ITEM 1. Business. 1 General 1 Residential Development 2 Operating Policies and Construction 4 Sales and Customer Financing and Land Policy 5 Joint Ventures and Government Regulation 6 Environmental Regulation and Litigation 7 Competition and Employees 7 Economic Conditions 8
ITEM 2.
Item 2. Properties.
Lease of Executive Offices
Except as noted below, the Company's real property assets are described generally under Item 1 -- Business. The Company is currently leasing office space comprising approximately 12,000 square feet at One Greenwood Square at 3333 Street Road, Bensalem, Pennsylvania. The annual rent is approximately $200,000 and the lease expires in December, 2001.
Item 3.
Item 3. Legal Proceedings. The Company is a plaintiff or defendant in various cases arising out of its usual and customary business. 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. (See Note 13 of Notes to Consolidated Financial Statements for a discussion of specific litigation).
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders.
Item 4A. Executive Officers of the Registrant. The following list contains certain information relative to executive officers of the Company. There are no family relationships among any executive officers. The term of each executive officer expires at the next annual meeting of the Board of Directors following the Annual Meeting of Stockholders scheduled to be held in December, 1999 or until their successors are duly elected and qualified.
Item 5.
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. Effective July 1998, in conjunction with the Company's name change to Orleans Homebuilders, Inc., the Company's ticker symbol was changed from "FPO" to "OHB". (Symbol: OHB)
The high and low sales prices on the Exchange for the periods indicated are as follows:
Fiscal year ended June 30, High Low ---------------------- ------ ------ 1998 First Quarter $1.125 $ .750 Second Quarter 1.625 .813 Third Quarter 1.438 .938 Fourth Quarter 2.938 1.125
1999 First Quarter $2.688 $1.375 Second Quarter 2.688 1.375 Third Quarter 2.563 1.750 Fourth Quarter 2.188 1.625
The number of common stockholders of record of the Company as of September 10, 1999 was approximately 309.
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, certain agreements). No assurance can be given that the Company will pay dividends in the future.
Item 6.
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 the Form 10-K.
The Company has not paid a cash dividend since December 1982.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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, 1999, the Company had approximately $60,235,000 available to be drawn under existing secured revolving and construction loans for planned development expenditures. The Company believes that the funds generated from operations and financing commitments from commercial lenders will provide the Company with sufficient capital to meet its operating needs through fiscal 2000. The Company has continued its ongoing land acquisition efforts during fiscal 1999. During this period, the Company acquired, in its existing markets, seven additional parcels of land totaling approximately 250 residential lots for an aggregate purchase price of approximately $8,543,000. Marketing activities had commenced on a majority of these communities as of June 30, 1999 and the remaining communities will commence marketing activities in fiscal 2000. As of June 30, 1999, the Company had contracted to purchase fifteen additional parcels of land, in its existing markets, for an aggregate purchase price of approximately $59,721,000. These purchase agreements are subject to due diligence review and are contingent upon the receipt of governmental approvals. The Company expects to utilize purchase money mortgages, secured financings and existing capital resources to finance these acquisitions. The Company anticipates completing a majority of these acquisitions during fiscal 2000 and 2001.
Overview of Operations
The tables included in "Item 1 - Business" summarize the Company's revenues, new orders and backlog data for the year ended June 30, 1999 with comparable data for fiscal 1998 and 1997. New orders for fiscal 1999 increased by approximately 25% to $173,897,000 on 803 units compared to $139,129,000 on 719 units during fiscal 1998. The increase in new orders can be attributed to adequate available financing for home buyers as a result of the overall favorable economic climate throughout the region in which the Company sells homes. In addition, the Company facilitated such growth by the opening of new communities in Hunterdon, Somerset
and Burlington Counties in New Jersey, and Bucks and Chester Counties in Pennsylvania. The average price per unit of new orders increased due to an increase in the number and percentage of highly priced single family homes sold in fiscal 1999 compared to fiscal 1998. Single family homes sold in fiscal 1999 accounted for approximately 46% of total unit sales compared with approximately 38% during fiscal 1998. In addition, the average unit sales price increased for the majority of communities open during fiscal 1999 compared with the same units offered for sale in fiscal 1998.
The dollar backlog at June 30, 1999 increased approximately 42% to $101,065,000 on 425 homes, as compared to the backlog at June 30, 1998 of $70,995,000 on 340 homes. The Company's continued geographic expansion with its new communities, coupled with favorable economic conditions and consumer sentiment, resulted in the increased backlog level. The Company anticipates delivering substantially all of its backlog units during fiscal 2000.
Inflation
Inflation can have a significant impact on the Company's liquidity. Rising costs of land, materials, labor, interest and administrative costs have generally been recoverable in prior years through increased selling prices. However, there is no assurance the Company will be able to continue to increase prices to cover the effects of inflation in the future.
Year 2000
The Company began assessing its Year 2000 ("Y2K") compliance issues at the beginning of fiscal 1998 and at that time determined that its primary internal computer hardware and software were not Y2K compliant. Subsequently, the Company determined that it would be more cost efficient to install a new Y2K compliant software package than to modify the existing software package. During fiscal 1999, the Company contracted to purchase a new software package, including several specific enhancements to modify the software to meet the Company's needs. In addition, during fiscal 1999, the Company upgraded its primary computer hardware system and installed the base software package of its new computer system for testing. The Company then began intensive testing of the new base software package. At the same time, the Company began working closely with the software vendor to complete the specifications for its required enhancements to the software. During the fourth quarter of fiscal 1999, the enhancements were completed and the Company completed its testing of the base software and the modifications. In addition, during the fourth quarter of fiscal 1999, the Company completely converted to the new enhanced Y2K compliant software package.
Through June 30, 1999, the Company has incurred approximately $600,000 in connection with Y2K readiness, of which approximately $300,000 has been
capitalized in connection with the purchase of new software and hardware and will be amortized over its useful life. The remainder was expensed as incurred. Cost incurred includes new hardware and software, consulting fees, internal staff costs and other expenses. The Company expects to incur nominal additional expenditures on this project through the end of calendar 1999.
The Company is also investigating the Y2K compliance status of its vendors, subcontractors and suppliers through the Company's own internal vendor compliance effort. This investigation began in early fiscal 1999 and will continue through calendar 1999 as the Company continues to assess the Y2K readiness of its vendors, subcontractors and suppliers. Any non-response or inadequate response from such business partner may cause the Company to re-evaluate its relationship with such partner. Since the Company does not rely on any individual vendor, subcontractor or supplier for a significant portion of its operations, the potential impact of Y2K non-compliance risks by any individual vendor, subcontractor or supplier is not expected to have any material effect on the Company.
While the Company believes it is taking all appropriate steps to achieve internal Y2K compliance, any potential future business interruptions, costs, damages or losses related thereto, are also dependent upon the Y2K compliance of third parties. In the event that the Company or a combination of the Company's vendors, subcontractors or suppliers experience disruptions due to the Y2K issue, the Company's operations could be adversely affected. The Y2K issue is universal and complex, as virtually every computer operation will be affected in some way. Consequently, no assurance can be given that complete Y2K compliance can be achieved without significant additional costs.
Forward Looking Statement
The Company's estimates of completion dates for its Y2K readiness program represent management's best estimates. These estimates are based upon many assumptions, including the availability of external resources to assist with systems remediation and replacement efforts, key third party suppliers, vendors and customers being Y2K compliant. If any of the assumptions ultimately prove to have been incorrect, the completion dates set forth above could be substantially and adversely affected.
Fiscal Years Ended June 30, 1999 and 1998
Results of Operations
Operating Revenues
Earned revenues for fiscal 1999 increased $41,575,000 to $150,573,000, or 38.1%, compared to fiscal 1998. Revenues from the sale of residential homes included 718 homes totaling $143,827,000 during fiscal 1999, as compared to 589 homes totaling $106,246,000 during fiscal 1998. Revenues from related parties
for fiscal 1999 included four low income homes with a sales value of $176,000, as compared to 27 low income homes with a sales value of $1,472,000 for fiscal 1998. These sales have satisfied, in part, the Company's low income housing requirements in Mount Laurel Township, New Jersey. The selling prices of these homes, which is determined by state statute, were the same as if the homes had been sold to unaffiliated third parties. The increase in revenues for fiscal 1999, as compared to fiscal 1998, is primarily attributable to the number of units sold which is the result of expanding the Company's operations in the Delaware Valley, as well as Central New Jersey, and favorable economic conditions affecting unit sales volume and price. The average selling price per unit increased to approximately $200,000 during fiscal 1999, as compared to approximately $180,000 during fiscal 1998. The increase in average selling price is partially due to an increase in the base price per unit, option revenue per unit, and an increase over the prior comparable period in the percentage of single family homes delivered when compared to total homes delivered for the period. Fiscal 1999 revenue from land sales increased approximately $3,510,000, or four times the land sales revenue from fiscal 1998. This increase is primarily due to an increase in the number and size of developed homesites sold during fiscal 1999 compared with fiscal 1998.
Costs and Expenses
Costs and expenses for fiscal 1999 increased $35,608,000, or 33.5%, compared with fiscal 1998. The fiscal 1999 cost of residential properties increased $30,411,000 to $120,815,000, or 33.6% when compared with fiscal 1998. Residential property costs increased as a result of the increased residential property revenues. Overall profit margins on residential properties improved due to increased sales volume and prices as a result of strong customer demand. The cost of residential properties as a percentage of residential property revenues was 84.0% for fiscal 1999 compared with 85.1% for fiscal 1998. In addition, the cost of land sales for fiscal 1999 increased $2,990,000 when compared with fiscal 1998. The increase in the cost of land sales is due to the overall increase in land sale revenues. The cost of land sales as a percentage of land sale revenues was 84.0% for fiscal 1999 compared with 80.3% for fiscal 1998. For fiscal 1999, selling, general and administrative expenses increased $1,942,000 to $15,515,000, or 14.3% when compared with fiscal 1998. The fiscal 1999 increase in selling, general and administrative expenses is attributable to an increase in the number of communities, residential property revenues and sales incentives. In addition, the Company's advertising costs increased due to the overall increase in communities open during fiscal 1999 when compared with the prior fiscal year. Although advertising costs increased, the percentage increase in advertising costs was significantly less than the percentage increase in residential property revenues as the Company contained costs by combined advertising for many new communities located within the Philadelphia
Metropolitan Area. The selling, general and administrative expenses as a percentage of residential property revenues decreased to 10.8% during fiscal 1999, compared to 12.8% in the prior fiscal year.
Net Income Available for Common Shareholders
Net income available for common shareholders for fiscal 1999 was $5,220,000 ($.46 basic and $.36 diluted earnings per share), compared with $1,668,000 ($.15 basic and $.14 diluted earnings per share) for fiscal 1998. This increase in net income available for common shareholders is primarily attributable to an increase in residential revenues as a result of unit sales volume, combined with a decrease in selling, general and administrative costs as a percentage of residential property revenues.
Fiscal Years Ended June 30, 1998 and 1997
Results of Operations
Operating Revenues
Earned revenues for fiscal 1998 increased $7,002,000, or 6.9% compared with fiscal 1997. Residential property revenues (including related party amounts) for fiscal 1998 increased $10,142,000, or 10.6% compared with fiscal 1997. Revenues from the sale of residential homes included 589 homes totaling $106,246,000 compared to 562 homes totaling $96,104,000 during fiscal 1997. The increase in revenues for fiscal 1998 is attributed to an increase in the number of units sold which is the result of the expanding geographic scope of the Company's operations and favorable economic conditions affecting unit sale volume. In addition, the average selling price per unit has increased to approximately $180,000 per unit during fiscal 1998 from $171,000 per unit during fiscal 1997. The increase in average selling price is due to a change in product mix towards larger townhouse and single family homes and fewer condominiums than in the previous year, as well as price increases at certain existing communities. Fiscal 1998 related party residential property revenues included 26 low income homes with an aggregate sales value of approximately $1,400,000, sold to Jeffrey P. Orleans, Chairman and Chief Executive Officer of the Company. 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. Fiscal 1998 revenue from land sales decreased approximately $2,742,000, or 71.2%, compared with fiscal 1997. This decrease is primarily due to a decrease in the number and size of developed homesites sold during fiscal 1998 compared with fiscal 1997. Also, other income for fiscal 1998 decreased $398,000, or 19.5%, compared with fiscal 1997. This decrease is primarily due to the fact that fiscal 1997 other income included non-recurring income items totaling approximately $632,000 from the final distribution of a joint venture partnership and insurance proceeds in excess of expenses incurred from a 1995 fire which destroyed the Company's corporate offices.
Costs and Expenses
Costs and expenses for fiscal 1998 increased $6,369,000, or 6.4%, compared with fiscal 1997. This increase is primarily due to an increase in the cost of residential properties sold and selling, general and administrative expenses totaling $9,088,000, partially offset by a decrease in the cost of land sales of $2,775,000. The fiscal 1998 cost of residential properties increased $7,895,000, or 9.6%, when compared with fiscal 1997. This increase in residential property costs is slightly less than the overall percentage increase in residential property revenues when compared with fiscal 1997. Overall profit margins on residential properties improved nominally, due to increased selling prices, as the cost of residential properties as a percentage of residential property revenues was 85.1% in fiscal 1998, compared with 85.9% in fiscal 1997. The decrease in the cost of land sales of $2,775,000, or 75.7% when compared to fiscal 1997, is consistent with the overall decrease in fiscal 1998 revenue from land sales. Profit margins on land sales during fiscal 1998 improved to 19.7% from 4.8% during fiscal 1997. Fiscal 1998 selling, general and administrative expenses increased $1,193,000, or 9.6%, when compared with fiscal 1997. The fiscal 1998 increase in selling, general and administrative expenses is attributable to start-up costs associated with the opening of communities in new regions, along with having more overall communities open throughout fiscal 1998 when compared with the prior year. The selling, general and administrative expenses as a percentage of residential property revenues is relatively consistent with the prior year.
Income Before Income Taxes
Income before income taxes increased $633,000, or 30.8%, to $2,690,000 for fiscal 1998 compared with $2,057,000 during fiscal 1997. This increase is primarily due to an increase in gross profit as a result of higher residential property revenues, partially offset by an increase in selling, general and administrative expenses necessary to support the increased revenues.
Income Tax Expense
The Company's effective tax rate for fiscal 1998 increased to 38.0% from 21.5% during fiscal 1997. The increase is due to the fact that fiscal 1997 income tax expense was reduced as a result of the elimination of a valuation allowance on certain tax assets. (See Note 11 of Notes to Consolidated Financial Statements for more information.)
Income From Operations Before Extraordinary Income and Net Income
Income from operations before extraordinary items was $1,668,000 or $.15 basic earnings per share for fiscal 1998, compared with $1,615,000 or $.14 basic earnings per share during fiscal 1997. The current year increase in income from operations before extraordinary item was offset by a higher effective income tax rate in fiscal 1998 when compared with fiscal 1997. Income from extraordinary items, net of tax expense, was $594,000 or $.05 per share during fiscal 1997. Net income was $1,668,000 or $.15 basic earnings per share for fiscal 1998, compared with $2,209,000 or $.19 basic earnings per share during fiscal 1997. The fiscal 1997 extraordinary gain, net of tax expense and the change in effective tax rate, accounts for substantially all of the decrease in net income during fiscal 1998 when compared with fiscal 1997.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995.
The following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual consolidated results and 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 Orleans Homebuilders, Inc.:
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 building material price fluctuations;
o changes in mortgage interest rates charged to buyers of the Company's units;
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 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; and
o increased cost of suitable development land.
Item 7A.
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 based on LIBOR and prime rate, and, therefore, affected by changes in market interest rates. Based on current operations, an increase in interest rates of 100 basis points will increase cost of sales and interest expense by approximately $450,000. Historically, the Company has been able to increase prices to cover portions of 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 effect on future earnings, fair values or cash flows of the Company.
Item 8.
Item 8. Financial Statements and Supplementary Data.
ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
Page ---- Reports of independent accountants 21-22
Consolidated balance sheets at June 30, 1999 23 and June 30, 1998
Consolidated statements of operations and retained 24 earnings for the years ended June 30, 1999, 1998 and 1997
Consolidated statements of cash flows for the years ended June 30, 1999, 1998 and 1997 25
Notes to consolidated financial statements 26
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, 1999, excepting indebtedness incurred in the ordinary course of business.
Independent Auditors' Report
The Board of Directors and Shareholders of Orleans Homebuilders, Inc.
We have audited the accompanying consolidated balance sheet of Orleans Homebuilders, Inc. and subsidiaries as of June 30, 1999, and the related consolidated statements of operations and retained earnings, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Orleans Homebuilders, Inc. and subsidiaries as of June 30, 1999, and the results of their operations and their cash flows for the year then ended in conformity with generally accepting accounting principles.
KPMG LLP
Philadelphia, Pennsylvania October 11, 1999
Report of Independent Accountants
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 at June 30, 1998 and the results of their operations and their cash flows for each of the two years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 the opinion expressed above. We have not audited the consolidated financial statements of Orleans Homebuilders, Inc. for any period subsequent to June 30, 1998.
PricewaterhouseCoopers LLP September 14, 1998
Orleans Homebuilders, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except share amounts)
See notes to consolidated financial statements
Orleans Homebuilders, Inc. and Subsidiaries Consolidated Statements of Operations and Retained Earnings
See notes to consolidated financial statements
Orleans Homebuilders, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands)
See notes to consolidated financial statements
Orleans Homebuilders, Inc. and Subsidiaries Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
During fiscal 1998, the Company changed its name to Orleans Homebuilders, Inc. ("OHB") from FPA Corporation. Orleans Homebuilders, Inc. and its subsidiaries (the Company) are currently engaged in residential real estate development in Pennsylvania and New Jersey. 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. The financial statements include the consolidated financial position and results of operations of Versailles Associates, L.P., and Bridlewood Associates, L.P., joint ventures in which a subsidiary of the Company is the sole General Partner. The outside limited partners have been allocated their portion of the income or loss and equity. These amounts are presented as minority interests in the financial statements. 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 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, construction overhead costs, interest on indebtedness and real estate taxes. 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.
Interest costs included in Costs and Expenses of residential properties and land sold for fiscal years 1999, 1998 and 1997 were $7,564,000, $5,373,000 and $5,617,000, respectively.
Advertising costs The total amount of advertising costs charged to expense was $2,377,000, $2,163,000 and $1,747,000 for the three years ended June 30, 1999, 1998 and 1997, 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 for fiscal 1999, 1998 and 1997 was approximately $200,000, respectively.
Income taxes The Company and its subsidiaries file a consolidated federal income tax return. See Note 11 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. Diluted earnings per share include additional common shares that would have been outstanding if the dilutive potential common shares had been issued. The weighted average number of shares used to compute basic earnings per common share and diluted earnings per common share, and a reconciliation of the numerator and denominator used in the computation for the three years ended June 30, 1999, 1998 and 1997, respectively, are shown in the following table.
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.
Reclassifications Certain amounts in the accompanying financial statements have been reclassified for comparative purposes.
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.
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.
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 1999, 1998 and 1997, were $440,000, $459,000 and $-0-, respectively. Income taxes paid were $3,451,000, $377,000 and $109,000 for fiscal 1999, 1998 and 1997, respectively.
On October 20, 1998, the Company issued 100,000 shares of Series D Preferred Stock (the "Series D Stock") to Jeffrey P. Orleans in exchange for an aggregate amount of $3,000,000 in Company notes held by Mr. Orleans.
Comprehensive income On July 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income consists of items such as net income, foreign currency translations and minimum pension liabilities. The Company's comprehensive income and net income are the same for fiscal 1999, 1998 and 1997.
Recent accounting pronouncements In June, 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133 - an amendment of SFAS No. 133". SFAS No. 133 provides new accounting and reporting standards for use of derivative instruments. Management intends to have the Company adopt this statement, as required by the provisions of SFAS No. 137, effective July 1, 2000. Although not precluded from doing so, the Company and its subsidiaries have not historically used such instruments extensively and, accordingly, management does not believe adoption of SFAS No. 133 will have a material impact on the Company's financial statements.
Note 2. Extraordinary Items
In July, 1996, the Company completed a transaction to fully satisfy notes payable with an outstanding balance of approximately $1,650,000 and reacquired 183,177 shares of Common Stock in exchange for a cash payment of approximately $1,061,000. These shares have been retained by the Company as Treasury Stock. This transaction resulted in an extraordinary gain of $594,000, net of income tax expense of approximately $100,000 in fiscal 1997.
Note 3. Joint Ventures
During fiscal 1997, the Company received approximately $319,000 from a final non-recurring distribution in excess of basis from a joint venture partnership. The Company will have no future obligations or operating activities with respect to this entity.
In October, 1992, a wholly owned subsidiary of the Company, Versailles at Europa, Inc. was established to act as the General Partner in a newly formed Versailles Associates, L.P. (the "Partnership"). The financial statements of the Partnership are included in the consolidated financial statements of the Company. The limited partner's share of the income and capital from this entity has been presented as minority interest in the accompanying consolidated financial statements. As of June 30, 1998, all units have been delivered and final distribution to the partners and liquidation of the partnership occurred in fiscal 1999.
Orleans Construction Corp. ("OCC"), a subsidiary of the Company, entered into a joint venture agreement with Bridlewood Associates, L.P., a limited partnership formed to develop an 85 acre parcel of land in Mount Laurel, New Jersey. OCC is the managing general partner. OCC and the limited partner share equally in the profits or losses of the entity. The financial statements of the Partnership are included in the consolidated financial statements of the Company. The limited partner's share of the income and capital from this entity has been presented as minority interest in the accompanying consolidated financial statements. As of June 30, 1999, all units have been delivered and final distribution to the partners and liquidation of the partnership is expected to occur in fiscal 2000.
Note 4. Certain Transactions with Related Parties
During fiscal 1999, 1998 and 1997, Jeffrey P. Orleans, Chairman and Chief Executive Officer of the Company, purchased four (4), twenty-six (26) and five (5) low income homes, respectively, with an aggregate sales value of approximately $176,000, $1,400,000 and $400,000, respectively. 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.
Under the terms of an existing option agreement, the Company has exercised its final option during fiscal 1997 to purchase sections of land from Orleans Builders and Developers ("OB&D"), a limited partnership whose partners include Jeffrey P. Orleans and the Trust of Selma Orleans. This parcel was subsequently sold to an unaffiliated third party for a purchase price of $763,000 during fiscal 1997. This transaction resulted in a profit to the Company before income taxes of $178,000. See Note 8 to the consolidated financial statements for a discussion of other related party transactions.
Note 5. Real Estate Held for Development and Sale
Residential properties completed or under construction consist of the following:
June 30, -------------------- 1999 1998 ------- ------- (In thousands)
Condominiums and townhomes $23,848 $26,539 Single-family homes 27,952 20,670 ------- ------- $51,800 $47,209 ======= =======
Sales status of above properties is as follows:
June 30, -------------------- 1999 1998 ------- ------- (In thousands)
Under contract for sale $41,144 $32,102 Unsold 10,656 15,107 ------- ------- $51,800 $47,209 ======= =======
Note 6. Mortgage Subsidiary
The Company has a wholly-owned financing subsidiary which had been involved, through unaffiliated companies, in issuing mortgage-collateralized bonds. Condensed financial information for the finance subsidiary is as follows:
June 30, -------------------- 1999 1998 ------- ------- (In thousands)
Total assets, principally mortgage notes receivable $262 $290 Total liabilities, principally bonds payable 200 230 ---- ---- Advances from parent company $ 62 $ 60 ==== ==== Net income for the year ended $ 4 $ 2 ==== ====
Note 7. Property and Equipment June 30, -------------------- 1999 1998 ------- ------- (In thousands)
Property and equipment consists of the following:
Equipment and fixtures $2,963 $2,581 Less accumulated depreciation (1,015) (689) ------ ------ $1,948 $1,892 ====== ======
During fiscal 1998, a subsidiary of the Company used approximately $1,555,000 of the proceeds from a 1997 Chester County Industrial Development Authority Wastewater Treatment Revenue Bond Offering to construct and operate a waste water spray irrigation facility. See Note 8 for additional information on the revenue bonds.
Depreciation expense, included in Other Costs and Expenses on the Company's Consolidated Statements of Operations and Retained Earnings, was $326,000, $214,000 and $128,000 during fiscal 1999, 1998 and 1997, respectively.
Note 8. Mortgage and Other Note Obligations
The maximum balance outstanding under construction and inventory loan agreements at any month end during fiscal 1999, 1998 and 1997 was $56,308,000, $48,461,000 and $38,178,000, respectively. The average month end balance during fiscal 1999, 1998 and 1997 was approximately $49,980,000, $39,916,000 and $30,608,000, respectively, bearing interest at an approximate average annual rate of 8.35%, 8.95% and 9.25%, respectively. At June 30, 1999, the Company had approximately $60,235,000 available to be drawn under existing secured revolving and construction loans for planned development expenditures. Mortgage obligations secured by land held for development and sale and improvements aggregating $10,820,000 and $21,203,000 at June 30, 1999 and 1998, respectively, are due in varying installments through fiscal 2003 with annual interest ranging from LIBOR plus 2% to the prime rate of interest plus 3/4%. The LIBOR and prime rate of interest at June 30, 1999 were 5.1675% and 7.75%, respectively.
Maturities of land and improvement mortgage obligations, other than residential property construction loans, are as follows: 2000 - $8,221,000; 2001 - $1,885,000; 2002 - $467,0000; and 2003 - $247,000. Obligations under residential property and construction loans amounted to $56,309,000 and $43,933,000 at June 30, 1999 and 1998, 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 significantly from community to community and over time within the same community.
Included in the Notes Payable - Related Parties balance at June 30, 1999 and 1998 is a $3,000,000 Convertible Subordinated 7% Note dated August 8, 1996 issued to Jeffrey P. Orleans which matures January 1, 2002. This note 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, 2000.
During fiscal 1999, the Company entered into 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, 2002 with annual interest at LIBOR plus 4% payable monthly. The total outstanding principal and interest is $650,000 at June 30, 1999.
At June 30, 1998, the Company had a $2,000,000 Variable Rate Note and a $1,746,000 Demand Note due to Mr. Orleans with interest at prime plus 2%, payable quarterly. In October, 1998, the Company issued 100,000 shares of Series D Preferred Stock in exchange for the $2,000,000 Variable Rate Note and $1,000,000 of the Demand Note. See Note 10 for additional information on the Series D Preferred Stock. The remaining portion of the Demand Note was paid in full in November, 1998.
At June 30, 1998, the Company had a $750,000 Revolving Working Capital Note due to Mr. Orleans with interest at the prime rate, payable monthly. The Revolving Working Capital Note was paid in full in June, 1999. The Company has the right to reborrow under this facility.
In December 1997, the Company purchased land from Mr. Orleans in exchange for a $500,000 Purchase Money Mortgage ("PMM"). Subsequently, during fiscal 1998, the Company repaid $200,000 of the PMM and began development of the land. The remaining balance of $300,000 will be repaid from the proceeds of units sold at this development. The PMM bears interest at 7% annually and is due no later than 60 months from the date of issuance.
Prior to October 22, 1993, the date of acquisition by the Company of Orleans Construction Corp., a real estate company which was wholly owned by Jeffrey P. Orleans, Chairman and Chief Executive Officer of the Company, 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 Jeffrey P. Orleans owns a majority interest. At June 30, 1999 and 1998, amounts owed by the Company to the partnership aggregated $2,049,000 and $2,256,000, respectively. These advances are payable on demand and bear interest at 7% annually. Interest incurred on these advances amounted to $149,000, $176,000 and $201,000 for the years ended June 30, 1999, 1998 and 1997, respectively.
Also included in the aggregate Notes Payable - Related Parties balance at June 30, 1998 are Series B Notes Payable held by Mr. Orleans of approximately $650,000 with annual interest at prime plus 2% payable quarterly. The Series B Notes were paid in full in November, 1998. At June 30, 1998, the Company had $1,350,000 of Deferred Series A and Series B Notes due to Mr. Orleans with annual interest at prime plus 2% payable quarterly. The Deferred Series A and Series B Notes were paid in full in June, 1999.
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 bonds mature November 1, 2006 and bear interest at 7% annually. The bonds will be repaid at a predetermined amount from settlement proceeds for each home sold with minimum annual repayments of approximately $200,000 commencing on November 1, 1998. 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. Included in Other Assets on the Company's Consolidated Balance Sheet at June 30, 1999 is $745,000 of restricted cash to be used for completion of the facility and repayment of the bonds. The total principal and accrued interest of $1,674,000 is included in Other Notes Payable at June 30, 1999.
In addition, the Company has various working capital and property and equipment note obligations which require various monthly repayment terms with maturity dates from fiscal 2000 through 2004.
The following table summarizes the components of Other Notes Payable, including related party amounts.
Maturities of these obligations during the next five fiscal years are (in thousands):
2000(3) $4,464 2001 1,517 2002 1,436 2003 401 2004 273 Thereafter 860 ------ $8,951 ====== - -------
(1) As more fully described in Note 10, during fiscal 1999 the Variable Rate Note and a portion of the Demand Note were exchanged for Company preferred stock.
(2) The holders of the related party notes payable are Jeffrey P. Orleans or Orleans Builders and Developers, L.P.
(3) Includes all demand notes and unsecured advances payable on demand.
Note 9. Subordinated Debentures
On September 8, 1980, the Company sold 25,000 Units, each consisting of a $1,000 debenture bearing interest at 14 l/2% per annum and 5 shares of Common Stock.
The debentures, which are unsecured obligations, require semi-annual interest payments each September and March with the principal balance due on September 1, 2000. Given that optional prepayments may be made at 100% of the principal amount thereof, the Company repaid the debentures in full in March, 1999. No gain or loss was recognized on the repayment.
Note 10. Preferred Stock
On October 20, 1998, the Company issued 100,000 shares of Series D Stock to Jeffrey P. Orleans in exchange for an aggregate amount of $3,000,000 in company notes held by Mr. Orleans. (See Note 8 for additional information on the notes.) The Series D Stock was issued from an aggregate of 500,000 shares of Preferred Stock authorized. The Series D 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 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 Stock is currently convertible into 2,000,000 shares of Common Stock.
Note 11. Income Taxes
The provision (benefit) for income taxes is summarized as follows:
For Year Ended June 30, ---------------------------- 1999 1998 1997 ------- ------ ----- (In Thousands) Continuing operations Current $3,747 $ 896 $271 Deferred (457) 126 171 ------ ------ ---- $3,290 $1,022 $442 ====== ====== ==== Extraordinary Item Current $ - $ - $100 Deferred - - - ------ ------ ---- $ - $ - $100 ====== ====== ====
The differences between taxes computed at federal income tax rates and amounts provided for continuing operations are as follows:
For Year Ended June 30, ---------------------------- 1999 1998 1997 ------- ------ ----- (In Thousands) Amount computed at statutory rate $2,944 $ 914 $597 State income taxes, net of federal tax benefit 346 162 59 Unrealized (realized) benefits from net operating loss carry forwards and other tax credits net of changes in related valuation reserves - (54) (276) ------ ------ ---- $3,290 $1,022 $380 ====== ====== ====
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 liability of $2,504,000 and $2,961,000 at June 30, 1999 and 1998, respectively, 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:
For Year Ended June 30, ---------------------------- 1999 1998 1997 ------- ------ ----- (In Thousands) Interest and real estate taxes $(253) $246 $172 Difference in tax accounting for land and property sales (net) (6) (8) 13 Unrealized (realized) tax net operating loss carryforwards and other tax credits, net of changes in related valuation reserves - (122) 223 Reserves 80 12 (173) Gain (loss) from joint ventures (7) 15 (109) Deferred compensation (305) (35) (7) Depreciation and other (47) 18 (10) State taxes 81 - - ----- ---- ---- $(457) $126 $109 ===== ==== ====
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 a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years." 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. Due to the fact that the Company had substantial capital and operational restructurings and significant losses in years prior to 1995, it was appropriate to record a valuation allowance at June 30, 1995, equal to 100% of the total deferred income tax assets which were dependent upon future income for realization in certain tax jurisdictions.
As of June 30, 1996, due to positive earnings and a strong backlog, the Company reduced its valuation allowance from 100% to 50% on certain tax assets which were dependent on future taxable income for realization. The deferred tax assets for which the Company previously provided (prior to June 30, 1996) a 100% valuation allowance consisted of $199,000 of state net operating loss carryforwards and federal alternative minimum tax credits aggregating $856,000 at June 30, 1996. As of June 30, 1997, due to continued positive results, the Company believed it appropriate to further adjust the valuation allowance to zero on its remaining tax assets as of June 30, 1997.
The components of net deferred taxes payable consisted of the following:
June 30, ------------------- 1999 1998 ------- ------- (In Thousands)
Capitalized interest and real estate taxes $2,499 $2,825 State income taxes 1,250 1,136 Other 21 75 ------ ------ Gross deferred tax liabilities 3,770 4,036 ------ ------
Reserves for books ( 52) ( 146) Partnership income ( 168) ( 167) Related party interest ( 50) ( 98) Executive bonus ( 342) - Employment contracts ( 316) ( 353) Vacation accrual ( 73) ( 73) Inventory adjustment ( 165) ( 160) Fixed assets ( 86) ( 78) Other ( 14) - ------ ------
Gross deferred tax assets (1,266) (1,075) ------ ------
Net deferred tax liabilities $2,504 $2,961 ====== ======
As of June 30, 1999, the Company had no remaining federal net operating loss or alternative minimum tax credit carryforwards.
Note 12. Stock Option Plan
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 (increased in December 1998 from 910,000 shares) of Common Stock of the Company. 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. During fiscal 1999, 10,625 options were granted at an exercise price of $2.06 per share. During fiscal 1998, 170,000 options were granted at an exercise price of $1.19 per share. The aforementioned options vest 25% per year beginning on the date of grant. During fiscal 1997, 200,000 options were granted at an exercise price of $1.50 per share.
In February, 1995, the Board of Directors adopted the 1995 Stock Option Plan for Non-Employee Directors (the "1995 Directors Plan"), which allows for the grant of options to purchase up to 100,000 shares of Common Stock of the Company. During fiscal 1998, 50,000 options were granted at an exercise price of $1.19 per share, subject to shareholder approval of an amendment to the 1995 Directors Plan increasing the number of options authorized for grant to 125,000 and certain other related amendments to the 1995 Directors Plan. The options vest 25% per year beginning on the date of grant. On February 28, 1995, 75,000 options were granted under this plan to three non-employee Directors.
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 aggregated 1,188,125 options to purchase shares of Common Stock of the Company at prices ranging from $.69 to $2.81 per share. All options expire between December 2002 and December 2008.
Effective in fiscal 1997, the Company was required to adopt the provisions of SFAS No. 123 "Accounting for Stock Based Compensation". As permitted, the Company has 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. Had compensation costs for the option plans been determined based on the fair value at the grant date for awards and recognized over the related vesting period in 1999, 1998 and 1997, consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share for the three years ended June 30, 1999 would have been reduced to the pro forma amounts indicated below:
For Year Ended June 30 ----------------------------------- 1999 1998 1997 ----------------------------------- (In thousands, except for EPS data)
Net Income - as reported $5,220 $1,668 $2,209 Net Income - pro forma 5,148 1,641 2,186 Diluted EPS - as reported .36 .14 .19 Diluted EPS - pro forma .35 .14 .19
The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option - Pricing Model with the following weighted average assumptions used for options granted in fiscal 1997 through fiscal 1999: dividend yield of 0% for all years; expected volatility of 73.9%; risk free interest rates for treasuries of comparable duration and expected lives of 10 years for all grants. The weighted average fair value of grants per share for fiscal 1999, 1998 and 1997 was $1.67, $.98 and $1.03 per share, respectively.
The fiscal 1998 option grants were included in the pro forma calculation for fiscal 1999, as they were not approved by the shareholders until December 1998.
The pro forma disclosures above may not be indicative of the effects on reported net income and net income per share for future years, as the pro forma disclosures include the effects of only those awards granted on or after July 1, 1995.
The following summarizes stock option activity for the three plans during the three years ended June 30, 1999:
The fiscal 1999 grants include 220,000 options granted in fiscal 1998 subject to shareholder approval, which was obtained during fiscal 1999.
The following table summarizes information about stock options outstanding at June 30, 1999.
Note 13. Commitments and Contingencies
General At June 30, 1999, the Company had outstanding bank letters of credit, surety bonds and financial security agreements amounting to $36,483,000 as collateral for completion of improvements at various developments of the Company.
At June 30, 1999 the Company had agreements to purchase land and approved homesites aggregating approximately 2,500 building lots with purchase prices totaling approximately $59,721,000 at fifteen locations. 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. Subsequent to year-end, but prior to September 30, 1999, the Company entered into agreements to purchase 335 building lots with an aggregate purchase price of approximately $20,000,000.
The Company anticipates completing a majority of these acquisitions in fiscal 2000 and 2001. As of June 30, 1999 and 1998, the Company had paid deposits and incurred other costs associated with the acquisition and development of these parcels aggregating $4,141,000 and $2,653,000, respectively, which are included in Other Assets.
Environmental Liability Exposure 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 current or 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 owner or operator of the property (including the prior owners) may be held strictly liable for all costs and liabilities relating to such hazardous substances. Environmental studies are undertaken in connection with property acquisitions by the Company.
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. The Plan, in part, requires the Company to (i) perform gas monitoring for methane on a quarterly basis for a period of one year; (ii) vegetate and cover with clean fill affected areas; and (iii) deed restrict portions of the affected open space owned by it. NJDEP's approval of the CEA imposes restrictions on the use of ground water within the affected area. 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 although 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.
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 theories of private nuisance, public nuisance, common law fraud, latent defects, negligent misrepresentation, consumer fraud, negligence, strict liability, vendor liability, and breach of warranty, among others.
The Company, in turn, asserted third-party claims against the former owners and operators of the Colts Neck property as well as claims against the generator of the municipal waste allegedly disposed on the property.
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 litigation entered into a settlement agreement. Under that agreement, which has been 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 has paid $650,000 on August 28, 1996 to the class, has no liability for the remainder of the Judgment. The remainder of the Judgment is to be paid solely from the proceeds of the state court litigation against the Company's insurance companies. 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.
The Company is currently prosecuting the litigation against its insurance companies in state court. Prosecution of those claims was pursued in federal court between 1994 and 1996, but has since been remanded to state court on jurisdictional grounds. The state court insurance litigation is being actively pursued. To date, settlements totaling $577,500 have been reached with seven defendants, half of which have been or will be paid to the plaintiff class, and half of which has been or will be used to fund the continued litigation. The likelihood of a favorable judgment or additional settlements in the litigation is uncertain.
In addition, the Company has reached a $215,000 tentative settlement of its third party claims in the above-mentioned federal litigation. One-half of the proceeds of any such settlement will be payable to the plaintiff class under the 1995 settlement agreement with the class.
The Company has accrued estimated costs of environmental testing as well as all other reasonably estimable future investigatory, engineering, legal and litigation costs and expenses. The Company believes that neither the implementation of the settlement agreement nor the resolution of the insurance claims through further litigation will have a material effect on its results of operations or its financial position.
The Company is not aware of any other environmental liabilities associated with any of its other projects.
Other Significant Litigation
During fiscal 1998, a judgment in the amount of $2,500,000 was rendered against the Company and in the amount of $1,250,000 against the Estate of Marvin Orleans and Jeffrey P. Orleans, trading as Orleans Construction Company, by the Court of Common Pleas of Bucks County, in an action brought against the Company, Orleans Construction Company and an unrelated party arising out of injuries to two workmen at the Company's project during its construction phase. In May 1999, a settlement was reached. The settlement, including delay damages, was completely satisfied from insurance proceeds. The insurance carrier paid $3,250,000 on behalf of the Company and $1,625,000 on behalf of Orleans Construction Company.
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 14. Quarterly Financial Data (Unaudited)
Unaudited summarized financial data by quarter for 1999 and 1998 are as follows (in thousands, except per share data):
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
As reported in the Company's Form 8-K dated September 13, 1999, the Company's former independent accountants resigned on such date. As reported in the Company's Form 8-K dated October 5, 1999, the Company has engaged KPMG LLP ("KPMG") as its new independent accountants for the Fiscal 1999 audit. The decision to engage KPMG was approved by the Audit Committee of the Board of Directors of the Company. A meeting of the Audit Committee will be held during the year, at which time a recommendation will be made as to the selection of the Company's auditors for Fiscal 2000. Representatives of KPMG will be present at the 1999 Annual Meeting and they will be given an opportunity to make a statement if they desire to do so and will be available to respond to any appropriate questions from stockholders.
PART III
Item 10.
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, 1999. Information concerning the executive officers is included under the separate caption Item A. "Executive Officers of the Registrant" under Part I of this Form 10-K.
Item 11.
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, 1999.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated herein by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders to be held in December, 1999.
Item 13.
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, 1999.
PART IV
Item 14.
Item 14. 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 - --------------
3.l Certificate of Incorporation of the Company dated 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) (herein referred to as "Form S-7")).
3.2 Amendment to Certificate of Incorporation of the Company filed 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 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")).
3.4 Agreement and Plan of Merger dated as of October 22, 1993, by and among the Company, FPA Merger Subsidiary, Inc. a Pennsylvania corporation; Orleans Construction Corp. ("OCC"); and Jeffrey P. Orleans, including the Certificate of Designation respecting the Series C Preferred Stock incorporated by reference to Exhibit 3.5 to the Company's Form 8-K dated October 22, 1993 filed with the Securities and Exchange Commission (the "1993 Form 8-K").
3.5 Certificate of Designation filed by the Company on September 6, 1991 with the Secretary of State of Delaware respecting the Series A Preferred Stock and Series B Junior Preferred Stock (incorporated by reference to Exhibit 4.4 of the Company's Form 8-K dated September 11, 1991 ("1991 Form 8-K")).
3.6 Subsequent Certificate to Certificate of Designations, Preferences and Rights of Series A Preferred Stock and Series B Junior Preferred Stock of FPA Corporation adopted September 14, 1992 and filed with the Secretary of State of Delaware. (incorporated by reference to Exhibit 4.19 to Registrant's Form 10-K for the fiscal year ended June 30, 1994.)
3.7 Subsequent Certificate to Certificate of Designations, Preferences and Rights of Series A Preferred Stock and Series B Junior Preferred Stock of FPA Corporation filed on September 2, 1993 with the Secretary of State of Delaware.
3.8 Certificate of Designations, Preferences and Rights of Series C Preferred Stock filed by the Company on October 21, 1993 with the Secretary of State of Delaware respecting the Series C Preferred Stock. (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K dated October 22, 1993).
3.9 Certificate of Elimination to Certificate of Designations, Preferences and Rights of Series C Preferred Stock of FPA Corporation filed on October 18, 1996 with the Secretary of State of Delaware (incorporated by reference to Exhibit 3.9 to the 1998 Form 10-K).
3.10 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).
3.11 By-Laws, as last amended on April 20, 1998 (incorporated by reference to Exhibit 3.11 to the 1998 Form 10-K).
4.l Form of the Company's 14 l/2% Subordinated Debentures due September l, 2000 (contained in, and beginning on page 12 of, Exhibit 4.2).
4.2 Form of Indenture dated September l, 1980, between the Company and The Fidelity Bank (the "Debenture Indenture"), relating to the Company's 14 l/2% Subordinated Debentures due September l, 2000 (incorporated by reference to Exhibit 2.3 of Amendment No. 2 to the Company's Form S-7).
4.3 Form of Second Supplemental Indenture dated March 30, 1990 to the Debenture Indenture (incorporated by reference to Exhibit 4.3 to the 1990 Form 8-K).
4.4 Note Exchange Agreement, dated September 11, 1991, respecting the issuance of $5,032,935.38 aggregate principal amount of 12 5/8% Senior Notes due February 15, 1996, with the form of the Company's 12 5/8% Senior Notes due February 15, 1996 attached as Exhibit A thereto (incorporated by reference to Exhibit 4.5 to the 1991 Form 8-K).
4.5 Debenture Exchange Agreement, dated September 11, 1991, respecting the issuance of $2,356,282.50 aggregate principal amount of 1991 14 1/2% Subordinated Debentures due September 1, 2000 with the form of the Company's 1991 14 1/2% Subordinated Debentures due September 1, 2000 attached as Exhibit A thereto (incorporated by reference to Exhibit 4.6 to the 1991 Form 8-K).
4.6 Form of Note Purchase Agreement dated as of October 22, 1993, together with form of Series A Variable Rate Notes due September 15, 1998 issued by the Company attached thereto (incorporated by reference to Exhibit 4.2 to the 1993 Form 8-K).
4.7 Form of Note Purchase Agreement dated October 22, 1993, together with form of Series B Variable Rate Mortgage Notes due September 15, 1998 issued by the Company attached thereto (incorporated by reference to Exhibit 4.24 to the 1993 Form 8-K).
4.8 Form of Note Purchase Agreement, dated as of August 1, 1996, together with form of $2,000,000 Variable Rate Note due September 30, 2000 (incorporated by reference to Exhibit 4.8 to the 1996 Form 10-K).
4.9 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 1997 Form 10-K).
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 Mortgage dated March 17, 1992 granted by the Company to Jeffrey P. Orleans, respecting property in Washington Township, Gloucester County, New Jersey (incorporated by reference to Exhibit 10.3 to the 1992 Form 8-K).
10.4* $4,000,000 Unsecured Line of Credit Agreement with Jeffrey P. Orleans, dated as of June 30, 1999.
22. Subsidiaries of Registrant (incorporated by reference to Exhibit 22 to the 1998 Form 10-K.)
23.* Consents of Experts and Counsel.
25.* Power of Attorney (included on Signatures page).
27.* Financial Data Schedule (included in electronic filing format only).
- --------------
* Exhibits included with this filing.
(b) Reports on Form 8-K
None.
SIGNATURES and POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jeffrey P. Orleans, Benjamin D. Goldman and Joseph A. Santangelo and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or each of them, of their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities 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 October 11, 1999 - -------------------------------------- Jeffrey P. Orleans Chairman of the Board and Chief Executive Officer
s/Benjamin D. Goldman October 11, 1999 - -------------------------------------- Benjamin D. Goldman Vice Chairman and Director
s/Sylvan M. Cohen October 11, 1999 - -------------------------------------- Sylvan M. Cohen Director
s/Robert N. Goodman October 11, 1999 - -------------------------------------- Robert N. Goodman Director
s/Andrew N. Heine October 11, 1999 - -------------------------------------- Andrew N. Heine Director
s/David Kaplan October 11, 1999 - -------------------------------------- David Kaplan Director
s/Lewis Katz October 11, 1999 - -------------------------------------- Lewis Katz Director
s/Michael T. Vesey October 11, 1999 - -------------------------------------- Michael T. Vesey President and Chief Operating Officer
s/Joseph A. Santangelo October 11, 1999 - -------------------------------------- Joseph A. Santangelo Chief Financial Officer, Treasurer and Secretary