Table ofContents

 

 

 

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

# **FORM 10-Q**

# ** **

| **(Mark One)** |
|----------------|
| **x**          | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES** |
| ** **     | ** ** | **EXCHANGE  ACT OF 1934** |
| ** **     | ** ** | ** ** |
| ** **     | ** ** | **For the quarterly period ended September 30, 2008** |
| ** **     | ** ** | ** ** |
| ** **     | ** ** | **OR** |
| ** **     | ** ** | ** ** |
| **o**          | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES** |
| ** **     | ** ** | **EXHANGE  ACT OF 1934** |

 

**For the transitionperiod                   to**

 

#### **CommissionFile No. 1-6830**

#### ** **

**ORLEANS HOMEBUILDERS, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                    | ** ** | **59-0874323**                            |
|---------------------------------|------------|-------------------------------------------|
| (State or other jurisdiction of |       | **(I.R.S. Employer Identification. No.)** |
| incorporation or organization)  |       |                                      |

 

**3333 Street Road, Suite 101**

**Bensalem, PA 19020**

(Address of principal executive offices)

 

**Telephone:        (215)245-7500**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  x No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

|   | Large  accelerated filer o                                              |   | Accelerated  filer o    |
|--------|------------------------------------------------------------------------------|--------|------------------------------|
|   |                                                                         |   |                         |
|   | Non-accelerated  filer o (Do not check if a smaller reporting  company) |   | Smaller  reporting company x |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o No x

 

Number of shares of common stock, par value$0.10 per share, outstanding as ofNovember 14, 2008:              18,839,141

(excluding 98,990 shares held in Treasury).

 

 

 

# ****

# **Table of Contents**

 

# **ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES**

# ** **

| ** **  | ** **                                                                                                                                       | **PAGE**   |
|-------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **  | **PART 1 – FINANCIAL INFORMATION**                                                                                                     |       |
|        |                                                                                                                                             |       |
| Item 1.     | Financial  Statements (unaudited)                                                                                                                |       |
|        |                                                                                                                                             |       |
|        | Condensed  Consolidated Balance Sheets at September 30, 2008 and June 30, 2008                                                         | 1          |
|        |                                                                                                                                             |       |
|        | Condensed  Consolidated Statements of Operations for the Three Months Ended  September 30, 2008 and 2007                                    | 2          |
|        |                                                                                                                                             |       |
|        | Condensed  Consolidated Statements of Shareholders’ Equity and Total Comprehensive Loss  for the Three Months Ended September 30, 2008 | 3          |
|        |                                                                                                                                             |       |
|        | Condensed  Consolidated Statements of Cash Flows for the Three Months Ended  September 30, 2008 and 2007                                    | 4          |
|        |                                                                                                                                             |       |
|        | Notes to Condensed Consolidated Financial Statements                                                                                             | 5          |
|        |                                                                                                                                             |       |
| Item 2.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                      | 22         |
|        |                                                                                                                                             |       |
| Item 3.     | Quantitative  and Qualitative Disclosures About Market Risk                                                                                      | 39         |
|        |                                                                                                                                             |       |
| Item 4.     | Controls and  Procedures                                                                                                                         | 39         |
|        |                                                                                                                                             |       |
| ** **  | **PART II  – OTHER INFORMATION**                                                                                                       | ** ** |
|        |                                                                                                                                             |       |
| Item 1A.    | Risk Factors                                                                                                                                     | 39         |
|        |                                                                                                                                             |       |
| **Item 6.** | **Exhibits**                                                                                                                                     | **40**     |

** **

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**OrleansHomebuilders, Inc. and SubsidiariesCondensed Consolidated Balance Sheets**

**(Unaudited)**

**(dollarsin thousands, except per share amounts)**

 
| ** **                                                                                                                         | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                         | ** ** | ** **                   | ** ** |
| Assets                                                                                                                             |       |                         |       |                    |       |
| Cash and cash equivalents                                                                                                          |       | $                            | 27,332     |                    | $          | 72,341 |   |
| Restricted cash - due from title company                                                                                           |       | 7,288                        |       | 19,269                  |       |
| Restricted cash - customer deposits                                                                                                |       | 7,948                        |       | 8,264                   |       |
| Marketable securities                                                                                                              |       | 15,745                       |       | —                  |       |
| Real estate held for development and sale:                                                                                         |       |                         |       |                    |       |
| Residential properties completed or under construction                                                                             |       | 202,645                      |       | 193,257                 |       |
| Land held for development or sale and improvements                                                                                 |       | 345,541                      |       | 359,555                 |       |
| Inventory not owned - variable interest entities                                                                                   |       | 15,944                       |       | 13,050                  |       |
| Inventory not owned - other financial interests                                                                                    |       | 12,031                       |       | 12,171                  |       |
| Property and equipment, at cost, less accumulated depreciation                                                                     |       | 1,235                        |       | 1,491                   |       |
| Goodwill                                                                                                                           |       | —                       |       | 4,180                   |       |
| Receivables, deferred charges and other assets                                                                                     |       | 22,579                       |       | 22,154                  |       |
| Land deposits and costs of future development                                                                                      |       | 10,139                       |       | 10,380                  |       |
| Total Assets                                                                                                                       |       | $                            | 668,427    |                    | $          | 716,112 |   |
|                                                                                                                               |       |                         |       |                    |       |
| Liabilities and Shareholders’ Equity                                                                                          |       |                         |       |                    |       |
| Liabilities:                                                                                                                       |       |                         |       |                    |       |
| Accounts payable                                                                                                                   |       | $                            | 36,585     |                    | $          | 44,916 |   |
| Accrued expenses                                                                                                                   |       | 44,854                       |       | 51,768                  |       |
| Deferred revenue                                                                                                                   |       | 223                          |       | 274                     |       |
| Customer deposits                                                                                                                  |       | 11,430                       |       | 11,856                  |       |
| Obligations related to inventory not owned - variable interest  entities                                                           |       | 13,571                       |       | 10,875                  |       |
| Obligations related to inventory not owned - other financial  interests                                                            |       | 11,931                       |       | 12,071                  |       |
| Mortgage and other note obligations                                                                                                |       | 383,135                      |       | 396,133                 |       |
| Subordinated notes                                                                                                                 |       | 105,000                      |       | 105,000                 |       |
| Other notes payable                                                                                                                |       | 704                          |       | 718                     |       |
| Total Liabilities                                                                                                                  |       | 607,433                      |       | 633,611                 |       |
|                                                                                                                               |       |                         |       |                    |       |
| Commitments and contingencies (See note 14)                                                                                        |       |                         |       |                    |       |
|                                                                                                                               |       |                         |       |                    |       |
| Shareholders’ Equity:                                                                                                         |       |                         |       |                    |       |
| Common stock, $0.10 par, 23,000,000 shares authorized, 18,938,131  shares issued at September 30, 2008 and June 30, 2007 |       | 1,894                        |       | 1,894                   |       |
| Capital in excess of par value - common stock                                                                                      |       | 75,635                       |       | 75,204                  |       |
| Accumulated other comprehensive loss                                                                                               |       | (818                         | )          | (816                    | )          |
| (Accumulated deficit) retained earnings                                                                                            |       | (14,463                      | )          | 7,473                   |       |
| Treasury stock, at cost (98,990 shares held at September 30,  2008 and June 30, 2008)                                    |       | (1,254                       | )          | (1,254                  | )          |
| Total Shareholders’ Equity                                                                                                    |       | 60,994                       |       | 82,501                  |       |
|                                                                                                                               |       |                         |       |                    |       |
| Total Liabilities and Shareholders’ Equity                                                                                    |       | $                            | 668,427    |                    | $          | 716,112 |   |

 

See accompanying notes whichare an integral part of the consolidated financial statements.

 

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**OrleansHomebuilders, Inc. and SubsidiariesCondensed Consolidated Statements of Operations**

**(Unaudited)**

**(dollarsin thousands, except per share amounts)**

 
| ** **                                          | ** ** | **Three months ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                           |
|                                                |       | **2008**                                             | ** ** | **2007** |   |
| Earned revenue                                      |       |                                                 |       |   |   |
| Residential properties                              |       | $                                                    | 88,602     |   | $ | 119,357 |   |
| Land sales                                          |       | 58                                                   |       | 1,186 |   |
| Other income                                        |       | 1,661                                                |       | 2,333 |   |
|                                                |       | 90,321                                               |       | 122,876 |   |
| Costs and expenses                                  |       |                                                 |       |   |   |
| Residential properties                              |       | 87,707                                               |       | 102,953 |   |
| Land sales                                          |       | 24                                                   |       | 1,258 |   |
| Other                                               |       | 1,784                                                |       | 1,994 |   |
| Selling, general and administrative                 |       | 16,578                                               |       | 18,275 |   |
| Impairment of goodwill                              |       | 4,180                                                |       | — |   |
| Interest:                                           |       |                                                 |       |   |   |
| Incurred                                            |       | 10,988                                               |       | 12,669 |   |
| Less capitalized                                    |       | (9,124                                               | )          | (12,669 | ) |
|                                                |       | 112,137                                              |       | 124,480 |   |
|                                                |       |                                                 |       |   |   |
| Loss from continuing operations before income taxes |       | (21,816                                              | )          | (1,604 | ) |
| Income tax provision                                |       | 120                                                  |       | 159 |   |
|                                                |       |                                                 |       |   |   |
| Loss from continuing operations                     |       | (21,936                                              | )          | (1,763 | ) |
|                                                |       |                                                 |       |   |   |
| Discontinued operations:                            |       |                                                 |       |   |   |
| Loss from discontinued operations, net of taxes     |       | —                                               |       | (292 | ) |
|                                                |       |                                                 |       |   |   |
| Net loss                                            |       | $                                                    | (21,936    | ) | $ | (2,055 | ) |
|                                                |       |                                                 |       |   |   |
| Basic loss per share                                |       |                                                 |       |   |   |
| Continuing operations                               |       | $                                                    | (1.19      | ) | $ | (0.10 | ) |
| Discontinued operations                             |       | $                                                    | —     |   | $ | (0.02 | ) |
| Loss per share                                      |       | $                                                    | (1.19      | ) | $ | (0.11 | ) |
|                                                |       |                                                 |       |   |   |
| Diluted loss per share                              |       |                                                 |       |   |   |
| Continuing operations                               |       | $                                                    | (1.19      | ) | $ | (0.10 | ) |
| Discontinued operations                             |       | $                                                    | —     |   | $ | (0.02 | ) |
| Loss per share                                      |       | $                                                    | (1.19      | ) | $ | (0.11 | ) |
|                                                |       |                                                 |       |   |   |
| Dividends declared per share                        |       | $                                                    | —     |   | $ | 0.02 |   |
|                                                |       |                                                 |       |   |   |
| Basic weighted average shares outstanding           |       | 18,504                                               |       | 18,502 |   |
|                                                |       |                                                 |       |   |   |
| Diluted weighted average shares outstanding         |       | 18,504                                               |       | 18,502 |   |

 

See accompanying notes whichare an integral part of the consolidated financial statements.

 

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**OrleansHomebuilders, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Changes in Shareholders’ Equity**

**AndTotal Comprehensive (Loss) Income**

**(Unaudited)**

**(dollarsin thousands)**

 
| ** **                                  | ** ** | **Three months ended  September 30, 2008** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                                     |
| ** **                                  | ** ** | **Shares**                                                     | ** ** | **Amount** | ** ** |
| **Common Stock**                            |       |                                                           |       |   |   |
| Beginning and ending balance                |       | 18,938,131                                                     |       | $ | 1,894 |   |
|                                        |       |                                                           |       |   |   |
| **Additional Paid in Capital**              |       |                                                           |       |   |   |
| Beginning balance                           |       |                                                           |       | $ | 75,204 |   |
| Fair market value of stock options issued   |       |                                                           |       | 322 |   |
| Shares awarded under Stock award plan       |       |                                                           |       | 109 |   |
| Ending balance                              |       |                                                           |       | $ | 75,635 |   |
|                                        |       |                                                           |       |   |   |
| **(Accumulated Deficit) Retained Earnings** |       |                                                           |       |   |   |
| Beginning balance                           |       |                                                           |       | $ | 7,473 |   |
| Net loss                                    |       |                                                           |       | (21,936 | ) |
| Ending balance                              |       |                                                           |       | $ | (14,463 | ) |
|                                        |       |                                                           |       |   |   |
| **Accumulated Other Comprehensive Loss**    |       |                                                           |       |   |   |
| Beginning balance                           |       |                                                           |       | $ | (816 | ) |
| Net unrealized loss on investments          |       |                                                           |       | (2 | ) |
| Ending balance                              |       |                                                           |       | $ | (818 | ) |
|                                        |       |                                                           |       |   |   |
| **Treasury Stock**                          |       |                                                           |       |   |   |
| Beginning and ending balance                |       | 98,990                                                         |       | $ | (1,254 | ) |
|                                        |       |                                                           |       |   |   |
| **Total Comprehensive Loss**                |       |                                                           |       |   |   |
| Net loss                                    |       |                                                           |       | $ | (21,936 | ) |
| Unrealized loss on investments              |       |                                                           |       | (2 | ) |
| **Total Comprehensive loss**                |       |                                                           |       | $ | (21,938 | ) |

 

See accompanying notes,which are an integral part of the consolidated financial statements

 

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**OrleansHomebuilders, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Cash Flows**

**(Unaudited)**

**(dollarsin thousands)**

 
| ** **                                                                   | ** ** | **Three months ended  September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                   | ** ** | ** **                                           |
| ** **                                                                   | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Cash flows from operating activities:                                        |       |                                                 |       |   |   |
| Net loss                                                                     |       | $                                                    | (21,936    | ) | $ | (2,055 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |       |                                                 |       |   |   |
| Depreciation and amortization                                                |       | 1,767                                                |       | 1,423 |   |
| Gain on sale of fixed assets                                                 |       | (5                                                   | )          | — |   |
| Write-off of real estate held for development and sale                       |       | 9,418                                                |       | 712 |   |
| Write-off of land deposits and costs of future development                   |       | 157                                                  |       | 400 |   |
| Write-off of goodwill                                                        |       | 4,180                                                |       | — |   |
| Deferred taxes                                                               |       | —                                               |       | 3,088 |   |
| Stock based compensation expense                                             |       | 483                                                  |       | 559 |   |
| Changes in operating assets and liabilities:                                 |       |                                                 |       |   |   |
| Restricted cash - due from title company                                     |       | 11,981                                               |       | 11,066 |   |
| Restricted cash - customer deposits                                          |       | 316                                                  |       | 710 |   |
| Real estate held for development and sale                                    |       | (4,792                                               | )          | (12,462 | ) |
| Receivables, deferred charges and other assets                               |       | (195                                                 | )          | (228 | ) |
| Land deposits and costs of future developments                               |       | 337                                                  |       | 583 |   |
| Accounts payable and other liabilities                                       |       | (15,346                                              | )          | (17,376 | ) |
| Customer deposits                                                            |       | (426                                                 | )          | 774 |   |
| Net cash used in operating activities                                        |       | (14,061                                              | )          | (12,806 | ) |
|                                                                         |       |                                                 |       |   |   |
| Cash flows from investing activities:                                        |       |                                                 |       |   |   |
| Purchases of marketable securities                                           |       | (23,910                                              | )          | — |   |
| Sales and maturities of marketable securities                                |       | 8,163                                                |       | — |   |
| Proceeds from sale of fixed assets                                           |       | 5                                                    |       | — |   |
| Net cash used in investing activities                                        |       | (15,742                                              | )          | — |   |
|                                                                         |       |                                                 |       |   |   |
| Cash flows from financing activities:                                        |       |                                                 |       |   |   |
| Borrowings from loans collateralized by real estate assets                   |       | —                                               |       | 25,000 |   |
| Repayment of loans collateralized by real estate assets                      |       | (13,000                                              | )          | — |   |
| Repayment of other note obligations                                          |       | (14                                                  | )          | (19 | ) |
| Financing costs of long-term debt                                            |       | (1,741                                               | )          | (3,063 | ) |
| Payments on liabilities associated with other financial interests            |       | (451                                                 | )          | — |   |
| Common stock cash dividend paid                                              |       | —                                               |       | (369 | ) |
| Net cash (used in) provided by financing activities                          |       | (15,206                                              | )          | 21,549 |   |
|                                                                         |       |                                                 |       |   |   |
| Net (decrease) increase in cash and cash equivalents                         |       | (45,009                                              | )          | 8,743 |   |
| Cash and cash equivalents at beginning of period                             |       | 72,341                                               |       | 19,991 |   |
| Cash and cash equivalents at end of period                                   |       | $                                                    | 27,332     |   | $ | 28,734 |   |

 

See accompanying notes whichare an integral part of the consolidated financial statements.

 

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** **

**ORLEANS HOMEBUILDERS, INC. ANDSUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**(Dollars in thousands, except per share amounts)**

 

**1.****             ****BASISOF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Orleans Homebuilders, Inc.and its subsidiaries (collectively, the “Company”) market, develop and buildhigh-quality, single-family homes, townhomes and condominiums to serve varioustypes of homebuyers, including move-up, luxury, empty nester, active adult andfirst-time homebuyers.  The Company alsogenerates revenue from the sale of land.

 

***Interim FinancialInformation***

 

Thesecondensed financial statements have been prepared in accordance with the rules ofthe Securities and Exchange Commission for interim financial statements and donot include all annual disclosures required by accounting principles generallyaccepted in the United States.  Thesefinancial statements should be read in conjunction with the auditedconsolidated financial statements and notes thereto included in the Company’s Form 10-Kfor the fiscal year ended June 30, 2008. The June 30, 2008, amounts were derived from the Company’s auditedfinancial statements, but do not include all disclosures required by accountingprinciples generally accepted in the United States of America.  The condensed financial information as of September 30,2008, and for the three months ended September 30, 2008 and 2007, isunaudited, but in the opinion of management includes all adjustments,consisting of normal recurring accruals, that management considers necessaryfor a fair presentation of the Company’s consolidated results of operations,financial position and cash flows. Results for the three months ended September 30, 2008, are notnecessarily indicative of results to be expected for the full fiscal year 2009or any other future periods.

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standard (“SFAS”) No. 157, “FairValue Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework formeasuring fair value in Generally Accepted Accounting Principles (“GAAP”), andexpands disclosures about fair value measurements.  SFAS No. 157 is effective for financialassets and financial liabilities in fiscal years beginning after November 15,2007 and for certain nonfinancial assets and certain nonfinancial liabilitiesin fiscal years beginning after November 15, 2008.  Effective July 1, 2008, the Company hasadopted the provisions of SFAS No. 157 that relate to its financial assetsand financial liabilities.  See note 15,Fair Value Disclosures.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities — Including an amendment of FASBStatement No. 115” (SFAS No. 159). This Statement permits entities to choose to measure many financialinstruments and certain other items at fair value and report unrealized gainsand losses on these instruments in earnings. SFAS No. 159 was effective July 1, 2008.  The Company did not adopt the fair valueoption.

 

Certainprior year amounts have been reclassified to conform to the fiscal year 2009presentation.

 

**2.****             ****RECENT ACCOUNTING PRONOUNCEMENTS**

 

InDecember 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements—an amendment of ARB No. 51”(“SFAS No. 160”). SFAS No. 160 requires that anoncontrolling interest in a subsidiary be reported as equity and the amount ofconsolidated net income specifically attributable to the noncontrollinginterest be identified in the consolidated financial statements.  It also calls for consistency in the mannerof reporting changes in the parent’s ownership interest and requires fair valuemeasurement of any noncontrolling equity investment retained in adeconsolidation.  SFAS No. 160is effective for fiscal year ending June 30, 2010.  The Company is evaluating the impact theadoption of SFAS 160 will have on its consolidated financial statements.

 

InDecember 2007, the FASB issued SFAS No. 141 (revised 2007), “BusinessCombinations” (“SFAS No. 141(R)”). SFAS No. 141(R) broadensthe guidance of SFAS No. 141, extending its applicability to alltransactions and other events in which one entity obtains control over one ormore other businesses.  It broadens thefair value measurement and recognition of assets acquired, liabilities assumed,and interests transferred as a result of business combinations.  SFAS No. 141(R) expands onrequired disclosures to improve the statement users’ abilities to evaluate thenature and financial effects of business combinations.  SFAS No. 141(R) is effectivefor fiscal year ending June 30, 2010. The Company is evaluating the impact the adoption of SFAS No. 141(R) willhave on its consolidated financial statements.

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities, an amendment ofFASB Statement No. 133.”  Thisstatement requires enhanced disclosures about an entity’s derivative andhedging activities and 

 

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therebyimproves the transparency of financial reporting.  The Statement is effective for financialstatements for fiscal years and interim periods beginning after November 15,2008 and is not expected to have an impact on the Company’s financialstatements.

 

InJune 2008, the FASB issued FASB Staff Position (“FSP”) Emerging IssuesTask Force 03-6-1, “Determining Whether Instruments Granted in Share-BasedPayment Transactions Are Participating Securities.” Under the FSP, unvestedshare-based payment awards that contain non-forfeitable rights to dividends ordividend equivalents are participating securities and, therefore, are includedin computing earnings per share pursuant to the two-class method.  The two-class method determines earnings pershare for each class of common stock and participating securities according todividends or dividend equivalents and their respective participation rights inundistributed earnings.  The Company’soutstanding restricted stock awards will be considered participating securitiesunder this FSP. The FSP is effective for the Company’s fiscal year beginning July 1,2009 and requires retrospective application. The Company does not expect the adoption of the FSP to have a materialimpact on its reported earnings per share.

 

**3.****             ****CASH AND CASH EQUIVALENTS**

 

Cashand cash equivalents consisted of the following at September 30, 2008 and June 30,2008:

 
| ** **                                                                           | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                                                                           | ** ** | ** **                   | ** ** |
| Cash and money market funds                                                          |       | $                            | 13,497     |                    | $          | 72,341 |   |
| Treasury securities - with maturities of less than three months at  time of purchase |       | 13,835                       |       | —                  |       |
|                                                                                 |       | $                            | 27,332     |                    | $          | 72,341 |   |

 

**4.****             ****MARKETABLE SECURITIES**

 

Inaccordance with SFAS No. 115, “Accounting for Certain Investments in Debtand Equity Securities”, securities are classified into three categories:held-to-maturity, available-for-sale and trading.  The Company’s marketable securities consistof United States Treasury securities classified as available-for-salesecurities.  Accordingly, they arecarried at fair value in accordance with SFAS No. 115.  Further, according to SFAS No. 115 theunrealized holding gains and losses for available-for-sales securities areexcluded from earnings and reported, net of deferred income taxes, inaccumulated other comprehensive loss, unless the loss is classified as otherthan a temporary decline in market value. At September 30, 2008, the amortized cost, gross unrealized gains(losses) and fair value of available-for-sale securities by major security typeand class of security were as follows:

 
| ** **                                                                       | ** ** | **Amortized  Cost** | ** ** | **Unrealized  Gains** | ** **          | **Unrealized  Losses** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|---------------------|------------------------|------------|------------|------------|
| ** **                                                                       | ** ** | ** **          | ** ** | ** **            | **Fair Value** | ** **             |
| Treasury securities - with maturities of less than one year at time  of purchase |       | $                   | 15,747     |                  | $                   | 4                      |       | $          | (6         | ) | $ | 15,745 |   |
|                                                                                  |            |                     |            |                       |                     |                        |            |            |            |  |  |  |  |

 

The treasury bills and treasury notes described abovehave maturities that range from three months to six months.

 

**5****.****             ****RESIDENTIAL PROPERTIES COMPLETEDOR UNDER CONSTRUCTION**

 

Residentialproperties completed or under construction consist of the following:

 
| ** **                                                 | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                                                 | ** ** | ** **                   | ** ** |
| Under contract for sale                                    |       | $                            | 105,425    |                    | $          | 109,980 |   |
| Unsold                                                     |       | 97,220                       |       | 83,277                  |       |
| Total residential property completed or under construction |       | $                            | 202,645    |                    | $          | 193,257 |   |

 

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**6**.              **MORTGAGE AND OTHER NOTE OBLIGATIONS ANDSUBORDINATED NOTES**

 

The$383,135 outstanding balance in mortgage and other note obligations at September 30,2008, consists of $382,950 outstanding under the Revolving Credit Facility,which is discussed below, and $185 under mortgage obligations collateralized byland held for development and sale and improvements.  The average daily balance of the RevolvingCredit Facility during the three months ended September 30, 2008, was$384,363.

 

The$105,000 outstanding balance in subordinated notes relates to the sale andissuance of trust preferred securities as discussed below.

 

***Revolving Credit Facility***

 

On December 22,2004, Greenwood Financial, Inc., a wholly-owned subsidiary of the Company,and other wholly-owned subsidiaries of the Company, as borrowers, and OrleansHomebuilders, Inc., as guarantor, entered into a Revolving Credit LoanAgreement for a Senior Secured Revolving Credit and Letter of Credit Facilitywith various banks as lenders (as amended and restated and further amended, the“Revolving Credit Facility”). The Revolving Credit Loan Agreement was amendedon January 24, 2006, via the Amended and Restated Revolving Credit LoanAgreement (the “Amended Credit Agreement”). In connection with the Amended Credit Agreement, Orleans Homebuilders, Inc.executed a Guaranty, which was amended on September 6, 2007 and amendedand restated on September 30, 2008. The Amended and Restated CreditAgreement was amended on November 1, 2006 (the “First Amendment”), February 7,2007 (the “Second Amendment”), May 8, 2007 (the “Third Amendment”), September 6,2007 (the “Fourth Amendment”), December 21, 2007 (the “Fifth Amendment”), May 9,2008 by a limited waiver (the “waiver letter”) to the Amended Credit Agreement,which was extended on September 15, 2008, and amended and restated in theSecond Amended and Restated Revolving Credit Loan Agreement, dated September 30,2008 (the “Second Amended Credit Agreement”).

 

***Waiver***

 

Absent the deferred taxasset valuation allowance of $43,500 during the March 31, 2008 fiscalquarter, the Company would have been in compliance with all of the financialcovenants in the Amended Credit Agreement at March 31, 2008. However, as aresult of the deferred tax asset valuation allowance, absent the waiver letterdated May 9, 2008, as extended on September 15, 2008, the Companywould have been in default of the minimum consolidated tangible net worth,maximum leverage ratio, and maximum land to consolidated adjusted tangible networth ratio covenants set forth in the Amended Credit Agreement at March 31,2008 (the “Subject Covenants”). Subject to certain limitations, the waiverletter temporarily waived compliance with the Subject Covenants generally from January 1,2008 to September 30, 2008 (the “Waiver Period”), unless another event ofdefault occurred or the Company failed to comply with the covenants in thewaiver letter.  The Second Amended CreditAgreement, entered into prior to the expiration of the Waiver Period, supersededthe waiver letter.

 

In the waiver letter, theCompany also agreed that it would act in good faith and use its best efforts towork with the agent lender during the Wavier Period to identify a materialgroup of assets in its borrowing base for reappraisal prior to September 15,2008, which have been reappraised and account for approximately 35% of theCompany’s collateral assets.

 

***Second Amended Credit Agreement:***

 

On September 30,2008, the Company entered into the Second Amended Credit Agreement which provides,among other things, that:

·                  The maturity date is December 20,2009 for all lenders.

·                  The amount of the Revolving CreditFacility is $440,000, except that the amount of the Revolving Credit Facilitywill be $425,000 through December 31, 2008, and $415,000 from July 1,2009 through December 20, 2009, unless otherwise permanently reduced as aresult of certain required prepayments. The amount actually available under theRevolving Credit Facility is also subject to the borrowing base availabilityrequirements in the Revolving Credit Facility.

·                  The letter of credit sublimit is reducedto $60,000.

·                  The swing line limit is reduced to$10,000.

·                  The unused fee is increased to 0.35%.

·                  The interest rate is changed to the LIBORinterest rate plus 5.0%.

·                  A fee will be earned and payable on September 15,2009 equal to 8.0% per annum, calculated on a daily basis, of the differencebetween $250,000 and the aggregate level of the lenders’ lending commitmentsunder the Revolving Credit Facility as they exist from time to time between September 30,2008 and the earlier of September 15, 2009 

 

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and the date thecommitments are permanently reduced to $250,000; however this fee will bereduced by 80% if the aggregate level of commitments on or before September 15,2009 have been permanently reduced to $250,000.

·                  If the Company’s indebtedness is not paidin full by December 20, 2009, a separate fee will be earned and payable onDecember 20, 2009 equal to 8.0% per annum, calculated on a daily basis, ofthe difference between $250,000 and the average daily outstanding cashborrowing as they exist from time to time after September 15, 2009.

·                  The letter of credit fees were changed tobe the applicable spread, with the issuer retaining an issuance fee of 0.125%.

·                  The borrowing base calculation wasamended to increase the maximum percentages for certain asset classes.

·                  Both of the leverage covenants, the debtservice coverage ratio covenant and the units in inventory covenant wereeliminated.

·                  The minimum consolidated tangible networth covenant was lowered to be not less than $75,000, (1) reduced by thesum of (a) inventory impairments under GAAP on assets in the borrowing basetaken by the Company and recorded after March 31, 2008, plus (b) theamount of any interest incurred less the amount of interest capitalized underStatement of Financial Accounting Standard No. 34 (“SFAS 34”), andrecorded after March 31, 2008, plus (c) any additional deferred taxasset valuation reserves recorded after March 31, 2008 (provided thatclauses (a) and (c) are limited to an aggregate amount not toexceed $30,000), plus (d) any impairments or write-offs relating totangible assets or pre-acquisition costs not contained in the borrowing baserecorded after March 31, 2008, and (2) increased by the sum of (x) anyfavorable adjustment recorded after March 31, 2008, to the deferred taxasset valuation allowance as reported in the Company’s third quarter fiscal2008 financials, plus (y) 50% of positive quarterly net income after March 31,2008 plus (z) 50% of any net securities proceeds received by the Companyand the borrowers under the Revolving Credit Facility after March 31,2008. However, in no event may the consolidated tangible net worth, aftertaking into account the reductions and increases above, at any time be lessthan $35,000.

·                  The minimum liquidity level is reduced to$15,000.

·                  The minimum cash flow from operationsratio is reduced and the related definition of debt service was amended toexclude any amortized deferred financing costs related to all amendments to theAmended Credit Agreement, the Second Amended Credit Agreement and/or the trustpreferred securities and any future amendments to any of the foregoing.

·                  A $5,000 limit was put on the Company’scash available for joint ventures, however, the Company may invest 50% of anynet securities proceeds raised by the Company after March 31, 2008 injoint ventures that are non-recourse to the Company and may maintain currentinvestments in cost-sharing arrangements or partnerships already in existence.

·                  The maximum amount of cash or cashequivalents (excluding cash at title companies) the Company is allowed tomaintain was set at a maximum of $32,500 for any consecutive five-day period.

·                  The borrowers may purchase (a) up to$8,000 of real estate (whether purchase money or otherwise) in the normalcourse of business, consistent with projections provided to the lenders and (b) improvedland (i.e., finished lot takedowns and/or controlled rolling lot options)purchased by the borrowers in the normal course of business, consistent withthe projections provided to the Lenders.

 

TheCompany also agreed that no dividends or distributions will be paid, nosubordinated debt will be repaid, except for interest payable on such debt, andlimitations were placed on purchases of additional land, including the methodfor financing such land.

Thelenders have agreed to allow the Company to pursue second lien indebtedness incertain limited circumstances. Any second lien indebtedness is subject to theapproval of the lenders and the proceeds of any second lien indebtedness mustbe used to prepay amounts advanced under the facility and the amount of thefacility will be permanently reduced by the amount of any such prepayment. TheCompany and the lenders have agreed that re-appraisals will be done on theCompany’s collateral assets. Approximately 35% of those assets have alreadybeen reappraised. Under this amended and restated credit agreement, the Companyhas permitted lenders to conduct future appraisals on a fair market value basison all projects with a GAAP cost of at least $4,000 to be phased in generallyover the next three fiscal quarters ending June 30, 2009, but excludingthe projects already recently appraised. The result of these appraisals issubject to numerous factors, and accordingly no assurance can be given on theresult of either the recent or future bank appraisals or the correspondingliquidity impact to the Company.

 

Additionalcovenants were added to the facility, including requirements that the Companyand borrowers grant a mortgage on any real property not already included in theborrowing base and subject to the Revolving Credit Facility; that all realproperty sales must be accomplished through a title company, with the netproceeds of such a sale going directly to the Agent for application to theoutstanding balance under the Revolving Credit Facility; that any purchases ofreal estate must be done through a title company through advances under theRevolving Credit Facility and all such acquisitions must be subject tomortgages in favor of the lenders; and at the time of any such advance, theCompany will be required to provide an estimate of the portion of the borrowingthat will be used for construction needs and asset purchases with respect to anapplicable project.

 

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***Terms of the Revolving Credit Facility:***

 

The borrowing limit underthe Revolving Credit Facility is $440,000, except that the amount of theRevolving Credit Facility will be $425,000 through December 31, 2008, and$415,000 from July 1, 2009 through December 20, 2009, unlessotherwise permanently reduced as a result of certain required prepayments. Thetotal amount of loans and advances outstanding at any time under the RevolvingCredit Facility may not exceed the lesser of the then-current borrowing base availabilityor the revolving sublimit as defined in the Revolving Credit Facility. Theborrowing base availability is based on the lesser of the appraised value orcost of real estate owned by the Company that has been admitted to theborrowing base and is subject to various limitations and qualifications setforth in the Revolving Credit Agreement.

 

Borrowings and advancesunder the Revolving Credit Facility bear interest on a per annum basis equal tothe LIBOR Market Index Rate plus 500 basis points beginning October 1,2008. Prior to October 1, 2008, the applicable spread had been 400 basispoints. During the term of the Revolving Credit Facility, interest is payablemonthly in arrears. At June 30, 2008, the interest rate was 6.4625%, whichincluded a 400 basis point spread.  At September 30,2008, the interest rate was 8.92625%, which included a 500 basis point spread.

 

A fee will be earned andpayable on September 15, 2009 equal to 8.0% per annum, calculated on adaily basis, of the difference between $250,000 and the aggregate level of thelenders’ lending commitments under the Revolving Credit Facility as they existfrom time to time between September 30, 2008 and the earlier of September 15,2009 and the date the commitments are permanently reduced to $250,000; howeverthis fee will be reduced by 80% if the aggregate level of commitments on orbefore September 15, 2009 have been permanently reduced to $250,000. Underthis provision, the Company currently estimates that the minimum it will berequired to pay is $0 and the maximum is $9,150. The Company expects that itwill pay no amounts under this provision as it intends to refinance the debtbefore the payment is due and payable. There can be no assurance that suchrefinancing will occur. In addition, if all indebtedness under the RevolvingCredit Facility is not fully repaid by December 30, 2009, a separate feewill be earned and payable on December 20, 2009 equal to 8.0% per annum ofthe amount by which the aggregate commitments under the Revolving CreditFacility that exist from time to time after September 15, 2009 exceed$250,000, calculated on a daily basis.

 

In addition to anyinterest that may be payable with respect to amounts advanced by the lenderspursuant to a letter of credit, the Company will be required to pay to thelender(s) issuing letters of credit an issuance fee of 0.125% of theamount of the letters of credit.

 

Under and subject to theterms of the Revolving Credit Facility, the borrowers may borrow and re-borrowfor the purpose of financing the acquisition and development of real estate,the construction of homes and improvements, for investment in joint ventures,for working capital and for such other appropriate corporate purposes as may beapproved by the lenders. Under the Revolving Credit Facility, each lender isgenerally obligated to fund only its pro rata portion of each requested loan oradvance.  As a result, if any lenderrefuses, or is unable, to fund its pro rata portion of a requested loan oradvance, the Company may be unable to borrow the entire amount of the requestedloan or advance despite the fact that if there are defaulting lenders, theCompany is permitted to submit additional borrowing requests in an effort tomake-up any borrowing shortfall caused by a defaulting lender failing to fund.

 

Approximately 35% of theCompany’s collateral assets have been reappraised pursuant to the terms of thewaiver letter and the Company and approximately one third of the assets in theborrowing base with a book value in excess of $4,000 that have not yet beenre-appraised will be appraised in each of the second, third and fourth quartersof fiscal year 2009. The re-appraisals that have been done to date have not hada material impact on the Company’s borrowing base availability, but there canbe no assurance that future reappraisals will not reduce borrowing baseavailability.

 

Various conditions mustbe satisfied in order for real estate to be admitted to the borrowing base,including that a mortgage in favor of lenders has been delivered to the agentfor lenders and that all governmental approvals necessary to begin developmentof for-sale residential housing, other than building permits and certain otherpermits borrower in good faith believes will be issued within 120 days, havebeen obtained. Depending on the stage of development of the real estate, theloan to value or loan to cost advance rate in the borrowing base ranges from50% to 95% of the appraised value or cost of the real estate. Based on theseranges, the Company is restricted as to the type of land it can have in variousstages of development as well as the dollar value of land under development.

 

As security for allobligations of borrowers to lenders under the Revolving Credit Facility,lenders continue to have a first priority mortgage lien on all real estateowned by the Company or any borrower and included in the borrowing base underthe Revolving Credit Facility. As further security, pursuant to the SecondAmended Credit Facility, the Company has also agreed to grant to the lenders asecurity interest in and assignment of all future tax refunds and proceedsthereof received or payable to the borrowers or the Company after the closingof the Second Amended Credit Agreement, mortgages in favor of lenders withrespect to all real property owned by the borrowers or the Company that is notalready subject to a lien in favor of the lenders under the Revolving CreditFacility and a security interest in inter-company debt. Orleans Homebuilders, Inc.has guaranteed the obligations of the borrowers to lenders 

 

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pursuant to a Guarantyexecuted by Orleans Homebuilders, Inc. on January 26, 2006, amendedon September 6, 2007 and amended and restated on September 30, 2008.

 

Under the Guaranty,Orleans Homebuilders, Inc. granted lenders a security interest in anybalance or assets in any deposit or other account that Orleans Homebuilders, Inc.has with any lender. However, the Company and its subsidiaries maintain amajority of the cash, cash equivalents and marketable securities available tothem in accounts and as treasury securities outside of the lenders under theRevolving Credit Facility.

 

The Revolving CreditFacility contains customary covenants that, subject to certain exceptions,limit or eliminate the ability of the Company to (among other things):

 

·                  Incur or assume other indebtedness,except certain permitted indebtedness and possible second lien indebtedness ifappropriately approved;

·                  Grant or permit to exist any lien, exceptcertain permitted liens;

·                  Enter into any merger, consolidation oracquisition of all or substantially all the assets of another entity;

·                  Sell, assign, lease or otherwise disposeof all or substantially all of its assets;

·                  Enter into any transaction with anaffiliate that is not a borrower or a guarantor under the Revolving CreditFacility, or a subsidiary of either;

·                  Pay any dividends;

·                  Redeem any stock or subordinated debt;and

·                  Invest in joint ventures or otherentities that are not obligors under the Revolving Credit Facility.

 

In addition, under theRevolving Credit Facility, all real property sales must be accomplished througha title company, with the net proceeds of such a sale going directly to theagent bank for application to the outstanding balance under the RevolvingCredit Facility. Any purchases of real estate must be done through a titlecompany through advances under the Revolving Credit Facility and all suchacquisitions must be subject to mortgages in favor of the lenders; and, at thetime of any such advance, the Company will be required to provide an estimateof the portion of the borrowing that will be used for construction needs.However, the Company may make additional draws from time-to-time pursuant tothe terms of the Revolving Credit Facility.

 

The Revolving CreditFacility also contains various financial covenants. Among other things, thefinancial covenants, as amended, require that:

 

·                  The Company must maintain a minimumconsolidated tangible net worth of at least $75,000 (1) reduced by the sumof (a) inventory impairments under GAAP on assets in the borrowing basetaken by the Company and recorded after March 31, 2008, plus (b) theamount of any interest expense incurred less the amount of interest capitalizedunder Statement of Financial Accounting Standard No. 34 (“SFAS 34”),and recorded after March 31, 2008, plus (c) any additional deferredtax asset valuation reserves recorded after March 31, 2008 (provided thatclauses (a) and (c) are limited to an aggregate amount not toexceed $30,000), plus (d) any impairments or write-offs relating totangible assets or pre-acquisition costs not contained in the borrowing baserecorded after March 31, 2008, and (2) increased by the sum of (x) anyfavorable adjustment recorded after March 31, 2008 to the deferred taxasset valuation allowance as reported in the Company’s third quarter fiscal2008 financials, plus (y) 50% of positive quarterly net income after March 31,2008 plus (z) 50% of any net securities proceeds received by the Companyand the borrowers under the Revolving Credit Facility after March 31,2008. However, in no event may the consolidated tangible net worth, aftertaking into account the reductions and increases above, at any time be lessthan $35,000.

·                  The Company must maintain a requiredliquidity level based on cash plus borrowing base availability of at least$15,000 of cash and cash equivalents (including cash held at a title company)on a consolidated basis at all times.

·                  The Company’s minimum cash flow fromoperations ratio based on cash flow from operations to interest incurredcovenant, must exceed 1.25-to-1.00 for the quarters ending September 30,2008 and December 31, 2008; 0.40-to-1.00 for the quarter ending March 31,2009; 1.00-to-1.00 for the quarter ending June 30, 2009; and 1.25-to-1.00for the quarter ending September 30, 2009 and thereafter. Cash flow fromoperations is calculated based on the last twelve months cash flow fromoperations, adjusted for interest paid (excluding any amortized deferredfinancing costs related to all amendments to the Amended Credit Agreement, theSecond Amended Credit Agreement and the trust preferred securities and anyfuture amendments to any of the foregoing), amounts from the disposition ofmodel homes that are subject to a sale-leaseback transaction to the extent suchamounts are not otherwise included in net cash provided by operatingactivities, and interest income.

·                  Investments in new non-recourse jointventures whereby the Company will provide services to develop uncompletedassets are permitted in an amount not to exceed $5,000. However, the Companymay also invest 50% of any net securities proceeds raised by the Company after March 31,2008 in joint ventures that are non-recourse to the Company and may maintaincurrent investments in cost-sharing arrangements or partnerships already inexistence.

 

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·                  The maximum amount of cash or cashequivalents (excluding cash at title companies) the Company is allowed tomaintain was set at a maximum of $32,500 for any consecutive five-day period.

·                  The Company may purchase (a) up to$8,000 of real estate (whether purchase money or otherwise) in the normalcourse of business, consistent with projections provided to the lenders and (b) improvedland (i.e., finished lot takedowns and/or controlled rolling lot options)purchased by the borrowers in the normal course of business, consistent withthe projections provided to the Lenders.

 

At the fiscal quartersended September 30, 2006, December 31, 2006, March 31, 2007, June 30,2007, March 31, 2008 and June 30, 2008, the Company would have beenin violation of certain financial covenants in the Amended and Restated CreditAgreement if not for the First Amendment, Second Amendment, Third Amendment,Fourth Amendment, waiver letter and the Second Amended Credit Agreement,respectively.

 

The Revolving CreditFacility provides that, subject to any applicable notice and cure provisions,each of the following (among others) is an event of default:

 

·                  Failure by borrowers to pay when due anyamounts owing under the Revolving Credit Facility;

·                  Failure by the Company to observe orperform any promise, covenant, warranty, obligation, representation oragreement under the Revolving Credit Facility or any other loan document;

·                  Bankruptcy and other insolvency events withrespect to any borrower or the Company;

·                  Dissolution or reorganization of anyborrower or the Company;

·                  The entry of a judgment or judgmentsagainst borrower(s) or the Company: (i) in an aggregate amount thatis at least $500 in excess of available insurance proceeds, if such judgment orjudgments are not dismissed or bonded within 30 days; or (ii) thatprevents borrowers from conveying lots and units in the ordinary course ofbusiness if such judgment or judgments are not dismissed or bonded within 30 days;or the issuance of any writs of attachment, execution or garnishment againstany borrower or the Company;

·                  Any material adverse change in thefinancial condition of a borrower or the Company which causes the lenders, ingood faith, to believe that the performance of any of the obligations under theRevolving Credit Facility is impaired or doubtful for any reason; and

·                  Specified cross defaults.

 

Upon the occurrence andcontinuation of an event of default, after completion of any applicable graceor cure period, lenders may demand immediate payment in full of allindebtedness outstanding under the Revolving Credit Facility, terminate theirobligations to make any loans or advances or issue any letter of credit, setoff and apply any and all deposits held by any lender for the credit or accountof any borrower. In addition, upon the occurrence of certain events ofbankruptcy or other insolvency  eventswith respect to any borrower or the Company, all indebtedness outstanding underthe Revolving Credit Facility shall be immediately due and payable without anyact or action by lenders. A default under the Company’s Revolving CreditFacility could also prevent the Company from making required payments under theCompany’s trust preferred securities, which would cause a default under thosesecurities.

 

If the Company does notmeet its forecast in its budgets, the Company could violate its debt covenantsand, absent a waiver or amendment from its lenders, the Company could be indefault under its Revolving Credit Facility and, as a result, its debt couldbecome due which would have a material adverse effect on the Company’sfinancial position and results of operations.

 

As of September 30,2008, the Company was in compliance with all of its financial covenants underthe Second Amended Credit Agreement.

*** ***

***Trust Preferred Securities:***

 

On November 23,2005, the Company issued $75,000 of trust preferred securities which mature on January 30,2036 and are callable, in whole or in part, at par plus accrued interest on orafter January 30, 2011. For the first ten years, the securities have afixed interest rate of 8.61% per annum, provided that certain covenant levelsare maintained. Thereafter, the securities have a floating interest rate equalto three-month LIBOR plus 360 basis points per annum, resetting quarterly. Thesecurities are treated as debt obligations for financial statement purposes.The Company used proceeds from the sale of these securities to repayoutstanding obligations under the Revolving Credit Facility discussed above.

 

The trust’s preferred andcommon securities require quarterly distributions of interest by the trust tothe holders of the trust securities at a fixed interest rate equal to 8.61% perannum through January 30, 2016 and, after January 30, 2016, at avariable interest rate (reset quarterly) equal to the three-month LondonInterbank Offered Rate (“LIBOR”) plus 360 basis points.  Since the Company failed to meet both thedebt service ratio and minimum tangible net worth requirement set forth in the August 13,2007 supplemental indenture as of the end of a fiscal quarter for at leastthree of the last four consecutive fiscal quarters ended on June 30, 2008,the applicable rate of interest was increased by 300 basis points. The Companybegan accruing for this increased interest rate on July 31, 2008, which 

 

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was paid to holders forthe first time with the coupon payable on October 31, 2008. The interestrate will return to the regularly applicable rate once the Company is incompliance with the debt service ratio and minimum tangible net worthrequirements as of the end of any fiscal quarter.  The terms of the trust securities aregoverned by an Amended and Restated Trust Agreement, dated November 23,2005, among OHI Financing, Inc., (“OHI Financing”) as depositor, JPMorganChase Bank, National Association, as property trustee, Chase Bank USA, NationalAssociation, as the Delaware trustee, and the administrative trustees namedtherein.

 

The trust used theproceeds from the sale of the trust’s securities to purchase $77,320 inaggregate principal amount of unsecured junior subordinated notes due January 30,2036 issued by OHI Financing, which includes $2,300 of inter-company issuances.The junior subordinated notes were issued pursuant to a Junior SubordinatedIndenture, dated November 23, 2005, as amended by a Supplemental Indenturedated August 13, 2007, collectively referred to herein as the “Indenture,”among OHI Financing, as issuer, and JPMorgan Chase Bank, National Association,as trustee. The terms of the junior subordinated notes are substantially thesame as the terms of the trust’s preferred securities. The interest payments onthe junior subordinated notes paid by OHI Financing, Inc. will be used bythe trust to pay the quarterly distributions to the holders of the trust’spreferred and common securities. Pursuant to the parent guarantee agreementdated November 23, 2005 by and between the Company and JPMorgan ChaseBank, National Association, as trustee, the Company has unconditionallyguaranteed OHI Financing, Inc.’s payment and other obligations under theindenture and the junior subordinated notes. The Company used the proceeds fromthe issuance and sale of the trust preferred securities and the subsequentpurchase of the junior subordinated notes to partially repay indebtedness.

 

The Indenture permits OHIFinancing to redeem the junior subordinated notes at par, plus accrued intereston or after January 30, 2011. If OHI Financing redeems any amount of thejunior subordinated notes, the Trust Agreement requires the trust to redeem alike amount of the trust securities. Under certain circumstances relating tothe tax treatment of the trust or the interest payments made on the juniorsubordinated notes or the classification of the trust as an “investment company”under the Investment Company Act of 1940, as amended, OHI Financing may alsoredeem the junior subordinated notes prior to January 30, 2011 at a 7.5%premium.

 

With certain exceptionsrelating to debt to a trust, partnership or other entity affiliated with theCompany that is a financing vehicle for the Company, the junior subordinatednotes and the Company’s obligations under the parent guarantee are expresslysubordinate to all of the Company’s existing and future debt unless it isprovided in the instrument creating or evidencing such debt, or pursuant towhich such debt is outstanding, that such debt is not superior in right topayment of the junior subordinated notes or the obligations under the parentcompany’s guarantee, as the case may be.

 

Under the Indenture, OHIFinancing will generally have to make eight consecutive Adjusted Interest Ratecoupon payments (other than the eight consecutive Adjusted Interest Rate couponpayments that could be made on each of the coupon payment dates from October 30,2008 to and including July 30, 2010) to cause an event of default underthe Indenture (or in some cases six consecutive coupon payments). Morespecifically, the Indenture provides that the earliest an event of defaultcould occur as a result of the payment of the Adjusted Interest Rate is (i) uponthe payment of the Adjusted Interest Rate coupon for October 30, 2010, ifapplicable, provided there have been eight prior consecutive Adjusted InterestRate coupons paid by OHI Financing; (ii) on either the fiscal quarterended March 31, 2010 or the fiscal year ended June 30, 2010, if ateither date both the trailing twelve months’ interest coverage ratio is lessthan 1.25 to 1, and OHI Financing has made the six prior consecutive AdjustedInterest Rate coupon payments; or (iii) on the fiscal quarter ended September 30,2010, if at such time both the trailing twelve months’ interest coverage ratiois less than 1.75 to 1, and OHI Financing has made the eight prior consecutiveAdjusted Interest Rate coupon payments. The Adjusted Interest Rate must be paidfor eight (or in some instances six) consecutive coupons in order to trigger anevent of default. If the interest coverage ratio test and the minimum consolidatedtangible net worth test, are both met, OHI Financing would make the payment ofthe Regular Interest Rate for the next coupon, and the Adjusted Interest Ratetest “resets” requiring OHI Financing to make eight (or in some instances six)new consecutive coupon payments at the Adjusted Interest Rate before triggeringan event of default. The interest coverage ratio and minimum consolidatedtangible net worth measure are not traditional financial maintenance covenants;they are only utilized in determining if the Adjusted Interest Rate or theRegular Interest Rate is applicable.

 

The junior subordinatednotes and the trust securities could become immediately payable upon an eventof default. Under the terms of the Trust Agreement and the Indenture, subjectto any applicable cure period, an event of default generally occurs upon:

 

·                  non-payment of any interest on the juniorsubordinated notes when it becomes due and payable, and continuance of thedefault for a period of 30 days;

·                  non-payment of the principal of, or anypremium on, the junior subordinated notes at their maturity;

·                  default in the performance, or breach, ofany covenant or warranty made by OHI Financing, Inc., in the indenture andthe continuance of the default or breach for a period of 30 days afterwritten notice to OHI Financing, Inc.;

·                  non-payment of any distribution on thetrust’s securities when it becomes due and payable, and continuance of thedefault for a period of 30 days;

·                  non-payment of the redemption price ofany trust’s security when it becomes due and payable;

 

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·                  default in the performance, or breach, inany material respect of any covenant or warranty of any of the trustees in theTrust Agreement, which default or breach continues for a period of 30 daysafter written notice to the trustees and OHI Financing, Inc.;

·                  default in the performance, or breach(which default or breach must be material in certain cases), of any covenant orwarranty made by OHI Financing, Inc. In the purchase agreement pursuant towhich the trust securities and the junior subordinated notes were sold andpurchased and the continuation of such default or breach for a period of30 days after written notice to OHI Financing, Inc.;

·                  bankruptcy, insolvency or liquidation ofthe property trustee, if a successor property trustee has not been appointedwithin 90 days thereafter;

·                  the bankruptcy or insolvency of OHIFinancing, Inc.; or

·                  certain dissolutions or liquidations, orterminations of the business or existence, of the trust.

 

Pursuant to the August 13,2007 Supplemental Indenture, OHI Financing established a $5,000 reserve fund inSeptember 2007 for the benefit of the holders of the trust preferredsecurities by posting a letter of credit with the trustee. If the adjustedinterest rate is in effect for the four consecutive coupon payments ending July 30,2009, this reserve fund must be increased by $2,500. Under certain events ofdefault, this reserve fund may be drawn by the trustee and used in respect ofthe trust preferred obligations. The reserve fund may be released upon theearlier of compliance with the applicable interest coverage ratio resulting inOHI Financing paying interest at the regular interest rate rather than the adjustedinterest rate, or redemption or defeasance of the notes in accordance with theterms of the Indenture.

 

On September 20,2005, the Company issued $30,000 of trust preferred securities which mature on September 30,2035 and are callable, in whole or in part, at par plus accrued interest on orafter September 30, 2010. For the first ten years, the securities have afixed interest rate of 8.52% per annum. Thereafter, the securities have afloating interest rate equal to three-month LIBOR plus 380 basis points perannum, resetting quarterly. The securities are treated as debt obligations forfinancial statement purposes. The Company used proceeds from the sale of thesesecurities to fund land purchases and residential construction. The obligationsrelating to the trust preferred securities are subordinated to the RevolvingCredit Facility.

 

**7.****             ****ASSETIMPAIRMENTS – REAL ESTATE HELD FOR DEVELOPMENT AND SALE**

 

TheCompany accounts for its real estate held for development and sale inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets” (“SFAS No. 144”). SFAS No. 144 requires that long-lived assets be reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying value of the asset may not be recoverable.  Recoverability of real estate held fordevelopment and sale is measured by comparing the carrying value to the futureundiscounted net cash flows expected to be generated by the asset.  The impairment loss is the difference betweenthe book value of the assets and the discounted future cash flows generatedfrom expected revenue of the assets, less the associated cost to complete anddirect costs to sell.  Estimated cashflows are discounted at a rate commensurate with the inherent risk of the assetsand cash flows, which approximates fair value. The estimates used in the determination of the estimated cash flows andfair value of the asset are based on factors known to us at the time suchestimates are made and our expectations of future operations.  These estimates of cash flows aresignificantly impacted by estimates of the amounts and timing of revenues andcosts and other factors, which, in turn, are impacted by local market economicconditions and the actions of competitors. Should the estimates or expectations used in determining estimated cashflows or fair value decrease or differ from current estimates in the future, wemay be required to recognize additional impairments related to these assets orother assets.

 

Asof September 30, 2008, there were a number of parcels which were testedfor impairment as a trigger was identified. Some of these parcels includedthose that had previously been impaired. In some cases, the undiscounted cashflow analysis prepared by management did not indicate an impairment, requiringthe asset to be written down to its fair value. However, these cash flows aresubject to significant estimates and assumptions made by management. In somecases, the results of whether an impairment is indicated from the undiscountedcash flow analysis is highly sensitive to changes in assumptions. These parcelscould suffer impairment in the future, and such impairment amounts could bematerial to the Company’s results of operations and financial position.

 

Whenimpairment is indicated, the Company estimates the fair value of inventoryunder SFAS No. 144 based on current market conditions and currentassumptions made by management, which may differ materially from actual resultsif market conditions change. For example, further market deterioration may leadthe Company to incur additional impairment charges on previously impairedinventory, as well as on inventory not currently impaired but for whichindicators of impairment may arise if further market deterioration occurs.

 

Inconducting the review for indicators of impairment on a community level, theCompany evaluates, among other things, the margins 

 

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onhomes that have been delivered, margins under sales contracts in backlog,projected margins with regard to future home sales over the life of thecommunity, and the estimated fair value of the land itself.

 

Indetermining the recoverability of the carrying value of the assets in acommunity that the Company has evaluated as requiring a test for impairment,significant quantitative and qualitative assumptions are made relative to thefuture home sales prices, sales incentives, direct and indirect costs(including interest expected to be capitalized) and home construction and landdevelopment and the pace of new home orders. In addition, these assumptions aredependent on the specific market conditions and competitive factors for thecommunity being tested. The Company’s estimates are made using informationavailable at the date of the recoverability test. However, as facts andcircumstances may change in future reporting periods, the estimates ofrecoverability are subject to change. When impairment is indicated, the Companyestimates the fair value of its communities using a discounted cash flow model.The determination of fair value also requires discounting the estimated cashflows at a rate commensurate with the inherent risks associated with the assetsand related estimated cash flow streams.

 

 The following table represents inventoryimpairments by region for the three months ended September 30, 2008 and2007:

 
| ** ** | ** ** | **Three months ended September 30,** | ** ** |
|------------|------------|----------------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
| ** ** | ** ** | **Communities**                                          | ** ** | **Impairment** | ** ** | **Communities** | ** ** | **Impairment** | ** ** |
| ** ** | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Northern   |       | 4                                                        |       | $ | 4,899 |   | 1 |   | $ | 712 |   |
| Southern   |       | 1                                                        |       | 97 |   | — |   | — |   |
| Midwestern |       | 3                                                        |       | 3,907 |   | — |   | — |   |
| Florida    |       | 1                                                        |       | 515 |   | — |   | — |   |
| Total      |       | 9                                                        |       | $ | 9,418 |   | 1 |   | $ | 712 |   |

 

**8.****             ****STOCKBASED COMPENSATION**

 

TheCompany follows the provision of SFAS No. 123 (revised 2004) “Share-BasedPayment” (“SFAS No. 123(R)”), which establishes the financial accountingand reporting standards for stock-based compensation plans.  SFAS No. 123(R) requires themeasurement and recognition of compensation expense for all stock-based awardsmade to employees and directors, including stock options and restrictedstock.  Under the provisions of SFAS No. 123(R),stock-based compensation cost is measured at the grant date, based on thecalculated fair value of the award, and is recognized as an expense over therequisite service period of the entire award (generally the vesting period ofthe award).  The fair value based methodin SFAS No. 123(R) is similar to the fair-value-based method in SFAS No. 123in most respects, subject to certain differences.  The Company previously adopted the fair valuerecognition provisions of SFAS No. 123 prospectively for all stock awardsgranted and, as such, the impact of the modified prospective adoption of SFAS123(R) did not have a significant impact on the financial position orresults of operations of the Company.

 

***Stock Option Plans***

 

OnAugust 26, 2004, the Company’s Board of Directors adopted the OrleansHomebuilders, Inc. 2004 Omnibus Stock Incentive Plan (as subsequentlyamended, the “2004 Stock Incentive Plan”), which is intended to function as anamendment, restatement and combination of all stock option and award plans ofthe Company other than the Orleans Homebuilders, Inc. Stock AwardPlan.  On December 6, 2007, the stockholders of theCompany approved the second amendment and restatement of the 2004 StockIncentive Plan to increase the number of shares of the Company’s common stockauthorized for issuance under the plan from 400,000 to 2,000,000 shares.

 

Duringthe three months ended September 30, 2008 and 2007, the Company recognized$322 and $474, respectively, of stock based compensation expense related tostock options.

 

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Thefollowing summarizes stock option activity for the Company’s stock option plansduring the three months ended September 30, 2008:

 
| ** **                       | ** ** | **Number  of Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|----------------------------------|------------|-----------------------------|------------|--------------------------------------------|------------|
| Outstanding, beginning of period |       | 752,500                     |       | $                                          | 9.01       |   |
| Granted                          |       | —                      |       | —                                     |       |
| Exercised                        |       | —                      |       | —                                     |       |
| Outstanding, end of period       |       | 752,500                     |       | $                                          | 9.01       |   |
| Exercisable, end of period       |       | 230,500                     |       | $                                          | 13.41      |   |

 

Therewere no options exercisable at September 30, 2008 that had a strike pricebelow the market value of the underlying shares of stock.

 

Thefollowing table summarizes information about the Company’s stock options at September 30,2008:

 
| ** **              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **              | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **              | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Remaining** | ** ** | **Weighted** | ** ** |
| ** **              | ** ** | **Outstanding at**      | ** ** | **Remaining**                | ** ** | **Average** | ** ** | **Exercisable at** | ** ** | **Average** | ** ** | **Average** | ** ** |
| ** **              | ** ** | **September 30,**       | ** ** | **Contractual**              | ** ** | **Exercise** | ** ** | **September 30,** | ** ** | **Contractual** | ** ** | **Exercise** | ** ** |
| **Exercise Price** | ** ** | **2008**                     | ** ** | **Life**                     | ** ** | **Price** | ** ** | **2008** | ** ** | **Life** | ** ** | **Price** | ** ** |
| $                       | 4.03       |                         | 180,000    |                         | 9.2        |   | $ | 4.03 |   | — |   | N/A |   | N/A |   |
| 4.65                    |       | 240,000                      |       | 9.2                          |       | 4.65 |   | 48,000 |   | 9.2 |   | $ | 4.65 |   |
| 4.85                    |       | 25,000                       |       | 9.6                          |       | 4.85 |   | — |   | N/A |   | N/A |   |
| 10.64                   |       | 30,000                       |       | 4.8                          |       | 10.64 |   | 30,000 |   | 4.8 |   | 10.64 |   |
| 15.63                   |       | 250,000                      |       | 7.7                          |       | 15.63 |   | 125,000 |   | 7.7 |   | 15.63 |   |
| 21.60                   |       | 27,500                       |       | 5.9                          |       | 21.60 |   | 27,500 |   | 5.9 |   | 21.60 |   |
|                    |       | 752,500                      |       | 8.4                          |       | $ | 9.01 |   | 230,500 |   | 7.4 |   | $ | 13.41 |   |
|                         |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |

 

Theaggregate intrinsic value as of September 30, 2008 for outstanding stockoptions and for stock options that are exercisable was $4 and $0, respectively.

 

TheCompany uses the Black-Scholes option pricing model to determine the aggregatefair value of the stock options granted. The aggregate fair value of the Company’s stock option grants areamortized to compensation expense over their respective vesting periods andincluded in selling, general and administrative expenses on the ConsolidatedStatements of Operations.  The Companytypically issues shares of common stock from treasury stock upon the exerciseof stock options, but such shares may also be newly issued.

 

Asof September 30, 2008, there was a total of $1,703 of unrecognizedcompensation expense related to time based non-vested stock options.  That cost is expected to be recognized over aweighted average period of 3.2 years.

 

***Stock Award Plans***

 

InOctober 2003, the Board of Directors adopted the Orleans Homebuilders, Inc.Stock Award Plan (the “Stock Award Plan”). The Stock Award Plan provides forthe grant of stock awards of up to an aggregate of 400,000 shares of theCompany’s common stock.  The Stock AwardPlan allows for the payment of all or a portion of the incentive compensationawarded under the Company’s bonus compensation plans to be paid by means of atransfer of shares of common stock.  Theplan has a ten year life and is open to all employees of the Company and itssubsidiaries.  The value of time basedrestricted stock awards are determined by their intrinsic value (as if theunderlying shares were vested and issued) on the grant date.  At September 30, 2008, the Company hadawarded 395,904 shares of common stock under the Stock Award Plan and had 4,096shares of the common stock available to issue under the Stock Award Plan.

 

OnOctober 17, 2008, the Board of Directors approved an increase in thenumber of shares available under the Stock Award Plan by 600,000 shares to1,000,000 shares, which is subject to stockholder approval at the Company’sAnnual Meeting on December 4, 2008.

 

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Duringthe three months ended September 30, 2008 and 2007, the Company did notgrant any stock awards.

 

Duringthe three months ended September 30, 2008 and 2007, the Company recognized$161 and $85, respectively, of stock based compensation expense related tostock awards.

 

Asof September 30, 2008, there was a total of $4,184 of unrecognizedcompensation expense related to time based non-vested restricted stockawards.  That cost is expected to berecognized over a weighted average period of 5.6 years.

 

**9.****             ****EMPLOYEERETIREMENT PLAN**

 

OnDecember 1, 2005, the Company adopted an unfunded, non-qualified targetdefined benefit retirement plan, effective as of September 1, 2005, whichcovers a group of management employees of the Company. The Company owns lifeinsurance policies on all participants in the Supplemental Executive Retirement Plan (“SERP”). ThisSERP, which was amended on March 13, 2006 and September 27, 2007, isintended to provide the participants with an annual supplemental retirementbenefit based upon their years of service with the Company and highest averagecompensation for five consecutive years. The annual supplemental benefit foreach participant will be adjusted based on the actual performance of the SERPcompared to the target. The benefit is payable for life with a minimum of tenyears guaranteed. In order to qualify for normal retirement benefits, aparticipant must attain age 65 with at least five years of participation in theSERP. Early retirement will be permitted beginning at age 55, afterfive years of participation in the SERP. Early retirement benefits will beadjusted actuarially to reflect the early retirement date.

 

If a participantterminates employment with the Company prior to attaining his or her normalretirement date, other than by reason of early retirement, death or disability,the participant will forfeit all benefits under the SERP, provided that certainterminations occurring after a change in control will not result in aforfeiture.  The Company can amend orterminate the SERP at any time. However, no amendment or termination willaffect the participants’ accrued benefits as determined in accordance with theSERP or delay any payments to a participant beyond the time that such amountwould otherwise be payable without regard to the amendment.

 

TheCompany used a 4% annual compensation increase and a 6.1% discount rate in itscalculation of the present value of its projected benefit obligation.  The discount rate used represented the Moody’sAA bond rate for long-term bonds as of June 2008.

 

TheCompany recognized the following costs related to the SERP for the three monthsended September 30, 2008 and 2007:

 
| ** **                         | ** ** | **Three months ended  September 30,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                           |
| ** **                         | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Net periodic pension cost:         |       |                                                 |       |   |   |
| Service cost                       |       | $                                                    | 130        |   | $ | 153 |   |
| Interest cost                      |       | 85                                                   |       | 85 |   |
| Amortization of prior service cost |       | 105                                                  |       | 103 |   |
| Amortization of actuarial gain     |       | (67                                                  | )          | (46 | ) |
| Total net periodic pension cost    |       | $                                                    | 253        |   | $ | 295 |   |

 

Assumptions used for determining net periodic pension costs:

 
| Discount rate |   | 6.10 | % | 6.10 | % |
|---------------|--------|------|---|------|---|
| Salary scale  |   | 4.00 | % | 4.00 | % |

 

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**10.****      ****LOSS PER SHARE**

 

Theweighted average number of shares used to compute basic loss per common shareand diluted loss per common share and a reconciliation of the numerator anddenominator used in the computation for the three months ended September 30,2008 and 2007 are shown in the following table:

 
| ** **                                                         | ** ** | **Three months ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | ** **                                           |
| ** **                                                         | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Numerator:                                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Loss from continuing operations for basic and diluted EPS          |       | $                                                    | (21,936    | ) | $ | (1,763 | ) |
|                                                               |       |                                                 |       |   |   |
| Denominator                                                        | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Weighted average common shares outstanding (in thousands)          |       | 18,504                                               |       | 18,502 |   |
|                                                               |       |                                                 |       |   |   |
| Basic and diluted loss per common share from continuing operations |       | $                                                    | (1.19      | ) | $ | (0.10 | ) |

 

Assumedshares (in thousands) under the treasury stock method for stock options of 0and 80 for the three months ended September 30, 2008 and 2007,respectively, were not included in the computation of diluted earnings pershare because the impact was anti-dilutive for those periods.

 

**11.****      ****INCOME TAXES**

 

The Company’s income taxexpense from continuing operations for the three months ended September 30,2008 was $120 compared with to $159 in the corresponding prior yearperiod.  These amounts representeffective tax rates for the three months ended September 30, 2008 and 2007of (0.6)% and (9.9)%, respectively.  Thesignificant changes in the Company’s effective tax rate resulted primarily fromthe recording of an $8,463 net valuation reserve in the first quarter of fiscalyear 2009 as compared with no valuation reserve in the comparable period of theprevious fiscal year.  SFAS No. 109 —“Accounting for Income Taxes” (“SFAS No. 109”) requires that companiesassess whether a valuation allowance should be established based on theconsideration of all available evidence using a “more likely than not” standard.  In making such judgments, significant weightis given to evidence that can be objectively verified.  SFAS No. 109 provides that a cumulativeloss in recent years is significant negative evidence in considering whetherdeferred tax assets are realizable and also restricts the amount of reliance onprojections of future taxable income to support the recovery of deferred taxassets.  The ultimate realization ofthese deferred tax assets is dependent upon the generation of future taxableincome during the periods in which those temporary differences becomedeductible.  Changes in existing tax lawscould also affect actual tax results and the valuation of deferred tax assetsover time.  The tax expense for the threemonths ended September 30, 2007 include the impact of a revision to aprior year tax contingency reserve of approximately $520 as well as a prioryear income tax return-to-accrual adjustment of approximately $228.

 

At September 30,2008 and June 30, 2008, the Company had net deferred income tax assets of$62,105 and $53,642, respectively, offset by full valuation allowances of$62,105 and $53,642, respectively.

 

The Company is currentlyunder examination by various taxing jurisdictions and anticipates finalizingthe examinations with certain jurisdictions within the next twelve months.  The final outcome of these examinations isnot yet determinable.  The statute oflimitations for the Company’s major tax jurisdictions remains open forexamination for tax years 2005-2007.

 

**12.****      ****DISCONTINUED OPERATIONS**

 

OnDecember 31, 2007, the Company specifically committed to exiting itsArizona market and, in connection with this decision, on that date, it disposedof its entire land position and its related work-in-process homes in Arizona,which constituted substantially all of its assets in Arizona.  The Company has historically reported thisbusiness as the western region operating segment.  The disposed work-in-process inventory andland assets constituted substantially all of the Company’s assets in the westernregion.  As such, all charges associatedwith the western region are included as a discontinued operation.

 

Asthe western region represented a component of the Company’s business, theconsolidated financial statements have been reclassified for all periodspresented to present this business as discontinued operations.  Summarized financial information for thewestern region is set forth below:

 

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| ** **                            | ** ** | **Three months  ended  September 30,  2007** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                            | ** ** | ** **                                             |
| ** **                            | ** ** | ** **                                             |
| ** **                            | ** ** | ** **                                             |
| Operating loss                        |       | $                                                      | (482       | ) |
| Tax benefit                           |       | (190                                                   | )          |
| Net loss from discontinued operations |       | $                                                      | (292       | ) |

 

Discontinuedoperations have not been segregated in the condensed consolidated statement ofcash flows. Therefore amounts for certain captions will not agree withrespective data in the condensed consolidated statement of operations.

 

**13.****      ****SEGMENT REPORTING**

 

SFAS No. 131 “Disclosuresabout Segments of an Enterprise and Related Information” (“SFAS No. 131”)establishes standards for the manner in which public enterprises report segmentinformation about operating segments. The Company has determined that its operations primarily involve fourreportable homebuilding segments operating in 11 markets.  Revenues are primarily derived from the saleof homes which the Company constructs. The segments reported have been determined to have similar economiccharacteristics including similar historical and expected future operatingperformance, employment trends, land acquisitions and land constraints,municipality behavior and met the other aggregation criteria in SFAS No. 131.  The reportable homebuilding segments includeoperations conducting business in the following markets:

 

Northern region:

 

·               Southeastern Pennsylvania;

·               Central New Jersey;

·               Southern New Jersey; and

·               Orange County, New York

 

Southern region:

 

·               Charlotte, North Carolina (including adjacent counties in SouthCarolina);

·               Richmond, Virginia;

·               Raleigh, North Carolina;

·               Greensboro, North Carolina; and

·               Tidewater, Virginia

 

Midwestern region:

 

·               Chicago, Illinois

 

Florida region:

 

·               Orlando, Florida

 

During the fiscal yearended June 30, 2008, the Company exited from the Phoenix, Arizonamarket.  See note 12, DiscontinuedOperations.

 

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The Company’s evaluationof segment performance is based on (loss) income from continuing operations beforetaxes.  During fiscal year 2008, theallocation to the segments was a fixed amount, which left a portion of the lossunallocated.  During fiscal year 2009,corporate (loss) income from continuing operations is fully allocated to thesegments based on budgeted revenue. The fiscal year 2009 allocation includesthe Company’s mortgage brokerage and property management subsidiaries.  Below is a summary of revenue and (loss)income from continuing operations before taxes for each reportable segment forthe three months ended September 30, 2008 and 2007:

 
| ** **                                                 | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| **Total Revenue**                                          |       |                                                 |       |   |   |
| Northern                                                   |       | $                                                    | 46,880     |   | $ | 51,140 |   |
| Southern                                                   |       | 27,305                                               |       | 48,505 |   |
| Midwestern                                                 |       | 11,490                                               |       | 13,538 |   |
| Florida                                                    |       | 3,190                                                |       | 8,269 |   |
| Corporate and unallocated(1)                               |       | 1,456                                                |       | 1,424 |   |
| Consolidated Total                                         |       | $                                                    | 90,321     |   | $ | 122,876 |   |
|                                                       |       |                                                 |       |   |   |
| **(Loss) Income from Continuing Operations Before  Taxes** |       |                                                 |       |   |   |
| Northern                                                   |       | $                                                    | (5,845     | ) | $ | (678 | ) |
| Southern                                                   |       | (9,436                                               | )          | (421 | ) |
| Midwestern                                                 |       | (5,512                                               | )          | (1,524 | ) |
| Florida                                                    |       | (1,023                                               | )          | (1,121 | ) |
| Corporate and unallocated                                  |       | —                                               |       | 2,140 |   |
| Consolidated Total                                         |       | $                                                    | (21,816    | ) | $ | (1,604 | ) |

 

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(1) Corporateand unallocated include the revenue of the Company’s mortgage brokerage andproperty management.

 

**14.****      ****COMMITMENTS AND CONTINGENCIES**

 

AtSeptember 30, 2008, the Company had outstanding bank letters of credit,surety bonds and financial security agreements amounting to $114,933 ascollateral for completion of improvements at various developments of theCompany.

 

Asof September 30, 2008, the Company owned or controlled approximately 7,004building lots.  As part of theaforementioned building lots, the Company has contracted to purchase, or hadunder option, undeveloped land and improved lots for an aggregate purchaseprice of $115,406, which are expected to yield approximately 1,775 buildinglots.  Generally, the Company structuresits land acquisitions so that it has the right to cancel its agreements topurchase undeveloped land and improved lots by forfeiture of its deposit underthe agreement.  Furthermore, purchase ofthe properties is usually contingent upon obtaining all governmental approvalsand satisfaction of certain requirements by the Company and the sellers.

 

Fromtime to time, the Company is named as defendant in legal actions arising fromits normal business activities.  Althoughthe amount of any liability that could arise with respect to currently pendingactions cannot be accurately predicted, in the opinion of the Company any suchliability will not have a material adverse effect on the financial position oroperating results of the Company.The Company accrues the costfor warranty and customer satisfaction into the cost of its homes as aliability at closing for each unit based on the Company’s individual budget perunit. These liabilities are reviewed on a quarterly basis and generally closedto earnings within nine to 12 months for unused amounts with any excessamounts expensed as identified as a change in estimate.  Any significant material defects aregenerally under warranty with the Company’s supplier.  The Company has not historically incurred anysignificant litigation requiring additional specific reserves for its productofferings (e.g., mold litigation).

 

Generally,the Company provides all of its homebuyers with a limited one year warranty asto workmanship. Under certain circumstances, this warranty may be extended totwo years. In practice, the Company may extend this warranty period with theultimate goal of satisfying the customer. In addition, the Company enrolls all ofits homes in a limited warranty program with a third party provider (with thepremium paid for this program included in the individual unit budgets describedabove). This limited warranty program generally covers certain defects forperiods of one to two years and major structural defects for up to ten yearsand actual costs incurred are paid for by the third party provider.

 

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The Company’s warrantyand customer satisfaction costs are charged to cost of sales at the time eachhome is closed and title and possession have been transferred to the homebuyer.The amount charged to additions represents warranty and customer satisfactioncosts factored into the cost of each home. The amount recorded as chargesincurred represents the actual warranty and customer satisfaction cost incurredfor the period presented. Certain costs to complete, not included as warrantycosts, have been excluded from the rollforward below:

 
| ** **                     | ** ** | **Three months ended  September 30,** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | ** **                                           |
| ** **                     | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Balance at beginning of period |       | $                                                    | 3,353      |   | $ | 2,909 |   |
| Warranty costs accrued         |       | 399                                                  |       | 988 |   |
| Actual warranty costs incurred |       | (669                                                 | )          | (675 | ) |
| Balance at end of period       |       | $                                                    | 3,083      |   | $ | 3,222 |   |

 

**15.  FAIR VALUE DISCLOSURES**

 

Effective July 1,2008, the Company adopted SFAS No. 157, “ Fair Value Measurements” (“SFAS No. 157”)as amended by FASB Staff Position SFAS No. 157-1, “ Application of FASBStatement No. 157 to FASB Statement No. 13 and Other AccountingPronouncements That Address Fair Value Measurements for Purposes of LeaseClassification or Measurement under Statement 13” (“FSP FAS No. 157-1”)and FASB Staff Position SFAS No. 157-2, “ Effective Date of FASB StatementNo. 157” (“FSP FAS No. 157-2”). SFAS No. 157 defines fair value,establishes a framework for measuring fair value in GAAP and provides forexpanded disclosure about fair value measurements.  SFAS No. 157 is applied prospectively,including to all other accounting pronouncements that require or permit fairvalue measurements.  FSP FAS No. 157-1amends SFAS No. 157 to exclude from the scope of SFAS No. 157 certainleasing transactions accounted for under SFAS No. 13, “Accounting forLeases” for purposes of measurements and classifications.  FSP FAS No. 157-2 amends SFAS No. 157to defer the effective date of SFAS No. 157 for all non-financial assetsand non-financial liabilities except those that are recognized or disclosed atfair value in the financial statements on a recurring basis to fiscal yearsbeginning after November 15, 2008.

 

SFAS No. 157 definesfair value as the exchange price that would be received for an asset or paid totransfer a liability (an exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date. SFAS No. 157 also establishes a fairvalue hierarchy which requires an entity to maximize the use of observableinputs and minimize the use of unobservable inputs when measuring fairvalue.  The standard describes threelevels of inputs that may be used to measure fair value.  Financial assets and liabilities arecategorized based on the inputs to the valuation techniques as follows:

 

Level 1    Fair value determined based on quotedprices in active markets for identical assets.

 

Level 2    Fair value determined using significantother observable inputs.

 

Level 3   Fair values determined using significantunobservable inputs.

 

The Company’s financialinstruments measured at fair value on a recurring basis are summarized below:

 
| ** **                     | ** ** | **Fair Value Hierarchy** | ** ** | **Fair Value at  September 30, 2008** | ** ** |
|--------------------------------|------------|------------------------------------|------------|-----------------------------------------------------------|------------|
| **Financial Instruments** | ** ** | ** **                         | ** ** |
| Marketable securities          |       | Level  1                           |       | $                                                         | 15,745     |   |
|                                |            |                                    |            |                                                           |            |  |

 

The partial adoption ofSFAS No. 157 under FSP FAS No. 157-2 did not have a material impacton the Company’s financial assets and liabilities.  Management is evaluating the impact that SFASNo. 157 will have on its non-financial assets and non-financialliabilities since the application of SFAS No. 157 for such items wasdeferred to July 1, 2009.  TheCompany believes that the impact of these items will not be material to itsconsolidated financial statements.

 

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**16.  GOODWILL**

 

During the three monthsended September 30, 2008, the Company recorded an impairment chargerelated to the goodwill that arose from the Parker & LancasterCorporation acquisition.  This assessment was performed in accordancewith SFAS No. 142.  Managementevaluated the recoverability of the goodwill by comparing the carrying value ofthe Company’s southern reporting unit to its fair value.  Fair value was determined based on thediscounted future cash flows.  These cashflows are significantly impacted by estimates related to current and futureeconomic conditions, including absorption rates and margins reflective ofslowing demand, as well as anticipated future demand and timing thereof.  The amounts included in the discounted cashflow analysis are based on management’s best estimate of future results.  This estimate considered increased risk anduncertainty associated with current market and economic conditions as reflectedwithin the discount rate used to present value future cash flows and lowerexpected pricing over the projection period due to decreased consumer demand inthe near term over the projection period. The deteriorating market conditions in the Southern Region in whichParker & Lancaster operates are the result of continued economicturmoil, uncertainty in the credit and financial markets, decreased consumerdemand and increased mortgage underwriting standards. Discount rates were basedon the Company’s weighted average cost of capital adjusted for theaforementioned business risks.  Theamount of the goodwill impairment was $4,180 and was recorded in the Company’ssouthern reporting segment.  As a resultof this impairment charge, the Company has no goodwill on its Balance Sheet at September 30,2008.  Actual results could differsignificantly from such estimates.  Noimpairment charge related to goodwill was taken during the three months ended September 30,2007.

 

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**ITEM 2.****                 M****ANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

**(Dollarsin thousands, except per share data)**

 

OrleansHomebuilders, Inc., a Delaware corporation, and its subsidiaries(collectively, the “Company”, “OHB”, “Orleans”, “we”, “us” or “our”) market,develop and build high-quality, single-family homes, townhomes and condominiumsto serve various types of homebuyers, including move-up, luxury, empty nester,active adult, first-time move-up and first-time homebuyers. The Companybelieves this broad range of home designs gives it flexibility to addresseconomic and demographic trends within its markets.  The Company has been in operation since 1918and is currently engaged in residential real estate development in eight statesin the following 11 markets: Southeastern Pennsylvania; Central New Jersey;Southern New Jersey; Orange County, New York; Charlotte, Raleigh and Greensboro,North Carolina; Richmond and Tidewater, Virginia; Chicago, Illinois; andOrlando, Florida.  The Company’sCharlotte, North Carolina market also includes operations in adjacent countiesin South Carolina.  The Company hasoperated in Pennsylvania and New Jersey for over 90 years.  In fiscal year 2001, the Company beganoperations in North Carolina and Virginia through the acquisition of Parker &Lancaster Corporation (“PLC”), a privately-held residential homebuilder.  The Company entered the Orlando, Floridamarket on July 28, 2003 through its acquisition of Masterpiece Homes, Inc.,now Masterpiece Homes, LLC. (“Masterpiece Homes”), a privately-held residentialhomebuilder.  On July 28, 2004, theCompany entered the Chicago, Illinois market through the acquisition of RealenHomes, L.P. (“Realen Homes”), an established privately-held homebuilderwith operations in Chicago, Illinois and southeastern Pennsylvania.  On December 23, 2004, pursuant to anAsset Purchase Agreement of the same date, the Company acquired, through awholly-owned subsidiary, certain real estate assets from Peachtree ResidentialProperties, LLC, a North Carolina limited liability company and PeachtreeTownhome Communities, LLC, a North Carolina limited liability companywhich, at the time the Company acquired the assets, were wholly-ownedsubsidiaries of Peachtree Residential Properties, Inc., a Georgiacorporation (collectively, “Peachtree Residential Properties”).  In December 2005, the Company enteredthe Phoenix, Arizona market as a start-up operation via the purchase of anundeveloped parcel of land.  On December 31,2007, the Company committed to exiting the Phoenix market and, in connectionwith that decision, on that date disposed of its entire land position and itsrelated work-in-process homes in Phoenix, which constituted substantially allof its assets in the western region.  TheConsolidated Financial Statements have been reclassified for all prior periodspresented to reflect this business as a discontinued operation.  See Note 12, Discontinued Operations.

 

Referencesto a given fiscal year in this Quarterly Report on Form 10-Q is to thefiscal year ended June 30th of that year. For example, the phrases “fiscal 2009”, “2009 fiscal year” or “yearended June 30, 2009” refer to the fiscal year ending June 30,2009.  When used in this report, the “northernregion” segment refers to our markets in Pennsylvania, New Jersey and New York;the “southern region” segment refers to our markets in North Carolina andVirginia, as well as the adjacent counties in South Carolina; the “midwesternregion” segment refers to our market in Illinois; the “Florida region” segmentrefers to our market in Florida; and the “western region” segment refers to ourformer market in Arizona.

 

**Results of Operations**

 

***New Orders, Residential Revenues and Backlog:***

 

Duringthe last three years, we and the entire housing industry have faced severalsignificant challenges in the housing and mortgage markets as a whole.  These challenges have increased significantlyduring the three months ended September 30, 2008 as these difficultieswhich previously were confined to certain segments of the economy (includinghomebuilding) have expanded to a greater portion of the United States andglobal economy.  Recent economic reportsshow that the United States economy is suffering from falling wages, risinginflation, weak consumer spending, job losses, tight credit and a lingeringmalaise in the real estate industry. Many economists believe that the United States is either in or headedtoward a recession.  We believe thatoverall economic conditions and conditions in the housing and mortgage marketswill remain difficult and these conditions may continue to have a negativeimpact on new orders, new order pricing and consumer confidence related tohousing in the near term, thereby further reducing revenues, gross margins andnet income.  We are continuing to respondto these unfavorable market conditions by attempting to maintain absorption levelsthrough the use of sales incentives, reevaluating our individual land holdings,reducing our land expenditures and emphasizing cost reductions to adjust forlower levels of production.  Furtherdecreases in demand for our homes may require us to further increase the use ofsales incentives and to take other steps to reduce expenditures and expenses.

 

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Forthe tables below setting forth certain details as to residential salesactivities, the information is provided for the three months ended September 30,2008 and 2007 in the case of residential revenue earned and new orders, and asof September 30, 2008 and 2007 in the case of backlog.  We consider a sales contract or a potentialsale to be classified as a new order and, therefore, become a part of backlog, at the time a homebuyerexecutes a contract to purchase a home from the Company.

 
| ** **                      | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| **New  orders**                 |       |                                                    |       |       |       |       |       |   |   |
| Dollars                         |       | $                                                       | 53,630     |       | $          | 132,576    |       | $ | (78,946 | ) | (59.5 | )% |
| Units                           |       | 135                                                     |       | 303        |       | (168       | )          | (55.4 | )% |
| Average  sales price            |       | $                                                       | 397        |       | $          | 438        |       | $ | (41 | ) | (9.4 | )% |
|                            |       |                                                    |       |       |       |       |       |   |   |
| **Residential  revenue earned** |       |                                                    |       |       |       |       |       |   |   |
| Dollars                         |       | $                                                       | 88,602     |       | $          | 119,357    |       | $ | (30,755 | ) | (25.8 | )% |
| Units                           |       | 200                                                     |       | 263        |       | (63        | )          | (24.0 | )% |
| Average  sales price            |       | $                                                       | 443        |       | $          | 454        |       | $ | (11 | ) | (2.4 | )% |

 
| ** **           | ** ** | **September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **           | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| **Backlog**          |       |                   |       |       |       |       |       |   |   |
| Dollars              |       | $                      | 203,337    |       | $          | 331,132    |       | $ | (127,795 | ) | (38.6 | )% |
| Units                |       | 421                    |       | 649        |       | (228       | )          | (35.1 | )% |
| Average  sales price |       | $                      | 483        |       | $          | 510        |       | $ | (27 | ) | (5.3 | )% |

 

New orders for the three months ended September 30, 2008 decreased$78,946 or 59.5%, to $53,630 on 135 homes, compared to $132,576 on 303 homesfor the three months ended September 30, 2007.  The average price per home decreased byapproximately 9.4% to $397 for the three months ended September 30, 2008compared to $438 or the three months ended September 30, 2007.

 

Thedecrease in new orders for the three months ended September 30, 2008 isattributable to the continued deterioration in the overall housing and mortgagemarkets during the period.  The decreasein the average sales price on new orders generally represents a response to thedeterioration in market conditions by us in an effort to increase absorptionthrough the use of marketing incentives and price reductions.

 

Residential revenues earned for the three months ended September 30,2008 decreased $30,755, or 25.8%, to $88,602 on 200 homes, compared to $119,357on 263 homes for the three months ended September 30, 2007.  The decrease in residential revenues earnedis also due to the continued deterioration in the overall housing and mortgagemarkets.

 

Changesin backlog are the net result of changes in net new orders and residentialrevenues earned.

 

Cancellationrates for the three months ended September 30, 2008 were 36.0% of neworders compared to 21.0% for the three months ended September 30,2007.  This increase is also the resultof the deteriorating economy.  Theincrease was the result of lower gross orders in the northern and southernregions.  Company wide, cancellationsdeclined from 82 in the three months ended September 30, 2007 to 76 in thethree months ended September 30, 2008.

 

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***Northern Region:***

*** ***
| ** **                     | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **New orders**                 |       |                                                    |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                       | 25,454     |       | $          | 53,582     |       | $ | (28,128 | ) | (52.5 | )% |
| Units                          |       | 55                                                      |       | 113        |       | (58        | )          | (51.3 | )% |
| Average sales price            |       | $                                                       | 463        |       | $          | 474        |       | $ | (11 | ) | (2.3 | )% |
|                           |       |                                                    |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                                    |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                       | 46,725     |       | $          | 51,026     |       | $ | (4,301 | ) | (8.4 | )% |
| Units                          |       | 97                                                      |       | 105        |       | (8         | )          | (7.6 | )% |
| Average sales price            |       | $                                                       | 482        |       | $          | 486        |       | $ | (4 | ) | (0.8 | )% |

 
| ** **          | ** ** | **September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Change** | ** ** | **%Change** | ** ** |
| ** **          | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Backlog**         |       |                   |       |       |       |       |       |   |   |
| Dollars             |       | $                      | 88,547     |       | $          | 147,191    |       | $ | (58,644 | ) | (39.8 | )% |
| Units               |       | 168                    |       | 263        |       | (95        | )          | (36.1 | )% |
| Average sales price |       | $                      | 527        |       | $          | 560        |       | $ | (33 | ) | (5.9 | )% |

 

Ournorthern region is comprised of our Southeastern Pennsylvania; Central NewJersey; Southern New Jersey and Orange County, New York markets.  We believe that our geographic mix in this marketallows us to compete better than if we were situated in one or two concentratedmarkets.  In the northern region, wecurrently build homes primarily targeted toward move-up, luxury, empty nesterand active adult homebuyers.

 

Thedecrease in new orders for the northern region noted above is the result of alarge decrease in the number of units sold, coupled with a slight decline inthe average sales price.  The decrease inthe number of units is primarily the result of deteriorating marketconditions.  The decrease in residentialrevenue earned was the result of both decreases in the units sold and theaverage sale price.

 

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***Southern Region:***

 
| ** **                     | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **New orders**                 |       |                                                    |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                       | 18,225     |       | $          | 58,582     |       | $ | (40,357 | ) | (68.9 | )% |
| Units                          |       | 51                                                      |       | 121        |       | (70        | )          | (57.9 | )% |
| Average sales price            |       | $                                                       | 357        |       | $          | 484        |       | $ | (127 | ) | (26.2 | )% |
|                           |       |                                                    |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                                    |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                       | 27,278     |       | $          | 48,373     |       | $ | (21,095 | ) | (43.6 | )% |
| Units                          |       | 64                                                      |       | 100        |       | (36        | )          | (36.0 | )% |
| Average sales price            |       | $                                                       | 426        |       | $          | 484        |       | $ | (58 | ) | (12.0 | )% |

 
| ** **          | ** ** | **September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **          | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Backlog**         |       |                   |       |       |       |       |       |   |   |
| Dollars             |       | $                      | 94,706     |       | $          | 140,737    |       | $ | (46,031 | ) | (32.7 | )% |
| Units               |       | 203                    |       | 264        |       | (61        | )          | (23.1 | )% |
| Average sales price |       | $                      | 467        |       | $          | 533        |       | $ | (66 | ) | (12.4 | )% |

 

Oursouthern region is comprised of our Charlotte, Raleigh and Greensboro, NorthCarolina and the Richmond and Tidewater, Virginia markets.  The Charlotte, North Carolina market alsoincludes operations in adjacent counties in South Carolina.  The Company in its southern region currentlybuilds homes targeted toward move-up and luxury homebuyers.

 

Thedecrease in new orders for the three months ended September 30, 2008compared to the three months ended September 30, 2007 is the result ofsignificant decreases in both the number of units sold and the average priceper unit.  The decrease in residentialrevenues earned for the three months ended September 30, 2008 compared tothe three months ended September 30, 2007 is also due to significantdecreases in the number of units sold and the average sale price per unit.  These decreases are the result of thecontinued deterioration in the market.

 

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***Midwestern Region:***

 
| ** **                     | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **New orders**                 |       |                                                    |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                       | 8,160      |       | $          | 13,436     |       | $ | (5,276 | ) | (39.3 | )% |
| Units                          |       | 21                                                      |       | 40         |       | (19        | )          | (47.5 | )% |
| Average sales price            |       | $                                                       | 389        |       | $          | 336        |       | $ | 53 |   | 15.8 | % |
|                           |       |                                                    |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                                    |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                       | 11,478     |       | $          | 12,836     |       | $ | (1,358 | ) | (10.6 | )% |
| Units                          |       | 28                                                      |       | 28         |       | —     |       | 0.0 | % |
| Average sales price            |       | $                                                       | 410        |       | $          | 458        |       | $ | (48 | ) | (10.5 | )% |

 
| ** **          | ** ** | **September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **          | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Backlog**         |       |                   |       |       |       |       |       |   |   |
| Dollars             |       | $                      | 17,766     |       | $          | 28,532     |       | $ | (10,766 | ) | (37.7 | )% |
| Units               |       | 41                     |       | 67         |       | (26        | )          | (38.8 | )% |
| Average sales price |       | $                      | 433        |       | $          | 426        |       | $ | 7 |   | 1.6 | % |

 

Inour midwestern region, we have operations in the Chicago area.  The Company in its midwestern regioncurrently builds homes primarily targeted toward the move-up homebuyer.

 

Duringthe three months ended September 30, 2008, both new order dollars and thenumber of units sold decreased as compared to the same periods in the prioryear.  This decrease is primarily theresult of the deteriorating economic and market conditions noted above.  There was, however, a significant increase inthe average sale price of our new orders in this region.  During our first quarter of fiscal year 2008,market prices of new homes in the Chicago market declined significantly.  During the first quarter of fiscal year 2009,we were able to increase our sales prices, which had a positive impact of ouraverage sale price for new orders.  Theaffect of this was more home sales at lower prices in the comparable quarter ofthe prior fiscal year.  The decrease inresidential revenues earned was due to a decline in average sale price, withunits closed during the three months ended September 30, 2008 equalingunits closed during the three months ended September 30, 2007.

 

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***Florida Region:***

 
| ** **                     | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **New orders**                 |       |                                                    |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                       | 1,791      |       | $          | 6,976      |       | $ | (5,185 | ) | (74.3 | )% |
| Units                          |       | 8                                                       |       | 29         |       | (21        | )          | (72.4 | )% |
| Average sales price            |       | $                                                       | 224        |       | $          | 241        |       | $ | (17 | ) | (7.1 | )% |
|                           |       |                                                    |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                                    |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                       | 3,121      |       | $          | 7,122      |       | $ | (4,001 | ) | (56.2 | )% |
| Units                          |       | 11                                                      |       | 30         |       | (19        | )          | (63.3 | )% |
| Average sales price            |       | $                                                       | 284        |       | $          | 237        |       | $ | 47 |   | 19.8 | % |

 
| ** **          | ** ** | **September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **          | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Backlog**         |       |                   |       |       |       |       |       |   |   |
| Dollars             |       | $                      | 2,318      |       | $          | 14,672     |       | $ | (12,354 | ) | (84.2 | )% |
| Units               |       | 9                      |       | 55         |       | (46        | )          | (83.6 | )% |
| Average sales price |       | $                      | 258        |       | $          | 267        |       | $ | (9 | ) | (3.4 | )% |

 

Theabove table reflects results from our Florida region for the three months endedSeptember 30, 2008 and 2007.  In theFlorida region, we have operations in the Orlando market.  The three months ended September 30,2007, also reflect results from the Palm Bay market from which we substantiallyexited during the first quarter of fiscal 2008 and the Palm Coast market fromwhich we substantially exited during the second quarter of fiscal 2008.  The Company in the Florida region currentlybuilds homes primarily targeted toward first-time, move-up and entry levelhomebuyers.

 

Thedecrease in new orders for the three months ended September 30, 2008, ascompared to the three months ended September 30, 2007, is primarily theresult of the continued deterioration of market conditions in this region.  New orders were also negatively impacted byour exit from the Palm Bay and Palm Coast markets, as noted above.  The decline in residential revenue earned isalso the result of the overall decline in market conditions, as well as ourexit from the Palm Bay and Palm Coast markets, as noted above.

 

***Costs and Expenses:***

 

***Residential Properties:***

 
| ** **                     | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Residential Properties**     |       |                                                    |       |       |       |       |       |   |   |
| Earned revenue                 |       | $                                                       | 88,602     |       | $          | 119,357    |       | $ | (30,755 | ) | (25.8 | )% |
| Cost of residential properties |       | 87,707                                                  |       | 102,953    |       | (15,246    | )          | (14.8 | )% |
| Gross profit margin            |       | $                                                       | 895        |       | $          | 16,404     |       | $ | (15,509 | ) | (94.5 | )% |
| Gross profit margin %          |       | 1.0                                                     | %          | 13.7       | %          |       |       |   |   |

 

Thecosts of residential properties for the three months ended September 30,2008, compared to the three months ended September 30, 2007 decreasedprimarily as a result of decreased residential revenue earned.  Impairments of residential property in theamount of $9,418 and $712 were recorded in the three months ended September 30,2008 and 2007, respectively.  Grossprofit percentage for the three months ended September 30, 2008 was 1.0%,as compared to 13.7% for the three months ended September 30, 2007.  Without recording the impairments in thecurrent quarter, the gross profit percentage would have decreased from 14.3%during the three months ended September 30, 2007 to 11.6% during the threemonths ended September 30, 2008.

 

Wesell a variety of home types in various communities and regions, each yieldinga different gross profit margin. As a result, 

 

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dependingon the mix of both communities and home types delivered, the consolidated grossprofit margin may fluctuate up and down on a periodic basis and periodic profitmargins may not be representative of the consolidated gross profit margin forthe entire year or future years.

 

Wecapitalize interest costs to inventory during development andconstruction.  Capitalized interest ischarged to cost of sales as the related inventory is delivered to thebuyer.  Historically, our inventoryeligible for interest capitalization exceeded our debt levels.  As a result of our reduction of inventoriesin recent quarters the Company’s active inventory has been lower than its debtlevel; therefore, a portion of the interest incurred during those periods wasexpensed directly to interest expense. As all interest incurred is ultimately expensed, this occurrence onlyaccelerates the expense recognition of the interest incurred during theperiod.  Interest included in the costsand expenses of residential properties and land sold for the three months endedSeptember 30, 2008 and September 30, 2007 was $4,144 and $3,809,respectively.  Interest charged directlyto interest expense during the three months ended September 30, 2008 and September 30,2007 was $1,864 and $0, respectively. Included in interest expense during the quarter ended September 30,2008, was the write-off of debt acquisition costs in the amount of $784.  This charge was recognized due to thedecrease in borrowing capacity as a result of the September 30, 2008amendment to the Revolving Credit Facility.

*** ***

***Selling, General and Administrative:***

 
| ** **                              | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                              | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Selling, General and Administrative** |       |                                                    |       |       |       |       |       |   |   |
| Selling and advertising                 |       | $                                                       | 5,133      |       | $          | 6,455      |       | $ | (1,322 | ) | (20.5 | )% |
| Commissions                             |       | 3,557                                                   |       | 4,277      |       | (720       | )          | (16.8 | )% |
| General and administrative              |       | 7,888                                                   |       | 7,543      |       | 345        |       | 4.6 | % |
| Total                                   |       | $                                                       | 16,578     |       | $          | 18,275     |       | $ | (1,697 | ) | (9.3 | )% |

 

Sellingand advertising costs include amortization of deferred marketing costs andother selling costs.  These costsdecreased primarily as a result of reduced sales office headcount, as part ofheadcount reductions that took place in January 2008 and August 2008.

 

Thedecrease in commission expense is primarily attributable to the decrease inresidential revenues as noted above. Commission expense as a percentage of residential revenue increased to4.0% for the three months ended September 30, 2008 from 3.6% for the threemonths ended September 30, 2007. The increased rate is due to increased incentives to the Company’s salesforce.

 

Generaland administrative costs were consistent with the prior year.  Write-offs of abandoned projects and otherpre-acquisition costs were $157 and $400 for the three months ended September 30,2008 and 2007, respectively.

 

***Land Sales and Other Income:***

 
| ** **                 | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** |
|----------------------------|------------|---------------------------------------------------------|------------|------------|------------|
| ** **                 | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                 | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Land sales**             |       |                                                    |       |       |       |   |   |
| Earned revenue             |       | $                                                       | 58         |       | $          | 1,186 |   | $ | (1,128 | ) |
| Costs and expenses         |       | 24                                                      |       | 1,258      |       | (1,234 | ) |
| Gross profit (loss)        |       | $                                                       | 34         |       | $          | (72 | ) | $ | 106 |   |
| ** **                 |       |                                                    |       |       |       |   |   |
| **Other income (expense)** |       |                                                    |       |       |       |   |   |
| Other income               |       | $                                                       | 1,661      |       | $          | 2,333 |   | $ | (672 | ) |
| Other expense              |       | $                                                       | 1,784      |       | $          | 1,994 |   | $ | (210 | ) |

 

TheCompany had land sales revenue of $58 and $1,186 during the three months ended September 30,2008 and 2007, respectively.  Otherincome consists primarily of property management fees and mortgage processingincome, while other expense consists primarily of the costs of propertymanagement and mortgage processing, along with depreciation expense for theCompany.

 

Ourmortgage processing business assists homebuyers in obtaining financing directlyfrom unaffiliated lenders.  We do notfund or service the mortgage loans, nor do we assume any credit or interestrate risk in connection with originating the mortgages.

 

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***Income Taxes and Loss from Continuing Operations:***

 
| ** **                                  | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|
| ** **                                  | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                                  | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pre-tax loss from continuing operations     |       | $                                                       | (21,816    | )          | $          | (1,604 | ) | $ | (20,212 | ) |
| Income tax (benefit) expense                |       | 120                                                     |       | 159        |       | (39 | ) |
| Loss from continuing operations, net of tax |       | $                                                       | (21,936    | )          | $          | (1,763 | ) | $ | (20,173 | ) |

 

Theeffective income tax rate was (0.6)% for the three months ended September 30,2008 as compared to (9.9)% for the three months ended September 30,2007.  The significant change in theCompany’s tax rate was a result of the additional valuation allowance against the deferred tax assetsdue to the lack of objectively verifiable evidence regarding the realization ofthese assets in the foreseeable future. There was no valuation allowance booked during the first quarter offiscal year 2008.  As of September 30,2008, the valuation allowance amounted to $62,105.  Of this amount $8,463 was booked during thefirst quarter of fiscal year 2009. The tax expense for the three months ended September 30,2007 include the impact of a revision to a prior year tax contingency reserveof approximately $520 as well as a prior year income tax return-to-accrualadjustment of approximately $228.

 

***Loss from Discontinued Operations:***

 

On December 31, 2007, the Company specifically committed toexiting its Arizona market and, in connection with this decision, on that date,it disposed of its entire land position and its related work-in-process homesin Arizona.  We have historicallyreported this business as the western region operating segment.  The disposed work-in-process inventory andland assets constituted substantially all of our assets in the westernregion.  As such, all charges associatedwith the western region are included as a discontinued operation.

 

Loss from discontinued operations was $292 or a loss of $0.02 per sharefor the three months ended September 30, 2007.  See Note 12 to our consolidated financialstatements in Item 1 of this Part 1.

 

**Liquidity and Capital Resources**

 

Onan ongoing basis, we require capital for expenditures to purchase and developland, to construct homes, to fund related carrying costs and overhead and tofund 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 andamenities.  Our sources of capital include funds derived from operations,sales of assets and various borrowings, most of which are secured.  In aneffort to increase liquidity, we may pursue sales of parcels of land, as wellas alternatives for selling a portion of our model home portfolio and otherassets; however, we can offer no assurances as to whether or when suchtransactions will occur or whether the transactions will be on termsadvantageous to us.

 

Asof September 30, 2008, we had $29,344 of borrowing capacity under oursecured revolving credit facility discussed below, subject to borrowing baseavailability.  At September 30,2008, we had borrowings in excess of availability of $6,487.  In connection with entering into our SecondAmended Credit Agreement, we made payments on our credit facility of $19,000,giving us availability of $12,513 immediately after these net repayments.  A majority of our debt is variable rate,based on the 30-day LIBOR rate, and therefore, we are exposed to market risk inconnection with interest rate changes. At September 30, 2008, the 30-day LIBOR rate of interest was3.92625%.  The libor rate has sincedecreased and as of October 31, 2008 was 2.58125%

 

Duringthe three months ended September 30, 2008, our liquidity decreased by$27,321 as shown in the table below:

 
| ** **                                 | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| Cash and cash equivalents                  |       | $                            | 27,332     |                    | $          | 72,341 |   |
| Restricted cash - due from title companies |       | 7,288                        |       | 19,269                  |       |
| Marketable securities                      |       | 15,745                       |       | —                  |       |
| Net borrowing base availability            |       | (6,487                       | )          | (20,411                 | )          |
| Liquidity                                  |       | $                            | 43,878     |                    | $          | 71,199 |   |

 

Thedecrease in liquidity is due to the decrease in closings that took place duringthe three months ended September 30, 2008, coupled 

 

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withthe inventory impairments recorded during the quarter.

 

Wecurrently believe that cash and marketable securities on hand, funds generatedfrom operations and financial commitments from available lenders will providesufficient capital for us to meet our existing operating needs.

 

***Revolving Credit Facility***

 

OnDecember 22, 2004, Greenwood Financial, Inc., a wholly-ownedsubsidiary of the Company, and other wholly-owned subsidiaries of the Company,as borrowers, and Orleans Homebuilders, Inc., as guarantor, entered into aRevolving Credit Loan Agreement for a Senior Secured Revolving Credit andLetter of Credit Facility with various banks as lenders (as amended andrestated and further amended, the “Revolving Credit Facility”). The RevolvingCredit Loan Agreement was amended on January 24, 2006, via the Amended andRestated Revolving Credit Loan Agreement (the “Amended Credit Agreement”). Inconnection with the Amended Credit Agreement, Orleans Homebuilders, Inc.executed a Guaranty, which was amended on September 6, 2007, and amendedand restated on September 30, 2008. The Amended and Restated CreditAgreement was amended on November 1, 2006 (the “First Amendment”), February 7,2007 (the “Second Amendment”), May 8, 2007 (the “Third Amendment”), September 6,2007 (the “Fourth Amendment”), December 21, 2007 (the “Fifth Amendment”), May 9,2008 by a limited waiver (the “waiver letter”) to the Amended Credit Agreement,which was extended on September 15, 2008, and amended and restated in theSecond Amended and Restated Revolving Credit Loan Agreement, dated September 30,2008 (the “Second Amended Credit Agreement”).

 

***Waiver***

 

Absentthe deferred tax asset valuation allowance of $43,500 during the March 31,2008 fiscal quarter, the Company would have been in compliance with all of thefinancial covenants in the Amended Credit Agreement at March 31, 2008.However, as a result of the deferred tax asset valuation allowance, absent thewaiver letter dated May 9, 2008, as extended on September 15, 2008,the Company would have been in default of the minimum consolidated tangible networth, maximum leverage ratio, and maximum land to consolidated adjustedtangible net worth ratio covenants set forth in the Amended Credit Agreement atMarch 31, 2008 (the “Subject Covenants”). Subject to certain limitations,the waiver letter temporarily waived compliance with the Subject Covenantsgenerally from January 1, 2008 to September 30, 2008 (the “WaiverPeriod”), unless another event of default occurred or we failed to comply withthe covenants in the waiver letter.

 

Inthe waiver letter, the Company also agreed that it would act in good faith anduse its best efforts to work with the agent lender during the Wavier Period toidentify a material group of assets in its borrowing base for reappraisal priorto September 15, 2008, which have been reappraised and account forapproximately 35% of the Company’s collateral assets.

 

***Second Amended Credit Agreement:***

 

OnSeptember 30, 2008, the Company entered into the Second Amended CreditAgreement which provides, among other things, that:

 

·                  The maturity date is December 20, 2009for all lenders.

·                  The amount of the Revolving Credit Facilityis $440,000, except that the amount of the Revolving Credit Facility will be$425,000 through December 31, 2008, and $415,000 from July 1, 2009through December 20, 2009, unless otherwise permanently reduced as aresult of certain required prepayments. The amount actually available under theRevolving Credit Facility is also subject to the borrowing base availabilityrequirements in the Revolving Credit Facility.

·                  The letter of credit sublimit is reduced to$60,000.

·                  The swing line limit is reduced to $10,000.

·                  The unused fee is increased to 0.35%.

·                  The interest rate is changed to the LIBORinterest rate plus 5.0%.

·                  A fee will be earned and payable on September 15,2009 equal to 8.0% per annum, calculated on a daily basis, of the differencebetween $250,000 and the aggregate level of the lenders’ lending commitmentsunder the Revolving Credit Facility as they exist from time to time between September 30,2008 and the earlier of September 15, 2009 and the date the commitmentsare permanently reduced to $250,000; however this fee will be reduced by 80% ifthe aggregate level of commitments on or before September 15, 2009 havebeen permanently reduced to $250,000.

·                  If the Company’s indebtedness is not paid infull by December 20, 2009, a separate fee will be earned and payable on December 20,2009 equal to 8.0% per annum, calculated on a daily basis, of the differencebetween $250,000 and the average daily outstanding cash borrowing as they existfrom time to time after September 15, 2009.

 

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·                  The letter of credit fees were changed to bethe applicable spread, with the issuer retaining an issuance fee of 0.125%.

·                  The borrowing base calculation was amended toincrease the maximum percentages for certain asset classes.

·                  Both of the leverage covenants, the debtservice coverage ratio covenant and the units in inventory covenant wereeliminated.

·                  The minimum consolidated tangible net worthcovenant was lowered to be not less than $75,000, (1) reduced by the sumof (a) inventory impairments under GAAP on assets in the borrowing basetaken by the Company and recorded after March 31, 2008, plus (b) theamount of any interest incurred less the amount of interest capitalized underStatement of Financial Accounting Standard No. 34 (“SFAS 34”), andrecorded after March 31, 2008, plus (c) any additional deferred taxasset valuation reserves recorded after March 31, 2008 (provided thatclauses (a) and (c) are limited to an aggregate amount not toexceed $30,000), plus (d) any impairments or write-offs relating totangible assets or pre-acquisition costs not contained in the borrowing baserecorded after March 31, 2008, and (2) increased by the sum of (x) anyfavorable adjustment recorded after March 31, 2008, to the deferred taxasset valuation allowance as reported in the Company’s third quarter fiscal2008 financials, plus (y) 50% of positive quarterly net income after March 31,2008 plus (z) 50% of any net securities proceeds received by the Companyand the borrowers under the Revolving Credit Facility after March 31,2008. However, in no event may the consolidated tangible net worth, aftertaking into account the reductions and increases above, at any time be lessthan $35,000.

·                  The minimum liquidity level is reduced to$15,000.

·                  The minimum cash flow from operations ratiois reduced and the related definition of debt service was amended to excludeany amortized deferred financing costs related to all

·                  amendments to the Amended Credit Agreement,the Second Amended Credit Agreement and/or the trust preferred securities andany future amendments to any of the foregoing.

·                  A $5,000 limit was put on our cash availablefor joint ventures, however, the Company may invest 50% of any net securitiesproceeds raised by the Company after March 31, 2008 in joint ventures thatare non-recourse to the Company and may maintain current investments incost-sharing arrangements or partnerships already in existence.

·                  The maximum amount of cash or cashequivalents (excluding cash at title companies) we are allowed to maintain wasset at a maximum of $32,500 for any consecutive five-day period.

·                  The borrowers may purchase (a) up to$8,000 of real estate (whether purchase money or otherwise) in the normalcourse of business, consistent with projections provided to the lenders and (b) improvedland (i.e., finished lot takedowns and/or controlled rolling lot options)purchased by the borrowers in the normal course of business, consistent withthe projections provided to the Lenders.

 

TheCompany also agreed that no dividends or distributions will be paid, no subordinateddebt will be repaid, except for interest payable on such debt, and limitationswere placed on purchases of additional land, including the method for financingsuch land.

 

Thelenders have agreed to allow the Company to pursue second lien indebtedness incertain limited circumstances. Any second lien indebtedness is subject to theapproval of the lenders and the proceeds of any second lien indebtedness mustbe used to prepay amounts advanced under the facility and the amount of thefacility will be permanently reduced by the amount of any such prepayment. TheCompany and the lenders have agreed that re-appraisals will be done on theCompany’s collateral assets. Approximately 35% of those assets have alreadybeen reappraised. The results of the appraisals included both individualreductions in appraised values as well as some increases in appraised values.While these project appraisals are not scheduled to be utilized in borrowingbase availability determinations until the borrowing base certificate dated asof September 30, 2008, the Company estimates that the net borrowing baseavailability, calculated on a lower of GAAP cost or appraised value basis foreach individual project category and as adjusted for increases and decreases inthese project appraisals would have resulted in an increase in borrowing baseavailability of approximately $1.5 million as of June 30, 2008 andapproximately $2.7 million as of August 31, 2008, respectively. Underthis amended and restated credit agreement, the Company has permitted lendersto conduct future appraisals on a fair market value basis on all projects witha GAAP cost of at least $4,000 to be phased in generally over the next threefiscal quarters ended June 30, 2009, but excluding the projects alreadyrecently appraised. The result of these appraisals is subject to numerousfactors, and accordingly no assurance can be given on the result of either therecent or future bank appraisals or the corresponding liquidity impact to theCompany.

 

Additionalcovenants were added to the facility, including requirements that the Companyand borrowers grant a mortgage on any real property not already included in theborrowing base and subject to the Revolving Credit Facility; that all realproperty sales must be accomplished through a title company, with the netproceeds of such a sale going directly to the Agent for application to theoutstanding balance under the Revolving Credit Facility; that any purchases ofreal estate must be done through a title company through advances under theRevolving Credit Facility and all such acquisitions must be subject tomortgages in favor of the lenders; and at the time of any such advance, theCompany will be required to provide an estimate of the portion of the borrowingthat will be used for construction needs and asset purchases with respect to anapplicable project.

 

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***Terms of the Revolving Credit Facility:***

 

Theborrowing limit under the Revolving Credit Facility is $440,000, except thatthe amount of the Revolving Credit Facility will be $425,000 through December 31,2008, and $415,000 from July 1, 2009 through December 20, 2009,unless otherwise permanently reduced as a result of certain requiredprepayments. The total amount of loans and advances outstanding at any timeunder the Revolving Credit Facility may not exceed the lesser of thethen-current borrowing base availability or the revolving sublimit as definedin the Revolving Credit Facility. The borrowing base availability is based onthe lesser of the appraised value or cost of real estate owned by us that hasbeen admitted to the borrowing base and is subject to various limitations andqualifications set forth in the Revolving Credit Agreement.

 

Borrowingsand advances under the Revolving Credit Facility bear interest on a per annumbasis equal to the LIBOR Market Index Rate plus 500 basis points beginning October 1,2008. Prior to October 1, 2008, the applicable spread had been 400 basispoints. During the term of the Revolving Credit Facility, interest is payablemonthly in arrears. At June 30, 2008, the interest rate was 6.4625%, whichincluded a 400 basis point spread. At September 30, 2008, the interestrate was 8.92625%, which included a 500 basis point spread.

 

Afee will be earned and payable on September 15, 2009 equal to 8.0% perannum, calculated on a daily basis, of the difference between $250,000 and theaggregate level of the lenders’ lending commitments under the Revolving CreditFacility as they exist from time to time between September 30, 2008 andthe earlier of September 15, 2009 and the date the commitments arepermanently reduced to $250,000; however this fee will be reduced by 80% if theaggregate level of commitments on or before September 15, 2009 have beenpermanently reduced to $250,000. Under this provision, we currently estimatethat the minimum we will be required to pay is $0 and the maximum is $9,150,and the Company expects that it will pay no amounts under this provision as itintends to refinance the debt before the payment is due and payable. There canbe no assurance that such refinancing will occur. In addition, if allindebtedness under the Revolving Credit Facility is not fully repaid by December 30,2009, a separate fee will be earned and payable on December 20, 2009 equalto 8.0% per annum of the amount by which the aggregate commitments under theRevolving Credit Facility that exist from time to time after September 15,2009 exceed $250,000, calculated on a daily basis.

 

Inaddition to any interest that may be payable with respect to amounts advancedby the lenders pursuant to a letter of credit, we will be required to pay tothe lender(s) issuing letters of credit an issuance fee of 0.125% of theamount of the letters of credit.

 

Underand subject to the terms of the Revolving Credit Facility, the borrowers mayborrow and re-borrow for the purpose of financing the acquisition anddevelopment of real estate, the construction of homes and improvements, forinvestment in joint ventures, for working capital and for such otherappropriate corporate purposes as may be approved by the lenders. Capitalizedterms used below and not otherwise defined have the meanings set forth in theAmended and Restated Credit Agreement.

 

Approximately35% of the Company’s collateral assets have been reappraised pursuant to theterms of the waiver letter and the Company and approximately one third of theassets in the borrowing base with a book value in excess of $4,000 that havenot yet been re-appraised will be appraised in each of the second, third andfourth quarters of fiscal year 2009. The re-appraisals that have been done todate have not had a material impact on the Company’s valuation of thecollateral assets, but there is no assurance that future re-appraisals will nothave an impact on our valuations and thereby potentially reduce our borrowingbase availability.

 

Variousconditions must be satisfied in order for real estate to be admitted to theborrowing base, including that a mortgage in favor of lenders has beendelivered to the agent for lenders and that all governmental approvalsnecessary to begin development of for-sale residential housing, other thanbuilding permits and certain other permits borrower in good faith believes willbe issued within 120 days, have been obtained. Depending on the stage ofdevelopment of the real estate, the loan to value or loan to cost advance ratein the borrowing base ranges from 50% to 95% of the appraised value or cost ofthe real estate. Based on these ranges, the Company is restricted as to thetype of land it can have in various stages of development as well as the dollarvalue of land under development.

 

Assecurity for all obligations of borrowers to lenders under the Revolving CreditFacility, lenders continue to have a first priority mortgage lien on all realestate owned by the Company or any borrower and included in the borrowing baseunder the Revolving Credit Facility. As further security, pursuant to theSecond Amended Credit Facility, the Company has also agreed to grant to thelenders a security interest in and assignment of all future tax refunds andproceeds thereof received or payable to the borrowers or the Company after theclosing of the Second Amended Credit Agreement, mortgages in favor of lenderswith respect to all real property owned by the borrowers or the Company that isnot already subject to a lien in favor of the lenders under the RevolvingCredit Facility and a security interest in inter-company debt. OrleansHomebuilders, Inc. has guaranteed the obligations of the borrowers tolenders pursuant to a Guaranty executed by Orleans Homebuilders, Inc. on January 26,2006, amended on September 6, 2007 and amended and restated on September 30,2008.

 

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Underthe Guaranty, Orleans Homebuilders, Inc. granted lenders a securityinterest in any balance or assets in any deposit or other account that OrleansHomebuilders, Inc. has with any lender. However, the Company and itssubsidiaries maintain a majority of the cash, cash equivalents and marketablesecurities available to them in accounts and as United States treasurysecurities in accounts outside of the lenders under the Revolving CreditFacility.

 

TheRevolving Credit Facility contains customary covenants that, subject to certainexceptions, limit or eliminate the ability of the Company to (among otherthings):

 

·                  Incur or assume other indebtedness, exceptcertain permitted indebtedness and possible second lien indebtedness ifappropriately approved;

·                  Grant or permit to exist any lien, exceptcertain permitted liens;

·                  Enter into any merger, consolidation or acquisitionof all or substantially all the assets of another entity;

·                  Sell, assign, lease or otherwise dispose ofall or substantially all of its assets;

·                  Enter into any transaction with an affiliatethat is not a borrower or a guarantor under the Revolving Credit Facility, or asubsidiary of either;

·                  Pay any dividends;

·                  Redeem any stock or subordinated debt; and

·                  Invest in joint ventures or other entitiesthat are not obligors under the Revolving Credit Facility.

 

Inaddition, under the Revolving Credit Facility, all real property sales must beaccomplished through a title company, with the net proceeds of such a salegoing directly to the agent bank for application to the outstanding balanceunder the Revolving Credit Facility. Any purchases of real estate must be donethrough a title company through advances under the Revolving Credit Facilityand all such acquisitions must be subject to mortgages in favor of the lenders;and, at the time of any such advance, the Company will be required to providean estimate of the portion of the borrowing that will be used for constructionneeds. However, the Company may make additional draws from time-to-timepursuant to the terms of the Revolving Credit Facility.

 

TheRevolving Credit Facility also contains various financial covenants. Amongother things, the financial covenants, as amended, require that:

 

·                  We must maintain a minimum consolidatedtangible net worth of at least $75,000 (1) reduced by the sum of (a) inventoryimpairments under GAAP on assets in the borrowing base taken by the Company andrecorded after March 31, 2008, plus (b) the amount of any interestexpense incurred less the amount of interest capitalized under Statement ofFinancial Accounting Standard No. 34 (“SFAS 34”), and recorded after March 31,2008, plus (c) any additional deferred tax asset valuation reservesrecorded after March 31, 2008 (provided that clauses (a) and (c) arelimited to an aggregate amount not to exceed $30,000), plus (d) anyimpairments or write-offs relating to tangible assets or pre-acquisition costsnot contained in the borrowing base recorded after March 31, 2008, and (2) increasedby the sum of (x) any favorable adjustment recorded after March 31,2008 to the deferred tax asset valuation allowance as reported in the Company’sthird quarter fiscal 2008 financials, plus (y) 50% of positive quarterlynet income after March 31, 2008 plus (z) 50% of any net securitiesproceeds received by the Company and the borrowers under the Revolving CreditFacility after March 31, 2008. However, in no event may the consolidatedtangible net worth, after taking into account the reductions and increasesabove, at any time be less than $35,000.

·                  We must maintain a required liquidity levelbased on cash plus borrowing base availability of at least $15,000 of cash andcash equivalents (including cash held at a title company) on a consolidatedbasis at all times.

·                  Our minimum cash flow from operations ratiobased on cash flow from operations to interest incurred covenant, must exceed1.25-to-1.00 for the quarters ending September 30, 2008 and December 31,2008; 0.40-to-1.00 for the quarter ending March 31, 2009; 1.00-to-1.00 forthe quarter ending June 30, 2009; and 1.25-to-1.00 for the quarter ending September 30,2009 and thereafter. Cash flow from operations is calculated based on the lasttwelve months cash flow from operations, adjusted for interest paid (excludingany amortized deferred financing costs related to all amendments to the AmendedCredit Agreement, this Second Amended Credit Agreement and the trust preferredsecurities and any future amendments to any of the foregoing), amounts from thedisposition of model homes that are subject to a sale-leaseback transaction tothe extent such amounts are not otherwise included in net cash provided byoperating activities, and interest income.

·                  Investments in new non-recourse jointventures whereby we will provide services to develop uncompleted assets arepermitted in an amount not to exceed $5,000. However, the Company may alsoinvest 50% of any net securities 

 

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proceeds raised by the Company after March 31, 2008 in jointventures that are non-recourse to the Company and may maintain currentinvestments in cost-sharing arrangements or partnerships already in existence.

·                  The maximum amount of cash or cashequivalents (excluding cash at title companies) we are allowed to maintain wasset at a maximum of $32,500 for any consecutive five-day period.

·                  The Company may purchase (a) up to$8,000 of real estate (whether purchase money or otherwise) in the normalcourse of business, consistent with projections provided to the lenders and (b) improvedland (i.e., finished lot takedowns and/or controlled rolling lot options)purchased by the borrowers in the normal course of business, consistent withthe projections provided to the Lenders.

 

Atthe fiscal quarters ended September 30, 2006, December 31, 2006, March 31,2007, June 30, 2007, March 31, 2008 and June 30, 2008, we wouldhave been in violation of certain financial covenants in the Amended andRestated Credit Agreement if not for the First Amendment, Second Amendment,Third Amendment, Fourth Amendment, waiver letter and the Second Amended CreditAgreement, respectively.

 

TheRevolving Credit Facility provides that, subject to any applicable notice andcure provisions, each of the following (among others) is an event of default:

 

·                  Failure by borrowers to pay when due anyamounts owing under the Revolving Credit Facility;

·                  Failure by the Company to observe or performany promise, covenant, warranty, obligation, representation or agreement underthe Revolving Credit Facility or any other loan document;

·                  Bankruptcy and other insolvency events withrespect to any borrower or the Company;

·                  Dissolution or reorganization of any borroweror the Company;

·                  The entry of a judgment or judgments againstborrower(s) or the Company: (i) in an aggregate amount that is atleast $500 in excess of available insurance proceeds, if such judgment orjudgments are not dismissed or bonded within 30 days; or (ii) thatprevents borrowers from conveying lots and units in the ordinary course ofbusiness if such judgment or judgments are not dismissed or bonded within30 days; or the issuance of any writs of attachment, execution orgarnishment against any borrower or the Company;

·                  Any material adverse change in the financialcondition of a borrower or the Company which causes the lenders, in good faith,to believe that the performance of any of the obligations under the RevolvingCredit Facility is impaired or doubtful for any reason; and

·                  Specified cross defaults.

 

Uponthe occurrence and continuation of an event of default, after completion of anyapplicable grace or cure period, lenders may demand immediate payment in fullof all indebtedness outstanding under the Revolving Credit Facility, terminatetheir obligations to make any loans or advances or issue any letter of credit,set off and apply any and all deposits held by any lender for the credit oraccount of any borrower. In addition, upon the occurrence of certain events ofbankruptcy or other insolvency events with respect to any borrower or theCompany, all indebtedness outstanding under the Revolving Credit Facility shallbe immediately due and payable without any act or action by lenders. A defaultunder our Revolving Credit Facility could also prevent us from making requiredpayments under our trust preferred securities, which would cause a defaultunder those securities.

 

Ifwe do not meet our forecast in our budgets, we could violate our debt covenantsand, absent a waiver or amendment from our lenders, we could be in defaultunder our Revolving Credit Facility and, as a result, our debt could become duewhich would have a material adverse effect on our financial position andresults of operations.

 

Asof September 30, 2008, the Company was in compliance with all of itsfinancial covenants under the Second Amended Credit Agreement.

 

***Trust Preferred Securities:***

 

OnNovember 23, 2005, the Company issued $75,000 of trust preferredsecurities which mature on January 30, 2036 and are callable, in whole orin part, at par plus accrued interest on or after January 30, 2011. Forthe first ten years, the securities have a fixed interest rate of 8.61% perannum, provided that certain covenant levels are maintained. Thereafter, thesecurities have a floating interest rate equal to three-month LIBOR plus 360basis points per annum, resetting quarterly. The securities are treated as debtobligations for financial statement purposes. The Company used proceeds fromthe sale of these securities to repay outstanding obligations under theRevolving Credit Facility discussed above.

 

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The trust’s preferred and common securities require quarterlydistributions of interest by the trust to the holders of the trust securitiesat a fixed interest rate equal to 8.61% per annum through January 30, 2016and, after January 30, 2016, at a variable interest rate (reset quarterly)equal to the three-month London Interbank Offered Rate (“LIBOR”) plus 360 basispoints.  Since the Company failed to meetboth the debt service ratio and minimum tangible net worth requirement setforth in the August 13, 2007 supplemental indenture as of the end of afiscal quarter for at least three of the last four consecutive fiscal quartersending on June 30, 2008, the applicable rate of interest was increased by300 basis points. We began accruing for this increased interest rate on July 31,2008, which was paid to holders for the first time with the coupon payable on October 31,2008. The interest rate will return to the regularly applicable rate once theCompany is in compliance with the debt service ratio and minimum tangible networth requirements as of the end of any fiscal quarter. The terms of the trustsecurities are governed by an Amended and Restated Trust Agreement, dated November 23,2005, among OHI Financing, Inc., (“OHI Financing”) as depositor, JPMorganChase Bank, National Association, as property trustee, Chase Bank USA, NationalAssociation, as the Delaware trustee, and the administrative trustees namedtherein.

 

Thetrust used the proceeds from the sale of the trust’s securities to purchase$77,320 in aggregate principal amount of unsecured junior subordinated notesdue January 30, 2036 issued by OHI Financing, which includes $2,300 ofinter-company issuances. The junior subordinated notes were issued pursuant toa Junior Subordinated Indenture, dated November 23, 2005, as amended by aSupplemental Indenture dated August 13, 2007, collectively referred toherein as the “Indenture,” among OHI Financing, as issuer, and JPMorgan ChaseBank, National Association, as trustee. The terms of the junior subordinatednotes are substantially the same as the terms of the trust’s preferredsecurities. The interest payments on the junior subordinated notes paid by OHIFinancing, Inc. will be used by the trust to pay the quarterlydistributions to the holders of the trust’s preferred and common securities.Pursuant to the parent guarantee agreement dated November 23, 2005 by andbetween the Company and JPMorgan Chase Bank, National Association, as trustee,the Company has unconditionally guaranteed OHI Financing, Inc.’s paymentand other obligations under the indenture and the junior subordinated notes.The Company used the proceeds from the issuance and sale of the trust preferredsecurities and the subsequent purchase of the junior subordinated notes topartially repay indebtedness.

 

TheIndenture permits OHI Financing to redeem the junior subordinated notes at par,plus accrued interest on or after January 30, 2011. If OHI Financingredeems any amount of the junior subordinated notes, the Trust Agreementrequires the trust to redeem a like amount of the trust securities. Undercertain circumstances relating to the tax treatment of the trust or theinterest payments made on the junior subordinated notes or the classificationof the trust as an “investment company” under the Investment Company Act of1940, as amended, OHI Financing may also redeem the junior subordinated notesprior to January 30, 2011 at a 7.5% premium.

 

Withcertain exceptions relating to debt to a trust, partnership or other entityaffiliated with the Company that is a financing vehicle for the Company, thejunior subordinated notes and the Company’s obligations under the parentguarantee are expressly subordinate to all of the Company’s existing and futuredebt unless it is provided in the instrument creating or evidencing such debt,or pursuant to which such debt is outstanding, that such debt is not superiorin right to payment of the junior subordinated notes or the obligations underthe parent company’s guarantee, as the case may be.

 

Underthe Indenture, OHI Financing will generally have to make eight consecutiveAdjusted Interest Rate coupon payments (other than the eight consecutiveAdjusted Interest Rate coupon payments that could be made on each of the couponpayment dates from October 30, 2008 to and including July 30, 2010)to cause an event of default under the Indenture (or in some cases sixconsecutive coupon payments). More specifically, the Indenture provides thatthe earliest an event of default could occur as a result of the payment of theAdjusted Interest Rate is (i) upon the payment of the Adjusted InterestRate coupon for October 30, 2010, if applicable, provided there have beeneight prior consecutive Adjusted Interest Rate coupons paid by OHI Financing; (ii) oneither the fiscal quarter ended March 31, 2010 or the fiscal year ended June 30,2010, if at either date both the trailing twelve months’ interest coverageratio is less than 1.25 to 1, and OHI Financing has made the six priorconsecutive Adjusted Interest Rate coupon payments; or (iii) on the fiscalquarter ended September 30, 2010, if at such time both the trailing twelvemonths’ interest coverage ratio is less than 1.75 to 1, and OHI Financing hasmade the eight prior consecutive Adjusted Interest Rate coupon payments. TheAdjusted Interest Rate must be paid for eight (or in some instances six)consecutive coupons in order to trigger an event of default. If the interestcoverage ratio test and the minimum consolidated tangible net worth test, areboth met, OHI Financing would make the payment of the Regular Interest Rate forthe next coupon, and the Adjusted Interest Rate test “resets” requiring OHIFinancing to make eight (or in some instances six) new consecutive couponpayments at the Adjusted Interest Rate before triggering an event of default.The interest coverage ratio and minimum consolidated tangible net worth measureare not traditional financial maintenance covenants; they are only utilized indetermining if the Adjusted Interest Rate or the Regular Interest Rate isapplicable.

 

Thejunior subordinated notes and the trust securities could become immediatelypayable upon an event of default. Under the terms of the Trust Agreement andthe Indenture, subject to any applicable cure period, an event of defaultgenerally occurs upon:

 

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·                  non-payment of any interest on the juniorsubordinated notes when it becomes due and payable, and continuance of thedefault for a period of 30 days;

·                  non-payment of the principal of, or anypremium on, the junior subordinated notes at their maturity;

·                  default in the performance, or breach, of anycovenant or warranty made by OHI Financing, Inc., in the indenture and thecontinuance of the default or breach for a period of 30 days after writtennotice to OHI Financing, Inc.;

·                  non-payment of any distribution on the trust’ssecurities when it becomes due and payable, and continuance of the default fora period of 30 days;

·                  non-payment of the redemption price of anytrust’s security when it becomes due and payable;

·                  default in the performance, or breach, in anymaterial respect of any covenant or warranty of any of the trustees in theTrust Agreement, which default or breach continues for a period of 30 daysafter written notice to the trustees and OHI Financing, Inc.;

·                  default in the performance, or breach (whichdefault or breach must be material in certain cases), of any covenant orwarranty made by OHI Financing, Inc. In the purchase agreement pursuant towhich the trust securities and the junior subordinated notes were sold andpurchased and the continuation of such default or breach for a period of30 days after written notice to OHI Financing, Inc.;

·                  bankruptcy, insolvency or liquidation of theproperty trustee, if a successor property trustee has not been appointed within90 days thereafter;

·                  the bankruptcy or insolvency of OHI Financing, Inc.;or

·                  certain dissolutions or liquidations, orterminations of the business or existence, of the trust.

 

 Pursuantto the August 13, 2008 Supplemental Indenture, OHI Financing established a$5,000 reserve fund in September 2007 for the benefit of the holders ofthe trust preferred securities by posting a letter of credit with the trustee.If the adjusted interest rate is in effect for the four consecutive couponpayments ending July 30, 2009, this reserve fund must be increased by$2,500. Under certain events of default, this reserve fund may be drawn by thetrustee and used in respect of the trust preferred obligations. The reservefund may be released upon the earlier of compliance with the applicableinterest coverage ratio resulting in OHI Financing paying interest at theregular interest rate rather than the adjusted interest rate, or redemption ordefeasance of the notes in accordance with the terms of the Indenture.

 

 OnSeptember 20, 2005, the Company issued $30,000 of trust preferredsecurities which mature on September 30, 2035 and are callable, in wholeor in part, at par plus accrued interest on or after September 30, 2010.For the first ten years, the securities have a fixed interest rate of 8.52% perannum. Thereafter, the securities have a floating interest rate equal tothree-month LIBOR plus 380 basis points per annum, resetting quarterly. Thesecurities are treated as debt obligations for financial statement purposes.The Company used proceeds from the sale of these securities to fund landpurchases and residential construction. The obligations relating to the trustpreferred securities are subordinated to the Revolving Credit Facility.

 

***Cash Flow Statement***

 

Netcash used by operating activities for the three months ended September 30,2008 was $14,061, compared to $12,806 for the three months ended September 30,2007.  The increase was primarily due toa larger loss in the current fiscal year prior to taking into account non-cashcharges.

 

Netcash used in investing activities for the three months ended September 30,2008 was $15,742.  This was related tonet purchases of short-term marketable securities – primarily treasury billsand treasury notes - during the first quarter of fiscal year 2009.  There was no cash provided by or used ininvesting activities during the comparable period of the previous fiscal year.

 

Netcash used in financing activities for the three months ended September 30,2008 was $15,206, compared to net cash provided by financing activities of$21,549 for the three months ended September 30, 2007.  Cash used in financing activities primarilyrelates to net paydowns on our credit facility during the three months ended September 30,2008.  The cash provided by financingactivities for the three months ended September 30, 2007 was primarily dueto net borrowings on our credit facility.

 

**Lot Positions**

 

Asof September 30, 2008, we owned or controlled approximately 7,004 buildinglots.  Included in the aforementionedlots, we had contracted to purchase, or has under option, undeveloped land andimproved building lots for an aggregate purchase price of approximately$115,406 that are expected to yield approximately 1,775 building lots.  The table below shows our lots by region:

 

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| **Region** | ** ** | **Lots  owned** | ** ** | **Percent  of lots  owned** | ** ** | **Lots under  options of  agreement  of sale** | ** ** | **Percent  of lots  controlled** | ** ** | **Total lots  owned or  controlled** | ** ** | **Percent  of total** | ** ** |
|------------|------------|-----------------|------------|----------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------------------|------------|----------------------------|------------|
| Northern   |       | 2,718           |       | 52.0                             | %          | 1,002                                                         |       | 56.5                                  | %          | 3,720                                          |       | 53.1                       | %          |
| Southern   |       | 1,916           |       | 36.7                             | %          | 512                                                           |       | 28.8                                  | %          | 2,428                                          |       | 34.7                       | %          |
| Midwestern |       | 347             |       | 6.6                              | %          | 231                                                           |       | 13.0                                  | %          | 578                                            |       | 8.2                        | %          |
| Florida    |       | 248             |       | 4.7                              | %          | 30                                                            |       | 1.7                                   | %          | 278                                            |       | 4.0                        | %          |
| Total      |       | 5,229           |       | 100.0                            | %          | 1,775                                                         |       | 100.0                                 | %          | 7,004                                          |       | 100.0                      | %          |

 

As noted above in our discussion of our Revolving Credit Facility, theterms in the Second Amended Credit Agreement allow us to purchase only (a) upto $8,000 of real estate in the normal course of business, consistent withprojections provided to our lenders and (b) improved land (i.e. finishedlost takedowns and/or controlled rolling lot options) purchased in the normalcourse of business consistent with the projections provided to our lenders.

 

***Undeveloped LandAcquisitions***

 

Inrecent years, the process of acquiring desirable undeveloped land has beenextremely competitive, particularly in the northern region, mostly due to thelack of available parcels suitable for development.  In addition, expansion of regulation in thehousing industry has increased the time it takes to acquire undeveloped landwith all of the necessary governmental approvals required to beginconstruction.  Generally, we structureour land acquisitions so that we have the right to cancel our agreements topurchase undeveloped land by forfeiture of our deposit under theagreement.  Included in the balance sheetcaptions “Inventory not owned — Variable Interest Entities” and “Land depositsand costs of future development,” at September 30, 2008 we had $9,340invested in 10 parcels of undeveloped land, of which $3,571 is cash deposits, aportion of which is non-refundable.  At September 30,2008, overall undeveloped parcels of land under contract had an aggregatepurchase price of approximately $57,404 and were expected to yieldapproximately 1,072 building lots.

 

Weattempt to further mitigate the risks involved in acquiring undeveloped land bystructuring our undeveloped land acquisitions so that the deposits requiredunder the agreements coincide with certain benchmarks in the governmentalapproval process, thereby limiting the amount at risk.  This process allows us to periodically reviewthe approval process and make a decision on the viability of developing theparcel to be acquired based upon expected profitability.  In some circumstances we may be required tomake deposits solely due to the passage of time.  This structure still provides us anopportunity to periodically review the viability of developing the parcel ofland.  In addition, we primarilystructure our agreements to purchase undeveloped land to be contingent uponobtaining all governmental approvals necessary for construction.  Under most agreements, we secure theresponsibility for obtaining the required governmental approvals as we believethat we have significant expertise in this area.  We intend to complete the acquisition ofundeveloped land only after all governmental approvals are in place.  In certain rare circumstances, however, whenall extensions have been exhausted, we must make a decision on whether toproceed with the purchase even though all governmental approvals have not yetbeen received.  In these circumstances,we perform reasonable due diligence to ascertain the likelihood that thenecessary governmental approvals will be granted.

 

***Improved Lot Acquisitions:***

 

Theprocess of acquiring improved building lots from developers is extremelycompetitive.  We compete with manynational homebuilders to acquire improved building lots, some of which havegreater financial resources than us.  Theacquisition of improved lots is usually less risky than the acquisition ofundeveloped land as the contingencies and risks involved in the landdevelopment process are borne by the developer rather than us.  In addition, governmental approvals aregenerally in place when the improved building lots are acquired.

 

AtSeptember 30, 2008, we had contracted to purchase or had under optionapproximately 703 improved building lots, which include lots that were sold,but for accounting purposes are treated as a financing obligation because theyare subject to an option agreement, for an aggregate purchase price ofapproximately $58,002.  At September 30,2008, we had $799 invested, of which are $775 is cash deposits, invested inthese improved building lots.

 

Weexpect to utilize primarily the Revolving Credit Facility as described above aswell as other existing capital resources, to finance the acquisitions ofundeveloped land and improved lots described above. We anticipate completing amajority of these acquisitions during the next several years.

 

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**Recent Accounting Pronouncements**

 

In December 2007, the Financial Accounting Standard Board (“FASB”)issued Statement of Financial Accounting Standard (“SFAS”) No. 160, “NoncontrollingInterests in Consolidated Financial Statements—an amendment of ARB No. 51”(“SFAS No. 160”). SFAS No. 160 requires that anoncontrolling interest in a subsidiary be reported as equity and the amount ofconsolidated net income specifically attributable to the noncontrollinginterest be identified in the consolidated financial statements.  It also calls for consistency in the mannerof reporting changes in the parent’s ownership interest and requires fair valuemeasurement of any noncontrolling equity investment retained in adeconsolidation.  SFAS No. 160is effective for fiscal year ending June 30, 2010.  The Company is evaluating the impact theadoption of SFAS 160 will have on its consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141 (revised2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) broadensthe guidance of SFAS No. 141, extending its applicability to alltransactions and other events in which one entity obtains control over one ormore other businesses.  It broadens thefair value measurement and recognition of assets acquired, liabilities assumed,and interests transferred as a result of business combinations.  SFAS No. 141(R) expands onrequired disclosures to improve the statement users’ abilities to evaluate thenature and financial effects of business combinations.  SFAS No. 141(R) is effectivefor fiscal year ending June 30, 2010. The Company is evaluating the impactthe adoption of SFAS No. 141(R) will have on its consolidatedfinancial statements.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities, an amendment ofFASB Statement No. 133.”  Thisstatement requires enhanced disclosures about an entity’s derivative andhedging activities and thereby improves the transparency of financialreporting.  The Statement is effectivefor financial statements for fiscal years and interim periods beginning after November 15,2008 and is not expected to have an impact on the Company’s financialstatements.

 

In June 2008, the FASB issued FASB Staff Position (“FSP”) EmergingIssues Task Force 03-6-1, “Determining Whether Instruments Granted inShare-Based Payment Transactions Are Participating Securities.” Under the FSP,unvested share-based payment awards that contain non-forfeitable rights todividends or dividend equivalents are participating securities and, therefore,are included in computing earnings per share pursuant to the two-classmethod.  The two-class method determinesearnings per share for each class of common stock and participating securitiesaccording to dividends or dividend equivalents and their respectiveparticipation rights in undistributed earnings. The Company’s outstanding restricted stock awards will be consideredparticipating securities under this FSP. The FSP is effective for the Company’sfiscal year beginning July 1, 2009 and requires retrospectiveapplication.  The Company does not expectthe adoption of the FSP to have a material impact on its reported earnings pershare.

 

CautionaryStatement for Purposes of the “Safe Harbor” Provisions of the PrivateSecurities Litigation Reform Act of 1995

 

Inaddition to historical information, this report contains statements relating tofuture events or our future results. These statements are forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), and are subject to the Safe Harbor provisions created by statute.  Generally words such as “may”, “will”, “should”,“could”, “would”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”and “believe” or the negative of or other variation on these and other similarexpressions identify forward-looking statements.  These forward-looking statements including,without limitation, statements with respect to the downturn in the homebuildingindustry; changes in consumer confidence and cancellation rates; the Company’ssignificant level of debt and anticipated defaults under our credit agreement;the Company’s intention to refinance its bank debt, anticipated realization ofdeferred tax assets; anticipated reappraisals of assets in our borrowing base;the substantial elimination of the possibility of certain defaults under theCompany’s $75,000 issue of trust preferred securities until at least September 2010;anticipated tax refunds; potential effects of changes in financial andcommodity market prices and interest rates; potential liabilities relating tolitigation currently pending against us; anticipated delivery of homes inbacklog; fluctuations in market conditions; appropriateness of completed homeinventory levels; the overall direction of the housing market; expectedwarranty costs; future land acquisitions; and the availability of sufficientcapital for us to meet our operating needs are made only as of the date of thisreport.  We do not undertake to update orrevise the forward-looking statements, whether as a result of new information,future events or otherwise.  Foradditional information on some potential risks, see the Company’s Annual Reporton Form 10-K/A for the fiscal year ended June 30, 2008.

 

Forward-lookingstatements are based on current expectations and involve risks anduncertainties and our future results could differ significantly from thoseexpressed or implied by our forward-looking statements.

 

Manyfactors could cause our actual consolidated results to differ materially fromthose expressed in any of our forward-looking statements.

 

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**ITEM 3.**                             **QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Marketrisk represents the risk of loss that may impact the financial position,results of operations or cash flows of the Company, due to adverse changes infinancial and commodity market prices and interest rates.  The Company’s principal market risk exposurecontinues to be interest rate risk.  Amajority of the Company’s debt is variable based on LIBOR, and, therefore,affected by changes in market interest rates. Based on current operations, an increase or decrease in interest ratesof 100 basis points will result in a corresponding increase or decreaseinterest charges incurred by the Company of approximately $3,800 in a fiscalyear, a portion of which may be capitalized and included in cost of sales ashomes are delivered.

 

Changesin the prices of commodities that are a significant component of homeconstruction costs, particularly lumber, may result in unexpected short termincreases in construction costs.  Sincethe sale price of the Company’s homes is fixed at the time the buyer entersinto a contract to acquire a home and because the Company generally contractsto sell its homes before construction begins, any increase in costs in excessof those anticipated may result in gross margins lower than anticipated for thehomes in the Company’s backlog.  TheCompany attempts to mitigate the market risks of price fluctuation ofcommodities by entering into fixed-price contracts with its subcontractors andmaterial suppliers for a specified period of time, generally commensurate withthe building cycle.

 

Therehave been no material adverse changes to the Company’s (i) exposure tomarket risk and (ii) management of these risks, since June 30, 2008.

 

**ITEM 4.**                             **CONTROLS AND PROCEDURES**

 

TheCompany’s management, with the participation of the Company’s Chief ExecutiveOfficer, President and Chief Operating Officer, Executive Vice President andChief Financial Officer and Vice President and Corporate Controller evaluatedthe effectiveness of the Company’s disclosure controls and procedures as of theend of the period covered by this report. Based upon that evaluation, the Chief Executive Officer, President andChief Operating Officer, Executive Vice President and Chief Financial Officerand Vice President and Corporate Controller concluded that the Company’sdisclosure controls and procedures are functioning effectively to providereasonable assurance that information required to be disclosed by the Companyin reports filed under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in theSecurity and Exchange Commission’s rules and forms and also to ensureinformation required to be disclosed is accumulated and communicated tomanagement including the Chief Executive Officer, President and Chief OperatingOfficer, Executive Vice President and Chief Financial Officer and VicePresident and Corporate Controller as appropriate to allow timely decisionsregarding required disclosure.

 

Therehas been no change in the Company’s internal control over financial reportingduring the Company’s most recent fiscal quarter that has materially affected,or is reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**PART II. OTHERINFORMATION**

 

**ITEM1A.**                    **RISK FACTORS**

 

Therehas been no material changes in our risk factors during the three months ended September 30,2008.  For additional informationregarding risk factors, see our Annual Report on Form 10-K for the yearended June 30, 2008.

 

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**ITEM 6.**                             **EXHIBITS**

 
| 10.1 |   | Extension of the Waiver Letter, dated as of September 15, 2008,  by and among Greenwood Financial, Inc. and certain affiliates, Orleans  Homebuilders, Inc., Wachovia Bank, National Association and various  other lenders party thereto (incorporated by reference to Exhibit 10.1  to the Company’s Form 8-K filed with the Securities and Exchange  Commission on September 17, 2008).                                                                                                                                                                                                                                                                                                                            |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2 |   | Second Amended and Restated Revolving Credit Loan Agreement among  Greenwood Financial, Inc. and certain affiliates as borrowers, Orleans  Homebuilders, Inc., as Guarantor, Wachovia Bank, National Association,  as Administrative Agent, Wachovia Capital Markets, LLC, as Lead  Arranger, Bank of America, N.A., as Syndication Agent, Sovereign Bank, as  Documentation Agent, Manufacturers and Traders Trust Company, as Documentation  Agent and Wachovia Bank, National Association and certain other Lenders dated  as of September 30, 2008 (incorporated by reference to  Exhibit 10.18(i) to the Company’s Form 10-K/A filed with the  Securities and Exchange Commission on October 3, 2008). |
| 10.3 |   | Amended and Restated Guaranty by Orleans Homebuilders, Inc.  dated September 30, 2008 (incorporated by reference to  Exhibit 10.19(c) to the Company’s Form 10-K/A filed with the  Securities and Exchange Commission on October 3, 2008).                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.4 |   | Security Agreement among Orleans Homebuilders, Inc., certain  subsidiaries of Orleans Homebuilders, Inc. and Wachovia Bank, National  Association, dated September 30, 2008 (incorporated by reference to  Exhibit 10.35 to the Company’s Form 10-K/A filed with the  Securities and Exchange Commission on October 3, 2008).                                                                                                                                                                                                                                                                                                                                                                                         |
| 31.1 |   | Certification of Jeffrey P. Orleans pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 31.2 |   | Certification of Michael T. Vesey pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 31.3 |   | Certification of Garry P. Herdler pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 32.1 |   | Certification of Jeffrey P. Orleans pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 32.2 |   | Certification of Michael T. Vesey pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 32.3 |   | Certification of Garry P. Herdler pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

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SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                   | ORLEANS HOMEBUILDERS, INC.            |
|------------------------|---------------------------------------|
|                   | (Registrant)                          |
|                   |                                  |
| November 14, 2008 | Jeffrey P. Orleans                    |
|                   | Jeffrey P. Orleans                    |
|                   | Chairman of the Board and Chief       |
|                   | Executive Officer                     |
|                   | (Principal Executive Officer)         |
|                   |                                  |
| November 14, 2008 | Michael T. Vesey                      |
|                   | Michael T. Vesey                      |
|                   | President and Chief Operating Officer |
|                   |                                  |
| November 14, 2008 | Garry P. Herdler                      |
|                   | Garry P. Herdler                      |
|                   | Executive Vice President and          |
|                   | Chief Financial Officer               |
|                   | (Principal Financial Officer)         |
|                   |                                  |
| November 14, 2008 | Mark D. Weaver                        |
|                   | Mark D. Weaver                        |
|                   | Vice President and                    |
|                   | Corporate Controller                  |
|                   | (Principal Accounting Officer)        |

 

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**EXHIBIT INDEX**

 
| 31.1 |   | Certification of Jeffrey P. Orleans pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.    |
|------|--------|---------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of Michael T. Vesey pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. |
| 31.3 |   | Certification of Garry P. Herdler pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.      |
| 32.1 |   | Certification of Jeffrey P. Orleans pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.    |
| 32.2 |   | Certification of Michael T. Vesey pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |
| 32.3 |   | Certification of Garry P. Herdler pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.      |

 

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