for costs and liabilities relating to such hazardous substances. Environmental studies are generally undertaken in connection with property acquisitions by the Company and the Company endeavors to obtain Phase I environmental site assessments on all properties acquired. Further governmental regulation on environmental matters affecting residential development could impose substantial additional expense to the Company, which could adversely affect the results of operations of the Company or the value of properties owned, or under contract of purchase by the Company. (See Note 11 of Notes to Consolidated Financial Statements and Item 3, Legal Proceedings, for a discussion of specific environmental litigation.) 8 Competition ----------- The real estate industry is highly competitive. The Company competes on the basis of its reputation, location, design, price, financing programs, quality of product and related amenities. The Company competes with regional and national home builders in its areas of development, some of which have greater sales, financial resources and geographical diversity than the Company. Numerous local residential builders and individual resales of residential units and homesites provide additional competition. Employees --------- The Company, as of June 30, 2003, employed 147 executive, administrative and clerical personnel, 85 sales personnel and 173 construction supervisory personnel and laborers, for a total of 405 employees. The level of construction and sales employees varies throughout the year in relation to the level of activities at the Company's various developments. The Company has had no work stoppages and considers its relations with employees to be good. Economic Conditions ------------------- The Company's business is affected by general economic conditions in the United States and its related regions and particularly by the level of interest rates. The Company cannot determine whether interest rates will continue to be at levels attractive to prospective home buyers or whether mortgage and construction financing will continue to be available. Seasonality ----------- The sale and construction of homes may be adversely affected by harsh winter weather conditions in some of the regions in which the Company operates. 9 Item 2. Properties. ------- ----------- Lease of Executive Offices -------------------------- The Company leases office space for its corporate headquarters at 3333 Street Road, Bensalem, Pennsylvania 19020, consisting of approximately 18,500 square feet. The Company also leases additional office space consisting of approximately 8,000 square feet in Bensalem, Pennsylvania, 4,600 square feet in Hainesport, New Jersey, 14,000 square feet in Richmond, Virginia and a total of 12,000 square feet in three North Carolina locations for certain centralized support services related to operations in those regions. Item 3. Legal Proceedings. ------- ------------------ General ------- The Company is a plaintiff or defendant in various cases arising out of its business operations. The Company believes that it has adequate reserves, insurance or meritorious defenses in all pending cases in which it is a defendant and that adverse decisions in any or all of the cases would not have a material effect upon the Company. Personal Injury --------------- 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, which was further amended in June 2003, will be paid entirely by the Company's liability insurance carrier. A lump sum payment of approximately $5,600,000 was paid to the plaintiff. In addition, payment in the amount of approximately $1,300,000 is to be placed in a structured settlement annuity which shall tender payments to the plaintiff, or the plaintiff's designated beneficiary in the event of the death of the plaintiff, in the amount of $5,000 per month through 2033, such payment increasing annually by 3%. Further, a payment of approximately $2,100,000 is to be placed , by the insurance carrier, in a structured settlement annuity which shall tender payments to the plaintiff in the amount of $120,000 per year beginning September 2003 and annually thereafter until the death of the plaintiff. 10 Carbon Monoxide Litigation -------------------------- 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 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 of $470,000, in connection with the settlement agreement. 11 Colts Neck Litigation --------------------- Pursuant to an Order dated February 6, 1996 issued by the New Jersey Department of Environmental Protection ("NJDEP"), the Company submitted a Closure/Post-Closure Plan ("Plan") and Classification Exception Area ("CEA") for certain affected portions of Colts Neck Estates, a single family residential development built by the Company in Washington Township, Gloucester County, New Jersey. The affected areas include those portions of Colts Neck where solid waste allegedly was deposited. NJDEP approved the Plan and CEA on July 22, 1996 and the Company carried it out thereafter. NJDEP as a standard condition of its approval of the Plan and CEA reserves the right to amend its approval to require additional remediation measures if warranted. Neither the implementation of the Plan nor CEA is expected to have a material adverse effect on the Company's results of operations or its financial position. Approximately 145 homeowners at Colts Neck instituted three lawsuits against the Company, which were separately filed in state and Federal courts between April and November 1993. These suits were consolidated in the United States District Court for the District of New Jersey and were subject to court-sponsored mediation. Asserting a variety of state and federal claims, the plaintiffs in the consolidated action alleged that the Company and other defendants built and sold them homes which had been constructed on and adjacent to land which had been used as a municipal waste landfill and a pig farm. The complaints asserted claims under the federal Comprehensive Environmental Response, Compensation and Liability Act, the Federal Solid Waste Disposal Act, the New Jersey Sanitary Landfill Facility Closure and Contingency Act, the New Jersey Spill Compensation and Control Act, as well as under state common law and other statutory law. In September 1993, the Company brought an action in New Jersey state court against more than 30 of its insurance companies seeking indemnification and reimbursement of costs of defense in connection with the three Colts Neck actions referred to above. As a result of the court sponsored mediation, the Company and the plaintiffs in the consolidated federal litigation entered into a settlement agreement. Under that agreement, which was approved by the Court, a $6,000,000 judgment was entered against the Company in favor of a class comprising most of the current and former homeowners. The Company, which had paid $650,000 on August 28, 1996 to the plaintiff class, has no liability for the remainder of the judgment, which is to be paid solely from the proceeds of the state court litigation against the Company's insurance carriers. Although, under the settlement agreement the Company is obligated to prosecute and fund the litigation against its insurance companies, the Company is entitled to obtain some reimbursement of those expenses. Specifically, under the settlement agreement, the Company may obtain reimbursement of its aggregate litigation expenses in excess of $100,000 incurred in connection with its continued 12 prosecution of the insurance claims to the extent that settlements are reached and to the extent that the portion of those settlement funds designated to fund the litigation are not exhausted. The Company's right to reimbursement may, under certain circumstances, be limited to a total of $300,000. In August 2002, settlement agreements were reached with all remaining insurance company defendants to settle the Colts Neck insurance litigation. Under the terms of the settlement agreement between the Company and the plaintiffs, the proceeds from the insurance settlements were paid to the plaintiffs. The Company, in turn, is relieved of all further obligations to prosecute the Colts Neck insurance litigation. 13 Item 4. Submission of Matters to a Vote of Security Holders. ------- ---------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. Item 5. Market for Registrant's Common Stock and Related Stockholder Matters. ------- --------------------------------------------------------------------- The principal market on which the Company's Common Stock is traded is the American Stock Exchange, Inc. (Symbol: OHB). The high and low sales prices on the American Stock Exchange for the periods indicated below are as follows:
Fiscal year ended June 30, High Low -------------- ---- --- 2003 First Quarter $ 8.55 $ 6.16 Second Quarter 8.15 6.50 Third Quarter 8.74 6.93 Fourth Quarter 11.90 6.90 2002 First Quarter $ 3.18 $ 2.20 Second Quarter 7.00 2.30 Third Quarter 9.34 5.55 Fourth Quarter 9.90 6.30
The number of common stockholders of record of the Company as of August 29, 2003 was approximately 200. The Company has not paid a cash dividend since December 1982. Payment of dividends will depend upon the earnings of the Company, its funds derived from operations, its working capital needs, its debt service requirements, its general financial condition and other factors (including, without limitation, restrictions in certain financing agreements). No assurance can be given that the Company will pay dividends in the future. 14 Equity Compensation Plan Information
Number of securities remaining available for Number of securities to be future issuance under issued upon exercise of Weighted-average exercise equity compensation plans outstanding options, price of outstanding (excluding securities warrants options, warrants and reflected in Plan category and rights rights column (a)) ------------- -------------------------- ------------------------- ------------------------ (a) (b) (c) Equity compensation plans approved by security holders ..... 637,500 $1.53 255,000 Equity compensation plans not approved by security holders ..... (1) N/A N/A Total....................... 677,500 $1.49 255,000
(1) In connection with the Company's acquisition of PLC on October 13, 2000, the Company entered into employment agreements with certain of the former PLC shareholders. Performance under the employment agreements entitles the former PLC shareholders to an aggregate of 150,000 shares of common stock of the Company issuable in equal installments on each of the first four anniversaries of the closing of the acquisition. Through June 30, 2003, the Company had issued 75,000 shares of common stock under these agreements. The former PLC shareholders have the right to cause the Company to repurchase the common stock issued pursuant to the PLC acquisition and the employment agreements approximately five years after the closing of the acquisition at a price of $3.33 per share. The agreement pursuant to which the Company acquired PLC on October 13, 2000 (the "Acquisition Agreement") provides for the issuance to the former PLC shareholders of an aggregate of 150,000 shares of the Company's common stock in equal installments on each of the first four anniversaries of the closing of the acquisition. In addition, in connection with the Company's acquisition of PLC, the Company entered into employment agreements the with the former PLC shareholders (the "Employment Agreements"). Performance under the Employment Agreements entitles the former PLC shareholders to an aggregate of 150,000 shares of the Company's common stock also to be issued in equal installments on each of the first four anniversaries of the closing of the acquisition. During each of fiscal 2003 and 2002, the Company issued 75,000 shares of common stock pursuant to these agreements. This issuance was exempt from registration under Section 4(2) of the Securities Act of 1933 as a result of the limited number of persons to whom the shares were issued and the fact that the obligation to issue the shares was the result of a negotiated transaction. The Company anticipates that it will issue the balance of the shares in accordance with the terms of the Acquisition Agreement and the Employment Agreements. 15 Item 6. Selected Financial Data. The following table sets forth selected financial data for the Company and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included under Item 8 of this Form 10-K.
Year Ended June 30, (In thousands, except per share data) Operating Data 2003 2002 2001 2000 1999 -------------- ---- ---- ---- ---- ---- Earned revenues $ 388,485 $ 354,656 $ 287,222 $ 178,997 $ 150,573 Net income available for common shareholders 27,087 17,703 10,549 7,329 5,220 Per share data for net income available for common shareholders: Basic 2.18 1.51 0.91 0.65 0.46 Diluted 1.65 1.09 0.67 0.49 0.36
Balance at June 30, (In thousands) Balance Sheet Data 2003 2002 2001 2000 1999 ------------------ ---- ---- ---- ---- ---- Residential properties $ 109,895 $ 112,279 $ 100,950 $ 65,669 $ 51,800 Land and improvements 100,791 82,699 71,739 61,991 59,763 Inventory not owned 18,443 - - - - Total assets 290,709 238,499 213,500 150,328 136,537 Mortgage obligations secured by real estate 106,707 113,058 102,605 69,344 67,129 Other notes payable 2,531 4,974 11,669 7,563 8,951 Shareholders' equity 89,539 61,655 43,820 33,271 25,942
The Company has not paid a cash dividend since December 1982. 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ------------------------------------------------------------ Orleans Homebuilders, Inc. and its subsidiaries (collectively, the "Company", "OHB" or "Orleans") are currently engaged in residential real estate development in New Jersey, North Carolina, Pennsylvania, South Carolina and Virginia. The Company has operated in the Pennsylvania and New Jersey areas for over 85 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 (see Note 2 of Notes to Consolidated Financial Statements for further details on the acquisition). In July 2003, the Company entered the central Florida market through its acquisition of Masterpiece Homes, Inc. ("Masterpiece"), an established homebuilder located in Orange City, Florida. Masterpiece reported revenues for the calendar year ended 2002 and the six months ended June 30, 2003 of approximately $26,300,000 and $20,000,000, respectively. Except as specifically indicated, information in this report does not include the operations of Masterpiece. Results of Operations --------------------- The tables included in "Item 1 - Business" summarize the Company's revenues, new orders and backlog data for fiscal 2003 with comparable data for fiscal 2002 and 2001. Fiscal Years Ended June 30, 2003 and 2002 ----------------------------------------- Orders and Backlog ------------------ The dollar value of new orders for fiscal 2003 increased $105,994,000, or 29.8%, to $462,273,000 on 1,348 homes compared to $356,279,000 on 1,279 homes for fiscal 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 23%, to $343,000 per home for fiscal 2003, compared to $279,000 per home for 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 in fiscal 2003, when compared with the same communities and products offered for sale in fiscal 2002. 17 Overall the number of new orders for fiscal 2003 increased by 69 homes, or 5.4%, to 1,348 homes compared to 1,279 homes for fiscal 2002. In the northern region, the number of new orders for fiscal 2003 decreased to 761 homes from 798 homes in fiscal 2002 due to a change in the Company's product offerings to more single family homes when compared with the prior fiscal year. 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 believes is due to the intensity of development in recent years. In the southern region, the number of new orders for fiscal 2003 increased to 587 homes from 481 homes in fiscal 2002 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 backlog at June 30, 2003 increased $79,703,000, or approximately 38.7%, to $285,767,000 on 752 homes compared to the backlog at June 30, 2002 of $206,064,000 on 647 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. Operating Revenues ------------------ Earned revenues for fiscal 2003 increased $33,829,000 to $388,485,000, or 9.5%, compared to fiscal 2002. Earned revenues principally consist of revenues from the sale of residential properties, but also include revenue from land sales, interest income, property management fees and mortgage processing income. Revenues from the sale of residential homes included 1,243 homes totaling $382,570,000 during fiscal 2003, as compared to 1,322 homes totaling $351,060,000 during fiscal 2002. The increase in residential revenue earned is due to an increase in northern region residential revenue earned of approximately $23,048,000 and an increase in southern region residential revenue earned of approximately $8,462,000, compared with the prior fiscal year ended June 30, 2002. The overall increase in residential revenue earned is attributable to an increase in the average selling price per home for fiscal 2003, compared to the prior fiscal year, partially offset by a decrease in homes delivered in fiscal 2003 compared to fiscal 2002. 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 18 resulted in additional favorable pricing conditions for homebuilders. The overall decrease in homes delivered is partially due to a shift in homebuyer patterns in the southern region to more pre-construction sales rather than pre-built specification home sales. Fewer homes have been delivered in the southern region in fiscal 2003 when compared with fiscal 2002 as pre-construction new orders take longer to fulfill than new orders for pre-built specification homes. In addition, a change in the Company's product offerings, to more single family homes, has resulted in fewer homes delivered during fiscal 2003 when compared with fiscal 2002. Further, harsh winter weather conditions in the regions in which the Company operates have also contributed to a decrease in the number of homes delivered for fiscal 2003 compared to fiscal 2002. The overall average selling price per home delivered in fiscal 2003 increased by approximately 15.8% to $308,000 per home, compared to $266,000 per home for 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 fiscal 2003, when compared with the same communities and products offered for sale in fiscal 2002. Costs and Expenses ------------------ Costs and expenses for fiscal 2003 increased $17,494,000, or 5.4%, to $343,430,000, compared with fiscal 2002. The cost of residential properties for fiscal 2003 increased $10,473,000 to $294,066,000, or 3.7%, when compared with fiscal 2002. The increase in the cost of residential properties by approximately 3.7% compared to the increase in residential property revenue of approximately 9% during the same time period is due to an increase in gross profit margins for fiscal 2003 compared to fiscal 2002. Gross profit margins on residential property revenues were 23.1% for fiscal 2003, compared with 19.2% for fiscal 2002. The increase in gross profit margin on residential property revenues for fiscal 2003 compared with 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. For fiscal 2003, selling, general and administrative expenses increased $5,222,000 to $44,821,000, or 13.2%, when compared with fiscal 2002. The increase in selling, general and administrative expenses is primarily attributable to an increase in sales commissions and incentive compensation of approximately $3,160,000 attributable to the Company's growth in residential revenue and profit. The Company has a bonus compensation plan for its executive 19 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. An increase in advertising costs of approximately $856,000 also contributed to an increase in selling, general and administrative expense. 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. The selling, general and administrative expenses as a percentage of residential property revenue increased to 11.7% for fiscal 2003 compared to 11.3% for 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. Income Tax Expense ------------------ For fiscal 2003, income tax expense increased $6,951,000 to $17,758,000, or 64.3%, when compared with fiscal 2002. The increase in income tax expense is primarily attributable to an increase in income from operations. Additionally, as a result of changes in state tax laws, during fiscal year 2003, in the states in which the Company operates, the Company adjusted its effective tax rate on a cumulative basis to 39.4% of income from operations before income taxes for fiscal 2003 compared to 37.6% from operations before income taxes for fiscal 2002. The increase in the effective tax rate results in an increase in income tax expense of $817,000 for fiscal 2003 when compared with the same effective tax rate of 37.6% for fiscal 2002. Net Income Available for Common Shareholders -------------------------------------------- Net income available for common shareholders for fiscal 2003 increased $9,384,000, or 53%, to $27,087,000 ($2.18 basic and $1.65 diluted earnings per share), compared with $17,703,000 ($1.51 basic and $1.09 diluted earnings per share) for 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. 20 Fiscal Years Ended June 30, 2002 and 2001 ----------------------------------------- Orders and Backlog ------------------ The dollar value of new orders for fiscal 2002 increased $43,186,000, or 13.8%, to $356,279,000 on 1,279 homes compared to $313,093,000 on 1,183 homes for fiscal 2001. The increase in new order dollars and new orders is partially attributable to the Company's expansion into North Carolina, South Carolina and Virginia, that is, the southern region, through its acquisition of PLC on October 13, 2000. The Company reported new orders from the southern region for fiscal 2002 compared to the prior fiscal year reporting of new orders from the southern region for the period October 13, 2000, the PLC acquisition date, through June 30, 2001, approximately nine months. In addition, new orders in Pennsylvania and New Jersey (the northern region), increased by $26,869,000, or 13.2%, when compared to new orders in the northern region for fiscal 2001. The increase in new orders in the northern region is primarily attributable to favorable conditions in the homebuilding industry, most notably, favorable financing conditions. Further, average price per unit of new orders in the combined regions increased to approximately $279,000 per home for fiscal 2002 compared to approximately $265,000 per home for fiscal 2001, due to a change in product mix as a result of the Company's current product offerings, as well as unit sales price increases. Overall, unit sales prices have increased at the majority of communities open during fiscal 2002, when compared with the same communities and units offered for sale in fiscal 2001. The dollar backlog at June 30, 2002, increased $18,966,000, or approximately 10.1%, to $206,064,000 on 647 homes compared to the backlog at June 30, 2001 of $187,098,000 on 623 homes. The increase in backlog and backlog dollars is primarily attributable to favorable economic conditions for the homebuilding industry in the regions where the Company operates. These favorable economic conditions, most notably financing conditions, have resulted in strong customer demand and positive home pricing trends. 21 Operating Revenues ------------------ Earned revenues for fiscal 2002 increased $67,434,000 to $354,656,000, or 23.5%, compared to fiscal 2001. Earned revenues principally consist of revenues from the sale of residential properties, but also include revenue from land sales, interest income, property management fees and mortgage processing income. Revenues from the sale of residential homes included 1,322 homes totaling $351,060,000 during fiscal 2002, as compared to 1,085 homes totaling $282,384,000 during fiscal 2001. Approximately $44,797,000 of the increase in residential revenue earned is attributable to the Company's southern region operations in North Carolina, South Carolina and Virginia and the remaining increase of $22,637,000 is attributable to the Company's northern region operations in New Jersey and Pennsylvania. The average selling price per home increased to approximately $266,000 for fiscal 2002 as compared to approximately $260,000 for fiscal 2001. The increase in residential revenue earned is attributable to an increase in the number of homes delivered and average selling price per home for fiscal year 2002 compared to the prior fiscal year. The number of homes delivered and average selling price have increased due to favorable economic conditions in the homebuilding industry, most notably, favorable financing conditions, and the inclusion of a full year of results for the Company's expansion into North Carolina, South Carolina and Virginia through its acquisition of PLC in October 2000. Favorable financing conditions have resulted in strong customer demand and positive home pricing trends. The overall average sales price per home varies from year-to-year depending upon current product offerings. Average sales prices have increased at the majority of communities open during fiscal 2002, when compared with the same communities and units offered for sale in fiscal 2001. Earned revenues, excluding revenues from the sale of residential properties, decreased to $3,596,000 in fiscal 2002 from $4,838,000 in fiscal 2001 as a result of a reduction in land sales. 22 Costs and Expenses ------------------ Costs and expenses for fiscal 2002 increased $56,247,000, or 20.9%, compared with fiscal 2001. The cost of residential properties for fiscal 2002 increased $47,464,000 to $283,593,000, or 20.1%, when compared with fiscal 2001. The increase in cost of residential properties is primarily attributable to the Company's growth in residential revenue. Gross profit margin on residential property revenues was 19.2% for fiscal 2002 compared with 16.4% for fiscal 2001. The increase in gross profit margin on residential property revenues for fiscal 2002 compared with fiscal 2001 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, as well as the relatively stable costs for key building materials, in fiscal 2002 when compared to the prior fiscal year. For fiscal 2002, selling, general and administrative expenses increased $9,117,000 to $39,298,000, or 30.2%, when compared with fiscal 2001. The increase in selling, general and administrative expenses is partially attributable to the reporting of fixed expenses in the southern region for twelve months of fiscal 2002 compared to approximately nine months in fiscal 2001 due to the timing of the Company's entry into the southern region market through its acquisition of PLC on October 13, 2000. In addition, selling, general and administrative expenses increased due to an increase in sales commissions of $3,495,000 and incentive compensation of $1,926,000 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 its consolidated pretax earnings. In addition, certain regional employees not participating in the bonus compensation plan are awarded bonuses based upon the pretax earnings of the respective regions. The selling, general and administrative expenses as a percentage of residential property revenue increased to 11.2% during fiscal 2002 compared to 10.7% in the prior fiscal year. The increase in selling, general and administrative expenses as a percentage of residential property revenues is attributable to an increase in fixed costs as a result of the Company's geographic expansion into North Carolina, South Carolina and Virginia. 23 Net Income Available for Common Shareholders -------------------------------------------- Net income available for common shareholders for fiscal 2002 increased $7,154,000, or 67.8%, to $17,703,000 ($1.51 basic and $1.09 diluted earnings per share), compared with $10,549,000 ($.91 basic and $.67 diluted earnings per share) for fiscal 2001. This increase in net income available for common shareholders is attributable to favorable conditions in the homebuilding industry resulting in strong customer demand, positive home pricing and improved gross margins, as well as the Company's acquired operations in North Carolina, South Carolina and Virginia through its October 13, 2000 acquisition of PLC. Liquidity and Capital Resources ------------------------------- The Company requires capital to purchase and develop land, to construct units, to fund related carrying costs and overhead and to fund various advertising and marketing programs to facilitate sales. These expenditures include site preparation, roads, water and sewer lines, impact fees and earthwork, as well as the construction costs of the homes and amenities. The Company's sources of capital include funds derived from operations, sales of assets and various borrowings, most of which are secured. At June 30, 2003, the Company had approximately $145,112,000 available under existing secured revolving and construction loans for planned development expenditures. In addition, the Company had $4,000,000 available under an existing unsecured line of credit and working capital arrangement with Jeffrey P. Orleans, Chairman, Chief Executive Officer and majority shareholder of the Company. Net cash provided by operating activities for fiscal 2003 was $11,447,000 compared to net cash used in operating activities for the prior fiscal year of $7,305,000. The increase in net cash provided by operating activities of $18,752,000 when compared with the prior year is primarily attributable to an increase in net income of $9,384,000 and an increase in accounts payable and accrued expenses of $5,100,000 and a decrease in real estate held for development and sale of $6,581,000, partially offset by a decrease in receivables, deferred charges and other assets of approximately $3,945,000 when compared with the prior fiscal year. The increase in net income is due to an increase in the Company's revenue earned for fiscal 2003 compared with the prior fiscal year. Net cash used in investing activities for fiscal 2003 was $1,613,000, compared to $2,678,000 for the prior fiscal year. This decrease is primarily related to a decrease in investing activities related to the acquisition of PLC. Net cash used in financing activities for fiscal 2003 was $8,208,000, compared to net cash provided by financing activities of 24 $3,680,000 for the prior fiscal year. The increase in net cash used in financing activities is due to a reduction in borrowings and an increase in repayments by the Company during fiscal 2003, as the Company is able to meet its cash needs through available cash provided by operating activities. During the fiscal year ended June 30, 2003, the Company acquired land for future development that is expected to yield approximately 1,400 building lots. The aggregate purchase price was approximately $54,852,000, including approximately $33,630,000 for land purchases in North Carolina, South Carolina and Virginia. In connection with the acquisition of PLC on October 13, 2000, contingent payments representing an aggregate of 50% of PLC's pretax profits in excess of $1,750,000 for each of the fiscal years ended June 30, 2001, 2002 and 2003 are payable to certain of the former PLC shareholders. The contingent payments are subject to an aggregate cumulative pay-out limitation of $2,500,000. Contingent payments of approximately $577,000, $1,529,000 and $394,000 were earned for fiscal 2003, 2002 and 2001, respectively, with actual cumulative contingent payments due reaching the aggregate cumulative payout limitation of $2,500,000. This completes the cumulative pay-out of the contingent payments in connection with the PLC acquisition. On July 28, 2003, the Company acquired all of the issued and outstanding shares of Masterpiece Homes, Inc. ("Masterpiece"), and entered into an employment agreement with the president of Masterpiece. Masterpiece 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) the right to purchase 15,000 shares of the Company's common stock at $10.64 per share on December 31, 2004, 2005 and 2006; and (v) contingent payments representing 25% of Masterpiece's pre-tax profits for the calendar years ended December 31, 2004, 2005 and 2006. 25 As of June 30, 2003 the Company had contracted to purchase, or has under option, land and improved lots for an aggregate purchase price of approximately $301,208,000 that are expected to yield approximately 6,860 homes. Including the aforementioned lots, the Company currently controls approximately 9,423 building lots. As of June 30, 2003, the Company had incurred costs associated with the acquisition and development of the approximately 6,860 homes, aggregating $20,778,000, including $10,556,000 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. Inflation --------- Inflation can have a significant impact on the Company's business performance and the homebuilding industry in general. Rising costs of land, materials, labor, overhead, administrative costs and interest rates on floating credit facilities can adversely affect the Company's business performance. In addition, rising costs of certain items, such as lumber, can adversely affect the expected profitability of the Company's backlog. Generally, the Company has been able to recover any increases in costs 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 inflation in the future. 26 Off-balance sheet arrangements, contractual obligations and commitments ----------------------------------------------------------------------- Certain off-balance sheet arrangements, contractual obligations and commitments are disclosed in various sections of the Consolidated Financial Statements, Notes to Consolidated Financial Statements, and below. Some typical off-balance sheet arrangements commonly affecting homebuilders include: o Cost sharing arrangement and unconsolidated real estate joint ventures--capital contribution requirements o Variable interest entities o Debt and debt service guarantees o Surety bonds and standby letters of credit o Executed contracts for construction and development activity Each of these items are described in detail below as they directly affect the Company. Cost sharing arrangements and unconsolidated real estate joint ventures--capital contribution requirements -------------------------------------------------------------------------------- The Company has developed and owned projects through joint ventures, accounted for using the equity method, with other parties in the past however, at the present time joint venture activities do not constitute a material portion of the Company's operations. In addition, the Company has partnered with other homebuilders and developers, under cost sharing agreements, to acquire land and/or to develop or improve common off-site facilities, such as sewer treatment plants, that will benefit both parties. Most of these agreements are set up as cost sharing agreements whereby the homebuilders and developers share in the cost of acquiring the parcel or improving the off-site facility. The Company currently does not have any material unfunded commitments with respect to joint ventures and cost sharing arrangements. Debt and debt service guarantees -------------------------------- At June 30, 2003, the Company has mortgage and other note obligations on the balance sheet totaling $109,238,000. The Company currently does not have any off-balance sheet debt service guarantees. Surety bonds and standby letters of credit ------------------------------------------ As of June 30, 2003, the Company had $71,400,000 in surety bonds and $1,880,000 in outstanding standby letters of credit, totaling $73,280,000 in favor of local municipalities or financial institutions to guarantee the construction of real property improvements or financial obligations. The 27 $71,400,000 in surety bonds are to guarantee the construction of public improvements and infrastructure such as sewer, streets, traffic signals, grading, and wildlife preservations in connection with the Company's various development projects. Surety bonds are commonly required by public agencies from homebuilders such as the Company and other real estate developers. The surety bonds and standby letters of credit are renewable and expire upon completion of the required improvements. Standby letters of credit are a form of credit enhancement that is commonly required in real estate development to secure the construction of public improvements. In the past three years, no surety bonds or standby letters of credit have been drawn on for use to satisfy the Company's obligations. Executed contracts for site work and construction activity ---------------------------------------------------------- The Company has entered into site work and construction contracts with various suppliers and contractors. These contracts are for construction and development activity in the numerous communities the Company has under development, and are originated in the normal course of business. The site work contracts generally require specific performance by the contractor to prepare the land for construction and are written on a community by community basis. For larger communities, site work contracts are awarded in phases, in order to limit any long term commitment by the Company or its contractor. Generally, site work contracts are completed in less than one year. The Company acts as a general contractor and contracts with various subcontractors at specified prices for construction of its homes. Subcontractors generally work on a piece meal basis and are not awarded contracts for a specified number of homes. These commitments are typically funded by construction loans and are originated in the normal course of business. The following table summarizes the Company's outstanding obligations as of June 30, 2003 and the effect such obligations are expected to have on liquidity and cash flow in future periods. For Mortgage and Other Note Obligations, payments due by period are shown based on the expiration date of the loan. Generally, the Company repays the loan obligation prior to the expiration date of the loan, as the homes which are collateral are sold. Loan obligations are repaid at a predetermined percentage (approximately 85%) of the base selling price of a home when a sale is completed (see Note 6 of Notes to Consolidated Financial Statements for further details), which usually results in the loan being fully repaid before all lots of the development are delivered. 28
Payments Due by Year Ended June 30, ----------------------------------------------------------------------------------------------------- Obligations Total 2004 2005 2006 2007 2008 thereafter ------------ ---------- ----------- ---------- ----------- ----------- ------------ Mortgage and Other Note Obligations $109,238 $87,866 $13,178 $6,699 $1,495 $ - $ - Operating Leases 3,318 776 709 639 382 158 654 Affordable Housing Contributions 2,885 777 776 551 451 330 - ------------ ---------- ----------- ---------- ----------- ----------- ------------ Total Obligations $115,441 $89,419 $14,663 $7,889 $2,328 $488 $654 ============ ========== =========== ========== =========== =========== ============
The above tables do not include certain obligations made in the ordinary course of business, such as trade payables. Critical Accounting Policies ---------------------------- The preparation of the Company's consolidated financial statements require the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, impairment of real estate assets, capitalization of costs, environmental liability exposure, miscellaneous litigation reserves, and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of the consolidated financial statements. 29 Consolidation of 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") which 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. FIN 46 requires significant use of judgment and estimates in determining its application. See New Accounting Pronouncements section of this 10-K for additional discussion of FIN 46. Estimates --------- Impairment charges to reduce the Company's real estate inventories to net realizable value are recorded using several factors including management's plans for future operations, recent operating results and projected cash flows, which include assumptions related to expected future demand and market conditions. The adequacy of the Company's impairment charges could be materially affected by changes in market conditions. Estimates for construction costs for homes closed are recorded in the period when the related home is closed. These estimates are based on detailed budgets for each home and historical experience and trends. If actual costs change, significant variances may be encountered. Reserves for the estimated cost of homes under warranty are recorded in the period in which the related home is closed and is based on historical experience and trends. Should actual warranty experience change, revisions to the estimated warranty liability would be required. Estimates for the costs to complete land development are recorded upon completion of the related land development project. Estimates for land and land development costs are allocated to development phases based on the total number of lots expected to be developed within each subdivision and are based on detailed budgets for the land development project and historical experience and trends. If actual costs or the total number of lots developed changes, significant variances may be encountered. Revenue recognition ------------------- Revenue is primarily derived from residential property sales. The Company recognizes revenues from sales of residential properties at the time of closing. The Company also sells developed and undeveloped land in bulk and under option agreements. Revenues from sales of land and other real estate are 30 recognized when the Company has received an adequate cash down payment and all other conditions necessary for profit recognition have been satisfied. To the extent that certain sales or portions thereof do not meet all conditions necessary for profit recognition, the Company uses other methods to recognize profit, including the percentage-of-completion, cost recovery and the deposit methods. These methods of profit recognition defer a portion or all of the profit to the extent it is dependent upon the occurrence of future events. Also, in general, specific identification and relative sales value methods are used to determine the cost of sales. Management estimates of future costs to be incurred after the completion of each sale are included in cost of sales. A change in circumstances that causes these estimates of future costs to increase or decrease significantly would affect the gain or loss recognized on future sales. Impairment ---------- The Company assesses the impairment of real estate assets when events or changes in circumstances indicate that the net book value may not be recoverable. Indicators the Company considers important which could trigger an impairment review include the following: - significant negative industry or economic trends; - a significant underperformance relative to historical or projected future operating results; - a significant change in the manner in which an asset is used; and - an accumulation of costs significantly in excess of the amount originally expected to construct an asset. Real estate is stated at the lower of cost or estimated fair value using the methodology described as follows. A write-down to estimated fair value is recorded when the Company determines that the net book value exceeds the estimated selling prices less cost to sell. These evaluations are made on a property-by-property basis. When the Company determines that the net book value of an asset may not be recoverable based upon the estimated undiscounted cash flow, an impairment write-down is recorded. Values from comparable property sales will also be considered. The evaluation of future cash flows and fair value of individual properties requires significant judgment and assumptions, including estimates of market value, development absorption, and remaining development costs. Significant adverse changes in circumstances affecting these judgments and assumptions in future periods could cause a significant impairment adjustment to be recorded. 31 Capitalization of costs ----------------------- Costs capitalized include, direct construction and development costs, including predevelopment costs, interest on indebtedness, real estate taxes, insurance, construction overhead and indirect project costs. Costs previously capitalized related to any abandoned development opportunities are written off when it is determined such costs will not provide any future benefits. Any decrease in development activity may result in a portion of capitalized costs to be expensed as incurred. Environmental liability exposure -------------------------------- Development and sale of real property creates a potential for environmental liability on the part of the Company as owner and developer, for its own acts as well as those of prior owners of the subject property or adjacent parcels. If hazardous substances are discovered on or emanating from any of the Company's properties, the Company and prior owners, may be held liable for costs and liabilities relating to such hazardous substances. Environmental studies are generally undertaken in connection with property acquisitions by the Company. In the event the Company incurs environmental remediation costs, including clean up costs, consulting fees for environmental studies and investigations, monitoring costs, and legal costs relating to clean up, litigation defense, and the pursuit of responsible third parties, such costs incurred in connection with properties previously sold are expensed. Costs relating to land under development and undeveloped land are capitalized as part of development costs. Costs incurred for properties to be sold are deferred and charged to cost of sales when the properties are sold. Should a previously undetected, substantial environmental hazard be found on the Company's properties, significant liquidity could be consumed by the resulting clean up requirements and a material expense may be recorded. Further, governmental regulation on environmental matters affecting residential development could impose substantial additional expense to the Company, which could adversely affect the results of operations of the Company or the value of properties owned, or under contract of purchase by the Company (see Item 3, Legal Proceedings, and Note 11 of Notes to Consolidated Financial Statements for a discussion of specific environmental litigation). Income taxes ------------ As part of the process of preparing the consolidated financial statements, significant management judgment is required to estimate income taxes. Estimates are based on interpretation of tax laws. The Company estimates actual current tax due and assesses temporary differences resulting from 32 differing treatment of items for tax and accounting purposes. The temporary differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet (see Note 8 of Notes to Consolidated Financial Statements for a discussion of income taxes). Adjustments may be required by a change in assessment of deferred tax assets and liabilities, changes due to audit adjustments by Federal and State tax authorities, and changes in tax laws. To the extent adjustments are required in any given period the adjustments would be included within the tax provision in the statement of operations and/or balance sheet. These adjustments could materially impact the financial position and results of operation and liquidity of the Company. New Accounting Pronouncements ----------------------------- 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 June, 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS No. 141"), which establishes standards for reporting business combinations entered into after June 30, 2001 and supercedes APB Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises". Among other things, SFAS No. 141 requires that all business combinations be accounted for as purchase transactions and provides specific guidance on the definition of intangible assets which require separate treatment. The statement is applicable for all business combinations entered into after June 30, 2001 and also requires that companies apply its provisions relating to intangibles from pre-existing business combinations. In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), which establishes standards for financial accounting and reporting for intangible assets acquired individually of with a group of other assets and for the reporting of goodwill and other intangible assets acquired in a business acquisition subsequent to initial accounting under SFAS No. 141. SFAS No. 142 supercedes APB Opinion No.17, "Intangible Assets" and related interpretations. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, companies with fiscal years beginning after March 15, 2001 may elect to adopt the provision of SFAS No. 142 at the beginning of its new fiscal year. Accordingly, the Company elected to early adopt SFAS No. 142 effective with the beginning of its new fiscal year on July 1, 2001. The 33 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 and does not expect that the adoption will have a material impact on its consolidated results of operations and financial position. 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 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 34 after May 15, 2002. The Company adopted the provisions of this statement on July 1, 2002 and adoption did not have a material impact on the Company's results of operations or financial position. 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 does not anticipate a material impact on the results of operations or financial position from the adoption of SFAS No. 146. In December 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS No 148") which 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, the FASB issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"). A Variable Interest Entity (VIE) is created when (i) the equity investment at risk is not sufficient to permit the entity from financing 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. Fin 46 is effective immediately for VIE's created after January 31, 2003. For VIE's created before January 31, 2003, FIN 46 must be applied when the transition period provisions are adopted. Based on the provisions of FIN 46, the Company has concluded that whenever it options land or lots from an entity and pays a significant non-refundable deposit, 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 35 deemed to be the primary beneficiary of the VIE it will consolidate the VIE on its balance sheet. The fair value of the VIE's inventory will be reported as "Inventory Not Owned - Variable Interest Entities". In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 "Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity" ("SFAS No. 150"). This standard requires issuers to classify as liabilities the following three types of freestanding financial instruments: (1) mandatorily redeemable financial instruments, (2) obligations to repurchase the issuer's equity shares by transferring assets; and (3) certain obligations to issue a variable number of shares. The Company will adopt the provisions of this statement, as required, on July 1, 2003, and it is not expected to have a significant financial impact on the financial position of the Company. Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995. -------------------------------------------------------------------------------- In addition to historical information, this report contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, as amended (the "Exchange Act") and are subject to the Safe Harbor provisions created by the 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. We do 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 our future results could differ significantly from those expressed or implied by our 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 the price and availability of building material; o changes in mortgage interest rates charged to buyers of the Company's homes; 36 o changes in the availability and cost of financing for the Company's operations, including land acquisition; o revisions in federal, state and local tax laws which provide incentives for home ownership; o inability to successfully integrate acquired businesses; o delays in obtaining land development permits as a result of (i) federal, state and local environmental and other land development regulations, (ii) actions taken or failed to be taken by governmental agencies having authority to issue such permits, and (iii) opposition from third parties; o increased cost of suitable development land; and o possible liabilities relating to environmental laws or other applicable regulatory provisions. 37 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. -------- ----------------------------------------------------------- Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of the Company, due to adverse changes in financial and commodity market prices and interest rates. The Company is exposed to market risk in the area of interest rate changes. A majority of the Company's debt is variable rate based on LIBOR and prime rate, and, therefore, affected by changes in market interest rates. Based on current operations, an increase/decrease in interest rates of 100 basis points will result in a corresponding increase/decrease in cost of sales and interest charges incurred by the Company of approximately $1,155,000 in a fiscal year, a portion of which will be capitalized and included in cost of sales as homes are delivered. Generally, the Company has in the past been able to increase prices to cover portions of any increase in cost of sales and interest charges incurred resulting from any increase in interest rates. As a result, the Company believes that reasonably possible near-term changes in interest rates will not result in a material negative effect on future earnings, fair values or cash flows of the Company. 38 Item 8. Financial Statements and Supplementary Data. ------- -------------------------------------------- ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Page ---- Report of independent accountants 40 Consolidated balance sheets at June 30, 2003 and June 30, 2002 41 Consolidated statements of operations and retained earnings for the years ended June 30, 2003, 2002 and 2001 42 Consolidated statements of shareholders' equity for the years ended June 30, 2003, 2002 and 2001 43 Consolidated statements of cash flows for the years ended June 30, 2003, 2002 and 2001 44 Notes to consolidated financial statements 45 All other schedules have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. The individual financial statements of the Registrant's subsidiaries have been omitted since the Registrant is primarily an operating company and all subsidiaries included in the consolidated financial statements, in the aggregate, do not have minority equity interest and/or indebtedness to any person other than the Registrant or its consolidated subsidiaries in amounts which together exceed 5 percent of total consolidated assets at June 30, 2003, excepting indebtedness incurred in the ordinary course of business. 39 Report of Independent Auditors To the Board of Directors and Shareholders of Orleans Homebuilders, Inc.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Orleans Homebuilders, Inc. and its subsidiaries (the "Company") at June 30, 2003 and June 30, 2002, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 4, the Company has adopted the provisions of FASB Interpretation No. 46 "Consolidation of Variable Interest Entities ("VIEs"), an interpretation of ARB No. 51" for VIEs entered into or modified after February 1, 2003. Such adoption effects land purchase transactions with significant deposits. PricewaterhouseCoopers LLP Philadelphia, PA September 5, 2003 40 Orleans Homebuilders, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands)
June 30, June 30, 2003 2002 -------------- ----------------- Assets Cash and cash equivalents $ 8,883 $ 7,257 Restricted cash - customer deposits 15,065 9,230 Real estate held for development and sale: Residential properties completed or under construction 109,895 112,279 Land held for development or sale and improvements 100,791 82,699 Inventory not owned - Variable Interest Entities 18,443 - Property and equipment, at cost, less accumulated depreciation 2,428 1,726 Deferred income taxes 233 - Intangible assets, net of amortization 4,180 3,718 Receivables, deferred charges and other assets 30,791 21,590 -------------- ----------------- Total Assets $ 290,709 $ 238,499 ============== ================= Liabilities and Shareholders' Equity Liabilities: Accounts payable $ 29,306 $ 24,199 Accrued expenses 27,445 23,232 Customer deposits 16,539 9,775 Obligations related to inventory not owned 17,643 - Mortgage and other note obligations primarily secured by real estate held for development and sale 106,707 113,058 Notes payable - related parties 2,500 3,750 Other notes payable 31 1,224 Deferred income taxes - 618 -------------- ------------------ Total Liabilities 200,171 175,856 -------------- ------------------ 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 June 30, 2003 and June 30, 2002, respectively 1,337 1,270 Capital in excess of par value - common stock 18,659 17,726 Retained earnings 67,589 40,502 Treasury stock, at cost (727,232 and 812,232 shares held at June 30, 2003 and June 30, 2002, respectively) (1,046) (843) -------------- ----------------- Total Shareholders' Equity 89,539 61,655 -------------- ----------------- Total Liabilities and Shareholders' Equity $ 290,709 $ 238,499 ============== =================
See notes to consolidated financial statements 41 Orleans Homebuilders, Inc. and Subsidiaries Consolidated Statements of Operations and Retained Earnings (in thousands, except per share amounts)
For the year ended June 30, 2003 2002 2001 --------------- -------------- --------------- Earned revenues Residential properties $ 382,570 $ 351,060 $ 282,384 Land sales 744 80 1,786 Other income 5,171 3,516 3,052 --------------- -------------- --------------- 388,485 354,656 287,222 --------------- -------------- --------------- Costs and expenses Residential properties 294,066 283,593 236,129 Land sales 875 102 1,664 Other 3,436 2,520 1,290 Selling, general and administrative 44,821 39,599 30,181 Interest Incurred 6,420 7,644 8,992 Less capitalized (6,188) (7,522) (8,567) --------------- -------------- --------------- 343,430 325,936 269,689 --------------- -------------- --------------- Income from operations before income taxes 45,055 28,720 17,533 Income tax expense 17,758 10,807 6,774 --------------- -------------- --------------- Net income 27,297 17,913 10,759 Preferred dividends 210 210 210 --------------- -------------- --------------- Net income available for common shareholders 27,087 17,703 10,549 Retained earnings, at beginning of period 40,502 22,799 12,250 --------------- -------------- --------------- Retained earnings, at end of period $ 67,589 $ 40,502 $ 22,799 =============== ============== =============== Basic earnings per share $ 2.18 $ 1.51 $ 0.91 =============== ============== =============== Diluted earnings per share $ 1.65 $ 1.09 $ 0.67 =============== ============== ===============
See notes to consolidated financial statements 42 Orleans Homebuilders, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity (dollars in thousands)
Preferred Stock Common Stock Shares Shares Issued and Issued and Outstanding Amount Outstanding Amount ------------ --------- ------------ ---------- Balance at July 1, 2000 100,000 $ 3,000 12,698,131 $ 1,270 Net income Preferred dividends ------------ --------- ------------ ---------- Balance at June 30, 2001 100,000 3,000 12,698,131 1,270 Stock options exercised Shares issued in connection with acquisition of PLC Net income Preferred dividends ------------ --------- ------------ ---------- Balance at June 30, 2002 100,000 3,000 12,698,131 1,270 Stock options exercised Treasury stock purchase Shares issued in connection with acquisition of PLC Net income Preferred dividends ------------ --------- ------------ ---------- Balance at June 30, 2003 100,000 $ 3,000 12,698,131 $ 1,270 ============ ========= ============ ==========
[RESTUBBED]
Capital in Excess of Treasury Stock Par Value - Retained Share Common Stock Earnings Held Amount Total ------------- ----------- ------------- ------- ----------- Balance at July 1, 2000 $ 17,726 $ 12,250 1,340,238 $ (975) $ 33,271 Net income 10,759 10,759 Preferred dividends (210) (210) ------------- ----------- ------------- ------- ----------- Balance at June 30, 2001 17,726 22,799 1,340,238 (975) 43,820 Stock options exercised (453,006) 132 132 Shares issued in connection with acquisition of PLC (75,000) - Net income 17,913 17,913 Preferred dividends (210) (210) ------------- ----------- ------------- ------- ----------- Balance at June 30, 2002 17,726 40,502 812,232 (843) 61,655 Stock options exercised (40,000) 37 37 Treasury stock purchase 30,000 (240) (240) Shares issued in connection with acquisition of PLC (75,000) - Net income 27,297 27,297 Preferred dividends (210) (210) ------------- ----------- ------------- ------- ----------- Balance at June 30, 2003 $ 17,726 $ 67,589 727,232 $(1,046) $ 88,539 ============= =========== ============= ======= ===========
See notes to consolidated financial statements 43 Orleans Homebuilders, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands)
Twelve Months Ended June 30, 2003 2002 2001 -------------- ---------- ----------- Cash flows from operating activities: Net income $ 27,297 $ 17,913 $ 10,759 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 449 526 507 Deferred taxes (851) (1,500) (227) Noncash compensation 11 45 33 Changes in operating assets and liabilities: Restricted cash - customer deposits (5,835) (806) 313 Real estate held for development and sale (15,708) (22,289) 362 Receivables, deferred charges and other assets (10,001) (6,055) (6,126) Accounts payable and other liabilities 9,320 4,220 10,895 Customer deposits 6,764 641 38 ------------ ---------- ----------- Net cash provided by (used in) operating activities 11,446 (7,305) 16,554 ------------ ---------- ----------- Cash flows from investing activities: Purchases of property and equipment (1,151) (1,273) (412) Acquisition of PLC, net of cash acquired (462) (1,405) (4,714) ------------ ---------- ----------- Net cash used in investing activities (1,613) (2,678) (5,126) ------------ ---------- ----------- Cash flows from financing activities: Borrowings from loans secured by real estate assets 252,962 262,981 178,119 Repayment of loans secured by real estate assets (259,313) (252,528) (181,602) Borrowings from other note obligations 4,000 17,770 10,673 Repayment of other note obligations (5,443) (24,465) (7,567) Treasury stock purchase (240) - - Stock options exercised 37 132 - Preferred stock dividend (210) (210) (210) ------------ ---------- ----------- Net cash (used in) provided by financing activities (8,207) 3,680 (587) ------------ ---------- ----------- Net increase (decrease) in cash and cash equivalents 1,626 (6,303) 10,841 Cash and cash equivalents at beginning of period 7,257 13,560 2,719 ------------ ---------- ----------- Cash and cash equivalents at end of period $ 8,883 $ 7,257 $ 13,560 ============ ========== ===========
See notes to consolidated financial statements 44 Orleans Homebuilders, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies Orleans Homebuilders, Inc. and its subsidiaries (the "Company" or "OHB") are currently engaged in residential real estate development in New Jersey, North Carolina, Pennsylvania, South Carolina and Virginia. A summary of the significant accounting principles and practices used in the preparation of the consolidated financial statements is as follows: Principles of consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. On October 13, 2000, the Company acquired all of the issued and outstanding shares of Parker & Lancaster Corporation ("PLC"). Unless otherwise indicated, the term, the "Company" or "OHB" includes the accounts of PLC and its subsidiaries. PLC is engaged in residential real estate development in North Carolina, South Carolina and Virginia. The Consolidated Statements of Operations and Retained Earnings and the Consolidated Statements of Cash Flows include the accounts of PLC and its wholly-owned subsidiaries beginning October 13, 2000. The Consolidated Balance Sheets include the accounts of PLC and its wholly-owned subsidiaries as of June 30, 2003 and 2002. In addition, certain joint ventures and business arrangements will be consolidated pursuant to FIN 46. See recent accounting pronouncements section of this Note 1 and Note 4 for additional discussion of FIN 46. All material intercompany transactions and accounts have been eliminated. Earned revenues from real estate transactions The Company recognizes revenues from sales of residential properties at the time of closing. The Company also sells developed and undeveloped land in bulk and under option agreements. Revenues from sales of land and other real estate are recognized when the Company has received an adequate cash down payment and all other conditions necessary for profit recognition have been satisfied. To the extent that certain sales or portions thereof do not meet all conditions necessary for profit recognition, the Company uses other methods to recognize profit, including the percentage-of-completion, cost recovery and the deposit methods. These methods of profit recognition defer a portion or all of the profit to the extent it is dependent upon the occurrence of future events. Real estate capitalization and cost allocation Residential properties completed or under construction are stated at cost or estimated net realizable value, whichever is lower. Costs include land and land improvements, direct construction costs and development costs, including predevelopment costs, interest on indebtedness, real estate taxes, insurance, construction overhead and indirect project costs. Selling and advertising costs are expensed as incurred. Total estimated costs of multi-unit developments are allocated to individual units based upon specific identification methods. Land and improvement costs include land, land improvements, interest on indebtedness and real estate taxes. Appropriate costs are allocated to projects on the basis of acreage, dwelling units and relative sales value. Land held for development and sale and improvements are stated at cost or estimated net realizable value, whichever is lower. Land and land improvements applicable to condominiums, townhomes and single-family homes, are transferred to construction in progress when construction commences. 45 Interest costs included in costs and expenses of residential properties and land sold for fiscal years 2003, 2002 and 2001 were $8,073,000, $11,958,000 and $11,789,000, respectively. Intangible Assets Effective July 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("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 Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"). In accordance with SFAS No. 142, upon adoption of SFAS No. 142, the Company discontinued the amortization relating to all existing indefinite lived intangible assets. The amortization of indefinite lived intangible assets was approximately $167,000 during the year ended June 30, 2001. Intangible assets that have finite useful lives will be amortized over their useful lives. SFAS No. 142 requires an annual assessment of goodwill and non-amortizable intangible assets to determine potential impairment of such asset. The initial assessment was completed upon adoption and again at June 30, 2003 and no impairment charge was determined to be required. Advertising costs The total amount of advertising costs charged to selling, general and administrative expense was $5,731,000, $4,875,000 and $3,858,000 for the three years ended June 30, 2003, 2002, and 2001, respectively. Depreciation, amortization and maintenance expense Depreciation and amortization is primarily provided on the straight-line method at rates calculated to amortize the cost of the assets over their estimated useful lives. Expenditures for maintenance, repairs and minor renewals are expensed as incurred; major renewals and betterments are capitalized. At the time depreciable assets are retired or otherwise disposed of, the cost and the accumulated depreciation of the assets are eliminated from the accounts and any profit or loss is recognized. Leases The Company's leasing arrangements as lessee include the leasing of certain office space and equipment. These leases have been classified as operating leases. Rent expense was approximately $623,000, $515,000, and $360,000 for the three years ended June 30, 2003, 2002 and 2001, respectively. The Company has operating lease commitments of $776,000, $709,000, $639,000, $382,000, $158,000 and $654,000 for the years ended June 30, 2004, 2005, 2006, 2007, 2008 and thereafter, respectively. Stock-Based Compensation Effective July 1, 2002, the Company adopted the preferable fair value recognition provisions of SFAS No. 123, "Accounting for Stock Issued to Employees." The Company selected the prospective method of adoption as permitted by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." See Note 9 for additional disclosure and discussion on stock-based compensation. 46 Income taxes The Company and its subsidiaries file a consolidated federal income tax return. See Note 8 for an additional discussion of income tax matters. Earnings per share Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding. Basic shares outstanding includes the pro rata portion of unconditional shares issuable as part of the purchase price of the PLC acquisition. Diluted earnings per share include additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Disclosures about fair value of financial instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires the Company to disclose the estimated fair market value of its financial instruments. The Company believes that the carrying value of its financial instruments (primarily mortgages receivable and mortgage notes payable) approximates fair market value and that any differences are not significant. This assessment is based upon substantially all of the Company's debt obligations being based upon LIBOR or the prime rate of interest which are variable market rates. Segment reporting Since the Company operates primarily in a single extended geographical market with similar products at its various development projects, it is considered to represent a single operating segment for financial reporting purposes. Consolidated statements of cash flows For purposes of reporting cash flows, short-term investments with original maturities of ninety days or less are considered cash equivalents. Interest payments, net of amounts capitalized, for fiscal 2003, 2002 and 2001, were $232,000, $122,000 and $373,000, respectively. Income taxes paid were $17,007,000, $11,565,000 and $6,718,000 for fiscal 2003, 2002 and 2001, respectively. Non-cash activity The Company has a 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. As of June 30, 2003 the remaining balance of the Convertible Subordinated 7% Note is $2,000,000. On April 3, 2002, Benjamin D. Goldman, Vice Chairman of the Company, surrendered 47,619 shares of Company common stock, with a fair market value of $6.30 per share, in exchange for the exercise of stock options totaling 400,000 shares of common stock, issued from treasury stock, at $.75 per share. The fair market value of the stock surrendered was determined by the market price for the stock on the American Stock Exchange at the close of business on April 3, 2002. Non-cash assets acquired and liabilities assumed as a result of the PLC acquisition were approximately $47,234,000 and $43,089,000, respectively. In connection with the acquisition, the Company issued a subordinated promissory note in the aggregate principal amount of $1,000,000, payable over four years. In addition, the Company agreed to issue an aggregate of 300,000 shares of 47 common stock issuable in equal installments on each of the next four anniversaries of the closing of the acquisition. The former shareholders of PLC have the right to cause the Company to repurchase the common stock issued in this transaction approximately five years after the closing of the acquisition at a price of $3.33 per share. Comprehensive income In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") effective for fiscal years beginning after December 15, 1997. The statement changes the reporting of certain items reported as changes in the shareholders' equity section of the balance sheet and establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 130 requires that all components of comprehensive income shall be reported in the financial statements in the period in which they are recognized. Furthermore, a total amount for comprehensive income shall be displayed in the financial statements. The Company has adopted this standard effective July 1, 1998. The primary components of comprehensive income are net income, foreign currency translations, minimum pension liabilities, and the change in value of certain investments in marketable securities classified as available-for-sale. Upon adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") and Statement of Financial Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" ("SFAS No. 137") (effective for the Company on July 1, 2000), comprehensive income was also affected by the mark-to-market on the effective portion of hedge instruments. Since the Company had no material such items, comprehensive income and net income are the same for fiscal 2003, 2002 and 2001. Management's estimates and assumptions The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent accounting pronouncements 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 June, 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS No. 141"), which establishes standards for reporting business combinations entered into after June 30, 2001 and supercedes APB Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises". Among other things, SFAS No. 141 requires that all business combinations be accounted for as purchase transactions and provides specific guidance on the definition of intangible assets which require separate treatment. The statement is applicable for all business combinations entered into after June 30, 2001 and also requires that companies apply its provisions relating to intangibles from pre-existing business combinations. 48 In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), which establishes standards for financial accounting and reporting for intangible assets acquired individually of with a group of other assets and for the reporting of goodwill and other intangible assets acquired in a business acquisition subsequent to initial accounting under SFAS No. 141. SFAS No. 142 supercedes APB Opinion No.17, "Intangible Assets" and related interpretations. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, companies with fiscal years beginning after March 15, 2001 may elect to adopt the provision of SFAS No. 142 at the beginning of its new fiscal year. Accordingly, the Company elected to early adopt SFAS No. 142 effective with the beginning of its new 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 and does not expect that the adoption will have a material impact on its consolidated results of operations and financial position. 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 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 the provisions of this statement on July 1, 2002 and adoption did not have a material impact on the Company's results of operations or financial position. 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 does not anticipate a material impact on the results of operations or financial position from the adoption of SFAS No. 146. 49 In December 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS No 148") which 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, the FASB issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"). A Variable Interest Entity (VIE) is created when (i) the equity investment at risk is not sufficient to permit the entity from financing 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. Fin 46 is effective immediately for VIE's created after January 31, 2003. For VIE's created before January 31, 2003, FIN 46 must be applied when the transition period provisions are adopted. Based on the provisions of FIN 46, the Company has concluded that whenever it options land or lots from an entity and pays a significant non-refundable deposit, 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 VIE's inventory will be reported as "Inventory Not Owned - Variable Interest Entities". In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 "Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity" ("SFAS No. 150"). This standard requires issuers to classify as liabilities the following three types of freestanding financial instruments: (1) mandatorily redeemable financial instruments, (2) obligations to repurchase the issuer's equity shares by transferring assets; and (3) certain obligations to issue a variable number of shares. The Company will adopt the provisions of this statement, as required, on July 1, 2003, and it is not expected to have a significant financial impact on the financial position of the Company. 50 Note 2. Acquisitions On October 13, 2000, the Company acquired all of the issued and outstanding shares of PLC and entered into employment agreements ranging from two to three years with certain of the former PLC shareholders for combined consideration of (i) approximately $5,000,000 in cash; (ii) $1,000,000 of subordinated promissory notes which bear interest at the prime rate, subject to a cap of 10% and a floor of 8% (subject to the 8% floor at June 30, 2003 and 2002) with principal payable over four years; (iii) 300,000 shares of common stock of the Company (150,000 of which are issuable under certain employment agreements) payable in equal installments on each of the four anniversaries of the closing of the acquisition; and (iv) contingent payments representing an aggregate of 50% of PLC's pre-tax profits in excess of $1,750,000 for each of the fiscal years ended June 30, 2001, 2002 and 2003, subject to an aggregate cumulative pay-out limitation of $2,500,000. Through June 30, 2003, the contingent payments earned based on PLC's share of the pre-tax profits have reached the cumulative payout limitation of $2,500,000. The Company also incurred approximately $485,000 in acquisition costs to complete this transaction. The Company accounted for these transactions in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations", whereby certain of these amounts were considered to be part of the purchase price of the business and the remainder part of employee compensation. With respect to the amounts allocated to the purchase, such amount was allocated to the fair value of the assets and liabilities acquired with the excess of approximately $2,480,000 allocated to intangible assets and goodwill. Accumulated amortization of the intangible assets and goodwill at June 30, 2001 was approximately $167,000. In accordance with SFAS No. 142, the Company discontinued the amortization related to all intangible assets and goodwill recorded in connection with the PLC acquisition. See also Intangible Assets in Note 1 to these Consolidated Notes. During fiscal 2003, 2002 and 2001 intangible assets and goodwill increased by approximately $462,000, $1,405,000 and $183,000, respectively, as a result of the allocation of additional contingent payments earned by the former PLC shareholders. The former shareholders of PLC have the right to cause the Company to repurchase the common stock issued pursuant to the PLC acquisition and related employment agreements approximately five years after the closing of the acquisition at a price of $3.33 per share. If the PLC acquisition occurred on July 1, 2000, pro forma information for the Company would have been as follows: For the Year Ended June 30, 2001 (unaudited) (in thousands, except per share amounts) Revenue $ 306,867 Income from operations 17,623 Net income available for common shareholders 10,832 Earnings per share: Basic 0.93 Diluted 0.69 51 Note 3. Certain Transactions with Related Parties In December 1997, the Company purchased land approved for the development of 181 lots from Mr. Orleans in exchange for a $500,000 Purchase Money Mortgage, plus a share of one-half of the gross profit in excess of 16% on 134 of the lots. During fiscal 2002 and 2001, 54 and 48 lots, respectively, have settled and the Company incurred additional costs of approximately $383,000 and $145,000, respectively, for Mr. Orleans' share of the gross profit. As of June 30, 2002, all of the lots have been settled and the Company paid Mr. Orleans approximately $660,000 in total under this agreement, with the remaining amount of $29,000 being paid during fiscal 2003. Mr. Goldman and Mr. Orleans each own a 33-1/3% equity interest in a limited partnership that has a consulting agreement with a third party real estate title insurance company (the "Title Company"). The Company purchases real estate title insurance and related closing services from the Title Company for various parcels of land acquired by the Company. The Company paid the Title Company approximately $80,000, $190,000 and $197,000, for the fiscal years 2003, 2002 and 2001, respectively. These costs are considered to approximate fair value for services provided. In addition, the Company's homebuyers may elect to utilize the Title Company for the purchase of real estate title insurance and real estate closing services but, the homebuyers are under no obligation to do so. Under the terms of the consulting agreement, which expires in July 2007, the limited partnership providing the consulting services is entitled to receive 50% of the pretax profits attributable to certain operations of the Title Company, subject to certain adjustments. In addition, the limited partnership and the principals of the limited partnership, including Mr. Goldman and Mr. Orleans, have agreed not to engage in the real estate title insurance business or the real estate closing business during the term of the consulting agreement. During fiscal 2003, Jeffrey P. Orleans, Chairman and Chief Executive Officer of the Company, purchased five low income homes, with an aggregate sales value of approximately $317,000. These transactions satisfied, in part, the Company's low income housing requirements in Mount Laurel Township, New Jersey. The selling prices for these homes, which are determined by state statute, are the same as if the homes had been sold to unaffiliated third parties. During fiscal 2003 the Company entered into two separate ten year leases for the rental of office space with a company that is controlled by Mr. Orleans. The Company expects to take possession of the leased premises sometime during fiscal 2004 at which time the lease term will begin. The annual rental for the leased office space is $112,000 and escalates to $128,000 after the fifth year of the lease. The Company is also responsible to pay its pro rata share of common area maintenance costs. These costs are considered to approximate fair value for services provided. The Company leases office space and obtains real estate title insurance for various parcels of land acquired by the Company from companies controlled by Mr. Russell Parker, the president of the Company's subsidiary, PLC. The annual rental for the office space leased from an entity controlled by Mr. Parker is approximately $65,000 and is considered to approximate a fair market value rental. The Company paid real estate title insurance premiums to an entity controlled by Mr. Parker, of approximately $89,000, $69,000 and $12,000 for fiscal 2003, 2002 and 2001, respectively. These costs are considered to approximate fair value for services provided. Real estate title insurance paid by the Company is capitalized as a cost of acquiring the specific parcel in accordance with the Company's real estate capitalization and cost allocation policies and is subsequently expensed as part of cost of sales upon consummation of sales to the third party homebuyers. See Note 1 to the consolidated financial statements for a discussion of these policies. 52 See Note 6 to the consolidated financial statements for a discussion of other related party financing transactions. Note 4. Real Estate Held for Development and Sale A summary of real estate held for development and sale is as follows: Balance at June 30, 2003 2002 ----------- ----------- (in thousands) Condominiums and townhomes $ 28,837 $ 27,917 Single-family homes 81,058 84,362 Land held for development or sale and improvements 100,791 82,699 Inventory not owned 17,643 - ----------- ----------- Total real estate held for development and sale $ 228,329 $ 194,978 =========== =========== In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"). A Variable Interest Entity (VIE) is created when (i) the equity investment at risk is not sufficient to permit the entity from financing 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. Fin 46 is effective immediately for VIE's created after January 31, 2003. For VIE's created before January 31, 2003, FIN 46 must be applied when the transition period provisions are adopted. Based on the provisions of FIN 46, the Company has concluded that whenever it options land or lots from an entity and pays a significant non-refundable deposit, 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 VIE's inventory will be reported as "Inventory Not Owned - Variable Interest Entities". At June 30, 2003 the Company consolidated five VIE's created from February 1, 2003 to June 30, 2003 as a result of its option to purchase land or lots from the selling entities. The Company paid cash or issued letters of credit deposits to these five VIE's totaling $800,000. The Company's deposits and any costs incurred prior to acquisition of the land or lots, represent our maximum exposure to loss. The fair value of the property owned by the VIE's was $18,443,000. Since the Company could not get the selling entities to provide us with any financial information, the fair value of the property to be acquired less cash deposits, which totaled $17,643,000, was reported on the balance sheet as Obligations related to inventory not owned. Creditors, if any, of these VIE's have no recourse against the Company. 53 The Company will continue to secure land and lots using options. Including the deposits with the five VIE's above, at June 30, 2003, the Company has total costs incurred to acquire land and lots of approximately $20,778,000, including $10,556,000 of cash and letters of credit deposits. The total purchase price under these contracts is approximately $301,208,000. Not all deposits are with VIE's. The maximum exposure to loss is limited to deposits, although some deposits are refundable, and costs incurred prior to the acquisition of the land or lots. The Company is in the process of evaluating all option purchase agreements in effect as of January 31, 2003. Options with VIE's where the Company is the primary beneficiary will be consolidated when the transition period provisions are adopted. Sales status of residential properties completed or under construction is as follows: Balance at June 30, 2003 2002 ----------- ----------- (in thousands) Under contract for sale $ 76,303 $ 76,885 Unsold 33,592 35,394 ----------- ----------- Total residential properties completed or under construction $ 109,895 $112,279 =========== =========== Note 5. Property and Equipment Property and equipment consists of the following: Balance at June 30, 2003 2002 ----------- ----------- (in thousands) Property and equipment $ 4,640 $ 3,967 Less: accumulated depreciation (2,212) (2,241) -------- --------- Total property and equipment, net $ 2,428 $ 1,726 ======== ========= Depreciation expense, included in Other Costs and Expenses on the Company's Consolidated Statements of Operations and Retained Earnings, was $449,000, $526,000 and $340,000 during fiscal 2003, 2002 and 2001, respectively. 54 Note 6. Mortgage and Other Note Obligations The maximum balance outstanding under construction and inventory loan agreements at any month end during fiscal 2003, 2002 and 2001 was $133,018,000, $123,497,000 and $102,103,000, respectively. The average month end balance during fiscal 2003, 2002 and 2001 was approximately $115,490,000, $114,491,000 and $83,875,000, respectively, bearing interest at an approximate average annual rate of 4.51%, 5.63% and 7.85%, respectively. At June 30, 2003, the Company had approximately $145,112,000, available to be drawn under existing secured revolving and construction loans for planned development expenditures. Obligations under residential property and construction loans amounted to $103,797,000 and $107,551,000 at June 30, 2003 and 2002, respectively, and are repaid at a predetermined percentage (approximately 85% on average) of the selling price of a unit when a sale is completed. The repayment percentage varies from community to community and over time within the same community. Mortgage obligations secured by land held for development and sale and improvements aggregating $2,910,000 and $5,507,000 at June 30, 2003 and 2002, respectively, are due in varying installments through fiscal 2004 with annual interest at variable rates based on LIBOR or the prime rate of interest plus a spread. The LIBOR and prime rate of interest at June 30, 2003 were 1.3% and 4.0%, per annum, respectively. As partial consideration for the October 13, 2000 acquisition of PLC, the Company issued $1,000,000 of subordinated promissory notes to certain former PLC shareholders. The Company, via certain employment agreements entered into as a result of the acquisition, currently employs a majority of the former PLC shareholders. The subordinated promissory notes of $500,000 and $750,000 are included in Notes Payable - Related Parties at June 30, 2003 and 2002, respectively. The promissory notes bear interest, payable quarterly, at the prime rate, subject to a cap of 10% and a floor of 8% (currently incurring interest subject to the 8% floor at June 30, 2003) with principal payable on the anniversary date of the note in four equal installments. Included in Notes Payable - Related Parties at June 30, 2003 and 2002 is a balance due of $2,000,000 and $3,000,000, respectively under a Convertible Subordinated 7% Note dated August 8, 1996 issued to Jeffrey P. Orleans. This note is convertible into Orleans Homebuilders, Inc. common stock at $1.50 per share. 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. Interest is payable quarterly and the remaining principal is due in annual installments of $1,000,000 beginning on January 1, 2004 and 2005. The Company has a $4,000,000 unsecured line of credit agreement with Mr. Orleans. This agreement provides for an annual review for a one-year extension and currently expires June 30, 2004 with annual interest at LIBOR plus 4% per annum which is payable monthly. There were no principal and interest balances outstanding under this unsecured line of credit agreement at June 30, 2003 and 2002. Prior to October 22, 1993, the date of acquisition by the Company of Orleans Construction Corp.("OCC"), a real estate company which was wholly owned by Mr. Orleans, OCC had advanced funds to, borrowed funds from, and paid expenses and debt obligations on behalf of Orleans Builders and Developers, L.P., a partnership in which Mr. Orleans owns a majority interest. During fiscal 2002 the Company repaid the entire outstanding principal balance and accrued interest of approximately $900,000. These advances bear interest at 7% annually. Interest incurred on these advances amounted to $31,000 and $90,000 for the years ended June 30, 2002 and 2001, respectively. In June, 1997, the Chester County Industrial Development Authority issued bonds in the amount of $1,855,000 and loaned the proceeds thereof to a subsidiary of the Company. The proceeds from this obligation were used to construct and operate a waste water spray irrigation facility which is servicing the Company's Willistown Chase community in Chester County, Pennsylvania. In November 2002, the 55 Company repaid the entire outstanding principal balance of the bonds plus accrued interest. In connection with the repayment, the Company incurred a loss of approximately $61,000 as a result of the write-off of the remaining unamortized loan costs. Such amount is included in Interest Incurred on the Company's Consolidated Statement of Operations for the fiscal year 2003. Included in Other Notes Payable is the total principal and accrued interest of $1,115,000 related to the bonds at June 30, 2002. The following table summarizes the components of Other Notes Payable, including related party amounts.
Final Annual Outstanding Maturity Interest Balance at June 30, Date Rate 2003 2002 -------------- ------------------- -------- -------- (in thousands) Convertible Subordinated 7% Note January 2005 7% $ 2,000 $ 3,000 Subordinated Promissory Note October 2004 8%-10% 500 750 -------- -------- Subtotal notes payable related parties 2,500 3,750 -------- -------- Property and Equipment 2004-2005 7 1/4%-10% 31 63 Bonds Payable (secured by mortgage receivables) 2003 10%-12% - 46 Quaker Sewer Bonds November 7% - 1,115 2002 -------- -------- Subtotal other notes payable 31 1,224 -------- -------- Total notes payable related parties and other notes payable $ 2,531 $ 4,974 ======== ========
56 Maturities of these obligations are (in thousands): 2004 $ 1,559 2005 1,496 --------- Total notes payable related parties and other notes payable $ 2,531 ========= Note 7. Preferred Stock On October 20, 1998, the Company issued 100,000 shares of Series D Preferred Stock to Jeffrey P. Orleans in exchange for an aggregate amount of $3,000,000 in Company notes formerly held by Mr. Orleans. The Series D Preferred Stock was issued from an aggregate of 500,000 shares of Preferred Stock authorized. The Series D Preferred Stock has a liquidation value of $3,000,000, or $30.00 per share, and requires annual dividends of 7% of the liquidation value. The dividends are cumulative and are payable quarterly on the first day of March, June, September and December. The Series D Preferred Stock may be redeemed by the Company at any time after December 31, 2003, in whole or in part, at a cash redemption price equal to the liquidation value plus all accrued and unpaid dividends on such shares to the date of redemption. The Series D Preferred Stock is convertible into 2,000,000 shares of Common Stock. Note 8. Income Taxes The provision (benefit) for income taxes is summarized as follows: For the Year Ended June 30, --------------------------------- 2003 2002 2001 ---------- --------- -------- (in thousands) Continuing operations: Current $ 18,609 $ 12,307 $ 6,853 Deferred (851) (1,500) (79) -------- ---------- --------- Total provision (benefit) for income taxes $ 17,758 $ 10,807 $ 6,774 ======== ========== ========= The differences between taxes computed at federal income tax rates and amounts provided for continuing operations are as follows: For the Year Ended June 30, --------------------------------- 2003 2002 2001 ---------- --------- -------- (in thousands) Amount computed as statutory rate $ 15,319 $ 9,765 $ 5,961 State income taxes, net of federal 2,529 1,132 756 tax benefit Other, net (90) (90) 57 -------- ---------- --------- Total provision (benefit) for income taxes $ 17,758 $ 10,807 $ 6,774 ======== ========== ========= Deferred income taxes reflect the impact of "temporary differences" between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes". The principal components of the Company's deferred tax asset of $233,000 at June 30, 2003 and deferred tax liability of $618,000 at June 30, 2002, are temporary differences arising from interest and real estate taxes incurred prior to commencing active construction being capitalized for financial reporting purposes while being expensed for tax purposes. In addition, temporary differences arise from net realizable value adjustments recognized for financial reporting purposes, but not for tax purposes. These temporary differences reverse ratably as the communities sellout. The principal items making up the deferred income tax provisions (benefits) from continuing operations are as follows: 57
For the Year Ended June 30, 2003 2002 2001 --------- ---------- ------- (in thousands) Deferred provision (benefit) for income taxes: Interest and real estate taxes $ (528) $ 298 $ (371) Difference in tax accounting for land and property sales, net (182) (876) 107 Accrued expenses (168) (223) 56 Gain from joint ventures 5 25 3 Deferred compensation (231) (784) (19) Depreciation and other 272 41 53 State taxes (19) 19 92 ------- -------- ------ Total benefit for income taxes $ (851) $ (1,500) $ (79) ======= ======== ======
The components of net deferred taxes payable consisted of the following: Balance at June 30, 2003 2002 --------- ---------- (in thousands) Gross deferred tax liabilities: Capitalized interest and real estate taxes $ (2,263) $ (2,791) State income taxes (1,300) (1,319) Other (415) (144) --------- --------- Total gross deferred tax liabilities (3,978) (4,254) --------- --------- Less gross deferred tax assets: Reserve for books, not for tax 557 389 Partnership income 134 139 Executive bonus 1,796 1,515 Employment contracts 113 133 Vacation accrual 98 128 Inventory adjustment 1,502 1,320 Other 11 12 --------- --------- Total gross deferred tax assets 4,211 3,636 --------- --------- Net deferred tax assets (liabilities) $ 233 $ (618) ========= ========= Temporary differences represent the cumulative taxable or deductible amounts recorded in the financial statements in different years than recognized in the tax returns. SFAS No. 109 requires the Company to record a valuation allowance when it is "more likely than not that some portion or all of the deferred tax assets will not be realized." It further states that "forming a conclusion that 58 a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years." The Company does not have a valuation allowance for deferred tax assets at June 30, 2003. The ultimate realization of certain tax assets depends on the Company's ability to generate sufficient taxable income in the future, including the effects of future anticipated arising/reversing temporary differences. Note 9. Stock Option Plan and Employee Compensation Stock Based Compensation In December 1992, the Board of Directors adopted (i) the 1992 Stock Incentive Option Plan and (ii) the Non-Employee Directors Stock Option Plan. The 1992 Plan allows for the grant of options to purchase up to 1,210,000 shares of Common Stock of the Company. The options generally vest 25% per year beginning on the date of grant. The Non-Employee Directors Stock Option Plan allows for the grant of options to purchase up to 100,000 shares of Common Stock of the Company. All Non-Employee Directors Stock Options have been issued. No options were granted under either plan during the last three fiscal years. In February, 1995, the Board of Directors adopted the 1995 Stock Option Plan for Non-Employee Directors (the "1995 Directors Plan"). The 1995 Directors Plan allowed for the grant of options to purchase up to 125,000 shares of Common Stock of the Company. All 1995 Directors Plan options have been issued. The options vest 25% per year beginning on the date of grant. No options were granted under the 1995 Directors Plan during the last three fiscal years. The option price per share under all plans is established at the fair market value on the date of each grant. Total outstanding options under all three plans as of June 30, 2003 aggregated 637,500 options to purchase shares of Common Stock of the Company at prices ranging from $1.19 to $2.81 per share. All options expire between March 2004 and December 2008. At June 30, 2003, the Company has three stock-based compensation plans as described more fully above. Prior to July 1, 2002, the Company accounted for those plans under the recognition and measurement provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. Effective in fiscal 1997 the Company adopted the provisions of SFAS No. 123, "Accounting for Stock Based Compensation" and, as permitted, the Company elected to continue to utilize the intrinsic value method and not to charge the fair value of such options as earned directly to the financial statements but to disclose the effects of such a charge. In December 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS No. 148") which 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. Thus, the Company adopted the fair value recognition provisions of SFAS No. 123 prospectively to all stock awards granted, modified, or settled after July 1, 2002. Awards under the Company's plans generally have an exercise price equal to the fair market value of the underlying common stock on the date of grant, and generally vest over a four year period. The Company has not granted any awards since fiscal 1999. Given the aforementioned, the Company's net income available for common shareholders as reported and on a pro forma basis is the same for the fiscal year ended June 30, 2003. In addition, under the intrinsic value method of measurement as permitted by SFAS No. 123, for the fiscal years ended June 30, 2002 and 2001, net income available for common shareholders as reported is $30,000 and $44,000 higher, respectively, than net income available for common shareholders on a pro forma basis, resulting in no difference to Basic or Diluted EPS as reported for the respective fiscal years. Thus, the Company believes the tabular presentation of information required under SFAS No. 148 is not meaningful and therefore is excluded. 59 The following summarizes stock option activity for the three plans during the three years ended June 30, 2003:
2003 2002 ---- ---- Weighted- Weighted- Number of Average Number of Average Options Exercise Price Options Exercise Price ---------- -------------- ---------- --------------- Outstanding, 677,500 $1.49 1,185,625 $1.22 beginning of year Granted - - - Exercised (40,000) .92 (500,625) .86 Canceled - (7,500) 1.19 ------- --------- Outstanding, end 637,500 1.53 677,500 1.49 of year ======= ========= Exercisable, 637,500 1.53 626,875 1.49 end of year ======= ========= Available for grant, 255,000 end of year ======= 255,000 =========
[RESTUBBED]
2001 ---- Weighted- Number of Average Options Exercise Price --------- -------------- Outstanding, 1,188,125 $1.22 beginning of year Granted - - Exercised - - Canceled (2,500) 2.06 ---------- Outstanding, end 1,185,625 1.22 of year ========== Exercisable, 1,092,969 1.20 end of year ========== Available for grant, end of year 247,500
The following table summarizes information about stock options outstanding at June 30, 2003: Options Outstanding ------------------- Weighted- Average Weighted Range of Remaining Average Exercise Number Contractual Exercise Prices Outstanding Lives (in yrs) Price -------------------------------------------------------------------------------- $1.19 - $1.63 520,000 3.5 $1.34 $2.00 - $2.81 117,500 1.6 $2.38 ------- $1.19 - $2.81 637,500 3.1 $1.53 ======= [RESTUBBED] Options Exercisable ------------------- Weighted Average Number Exercise Exercisable Price ------------------------------ 520,000 $1.34 117,500 $2.38 ------- 637,500 $1.53 ======= 60 Employee Compensation The Company has a bonus compensation plan for its executive officers and key employees calculated at eight percent (8%) of its consolidated operating profits before taxes and excluding nonrecurring items, income or loss arising from extraordinary items, discontinued operations, debt repurchase at a discount, and the amount of awards under the bonus compensation plan ("Pre-Tax Profits"). Three percent (3%) of the Pre-Tax Profits are awarded as an incentive to the Chairman and approximately one and one-half percent (1.5%) is awarded to the President and Chief Operating Officer. The remaining approximately 3.5% of the Pre-Tax Profits is awarded at the discretion of the Chairman in consultation with the President to other executive officers and key employees whose performance merits recognition under goals and policies established by the Board of Directors. These bonus awards are approved by the Compensation Committee of the Board of Directors. In addition certain regional employees not participating in the bonus compensation plan are awarded bonuses calculated at up to eight percent (8%) of operating profits before taxes at a regional level. The total amount of bonus compensation charged to selling, general and administrative expense under these plans was $4,364,000, $3,789,000 and $1,863,000 for the three years ended June 30, 2003, 2002 and 2001, respectively. In connection with the acquisition of PLC on October 13, 2000, contingent payments representing an aggregate of 50% of PLC's pretax profits in excess of $1,750,000 for each of the fiscal years ended June 30, 2001, 2002 and 2003, are payable to certain of the former PLC shareholders. The contingent payments are subject to an aggregate cumulative pay-out limitation of $2,500,000. Contingent payments of approximately $577,000, $1,529,000 and $394,000, were earned and accrued for in fiscal 2003, 2002 and 2001, respectively. Contingent payments charged to intangible assets and goodwill amounted to $462,000, $1,405,000 and $183,000 for fiscal 2003, 2002 and 2001, respectively. The remaining portion of the contingent payments was charged to selling, general and administrative expense. 401(k) Plan The Company has a savings and retirement plan (the "401(k) Plan"), which is a voluntary, defined contribution plan. All employees in the northern region are eligible to participate in the 401(k) Plan after attaining age 21 and completing one year of continuous service with the Company. At the discretion of the Board of Directors, the Company may make matching contributions on the participant's behalf of up to thirty-three percent (33%) of the participant's eligible annual contribution. The Company made gross contributions of approximately $217,000, $194,000 and $152,000 to the 401(k) Plan for the three years ended June 30, 2003, 2002, and 2001, respectively. All employer contributions are immediately vested. In addition, as part of the PLC acquisition, the Company assumed the PLC savings and retirement plan (the "PLC 401(k) Plan"), which is a voluntary, defined contribution plan. All employees in the southern region are eligible to participate in the PLC 401(k) Plan after attaining age 21 and completing one year of continuous service with the Company. At the discretion of the Board of Directors, the Company may make matching contributions on the participant's behalf of up to fifty percent (50%) of the participant's eligible annual contribution. The Company made gross contributions of approximately $69,000, $71,000 and $40,000 to the PLC 401(k) Plan for the years ended June 30, 2003, 2002, and 2001, respectively. Employer contributions vest at 20% per year after the second year. 61 Note 10. Earnings Per Share Computation The weighted average number of shares used to compute basic earnings per common share and diluted earnings per common share, and a reconciliation of the numerator and denominator used in the computation for the three years ended June 30, 2003, 2002, and 2001, respectively, are shown in the following table.
For Year Ended June 30, ---------------------------------------- 2003 2002 2001 ----------- ----------- --------- (in thousands) Total common shares issued 13,029 12,698 12,698 Shares not issued, but unconditionally issuable (1) 154 205 194 Less: Average treasury shares outstanding 742 1,158 1,340 ----------- ----------- --------- Basic EPS 12,441 11,745 11,552 Effect of assumed shares issued under treasury stock method for stock options 542 823 615 Effect of assumed shares issued in PLC acquisition (1) - - 79 Effect of assumed conversion of $3,000,000 Convertible Subordinated 7% Note 1,669 2,000 2,000 Effect of assumed conversion of $3,000,000 Series D Preferred Stock 2,000 2,000 2,000 =========== ----------- --------- Diluted EPS shares 16,652 16,568 16,246 =========== =========== ========= Net income available for common shareholders $ 27,087 $ 17,703 $ 10,549 Effect of assumed conversion of $3,000,000 Convertible Subordinated 7% Note 109 130 130 Effect of assumed conversion of $3,000,000 Series D Preferred Stock 210 210 210 ----------- ----------- --------- Adjusted net income for diluted EPS $ 27,406 $ 18,043 $ 10,889 =========== =========== =========
(1) Represents portion of 273,000 shares unconditionally issuable in connection with the October 13, 2000 acquisition of PLC, not yet issued. The shares issuable in connection with the PLC acquisition are issuable in equal installments on each of the first four anniversaries of the date of the acquisition. Note 11. Commitments and Contingencies General At June 30, 2003, the Company had outstanding bank letters of credit, surety bonds and financial security agreements amounting to $73,280,000 as collateral for completion of improvements at various developments of the Company. 62 At June 30, 2003 the Company had agreements to purchase land and approved homesites aggregating approximately 6,860 building lots with purchase prices totaling approximately $301,208,000. Generally, the Company structures its land acquisitions so that it has the right to cancel its agreements to purchase undeveloped land and improved lots by forfeiture of its deposit under the agreement. Furthermore, purchase of the properties is contingent upon obtaining all governmental approvals and satisfaction of certain requirements by the Company and the sellers. The Company expects to utilize purchase money mortgages, secured financings and existing capital resources to finance these acquisitions. Contingent on the aforementioned, the Company anticipates completing a majority of these acquisitions during the next several years. As of June 30, 2003 and 2002, the Company had paid deposits and incurred other costs associated with the acquisition and development of these parcels aggregating $20,778,000 and $13,116,000, respectively, which are included in Other Assets. The Company currently has a commitment with various municipalities for affordable housing contributions totaling approximately $2,885,000, payable in installments through June 2008. Personal Injury --------------- 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, which was further amended in June 2003, will be paid entirely by the Company's liability insurance carrier. In connection with the settlement, a lump sum payment of approximately $5,600,000 was paid to the plaintiff. In addition, payment in the amount of approximately $1,300,000 is to be placed in a structured settlement annuity which shall tender payments to the plaintiff, or the plaintiff's designated beneficiary in the event of the death of the plaintiff, in the amount of $5,000 per month through 2033, such payment increasing annually by 3%. Further, a payment of approximately $2,100,000 is to be placed, by the insurance carrier, in a structured settlement annuity which shall tender payments to the plaintiff in the amount of $120,000 per year beginning September 2003 and annually thereafter until the death of the plaintiff. Carbon Monoxide Litigation -------------------------- 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 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 63 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. Colts Neck Litigation --------------------- Pursuant to an Order dated February 6, 1996 issued by the New Jersey Department of Environmental Protection ("NJDEP"), the Company submitted a Closure/Post-Closure Plan ("Plan") and Classification Exception Area ("CEA") for certain affected portions of Colts Neck Estates, a single family residential development built by the Company in Washington Township, Gloucester County, New Jersey. The affected areas include those portions of Colts Neck where solid waste allegedly was deposited. NJDEP approved the Plan and CEA on July 22, 1996 and the Company carried it out thereafter. NJDEP as a standard condition of its approval of the Plan and CEA reserves the right to amend its approval to require additional remediation measures if warranted. Neither the implementation of the Plan nor CEA is expected to have a material adverse effect on the Company's results of operations or its financial position. Approximately 145 homeowners at Colts Neck instituted three lawsuits against the Company, which were separately filed in state and Federal courts between April and November 1993. These suits were consolidated in the United States District Court for the District of New Jersey and were subject to court-sponsored mediation. Asserting a variety of state and federal claims, the plaintiffs in the consolidated action alleged that the Company and other defendants built and sold them homes which had been constructed on and adjacent to land which had been used as a municipal waste landfill and a pig farm. The complaints asserted claims under the federal Comprehensive Environmental Response, Compensation and Liability Act, the Federal Solid Waste Disposal Act, the New Jersey Sanitary Landfill Facility Closure and Contingency Act, the New Jersey Spill Compensation and Control Act, as well as under state common law and other statutory law. In September 1993, the Company brought an action in New Jersey state court against more than 30 of its insurance companies seeking indemnification and reimbursement of costs of defense in connection with the three Colts Neck actions referred to above. As a result of the court sponsored mediation, the Company and the plaintiffs in the consolidated federal litigation entered into a settlement agreement. Under that agreement, which was approved by the Court, a $6,000,000 judgment was entered against the Company in favor of a class comprising most of the current and former homeowners. The Company, which had paid $650,000 on August 28, 1996 to the plaintiff class, has no liability for the remainder of the judgment, which is to be paid solely from the proceeds of the state court litigation against the Company's insurance carriers. Although, under the settlement agreement the Company is obligated to prosecute and fund the litigation against its insurance companies, the Company is entitled to obtain some reimbursement of those expenses. Specifically, under the settlement agreement, the Company may obtain reimbursement of its aggregate litigation expenses in excess of $100,000 incurred in connection with its continued prosecution of the insurance claims to the extent that settlements are reached and to the extent that the portion of those settlement funds designated to fund the litigation are not exhausted. The Company's right to reimbursement may, under certain circumstances, be limited to a total of $300,000. In August, 2002, settlement agreements were reached with all remaining insurance company defendants to settle the Colts Neck insurance litigation. Under the terms of the settlement agreement between the Company and the plaintiffs, the proceeds from the insurance settlements were paid to the plaintiffs. The Company, in turn, is relieved of all further obligations to prosecute the Colts Neck insurance litigation. 64 The Company is not aware of any other significant environmental liabilities associated with any of its other projects. Other 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 any liability that could arise with respect to currently pending actions cannot be accurately predicted, in the opinion of the Company any such liability will not have a material adverse effect on the financial position or operating results of the Company. Note 12. Quarterly Financial Data (Unaudited) Unaudited summarized financial data by quarter for 2003 and 2002 are as follows (in thousands, except per share data):
Three Months Ended ------------------ Fiscal 2003 September 30 December 31 March 31 June 30 ------------------------- --------------- --------------- --------------- ------------ Net sales $86,030 $86,198 $ 76,991 $134,095 Gross profit 19,979 18,991 17,156 32,247 Net income available for 11,170 common shareholders 6,281 5,601 4,035 Net earnings per share: Basic .52 .46 .32 .88 Diluted .38 .34 .25 .68 Fiscal 2002 ------------------------- Net sales $80,260 $87,297 $ 78,243 $105,340 Gross profit 14,504 16,679 14,582 21,680 Net income available for common shareholders 3,724 4,038 3,386 6,555 Net earnings per share: Basic .32 .35 .29 .55 Diluted .23 .26 .20 .40
Note 13.Subsequent Event On July 28, 2003, the Company acquired all of the issued and outstanding shares of Masterpiece Homes, Inc. ("Masterpiece), and entered into an employment agreement with the president of Masterpiece. Masterpiece 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) the right to purchase 15,000 shares of the Company's common stock at $10.64 per share on December 31, 2004, 2005 and 2006; and (v) contingent payments representing 25% of Masterpiece's pre-tax profits for the calendar years ended December 31, 2004, 2005 and 2006. Item 9. Changes in and Disagreements with Accountants on Accounting and ------ Financial Disclosure. --------------------------------------------------------------- There are no matters required to be reported hereunder. 65 Item 9A. 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 the Chief Financial Officer concluded that the Company's disclosure controls and procedures, as of the end of the period covered by this report, were designed and are functioning effectively to provide reasonable assurance that the 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 SEC'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. PART III Item 10. Directors and Executive Officers of the Registrant. -------- --------------------------------------------------- Incorporated herein by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders to be held in December, 2003. Item 11. Executive Compensation. -------- ----------------------- Incorporated herein by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders to be held in December, 2003. Item 12. Security Ownership of Certain Beneficial Owners and Management and -------- Related Stockholder Matters. ------------------------------------------------------------------ Incorporated herein by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders to be held in December, 2003. Item 13. Certain Relationships and Related Transactions. -------- ----------------------------------------------- Incorporated herein by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders to be held in December, 2003. 66 Item 14. Principal Accountant Fees and Services. -------- --------------------------------------- Incorporated herein by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders to be held in December, 2003. PART IV ------- Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. -------- ----------------------------------------------------------------- (a) Financial Statements and Financial Statement Schedules 1. Financial Statements -------------------- The financial statements listed in the index on the first page under Item 8 are filed as part of this Form 10-K. 2. Financial Statement Schedules ----------------------------- None. 3. Exhibits -------- Exhibit Number -------------- 2.1 Stock Purchase Agreement dated as of October 12, 2000, by and among the Company, Parker & Lancaster Corporation, and the selling stockholders party thereto (incorporated by reference to Exhibit 2 to the Company's Form 8-K filed with the Securities and Exchange Commission on October 27, 2000). 3.l Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on September 4, 1969 (incorporated by reference to Exhibit 2.l of the Company's Registration Statement on Form S-7, filed with the Securities and Exchange Commission (S.E.C. File No. 2-68662)). 3.2 Amendment to Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on July 25, 1983 (incorporated by reference to Exhibit 3.2 of Amendment No. 2 to the Company's Registration Statement on Form S-2 filed with the Securities and Exchange Commission (S.E.C. File No. 2-84724)). 3.3 Amendment to Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on December 18, 1986. 3.4 Amendment to Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on May 27, 1992 (incorporated by reference to Exhibit 3.6 of Amendment No. 2 to the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission (S.E.C. File No. 33-43943) (the "Form S-1")). 67 3.5 Amendment to Certificate of Incorporation filed with the Secretary of State of Delaware on July 13, 1998 (incorporated by reference to Exhibit 3.10 to the 1998 Form 10-K). 3.6 Certificate of Designations, Preferences and Rights of Series D Preferred Stock filed with the Secretary of State of Delaware on October 14, 1998 (incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q for the period ended September 30, 1998). 3.7 By-Laws, as last amended on April 20, 1998 (incorporated by reference to Exhibit 3.11 to the 1998 Form 10-K). 4.1 Form of Note Purchase Agreement, dated as of August 1, 1996, together with form of $3,000,000 Convertible Subordinated 7% Note due January 1, 2002 (incorporated by reference to Exhibit 4.9 to the Company's Form 10-K for the fiscal year ended June 30, 1997). 4.2 Deferral Agreement to $3,000,000 Convertible Subordinated 7% Note dated December 14, 1999. 4.3 Deferral Agreement to $3,000,000 Convertible Subordinated 7% Note dated June 13, 2001. 4.4 Deferral Agreement to $3,000,000 Convertible Subordinated 7% Note dated December 11, 2001. 10.1** Form of Indemnity Agreement executed by the Company with Directors of the Company (incorporated by reference to Exhibit B to the Company's Proxy Statement respecting its 1986 Annual Meeting of Stockholders). 10.2** Employment Agreement between the Company and Jeffrey P. Orleans, dated June 26, 1987 (incorporated by reference to Exhibit 10.2 to the Form S-1.) 10.3** $4,000,000 Unsecured Line of Credit Agreement with Jeffrey P. Orleans dated as of June 30, 1999 (incorporated by reference to Exhibit 10.4 to the Company's 1999 Form 10-K for the fiscal year ended June 30, 1999). 10.4** 1992 Incentive Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-8 filed with the S.E.C. on December 15, 1998). 10.5** 1992 Non-Employee Directors Stock Option Plan (incorporated by reference to the Company's Information Statement filed with the S.E.C. on November 5, 1995 (SEC File No. 1-6803)). 10.7** 1995 Stock Option Plan for Non-Employee Directors (incorporated by reference to the Company's Registration Statement on Form S-8 filed with the S.E.C. on December 15, 1998). 10.8 Employment Agreement between the Company and J. Russell Parker, III, President of the Company's subsidiary, PLC 10.9 Employment Agreement between the Company and L. Anthony Piccola, Division Manager, Raleigh, NC 10.10 Employment Agreement between the Company and Thomas Gancsos, Division Manager, Richmond, VA 21.* Subsidiaries of Registrant. 68 23.* Consents of PricewaterhouseCoopers LLP 31.1* Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. 31.2* Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. 31.3* Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. 32.1* Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. 32.2* Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. 32.3* Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. ______________ * Exhibits included with this filing. ** Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit. (b) Reports on Form 8-k ------------------- None. 69 SIGNATURES and POWER OF ATTORNEY Pursuant to the requirements of Section 13 or 15(d) 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. By: /s/Jeffrey P. Orleans September 18, 2003 ----------------------------- Jeffrey P. Orleans, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: /s/ Jeffrey P. Orleans September 18, 2003 ---------------------------- Jeffrey P. Orleans Chairman of the Board and Chief Executive Officer /s/ Benjamin D. Goldman September 18, 2003 ---------------------------- Benjamin D. Goldman Vice Chairman and Director /s/ Jerome Goodman September 18, 2003 ---------------------------- Jerome Goodman Director /s/ Robert N. Goodman September 18, 2003 ---------------------------- Robert N. Goodman Director /s/ Andrew N. Heine September 18, 2003 ---------------------------- Andrew N. Heine Director /s/ David Kaplan September 18, 2003 ---------------------------- David Kaplan Director /s/ Lewis Katz September 18, 2003 ---------------------------- Lewis Katz Director /s/ Robert M. Segal September 18, 2003 ---------------------------- Robert M. Segal Director 70 /s/ John W. Temple September 18, 2003 ---------------------------- John W. Temple Director /s/ Michael T. Vesey September 18, 2003 ---------------------------- Michael T. Vesey President and Chief Operating Officer /s/ Joseph A. Santangelo September 18, 2003 ---------------------------- Joseph A. Santangelo Chief Financial Officer, Treasurer and Secretary 71 INDEX TO EXHIBITS Exhibit Number ------- 21. Subsidiaries of Registrant. 23. Consents of PricewaterhouseCoopers LLP 31.1 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. 31.2 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. 31.3 Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. 32.1 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. 32.2 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. 32.3 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. 72