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 March 31, 2009** |
| ** **                                             |
| **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)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of regulation S-T (§ 229.405) during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files).Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct). Yes o No x

 

Number of shares of common stock, par value$0.10 per share, outstanding as ofMay 15, 2009:   19,089,141

(excluding 98,990 shares held in Treasury).

 

 

 

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

# ** **

| ** **                                   | ** **                                                                                                                                  | **PAGE** |
|----------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **PART 1 — FINANCIAL INFORMATION** |
|                                         |                                                                                                                                        |     |
| Item 1.                                      | Financial  Statements (unaudited)                                                                                                           |     |
|                                         |                                                                                                                                        |     |
|                                         | Condensed Consolidated  Balance Sheets at March 31, 2009 and June 30, 2008                                                        | 1        |
|                                         |                                                                                                                                        |     |
|                                         | Condensed  Consolidated Statements of Operations for the Three and Nine Months Ended  March 31, 2009 and 2008                          | 2        |
|                                         |                                                                                                                                        |     |
|                                         | Condensed Consolidated Statements of Shareholders’  Equity and Total Comprehensive Loss for the Nine Months Ended March 31,  2009 | 3        |
|                                         |                                                                                                                                        |     |
|                                         | Condensed Consolidated Statements of Cash Flows for  the Nine Months Ended March 31, 2009 and 2008                                     | 4        |
|                                         |                                                                                                                                        |     |
|                                         | Notes to Condensed Consolidated Financial Statements                                                                                        | 5        |
|                                         |                                                                                                                                        |     |
| Item 2.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                 | 25       |
|                                         |                                                                                                                                        |     |
| Item 3.                                      | Quantitative  and Qualitative Disclosures About Market Risk                                                                                 | 50       |
|                                         |                                                                                                                                        |     |
| Item 4T.                                     | Controls and  Procedures                                                                                                                    | 50       |
|                                         |                                                                                                                                        |     |
| **PART II  — OTHER INFORMATION**   |
|                                         |                                                                                                                                        |     |
| Item 1A.                                     | Risk Factors                                                                                                                                | 51       |
|                                         |                                                                                                                                        |     |
| **Item 6.**                                  | **Exhibits**                                                                                                                                | **52**   |

 

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**Orleans Homebuilders, Inc. andSubsidiaries**

**CondensedConsolidated Balance Sheets**

**(Unaudited)**

**(dollars in thousands, except pershare amounts)**

 
| ** **                                                                                                                                                   | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                                                                   | ** ** | **2009**           | ** ** | **2008**          | ** ** |
| Assets                                                                                                                                                       |       |               |       |              |       |
| Cash and cash equivalents                                                                                                                                    |       | $                  | 13,260     |              | $          | 72,341 |   |
| Restricted cash - due from title company                                                                                                                     |       | 4,764              |       | 19,269            |       |
| Restricted cash - customer deposits                                                                                                                          |       | 6,350              |       | 8,264             |       |
| Marketable securities                                                                                                                                        |       | 497                |       | —            |       |
| Real estate held for development and sale:                                                                                                                   |       |               |       |              |       |
| Residential properties completed or under construction                                                                                                       |       | 177,057            |       | 193,257           |       |
| Land held for development or sale and improvements                                                                                                           |       | 335,386            |       | 359,555           |       |
| Inventory not owned - variable interest entities                                                                                                             |       | 10,666             |       | 13,050            |       |
| Inventory not owned - other financial interests                                                                                                              |       | 12,287             |       | 12,171            |       |
| Property and equipment, at cost, less accumulated depreciation                                                                                               |       | 762                |       | 1,491             |       |
| Goodwill                                                                                                                                                     |       | —             |       | 4,180             |       |
| Receivables, deferred charges and other assets                                                                                                               |       | 20,183             |       | 22,154            |       |
| Land deposits and costs of future development                                                                                                                |       | 10,251             |       | 10,380            |       |
| Total Assets                                                                                                                                                 |       | $                  | 591,463    |              | $          | 716,112 |   |
|                                                                                                                                                         |       |               |       |              |       |
| Liabilities and Shareholders’ Equity                                                                                                                    |       |               |       |              |       |
| Liabilities:                                                                                                                                                 |       |               |       |              |       |
| Accounts payable                                                                                                                                             |       | $                  | 31,176     |              | $          | 44,916 |   |
| Accrued expenses                                                                                                                                             |       | 37,664             |       | 51,768            |       |
| Deferred revenue                                                                                                                                             |       | 200                |       | 274               |       |
| Customer deposits                                                                                                                                            |       | 8,600              |       | 11,856            |       |
| Obligations related to inventory not owned - variable interest  entities                                                                                     |       | 10,234             |       | 10,875            |       |
| Obligations related to inventory not owned - other financial  interests                                                                                      |       | 12,187             |       | 12,071            |       |
| Mortgage and other note obligations                                                                                                                          |       | 355,066            |       | 396,133           |       |
| Subordinated notes                                                                                                                                           |       | 105,000            |       | 105,000           |       |
| Other notes payable                                                                                                                                          |       | —             |       | 718               |       |
| Total Liabilities                                                                                                                                            |       | 560,127            |       | 633,611           |       |
|                                                                                                                                                         |       |               |       |              |       |
| Commitments and contingencies (See note 14)                                                                                                                  |       |               |       |              |       |
|                                                                                                                                                         |       |               |       |              |       |
| Shareholders’ Equity:                                                                                                                                   |       |               |       |              |       |
| Common stock, $0.10 par, 23,000,000 shares authorized, 19,188,131 and  18,938,131 shares issued at March 31, 2009 and June 30, 2008,  respectively |       | 1,919              |       | 1,894             |       |
| Capital in excess of par value - common stock                                                                                                                |       | 76,545             |       | 75,204            |       |
| Accumulated other comprehensive loss                                                                                                                         |       | (821               | )          | (816              | )          |
| (Accumulated deficit) retained earnings                                                                                                                      |       | (45,053            | )          | 7,473             |       |
| Treasury stock, at cost (98,990 shares held at March 31, 2009  and June 30, 2008)                                                                  |       | (1,254             | )          | (1,254            | )          |
| Total Shareholders’ Equity                                                                                                                              |       | 31,336             |       | 82,501            |       |
|                                                                                                                                                         |       |               |       |              |       |
| Total Liabilities and Shareholders’ Equity                                                                                                              |       | $                  | 591,463    |              | $          | 716,112 |   |

 

See accompanying noteswhich are an integral part of the consolidated financial statements.

 

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**OrleansHomebuilders, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Operations**

**(Unaudited)**

**(inthousands, except per share amounts)**

 
| ** **                                          | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **March 31,**          | ** ** | **March 31,**         | ** ** |
| ** **                                          | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Earned revenue                                      |       |                   |       |                  |       |   |   |   |   |
| Residential properties                              |       | $                      | 64,347     |                  | $          | 109,018 |   | $ | 240,702 |   | $ | 372,865 |   |
| Land sales                                          |       | —                 |       | 1,912                 |       | 58 |   | 11,322 |   |
| Other income                                        |       | 2,347                  |       | 2,364                 |       | 6,483 |   | 6,926 |   |
|                                                |       | 66,694                 |       | 113,294               |       | 247,243 |   | 391,113 |   |
| Costs and expenses                                  |       |                   |       |                  |       |   |   |   |   |
| Residential properties                              |       | 62,558                 |       | 110,908               |       | 237,513 |   | 361,286 |   |
| Land sales                                          |       | —                 |       | 1,635                 |       | 26 |   | 47,677 |   |
| Other                                               |       | 1,551                  |       | 1,566                 |       | 5,191 |   | 5,001 |   |
| Selling, general and administrative                 |       | 11,479                 |       | 19,309                |       | 44,178 |   | 62,172 |   |
| Impairment of goodwill                              |       | —                 |       | —                |       | 4,180 |   | — |   |
| Interest:                                           |       |                   |       |                  |       |   |   |   |   |
| Incurred                                            |       | 9,942                  |       | 9,724                 |       | 31,948 |   | 35,428 |   |
| Less capitalized                                    |       | (7,987                 | )          | (9,724                | )          | (27,110 | ) | (35,428 | ) |
|                                                |       | 77,543                 |       | 133,418               |       | 295,926 |   | 476,136 |   |
|                                                |       |                   |       |                  |       |   |   |   |   |
| Loss from continuing operations before income taxes |       | (10,849                | )          | (20,124               | )          | (48,683 | ) | (85,023 | ) |
| Income tax expense                                  |       | 4,120                  |       | 26,987                |       | 3,843 |   | 2,458 |   |
|                                                |       |                   |       |                  |       |   |   |   |   |
| Loss from continuing operations                     |       | (14,969                | )          | (47,111               | )          | (52,526 | ) | (87,481 | ) |
|                                                |       |                   |       |                  |       |   |   |   |   |
| Discontinued operations:                            |       |                   |       |                  |       |   |   |   |   |
| Loss from discontinued operations, net of taxes     |       | —                 |       | (8,634                | )          | — |   | (21,704 | ) |
|                                                |       |                   |       |                  |       |   |   |   |   |
| Net loss                                            |       | $                      | (14,969    | )                     | $          | (55,745 | ) | $ | (52,526 | ) | $ | (109,185 | ) |
|                                                |       |                   |       |                  |       |   |   |   |   |
| Basic loss per share                                |       |                   |       |                  |       |   |   |   |   |
| Continuing operations                               |       | $                      | (0.81      | )                     | $          | (2.54 | ) | $ | (2.84 | ) | $ | (4.73 | ) |
| Discontinued operations                             |       | $                      | —     |                  | $          | (0.47 | ) | $ | — |   | $ | (1.17 | ) |
| Loss per share                                      |       | $                      | (0.81      | )                     | $          | (3.01 | ) | $ | (2.84 | ) | $ | (5.90 | ) |
|                                                |       |                   |       |                  |       |   |   |   |   |
| Diluted loss per share                              |       |                   |       |                  |       |   |   |   |   |
| Continuing operations                               |       | $                      | (0.81      | )                     | $          | (2.54 | ) | $ | (2.84 | ) | $ | (4.73 | ) |
| Discontinued operations                             |       | $                      | —     |                  | $          | (0.47 | ) | $ | — |   | $ | (1.17 | ) |
| Loss per share                                      |       | $                      | (0.81      | )                     | $          | (3.01 | ) | $ | (2.84 | ) | $ | (5.90 | ) |
|                                                |       |                   |       |                  |       |   |   |   |   |
| Dividends declared per share                        |       | $                      | —     |                  | $          | 0.02 |   | $ | — |   | $ | 0.06 |   |
|                                                |       |                   |       |                  |       |   |   |   |   |
| Basic weighted average shares outstanding           |       | 18,555                 |       | 18,520                |       | 18,525 |   | 18,508 |   |
|                                                |       |                   |       |                  |       |   |   |   |   |
| Diluted weighted average shares outstanding         |       | 18,555                 |       | 18,520                |       | 18,525 |   | 18,508 |   |

 

See accompanying notes which are an integral part ofthe consolidated financial statements.

 

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**Orleans Homebuilders, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Changes inShareholders’ Equity**

**And Total Comprehensive Loss**

**(Unaudited)**

**(dollars in thousands)**

** **
| ** **                                  | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **March 31, 2009**    | ** ** |
| ** **                                  | ** ** | **Shares**            | ** ** | **Amount** | ** ** |
| **Common Stock**                            |       |                  |       |   |   |
| Beginning balance                           |       | 18,938,131            |       | $ | 1,894 |   |
| Restricted stock award                      |       | 250,000               |       | 25 |   |
| Ending balance                              |       | 19,188,131            |       | $ | 1,919 |   |
|                                        |       |                  |       |   |   |
| **Additional Paid in Capital**              |       |                  |       |   |   |
| Beginning balance                           |       |                  |       | $ | 75,204 |   |
| Fair market value of stock options issued   |       |                  |       | 996 |   |
| Shares awarded under Stock award plan       |       |                  |       | 370 |   |
| Restricted stock award                      |       |                  |       | (25 | ) |
| Ending balance                              |       |                  |       | $ | 76,545 |   |
|                                        |       |                  |       |   |   |
| **(Accumulated Deficit) Retained Earnings** |       |                  |       |   |   |
| Beginning balance                           |       |                  |       | $ | 7,473 |   |
| Net loss                                    |       |                  |       | (52,526 | ) |
| Ending balance                              |       |                  |       | $ | (45,053 | ) |
|                                        |       |                  |       |   |   |
| **Accumulated Other Comprehensive Loss**    |       |                  |       |   |   |
| Beginning balance                           |       |                  |       | $ | (816 | ) |
| Net unrealized loss on investments          |       |                  |       | (5 | ) |
| Ending balance                              |       |                  |       | $ | (821 | ) |
|                                        |       |                  |       |   |   |
| **Treasury Stock**                          |       |                  |       |   |   |
| Beginning and ending balance                |       | 98,990                |       | $ | (1,254 | ) |
|                                        |       |                  |       |   |   |
| **Total Comprehensive Loss**                |       |                  |       |   |   |
| Net loss                                    |       |                  |       | $ | (52,526 | ) |
| Unrealized loss on investments              |       |                  |       | (5 | ) |
| **Total Comprehensive Loss**                |       |                  |       | $ | (52,531 | ) |

 

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

 

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**Orleans Homebuilders, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

**(dollars in thousands)**

 
| ** **                                                                                 | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                 | ** ** | **March 31,**    | ** ** |
| ** **                                                                                 | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                                                                       |       |                  |       |   |   |
| Cash flows from operating activities:                                                      |       |                  |       |   |   |
| Net loss                                                                                   |       | $                     | (52,526    | ) | $ | (109,185 | ) |
| Adjustments to reconcile net loss to net cash (used in) provided by  operating activities: |       |                  |       |   |   |
| Depreciation and amortization                                                              |       | 5,022                 |       | 3,465 |   |
| Gain on sale of fixed assets                                                               |       | (916                  | )          | (173 | ) |
| Gain on sale of marketable securities                                                      |       | (30                   | )          | — |   |
| Write-off of real estate held for development and sale                                     |       | 21,097                |       | 96,158 |   |
| Write-off of land deposits and costs of future development                                 |       | 1,880                 |       | 931 |   |
| Write-off of goodwill                                                                      |       | 4,180                 |       | — |   |
| Deferred taxes                                                                             |       | —                |       | 23,480 |   |
| Stock based compensation expense                                                           |       | 1,414                 |       | 1,739 |   |
| Changes in operating assets and liabilities:                                               |       |                  |       | — |   |
| Restricted cash - due from title company                                                   |       | 14,505                |       | 16,227 |   |
| Restricted cash - customer deposits                                                        |       | 1,914                 |       | 1,155 |   |
| Real estate held for development and sale                                                  |       | 19,630                |       | (1,698 | ) |
| Receivables, deferred charges and other assets                                             |       | 922                   |       | 1,869 |   |
| Land deposits and costs of future developments                                             |       | 532                   |       | (11,198 | ) |
| Accounts payable and other liabilities                                                     |       | (27,962               | )          | 40,961 |   |
| Customer deposits                                                                          |       | (3,256                | )          | (51 | ) |
| Net cash (used in) provided by operating activities                                        |       | (13,594               | )          | 63,680 |   |
|                                                                                       |       |                  |       |   |   |
| Cash flows from investing activities:                                                      |       |                  |       |   |   |
| Purchases of marketable securities                                                         |       | (34,021               | )          | — |   |
| Sales and maturities of marketable securities                                              |       | 33,549                |       | — |   |
| Purchases of property and equipment                                                        |       | (5                    | )          | (372 | ) |
| Proceeds from sale of fixed assets                                                         |       | 1,013                 |       | 537 |   |
| Proceeds from disposition of business                                                      |       | —                |       | 11,300 |   |
| Net cash provided by investing activities                                                  |       | 536                   |       | 11,465 |   |
|                                                                                       |       |                  |       |   |   |
| Cash flows from financing activities:                                                      |       |                  |       |   |   |
| Borrowings from loans collateralized by real estate assets                                 |       | 123,141               |       | 57,000 |   |
| Repayment of loans collateralized by real estate assets                                    |       | (165,603              | )          | (120,000 | ) |
| Repayment of other note obligations                                                        |       | (718                  | )          | (53 | ) |
| Financing costs of long-term debt                                                          |       | (2,303                | )          | (4,524 | ) |
| Liability associated with other financial interests                                        |       | —                |       | 12,565 |   |
| Payments on liabilities associated with other financial interests                          |       | (540                  | )          | — |   |
| Proceeds from stock options exercised                                                      |       | —                |       | 58 |   |
| Common stock cash dividends paid                                                           |       | —                |       | (1,115 | ) |
| Net cash used in financing activities                                                      |       | (46,023               | )          | (56,069 | ) |
|                                                                                       |       |                  |       |   |   |
| Net (decrease) increase in cash and cash equivalents                                       |       | (59,081               | )          | 19,076 |   |
| Cash and cash equivalents at beginning of period                                           |       | 72,341                |       | 19,991 |   |
| Cash and cash equivalents at end of period                                                 |       | $                     | 13,260     |   | $ | 39,067 |   |

 

Seeaccompanying notes which are an integral part of the consolidated financialstatements.

 

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**ORLEANS HOMEBUILDERS, INC.AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

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

 

**1.****             ****BASIS OF PRESENTATION AND SUMMARYOF 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 Financial Information***

 

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 audited consolidatedfinancial statements and notes thereto included in the Company’s Form 10-K/Afor 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 March 31,2009, and for the three and nine months ended March 31, 2009 and 2008, 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.  Resultsfor the three and nine months ended March 31, 2009, are not necessarilyindicative of results to be expected for the full fiscal year 2009 or any otherfuture periods.

 

Duringthe third quarter of fiscal year 2009, the Company recognized additional taxexpense of $3,794 reflecting the impact of cumulative out of periodadjustments.  This error was related toan overstatement of tax refunds due the Company reflected in the income taxreceivable account in the amount of $2,347, coupled with an overstatement of federal taxbenefits in the amount of $1,447 related to a state tax liability.  Theseerror corrections had the effect of increasing income tax expense and reducingnet income by $3,794.  The Companyconcluded that this adjustment was not material to the consolidated financialstatements for any prior period or to the third quarter of fiscal year 2009.

 

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, 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 thewestern region.  As such, all chargesassociated with the western region are included as a discontinued operation.

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standard (“SFAS”)No. 157, “Fair Value Measurements” (“SFAS No. 157”).  SFAS No. 157 defines fair value,establishes a framework for measuring fair value in Generally AcceptedAccounting Principles (“GAAP”), and expands disclosures about fair valuemeasurements.  SFAS No. 157 iseffective for financial assets and financial liabilities in fiscal yearsbeginning after November 15, 2007 and for certain nonfinancial assets andcertain nonfinancial liabilities in fiscal years beginning after November 15,2008.  Effective July 1, 2008, theCompany has adopted the provisions of SFAS No. 157 that relate to itsfinancial assets and 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 2009 presentation,with no effect on previously reported net loss or shareholders’ equity.

 

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

 

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements—an amendment ofARB No. 51” (“SFAS No. 160”). SFAS No. 160 requiresthat a noncontrolling interest in a subsidiary be reported as equity and theamount of consolidated net income specifically attributable to thenoncontrolling interest be identified in the consolidated financialstatements.  It also calls forconsistency in the manner of reporting changes in the parent’s ownership interestand requires fair value measurement of any noncontrolling equity investmentretained in a deconsolidation. SFAS No. 160 is effective for the Company’s fiscal year endingJune 30, 2010.  The Company isevaluating the impact the adoption of SFAS 160 will have on itsconsolidated 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 the Company’s fiscal year ending June 30, 2010.  The Company does not expect the adoption ofSFAS No. 141(R) to have a material impact on its consolidatedfinancial statements.

 

In June 2008, the FASB issued FASB Staff Position (“FSP”) EmergingIssues Task 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.

 

InDecember 2008, the FASB issued FSP SFAS 132R-1, “Employers’Disclosures about Postretirement Benefit Plan Assets”.  This statement provides additional guidanceregarding disclosures about plan assets of defined benefit pension or otherpostretirement plans.  This FSP iseffective for financial statements issued for fiscal years ending after December 15,2009.  Accordingly, the Company willadopt FSP SFAS 132R-1 in fiscal year 2010. The Company is currently evaluating the disclosure impact of adoptingthis FSP on its consolidated financial statements.

 

In April 2009, the FASB issued FSP SFAS 141R-1, “Accounting forAssets Acquired and Liabilities Assumed in a Business Combination That Arisefrom Contingencies”, (FSP SFAS 141R-1). This FSP amends and clarifies SFAS No. 141(R), to require that anacquirer recognize at fair value, at the acquisition date, an asset acquired ora liability assumed in a business combination that arises from a contingency ifthe acquisition-date fair value of that asset or liability can be determinedduring the measurement period.  If theacquisition-date fair value of such an asset acquired or liability assumedcannot be determined, the acquirer should apply the provisions of SFAS No. 5,“Accounting for Contingencies”, to determine whether the contingency should berecognized at the acquisition date or after it. FSP SFAS 141R-1 is effective for assets or liabilities arising fromcontingencies in business combinations for which the acquisition date is afterthe beginning of the first annual reporting period beginning after December 15,2008.  Accordingly, the Company willadopt FSP SFAS 141R-1 in fiscal year 2010. The Company does not expect the adoption of FSP SFAS 141R-1 to have amaterial impact on its consolidated financial statements.

 

InApril 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “InterimDisclosures about Fair Value of Financial Instruments.” The FSP amendsSFAS No. 107, “Disclosures about Fair Value of Financial Instruments”to require disclosure about fair value of financial instruments in interimfinancial statements. FSP FAS 107-1 and APB 28-1 is effective for interim andannual periods ending after June 15, 2009 with early adoption permittedfor periods ending after March 15, 2009.   The Company is currently evaluating thedisclosure impact of adopting this pronouncement on its consolidated financialstatements.

 

InApril 2009, the FASB issued FSP SFAS 115-2 and SFAS 124-2, “Recognitionand Presentation of Other-Than-Temporary Impairments.”  This FSP changes existing guidance fordetermining whether an impairment of debt securities is other than temporary.  The FSP requires other than temporary impairmentsto be separated into the amount representing the decrease in cash flowsexpected to be collected from a security (referred to as credit losses) whichis recognized in earnings and the amount related to other factors which isrecognized in other comprehensive income. This noncredit loss component of the impairment may only be classifiedin other comprehensive income if the holder of the security concludes that itdoes not 

 

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intendto sell and it will not more likely than not be required to sell the securitybefore it recovers its value.  If theseconditions are not met, the noncredit loss must also be recognized inearnings.  When adopting the FSP, anentity is required to record a cumulative effect adjustment as of the beginningof the period of adoption to reclassify the noncredit component of a previouslyrecognized other than temporary impairment from retained earnings toaccumulated other comprehensive income. FSP SFAS 115-2 and FAS 124-2 is effective for interim and annual periodsending after June 15, 2009.  TheCompany does not expect the adoption of this FSP to have a material impact onits consolidated financial statements.

 

InApril 2009, the FASB issued FSP SFAS 157-4, “Determining Fair Value Whenthe Volume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly.”  This FSP provides additional guidance onestimating fair value when the volume and level of activity for an asset orliability have significantly decreased in relation to normal market activityfor the asset or liability. The FSP also provides additional guidance on circumstancesthat may indicate that a transaction is not orderly.  FSP SFAS 157-4 is effective for interim andannual periods ending after June 15, 2009. The Company does not expect the adoption of this FSP to have amaterial impact on its consolidated financial statements.

 

TheCompany does not believe that any other recently issued, but not yet effective,accounting standards if currently adopted would have a material effect on theaccompanying financial statements.

 

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

 

Cashand cash equivalents consisted of cash on hand, demand deposits and moneymarket funds at March 31, 2009 and June 30, 2008.

 

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

 

In accordance with SFAS No. 115, “Accounting for CertainInvestments in Debt and Equity Securities”, securities are classified intothree 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 March 31, 2009, 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** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **     | ** ** |
|----------------------------------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|----------------|------------|
| ** **                                                                       | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| Treasury securities - with maturities of  less than one year at time of purchase |       | $             | 502        |           | $          | —         |       | $              | (5         | ) | $ | 497 |   |
|                                                                                  |            |               |            |                |            |                |            |                |            |  |  |  |  |

 

Thetreasury bills and treasury notes described above have maturities that rangefrom three months to six months at time of purchase.

 

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

 

Residentialproperties completed or under construction consist of the following:

 
| ** **                                                  | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                  | ** ** | **2009**           | ** ** | **2008**          | ** ** |
| Under contract for sale                                     |       | $                  | 94,031     |              | $          | 109,980 |   |
| Unsold                                                      |       | 83,026             |       | 83,277            |       |
| Total residential property completed or  under construction |       | $                  | 177,057    |              | $          | 193,257 |   |

 

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**6**.              **MORTGAGE AND OTHER NOTEOBLIGATIONS AND SUBORDINATED NOTES**

 

The$355,066 outstanding balance in mortgage and other note obligations at March 31,2009, consists of $354,879 outstanding under the Revolving Credit Facility,which is discussed below, and $187 under mortgage obligations collateralized byland held for development and sale and improvements.  The average daily balance of the RevolvingCredit Facility during the nine months ended March 31, 2009, was $372,744.

 

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

 

***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”).  In connection with the Amended CreditAgreement, Orleans Homebuilders, Inc. executed a Guaranty, which wasamended on September 6, 2007 and amended and restated on September 30,2008. The Amended and Restated Credit Agreement was amended on November 1,2006, February 7, 2007, May 8, 2007, September 6, 2007, December 21,2007, May 9, 2008 by a limited waiver 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”). The Second Amended Credit Agreement was subsequently amended by alimited waiver letter dated January 30, 2009 (the “waiver letter”) and theFirst Amendment to Second Amended and Restated Revolving Credit Loan Agreementand First Amendment to Security Agreement dated February 11, 2009 (the“First Amendment”).

 

***Waiver Letter***

 

Absentthe waiver letter described below, the Company would have continued to be indefault of its obligation to, on or before January 23, 2009, make aprincipal repayment in an amount necessary to reduce the outstanding principalbalance of the loans to the borrowing base availability (the “RepaymentCovenant”).  While the Company madecertain principal payments, the failure to make the repayment in full withinthe proscribed period constituted an event of default under the Second AmendedCredit Agreement, of which the Company provided notice to the Lenders.  In addition, Wachovia Bank, N.A. (“Wachovia”)asserted that the borrowers breached the liquidity covenant in the SecondAmended Credit Agreement (the “Liquidity Covenant”) for the quarter ended December 31,2008.  The Company disagrees withWachovia’s assertion that the borrowers breached the Liquidity Covenant andnotified Wachovia of their disagreement.

 

Thewaiver letter temporarily waived compliance with the Repayment Covenant and theLiquidity Covenant generally from December 31, 2008 through and including February 6,2009, unless another event of default occurred.  With the termination ofwaiver period without the First Amendment described below having been enteredinto, the failure of the borrowers to have complied with the Repayment Covenanton or before that date, the borrowers were again in breach of the RepaymentCovenant and, to the extent there had been a breach of the Liquidity Covenantas asserted by Wachovia (an assertion with which the Company disagrees), theborrowers were also in breach of that covenant.  Any such breaches were,however, cured by the First Amendment described below.

 

***First Amendment to the Second AmendedCredit Agreement and Security Agreement:***

 

OnFebruary 11, 2009, the Company entered into the First Amendment to theSecond Amended Credit Agreement which provides, among other things, that:

 

·                  The category reductions applicable tothe determination of borrowing base availability were adjusted so that themaximum borrowing base availability attributable to asset class (ii) (unitsnot subject to a qualifying agreement of sale) determined on the basis of anyborrowing base certificate that is delivered before July 31, 2009, wasincreased to a maximum of 58% of the aggregate borrowing base availabilityattributable to asset classes (i) (units subject to a qualifying agreementof sale) and (ii) (units not subject to a qualifying agreement of sale) asshown on the borrowing base certificate. For borrowing base certificates delivered on or after July 31,2009, the maximum percentage remains unchanged at 45%.

·                  The category reductions applicable tothe determination of the borrowing base availability were adjusted so that themaximum borrowing base availability attributable to asset classes (iii) (lotspart of improved land 

 

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not subject to a qualifying agreement ofsale), (iv) (lots part of land under development) and (v) (lots partof land approved for development), based on borrowing base certificatesdelivered before July 31, 2009, was increased to a maximum of 65% of thetotal borrowing base availability as shown on the borrowing basecertificate.  For borrowing basecertificates delivered on or after July 31, 2009, the maximum percentageis 55%.    The maximum dollar value ofborrowing base availability attributable to asset classes (iii), (iv) and (v) werealso adjusted to the following (with such limitations to be reduced dollar fordollar at the time and in the amounts of any impairments with respect to assetsin asset classes (iii), (iv) and (v) and included in the borrowingbase taken by borrowers):

(i)                                     Beginning with theBorrowing Base Certificate delivered on or after the effective date of theFirst Amendment: $235,000;

(ii)                                  Beginning with theBorrowing Base Certificate delivered on or after July 31, 2009: $200,000;and

(iii)                               Beginning with theBorrowing Base Certificate delivered after September 30, 2009: $190,000.

·                  Under the First Amendment, theaggregate effect of (i) the modification of the borrowing base categoryreductions applicable to units not subject to a qualifying agreement of sale(described above); (ii) the modification of the borrowing base categoryreductions for land under development (described above); and (iii)  theinventory impairments during the second fiscal quarter of approximately $8,670,was an increase in net borrowing base availability of $16,065 as of December 31,2008, from a negative $14,567 to a positive $1,498.

·                  The amount of the Revolving CreditFacility was reduced from $440,000 to $405,000, except that the amount of theRevolving Credit Facility will be reduced to $375,000 beginning on July 16,2009 and through maturity, unless otherwise permanently reduced as a result ofcertain prepayments required by the Revolving Credit Facility.  The letter of credit sublimit was reduced to$30,000 from $60,000, and the financial letter of credit sublimit was reducedto $15,000 from $25,000. The amount actually available under the RevolvingCredit Facility is also subject to the borrowing base availability requirementsin the Revolving Credit Facility.

·                  In the event there is one or moredefaulting lenders, so long as there is no event of default that has occurredand is continuing, pro-rata principal payments shall not be made to suchdefaulting lender, but instead shall be paid over to the master borrower.

·                  The minimum consolidated tangible networth level was adjusted to a minimum of at least $25,000 (1) reduced bythe sum of (a) any impairments or other charges under GAAP on assets inthe borrowing base taken by the Company and recorded in respect of thefinancial quarters ended December 31, 2008 and March 31, 2009, plus (b) any deferred tax assets valuation allowance reserves recorded in respect of thefiscal quarters ended December 31, 2008 and March 31, 2009, plus (c) anyimpairments or write-offs relating to tangible assets or pre-acquisition costsnot contained in the borrowing base recorded in respect of the fiscal quartersended December 31, 2008 and March 31, 2009****(provided,however, that the aggregate covenant level reduction pursuant to this clause (1) shallnot exceed $15,000), and (2) increased by the sum of (x) anyfavorable adjustment to the deferred tax asset valuation allowance recorded inrespect of the fiscal quarters ended December 31, 2008 and March 31,2009, plus (y) 50% of positive quarterly net income after March 31,2008.

·                  The definition of liquidity wasrevised to provide that negative borrowing base availability is deducted fromcash and cash equivalents when determining liquidity and the minimum requiredliquidity covenant was reduced from $15,000 to $10,000.  A five business day cure period in the eventof a breach of the minimum liquidity covenant was also added.

·                  The maximum amount of cash or cashequivalents (excluding cash in transit at title companies) that the Company isallowed to maintain was set at a maximum of $15,000 for any consecutivefive-day period.

·                  The cash flow from operationscovenant ratio was adjusted downward for the quarter ending June 30, 2009 to0.50:1.00 and for the quarter ending September 30, 2009 and thereafter to0.65:1.00.

·                  The Company’s ability to purchase upto $8,000 of unimproved real estate is no longer available; however, theCompany’s ability to acquire lots through option take-downs remainsunchanged.  The provision specificallyallowing the Company to make new joint venture investments up to certainspecified amounts was also eliminated.

·                  The interest rate was increased by 25basis points, to the one month LIBOR interest rate plus 5.25%.

·                  Generally, the ability to obtainletters of credit for general working capital or corporate purposes and theability to obtain letters of credit in connection with projects outside theborrowing base were eliminated (provided, however, that existing letters ofcredit can be renewed, subject to the other terms of the Loan Agreement).

 

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·                  Provisions were added providing thatno letter of credit will be issued or renewed and that no tri-party agreementwill be executed or maintained while any lender is a defaulting lender, exceptif the borrowers have delivered to the agent cash collateral equal to thedefaulting lenders’ pro rata share of the letter of credit or tri-partyagreement.  The cash collateral is to beused to reimburse lenders in the event of draws under letters of credit ortri-party agreements.

·                  Letter of credit advances (that is,payments pursuant to a letter of credit that result in the making of a loan toborrowers in excess of the then available borrowing base) must be repaid withinfive business days, or earlier under certain circumstances.

·                  Provisions were added to the SecondAmended Credit Agreement and related Security Agreement providing that, in theevent of receipt of any tax refund by any obligor that constitutes collateral,the amount received must be used to prepay the loans under the facility.  Any such collateral received by the agentwill likewise be applied to the outstanding indebtedness.  However, such reduction of the outstandingindebtedness would have the effect of then increasing the net borrowing baseavailability immediately thereafter.

·                  Additional provisions were added withrespect to the allocation among the lenders of burdens and risks associatedwith defaulting lenders.

·                  In consideration of entering into theFirst Amendment to the Second Amended Credit Agreement, the Company paid a feeequal to 0.25% of such approving lenders’ reduced commitments effective on theclosing of the amendment.

 

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

 

Theborrowing limit under the Revolving Credit Facility is $405,000, except thatthe amount of the Revolving Credit Facility will be reduced to $375,000beginning July 16, 2009, unless otherwise permanently reduced to an amountless than or equal to $375,000, as a result of certain required prepayments.The total amount of loans and advances outstanding at any time under theRevolving Credit Facility may not exceed the lesser of the then-currentborrowing base availability or the revolving sublimit as defined in theRevolving Credit Facility. The borrowing base availability is based on thelesser of the appraised value or cost of real estate owned by the Company thathas been admitted to the borrowing base and is subject to various limitationsand qualifications set forth in the Revolving Credit Agreement.

 

FromOctober 1, 2008 to February 10, 2009, borrowings and advances underthe Revolving Credit Facility bore interest on a per annum basis equal to theLIBOR Market Index Rate plus 500 basis points. Beginning on February 11, 2009, the interest rate increased to theLIBOR Market Index Rate plus 525 basis points. 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 March 31,2009, the interest rate was 5.76%, which included a 525 basis point spread.  LIBOR Market Index Rate is defined by theRevolving Credit Facility as one-month LIBOR for dollar deposits as it may beadjusted pursuant to the terms of the Revolving Credit Facility to account forany applicable Federal Reserve euro currency reserve requirements or similargovernmental requirements.

 

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 or less. Under this provision, the Companycurrently estimates that the minimum it will be required to pay is $0 and themaximum is $9,150. The Company expects that it will pay no amounts under thisprovision as it intends to refinance or otherwise modify the debt before thepayment is due and payable. There can be no assurance that such refinancingwill occur or will occur on terms favorable to the Company.  In addition, if all indebtedness under theRevolving Credit Facility is not fully repaid by December 20, 2009, aseparate fee will be earned and payable on December 20, 2009 equal to 8.0%per annum of the amount by which the aggregate commitments under the RevolvingCredit Facility that exist from time to time after September 15, 2009exceed $250,000, calculated on a daily basis. Under this provision, the Company currently estimates that the minimumit will be required to pay is $0 and the maximum is $2,630. The Company expectsthat it will pay no amounts under this provision as it intends to refinance thedebt before the payment is due and payable. There can be no assurance that suchrefinancing or modification will occur or will occur on terms favorable to theCompany.

 

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Inaddition to any interest that may be payable with respect to amounts advancedby the lenders pursuant to a letter of credit, the Company will be required topay to the lender(s) issuing letters of credit an issuance fee of 0.125%of the amount 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, forworking 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 borrowers may be unable to borrow the entire amount of therequested loan or advance despite the fact that if there are defaultinglenders, the borrowers are permitted to submit additional borrowing requests inan effort to make-up any borrowing shortfall caused by a defaulting lenderfailing to fund.  In addition, so long asno event of default has occurred and is continuing, pro-rata principal paymentsshall not be made to any defaulting lender, but instead shall be paid over tothe master borrower.  The RevolvingCredit Facility also provides for certain burden sharing measures to allocateamong the lenders the burdens and risks associated with defaulting lenders inthe event there are defaulting lenders.

 

Approximately35% of the borrowers’ borrowing base assets have been reappraised pursuant tothe terms of the waiver letter and approximately one third of the total assetsin the borrowing base with a book value in excess of $4,000 that were notpreviously reappraised, have just been reappraised, are currently beingreappraised, or are anticipated to be reappraised during the next quarter. Thereappraisals that have been done to date have not had a material impact on theCompany’s borrowing base availability, but there can be no assurance thatfuture reappraisals will not reduce borrowing base 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 (i) a security interest in and assignment of all future taxrefunds and proceeds thereof received or payable to the borrowers or theCompany after the closing of the Second Amended Credit Agreement, (ii) mortgagesin favor of lenders with respect to all real property owned by the borrowers orthe Company that is not already subject to a lien in favor of the lenders underthe Revolving Credit Facility and, (iii) a security interest ininter-company debt.  Pursuant to theFirst Amendment, all such tax refunds must be paid over to the lenders withinone business day and will be used to prepay any indebtedness under theRevolving Credit facility.  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.  Under the Guaranty, OrleansHomebuilders, Inc. granted lenders a security interest in any balance orassets in any deposit or other account that Orleans Homebuilders, Inc. haswith any lender. However, the Company and its subsidiaries maintain a majorityof the cash, cash equivalents and marketable securities available to them inaccounts and as treasury securities outside of the lenders under the RevolvingCredit Facility.

 

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.

 

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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:

 

·      Subject to a five day cure period, TheCompany must maintain a minimum consolidated tangible net worth of at least$25,000  (1) reduced by thesum of (a) any impairments or other charges under GAAP on assets in theborrowing base taken by the Company and recorded in respect of the financialquarters ended December 31, 2008 and March 31, 2009, plus (b) any deferred tax assets valuation allowance reserves recorded in respect of thefiscal quarters ended December 31, 2008 and March 31, 2009, plus (c) anyimpairments or write-offs relating to tangible assets or pre-acquisition costsnot contained in the borrowing base recorded in respect of the fiscal quartersended December 31, 2008 and March 31, 2009****(provided,however, that the aggregate covenant level reduction pursuant to this clause (1) shallnot exceed $15,000), and (2) increased by the sum of (x) anyfavorable adjustment to the deferred tax asset valuation allowance recorded inrespect of the fiscal quarters ended December 31, 2008 and March 31,2009, plus (y) 50% of positive quarterly net income after March 31,2008.

·      The Company must maintain a requiredliquidity level based on cash plus borrowing base availability of at least$10,000 of cash and cash equivalents (including cash held at a title company)on a consolidated basis at all times, minus the amount by which thethen-outstanding principal balance of the Company’s loans plus any swing lineloans exceeds the then-current borrowing base availability.

·      The Company’s minimum cash flow fromoperations ratio based on cash flow from operations to interest incurred covenant,must exceed 1.25-to-1.00 for the quarter ending December 31, 2008;0.40-to-1.00 for the quarter ending March 31, 2009; 0.50-to-1.00 for thequarter ending June 30, 2009; and 0.65-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, the 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.

·      The maximum amount of cash or cashequivalents (excluding cash at title companies) the Company is allowed tomaintain for any consecutive five-day period is $15,000.

·      The Company may purchase improved land(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, but otherwise limits the Company’sability to purchase improved and unimproved land.

 

Atthe fiscal quarters ended September 30, 2006, December 31, 2006, March 31,2007, June 30, 2007, March 31, 2008, June 30, 2008 and December 31,2008, the Company would have been in violation of certain financial covenantsin the Amended and Restated Credit Agreement if not for the first, second,third and fourth amendments to and waiver letter with respect to the Amendedand Restated Credit Agreement, the Second Amended Credit Agreement, the waiverletter and the First Amendment to the Second Amended Credit Agreement,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 

 

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course of business if such judgment or judgments are not dismissed orbonded within 30 days; or the issuance of any writs of attachment,execution or garnishment 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 and foreclose upon any collateral.  In addition, upon the occurrence of certainevents of bankruptcy or other insolvency events with respect to any borrower orthe Company, all indebtedness outstanding under the Revolving Credit Facilityshall be immediately due and payable without any act or action by lenders. Adefault under the Company’s Revolving Credit Facility could also prevent theCompany from making required payments under the Company’s trust preferredsecurities, which would cause a default under those securities.

 

TheRevolving Credit Facility currently provides for certain adjustments to themanner in which borrowing base availability is to be calculated to takeeffect with respect to borrowing base certificates delivered on or after July 31,2009 which will have the effect of reducing borrowing base availability. In addition, a portion of the Company’s borrowing base assetsare currently subject to reappraisal by the Company’slenders.  As a result, the Company may need to obtain an amendment to itsRevolving Credit Facility providing additional liquidity on or before August 15,2009.  If the Company is unable to obtain such an amendment, the Company’sfuture borrowings may exceed the then available borrowing base.  Undersuch circumstances, absent a wavier or an amendment from its lenders, theCompany could be in default under its Revolving Credit Facility and, as aresult, its debt could become due which would have a material adverse effect onthe Company’s financial position and results of operations.

 

Asof March 31, 2009, the Company was in compliance with all of its financialcovenants under the Second Amended Credit Agreement, as amended.

 

***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.

 

Thetrust’s preferred and common securities require quarterly distributions ofinterest by the trust to the holders of the trust securities at a fixedinterest rate equal to 8.61% per annum through January 30, 2016 and, afterJanuary 30, 2016, at a variable interest rate (reset quarterly) equal tothe three-month London Interbank Offered Rate (“LIBOR”) plus 360 basis points (“RegularInterest Rate”).  Since the Companyfailed to meet both the debt service ratio and minimum tangible net worthrequirement set forth in the August 13, 2007 supplemental indenture as ofthe end of a fiscal quarter for at least three of the last four consecutivefiscal quarters ended on June 30, 2008, the applicable rate of interestwas increased by 300 basis points (“Adjusted Interest Rate”). The Company beganaccruing for this increased interest rate on July 31, 2008, which was paidto holders for the first time with the coupon payable on October 31, 2008.The interest rate will return to the regularly applicable rate once the Companyis in compliance 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.

 

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 will be used by the trust to pay the quarterly distributions to theholders of the trust’s preferred and common securities. Pursuant to the parentguarantee agreement dated November 23, 2005 by and 

 

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betweenthe Company and JPMorgan Chase Bank, National Association, as trustee, theCompany has unconditionally guaranteed OHI Financing payment and otherobligations under the indenture and the junior subordinated notes. The Companyused the proceeds from the issuance and sale of the trust preferred securitiesand the subsequent purchase of the junior subordinated notes to partially repayindebtedness.

 

TheIndenture permits OHI Financing to redeem the junior subordinated notes at par,plus accrued interest on or after January 30, 2011. If OHI Financing redeemsany amount of the junior subordinated notes, the Trust Agreement requires thetrust to redeem a like amount of the trust securities. Under certaincircumstances relating to the tax treatment of the trust or the interestpayments made on the junior subordinated notes or the classification of thetrust as an “investment company” under the Investment Company Act of 1940, asamended, OHI Financing may also redeem the junior subordinated notes prior 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.  If the interest coverage ratio test and theminimum consolidated tangible net worth test are both met, OHI Financing wouldmake the payment of the Regular Interest Rate for the next coupon, and theAdjusted Interest Rate test “resets” requiring OHI Financing to make eight (orin some instances six) new consecutive coupon payments at the Adjusted InterestRate before triggering an event of default. The interest coverage ratio and minimumconsolidated tangible net worth measure are not traditional financialmaintenance covenants; they are only utilized in determining if the AdjustedInterest Rate or the Regular Interest Rate is applicable.

 

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:

 

·      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 in the indenture and the continuanceof the default or breach for a period of 30 days after written notice toOHI Financing;

·      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;

·      default in the performance, or breach (whichdefault or breach must be material in certain cases), of any covenant orwarranty made by OHI Financing. In the purchase agreement pursuant to which thetrust securities and the junior subordinated notes were sold and purchased andthe continuation of such default or breach for a period of 30 days afterwritten notice to OHI Financing;

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

·      the bankruptcy or insolvency of OHIFinancing; or

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

 

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Pursuantto the August 13, 2007 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.

 

On approximately July 30, 2009, pursuant to the terms of the firstamendment to the $75,000 issue of trust preferred securities, the Company isgenerally required to provide a $2,500 increase in the reserve fund for thebenefit of holders of the trust preferred securities by posting a letter ofcredit with the trustee.  The Companycurrently anticipates posting such letter of credit as is permitted under theexisting terms of the credit facility, provided the Company has sufficientliquidity to do so at such time.  Ifposted, this letter of credit will reduce our liquidity otherwise determined atthat time by $2,500.

 

**7.****              ASSET IMPAIRMENTS —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 theassets and cash flows, which approximates fair value.  The estimates used in the determination ofthe estimated cash flows and fair value of the asset are based on factors knownto the Company at the time such estimates are made and the Company’s expectationsof future operations.  These estimates ofcash flows are significantly impacted by estimates of the amounts and timing ofrevenues and costs and other factors, which, in turn, are impacted by localmarket economic conditions and the actions of competitors.  Should the estimates or expectations used indetermining estimated cash flows or fair value decrease or differ from currentestimates in the future, we may be required to recognize additional impairmentsrelated to these assets or other assets.

 

Asof March 31, 2009, there were a number of parcels which were tested forimpairment as a trigger was identified. Some of these parcels included those that had previously beenimpaired.  In some cases, theundiscounted cash flow analysis prepared by management did not indicate animpairment.  However, these cash flowsare subject to significant estimates and assumptions made by management.  In some cases, the results of whether animpairment is indicated from the undiscounted cash flow analysis is highly sensitiveto 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.  In conducting the review for indicators of impairment on a communitylevel, the Company evaluates, among other things, the margins on homes thathave been delivered, margins under sales contracts in backlog, projectedmargins with regard to future home sales over the life of the community, andthe fair value of the land itself. Inventory impairments are recorded in residential properties cost andexpenses.

 

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.  Forexample, further market deterioration may lead the Company to incur additionalimpairment charges on previously impaired inventory, as well as on inventorynot currently impaired.

 

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) of 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’sestimates are made using information 

 

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availableat the date of the recoverability test. However, as facts and circumstances may change in future reportingperiods, the estimates of recoverability are subject to change.  For example, in certain communities, inresponse to current market conditions, we have introduced new smaller-valueoriented product and we have also seen a shift in mix to our multi-familytownhome products as well as lower priced single family communities.  When impairment is indicated, the Companyestimates the fair value of its communities using a discounted cash flowmodel.  The determination of fair valuealso requires discounting the estimated cash flows at a rate commensurate withthe inherent risks associated with the assets and related estimated cash flowstreams.

 

Thefollowing table represents inventory impairments by region for continuingoperations for the three and nine months ended March 31, 2009 and 2008:

 
| ** ** | ** ** | **Three months ended March 31,** | ** ** |
|------------|------------|---------------------------------------|------------|
| ** ** | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| ** ** | ** ** | **Communities**                       | ** ** | **Impairment** | ** ** | **Communities** | ** ** | **Impairment** | ** ** |
| Northern   |       | 8                                     |       | $ | 2,618 |   | 3 |   | $ | 3,776 |   |
| Southern   |       | —                                |       | — |   | 6 |   | 3,150 |   |
| Midwestern |       | 1                                     |       | 133 |   | 7 |   | 6,451 |   |
| Florida    |       | 2                                     |       | 258 |   | 3 |   | 1,890 |   |
| Total      |       | 11                                    |       | $ | 3,009 |   | 19 |   | $ | 15,267 |   |

 
| ** ** | ** ** | **Nine months ended March 31,** | ** ** |
|------------|------------|--------------------------------------|------------|
| ** ** | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** ** | ** ** | ** **                           | ** ** | **Impairment** | ** ** | **Communities** | ** ** | **Impairment** | ** ** |
| Northern   |       | 19                                   |       | $ | 13,522 |   | 9 |   | $ | 10,142 |   |
| Southern   |       | 8                                    |       | 2,695 |   | 9 |   | 8,350 |   |
| Midwestern |       | 3                                    |       | 4,040 |   | 8 |   | 16,119 |   |
| Florida    |       | 3                                    |       | 840 |   | 4 |   | 4,285 |   |
| Total      |       | 33                                   |       | $ | 21,097 |   | 30 |   | $ | 38,896 |   |

 

Duringthe nine months ended March 31, 2008, the Company specifically identifiedparcels of land to sell and negotiated contracts with potential buyers.  Prior to the closing of the land saletransactions, the Company recorded asset impairments on the land to be sold of$36,556 for the nine months ended March 31, 2008.  The Company’s midwestern region recordedimpairments of $23,163 related to the sale of two parcels.  The Company’s Florida region recordedimpairments of $8,385 related to the sale of four parcels.  The Company’s southern region recordedimpairments of $5,008 related to the sale of two parcels.

 

Additionally,the Company recorded an impairment charge of $20,706 related to the sale of itsland position in the western region in the nine months ended March 31,2008.  This impairment charge is includedin loss from discontinued operations.

 

Theseimpairment charges represent the amounts by which the carrying value of theassets sold exceeded their fair values less costs to sell.  The fair value of the assets was determinedbased on the contracted sales price. These impairment charges were included in the cost of land sales on theConsolidated Statements of Operations.

 

**8.****              STOCK BASEDCOMPENSATION**

 

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 restricted stock.  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.

 

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***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 ofthe Company 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 March 31, 2009 and 2008, the Company recognized$313 and $535, respectively, of stock based compensation expense related tostock options.

 

Duringthe nine months ended March 31, 2009 and 2008, the Company recognized $972and $1,501, respectively, of stock based compensation expense related to stockoptions.

 

Thefollowing summarizes stock option activity for the Company’s stock option plansduring the nine months ended March 31, 2009:

 
| ** **                       | ** ** | ** **     | ** ** | **Weighted**       | ** ** |
|----------------------------------|------------|----------------|------------|--------------------|------------|
| ** **                       | ** ** | **Number**     | ** ** | **Average**        | ** ** |
| ** **                       | ** ** | **of Options** | ** ** | **Exercise Price** | ** ** |
| Outstanding, beginning of period |       | 752,500        |       | $                  | 9.01       |   |
| Granted                          |       | 250,000        |       | 2.20               |       |
| Exercised                        |       | —         |       | —             |       |
| Outstanding, end of period       |       | 1,002,500      |       | $                  | 7.32       |   |
| Exercisable, end of period       |       | 314,500        |       | $                  | 11.00      |   |

 

Therewere no options exercisable at March 31, 2009 that had a strike pricebelow the market value of the underlying shares of stock.

 

Duringthe nine months ended March 31, 2009, the Company granted options toacquire 250,000 shares.  During the ninemonths ended March 31, 2008, the Company granted options to acquire180,000 shares.  In addition, during thenine months ended March 31, 2008, options to acquire 240,000 shares at $15.60 wererepriced to $4.65.

 

Therewere no option or other grants made under the 2004 Stock Incentive Plan for thethree months ended March 31, 2009 and 2008.

 

Nooptions were exercised during the three and nine months ended March 31,2009.  During the three and nine monthsended March 31, 2008, 47,500 options were exercised.

 

Thefollowing table summarizes information about the Company’s stock options at March 31,2009:

 
| ** **               | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Average** | ** ** | **Weighted** | ** ** |
| ** **               | ** ** | **Outstanding at**           | ** ** | **Remaining**                | ** ** | **Average** | ** ** | **Exercisable at** | ** ** | **Remaining** | ** ** | **Average** | ** ** |
| **Range of**             | ** ** | **March 31,**           | ** ** | **Contractual**              | ** ** | **Exercise** | ** ** | **March 31,** | ** ** | **Contractual** | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | **2009**                     | ** ** | **Life**                     | ** ** | **Price** | ** ** | **2009** | ** ** | **Life** | ** ** | **Price** | ** ** |
| $ 2.20              | -          | $ 2.20                  |       |                         | 250,000    |   | 9.7 |   | $ | 2.20 |   | — |   | N/A |   | N/A |   |
| 4.03                     | -          | 4.85                         |       |                         | 445,000    |   | 8.7 |   | 4.41 |   | 132,000 |   | 8.7 |   | 4.48 |   |
| 10.64                    | -          | 10.64                        |       |                         | 30,000     |   | 4.3 |   | 10.64 |   | 30,000 |   | 4.3 |   | 10.64 |   |
| 15.63                    | -          | 15.63                        |       |                         | 250,000    |   | 7.2 |   | 15.63 |   | 125,000 |   | 7.2 |   | 15.63 |   |
| 21.60                    | -          | 21.60                        |       |                         | 27,500     |   | 5.4 |   | 21.60 |   | 27,500 |   | 5.4 |   | 21.60 |   |
|                     |       | 1,002,500                    |       | 8.4                          |       | $ | 7.32 |   | 314,500 |   | 7.4 |   | $ | 11.00 |   |
|                          |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Theaggregate intrinsic value as of March 31, 2009 for outstanding stockoptions and for stock options that were exercisable was $48 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 March 31, 2009, there was a total of $1,449 of unrecognizedcompensation expense related to time based non-vested stock options.  That cost is expected to be recognized over aweighted average period of 3.1 years.

 

***Stock Award Plans***

 

InOctober 2003, the Board of Directors adopted the Orleans Homebuilders, Inc.Stock Award Plan (the “Stock Award Plan”), which provided for the grant ofstock awards of up to an aggregate of 400,000 shares of the Company’s commonstock.  On October 17, 2008, theBoard of Directors approved an increase in the number of shares authorized forissuance under the Stock Award Plan from 400,000 shares to 1,000,000 shares,which was approved by stockholders at the Company’s Annual Meeting on December 4,2008.  The Stock Award Plan allows forthe payment of all or a portion of the incentive compensation awarded under theCompany’s bonus compensation plans to be paid by means of a transfer of sharesof common stock as well as other grants. The plan has a ten year life and is open to all employees of the Companyand its subsidiaries.  The value of timebased restricted stock awards are determined by their intrinsic value (as ifthe underlying shares were vested and issued) on the grant date.  There were no shares of stock awarded duringthe three months ended March 31, 2009 and 2008.  During the nine months ended March 31,2009 and 2008, the company awarded 250,000 and 240,000 shares of restrictedstock to an executive officer.  Therestricted stock awarded during the nine months ended March 31, 2009 wasissued under of the 2004 Stock Incentive Plan. At March 31, 2009, the Company had awarded 395,904 shares of commonstock under the Stock Award Plan and had 604,096 shares of the common stockavailable to issue under the Stock Award Plan.

 

Duringthe three months ended March 31, 2009 and 2008, the Company recognized$121 and $89, respectively, of stock based compensation expense related tostock awards.

 

Duringthe nine months ended March 31, 2009 and 2008, the Company recognized $417and $282, respectively, of stock based compensation expense related to stockawards.

 

Asof March 31, 2009, there was a total of $5,068 of unrecognized compensationexpense related to time based non-vested restricted stock awards.  That cost is expected to be recognized over aweighted average period of 5.1 years.

 

***Cash Bonus Plan***

 

On December 4, 2008, the Company’s Compensation Committee adopteda cash bonus plan for an executive officer (the “Plan”).  The Planprovides for a cash bonus of $375 to be paid to the executive officer in theevent the Company achieves certain performance targets as determined by theCompensation Committee, which may generally include targets relating to: (i) capitalstructure initiatives; (ii) refinancing the Company’s outstanding debt(such as by the issuance of new debt, equity or equity-linked securities by theCompany or a joint venture in which the Company is a participant); or (iii) theCompany entering into a new or modified credit facility (such as a modifiedcredit facility extending the maturity date of the Company’s revolving creditfacility).  The maximum amount payable pursuant to the Plan is $750,provided the Company achieves at least two of such performance targets. In the event the executive officer is awarded a cash bonus pursuant to thePlan, he will be given the option of using up to 50% of that cash bonus at thetime of the award to purchase restricted shares of the Company’s stock at apurchase price of $2.75 per share (or up to 136,363 shares of fully vestedcommon stock will be issued to the executive officer if all awards are earnedunder the Plan and the executive officer elects to have all such awards payablein Company common stock).  The Company isaccounting for the Plan as a combination award in accordance with SFAS No. 123(R).  Based on Company estimates, the Companyaccrued $375 during the period of December 2008 through March 2009;is accruing $375 during the period of December 2008 through September 2009;and is expensing $60 relating to the option to purchase restricted sharesduring the period of December 2009 through September 2009.  During the three and nine months ended March 31,2009, the Company recognized $412 and $549 of compensation expense related tothe Plan.  To date, no payments have beenmade under the Plan.

 

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**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 life insurance policies onall participants in the Supplemental Executive Retirement Plan (“SERP”).  This SERP, which was amended on March 13,2006 and September 27, 2007, is intended to provide the participants withan annual supplemental retirement benefit based upon their years of servicewith the Company and highest average compensation for five consecutiveyears.  The annual supplemental benefitfor each participant will be adjusted based on the actual performance of theSERP compared to the target.  The benefitis payable for life with a minimum of ten years guaranteed.  In order to qualify for normal retirementbenefits, a participant must attain age 65 with at least five years ofparticipation in the SERP.  Earlyretirement will be permitted beginning at age 55, after five years ofparticipation in the SERP. Early retirement benefits will be adjustedactuarially 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 andnine months ended March 31, 2009 and 2008:

 
| ** **                                                   | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | **March 31,**     | ** ** | **March 31,**    | ** ** |
| ** **                                                   | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net periodic pension cost:                                   |       |                   |       |                  |       |   |   |   |   |
| Service cost                                                 |       | $                      | 130        |                  | $          | 153 |   | $ | 389 |   | $ | 459 |   |
| Interest cost                                                |       | 85                     |       | 84                    |       | 255 |   | 254 |   |
| Amortization of prior service cost                           |       | 105                    |       | 104                   |       | 314 |   | 311 |   |
| Amortization of actuarial gain                               |       | (67                    | )          | (46                   | )          | (203 | ) | (138 | ) |
| Total net periodic pension cost                              |       | $                      | 253        |                  | $          | 295 |   | $ | 755 |   | $ | 886 |   |
|                                                         |       |                   |       |                  |       |   |   |   |   |
| Assumptions used for determining net periodic pension costs: |       |                   |       |                  |       |   |   |   |   |
|                                                         |       |                   |       |                  |       |   |   |   |   |
| Discount rate                                                |       | 6.10                   | %          | 6.10                  | %          | 6.10 | % | 6.10 | % |
| Salary scale                                                 |       | 4.00                   | %          | 4.00                  | %          | 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 and nine months ended March 31,2009 and 2008 are shown in the following table:

 
| ** **                                                         | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | **March 31,**     | ** ** | **March 31,**    | ** ** |
| ** **                                                         | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Numerator:                                                         | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss from continuing operations for basic and diluted EPS          |       | $                      | (14,969    | )                     | $          | (47,111 | ) | $ | (52,526 | ) | $ | (87,481 | ) |
|                                                               |       |                   |       |                  |       |   |   |   |   |
| Denominator                                                        | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average common shares outstanding (in thousands)          |       | 18,555                 |       | 18,520                |       | 18,525 |   | 18,508 |   |
|                                                               |       |                   |       |                  |       |   |   |   |   |
| Basic and diluted loss per common share from continuing operations |       | $                      | (0.81      | )                     | $          | (2.54 | ) | $ | (2.84 | ) | $ | (4.73 | ) |

 

Assumedshares (in thousands) under the treasury stock method for stock options of 0and 58 for the three months ended March 31, 2009 and 2008, respectively,and 0 and 74 for the nine months ended March 31, 2009 and 2008,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 had incometax expense from continuing operations for the nine months ended March 31,2009 of $3,843 as compared to $2,458 for the nine months ended March 31,2008.  These amounts represent effectivetax rates for the nine months ended March 31, 2009 and 2008 of (7.9)% and(2.9)%, respectively.  The significantchanges in the Company’s effective tax rate resulted primarily from therecording of a correction to the accrued income tax account in the amount of$2,347, as well as a $20,360 net valuation reserve in the first nine months offiscal year 2009 as compared with the initial establishment of a valuationreserve in the nine months ended March 31, 2008 in the amount of $43,544.  The $20,360 net valuation reserve includes acorrection related to the impact of a federal tax benefit in the amount of$1,447, related to a state liability recorded prior to the Company establishinga valuation reserve in the third quarter of fiscal year 2008, for which theCompany did not take taking a valuation reserve until the third quarter offiscal year 2009.  SFAS No. 109 — “Accountingfor Income Taxes” (“SFAS No. 109”) requires that companies assess whethera valuation allowance should be established based on the consideration of allavailable 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.

 

Duringthe third quarter of fiscal year 2009, the Company recognized additional taxexpense of $3,794 reflecting the impact of cumulative out of periodadjustments.  This error was related toan overstatement of tax refunds due the Company reflected in the income taxreceivable account in the amount of $2,347, coupled with an overstatementof federal tax benefits in the amount of $1,447 related to a state taxliability.  These error corrections had theeffect of increasing income tax expense and reducing net income by $3,794.  The Company concluded that this adjustmentwas not material to the consolidated financial statements for any prior periodor to the third quarter of fiscal year 2009.

 

At March 31, 2009and June 30, 2008, the Company had net deferred income tax assets of$74,002 and $53,642, respectively, offset by full valuation allowances of$74,002 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.

 

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**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 thewestern region.  As such, all chargesassociated with 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:

 
| ** **                            | ** ** | **Three months**   | ** ** | **Nine months**    | ** ** |
|---------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                            | ** ** | **ended**          | ** ** | **ended**          | ** ** |
| ** **                            | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
| ** **                            | ** ** | **2008**           | ** ** | **2008**           | ** ** |
| Operating loss                        |       | $                  | (130       | )                  | $          | (21,704 | ) |
| Tax expense                           |       | 8,504              |       | —             |       |
| Net loss from discontinued operations |       | $                  | (8,634     | )                  | $          | (21,704 | ) |

 

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:

 

        Northernregion:

 

·               Southeastern Pennsylvania;

·               Central New Jersey;

·               Southern New Jersey; and

·               Orange County, New York

 

        Southernregion:

 

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

·               Richmond, Virginia;

·               Raleigh, North Carolina;

·               Greensboro, North Carolina; and

·               Tidewater, Virginia

 

        Midwesternregion:

 

·               Chicago, Illinois

 

        Floridaregion:

 

·               Orlando, Florida

 

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

 

The Company’s evaluationof segment performance is based on (loss) income from continuing operations beforetaxes.  During fiscal year 2008, theallocation of corporate and unallocated (loss) income from continuingoperations before taxes to 

 

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the segments was a fixedamount, which left a portion of the loss unallocated.  During fiscal year 2009, corporate (loss)income from continuing operations is fully allocated to the segments based onbudgeted revenue.  The fiscal year 2009allocation includes the Company’s mortgage brokerage and property managementsubsidiaries.  Below is a summary ofrevenue and (loss) income from continuing operations before taxes for eachreportable segment for the three and nine months ended March 31, 2009 and2008:

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **March 31,**     | ** ** | **March 31,**    | ** ** |
| ** **                                                 | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Total Revenue**                                          |       |                   |       |                  |       |   |   |   |   |
| Northern                                                   |       | $                      | 31,451     |                  | $          | 51,923 |   | $ | 111,553 |   | $ | 158,200 |   |
| Southern                                                   |       | 27,505                 |       | 47,940                |       | 99,099 |   | 159,045 |   |
| Midwestern                                                 |       | 5,739                  |       | 6,623                 |       | 26,427 |   | 36,742 |   |
| Florida                                                    |       | 769                    |       | 5,156                 |       | 5,198 |   | 30,111 |   |
| Corporate and unallocated(1)                               |       | 1,230                  |       | 1,652                 |       | 4,966 |   | 7,015 |   |
| Consolidated Total                                         |       | $                      | 66,694     |                  | $          | 113,294 |   | $ | 247,243 |   | $ | 391,113 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| **(Loss) Income from Continuing Operations Before  Taxes** |       |                   |       |                  |       |   |   |   |   |
| Northern                                                   |       | $                      | (5,358     | )                     | $          | (4,576 | ) | $ | (19,246 | ) | $ | (15,668 | ) |
| Southern                                                   |       | (4,619                 | )          | (3,796                | )          | (19,801 | ) | (14,307 | ) |
| Midwestern                                                 |       | (182                   | )          | (8,419                | )          | (7,350 | ) | (45,810 | ) |
| Florida                                                    |       | (690                   | )          | (2,783                | )          | (2,286 | ) | (16,771 | ) |
| Corporate and unallocated                                  |       | —                 |       | (550                  | )          | — |   | 7,533 |   |
| Consolidated Total                                         |       | $                      | (10,849    | )                     | $          | (20,124 | ) | $ | (48,683 | ) | $ | (85,023 | ) |

 

----

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

 

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

 

AtMarch 31, 2009, the Company had outstanding bank letters of credit, suretybonds and financial security agreements amounting to $91,093 as collateral forcompletion of improvements at various developments of the Company.

 

Asof March 31, 2009, the Company owned or controlled approximately 5,893building 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 $85,743, which are expected to yield approximately 1,020 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 a 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.

 

TheCompany accrues the cost for warranty and customer satisfaction into the costof its homes as a liability at closing for each unit based on the Company’sindividual budget per unit. These liabilities are reviewed on a quarterly basisand generally closed to earnings within nine to 12 months for unusedamounts with any excess amounts expensed as identified as a change inestimate.  Any significant materialdefects are generally 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 allof its homes in a limited warranty program with a third party provider (withthe premium paid for this program included in the individual unit budgetsdescribed above). This limited warranty program generally covers certaindefects for periods of one to two years and major structural defects 

 

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forup to ten years, with actual costs incurred being paid for by the third partyprovider.

 

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:

 
| ** **                     | ** ** | **Nine months ended** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **March 31,**    | ** ** |
| ** **                     | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Balance at beginning of period |       | $                     | 3,353      |   | $ | 2,908 |   |
| Warranty costs accrued         |       | 1,150                 |       | 2,024 |   |
| Actual warranty costs incurred |       | (1,851                | )          | (2,154 | ) |
| Balance at end of period       |       | $                     | 2,652      |   | $ | 2,778 |   |

 

Onapproximately July 30, 2009, pursuant to the terms of the first amendmentto the $75,000 issue of trust preferred securities, the Company is generallyrequired to provide a $2,500 increase in the reserve fund for the benefit ofholders of the trust preferred securities by posting a letter of credit withthe trustee.  The Company currentlyanticipates posting such letter of credit as is permitted under the existingterms of the credit facility, provided the Company has sufficient liquidity todo so at such time.  If posted, thisletter of credit will reduce our liquidity otherwise determined at that time by$2,500.

 

**15.****      ****FAIRVALUE 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 quoted prices in active markets for identical assets. |
|---------|---------------------------------------------------------------------------------------|
|    |                                                                                  |
| Level 2 | Fair value  determined using significant other observable inputs.                     |
|    |                                                                                  |
| Level 3 | Fair values  determined using significant unobservable inputs.                        |

 

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

 
| ** **                | ** ** | ** **               | ** ** | **Fair Value at**       | ** ** |
|---------------------------|------------|--------------------------|------------|-------------------------|------------|
| **Financial Instruments** | ** ** | **Fair Value Hierarchy** | ** ** | **March 31, 2009** | ** ** |
| Marketable securities     |       | Level  1                 |       | $                       | 497        |   |
|                           |            |                          |            |                         |            |  |

 

The partial adoption ofSFAS No. 157 under FSP FAS No. 157-2 did not have a material impacton the Company’s financial 

 

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assets andliabilities.  Management is evaluatingthe impact that SFAS No. 157 will have on its non-financial assets andnon-financial liabilities since the application of SFAS No. 157 for suchitems was deferred to July 1, 2009. The Company believes that the impact of these items will not be materialto its consolidated financial statements.

 

**16.****      ****GOODWILL**

 

During the nine monthsended March 31, 2009, the Company recorded an impairment charge related tothe goodwill that arose from the Company’s Parker & LancasterCorporationacquisition.  This assessment wasperformed in accordance with SFAS No. 142. Management evaluated the recoverability of the goodwill by comparing thecarrying value of the 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 were the result of continued economicturmoil, uncertainty in the credit and financial markets, decreased consumerdemand and increased mortgage underwriting standards.  Discount rates were based on the Company’sweighted average cost of capital adjusted for the aforementioned businessrisks.  The amount of the goodwillimpairment was $4,180 and was recorded in the Company’s southern reportingsegment.  As a result of this impairmentcharge, the Company has no goodwill on its Consolidated Balance Sheet at March 31,2009.  No impairment charge related togoodwill was taken during the three and nine months ended March 31, 2008.

 

**17.****      ****VARIABLEINTEREST ENTITIES**

 

Avariable interest entity (“VIE”) is created when (i) the equity investmentat risk is not sufficient to permit the entity to finance its activitieswithout additional subordinated financial support from other parties or (ii) equityholders either (a) lack direct or indirect ability to make decisions aboutthe entity, (b) are protected from absorbing expected losses of the entityor (c) do not have the right to receive expected residual returns of theentity if they occur.  If an entity isdeemed to be a VIE, pursuant to FIN 46-R, an enterprise that absorbs amajority of the expected losses of the VIE is considered the primarybeneficiary and must consolidate the VIE.

 

Basedon the provisions of FIN 46-R, the Company has concluded that whenever itenters into an option agreement to acquire land or lots from an entity and paysa significant deposit that is not unconditionally refundable, a VIE is createdunder condition (ii) (b) of the previous paragraph.  The Company has been deemed to have providedsubordinated financial support, which refers to variable Interests that willabsorb some or all of an entity’s expected theoretical losses if theyoccur.  For each VIE created, the Companyperforms an analysis of the expected losses and residual returns based on theprobability of future cash flows based on the expected variability as outlinedin FIN 46-R.  If the Company isdeemed to be the primary beneficiary of the VIE it will consolidate the VIE onits balance sheet.  The fair value of theVIEs inventory, generally believed to be the purchase price of the land underoption, will be reported as “Inventory not owned—Variable Interest Entities.”

 

AtMarch 31, 2009, the Company consolidated three VIEs as a result of itsoptions to purchase land or lots from the selling entities.  The Company paid cash of $412 and issuedletters of credit of $100 to these VIEs and incurred additional pre-acquisitioncosts totaling $21.  The Company’sdeposits and any costs incurred prior to acquisition of the land or lotsrepresent the Company’s maximum exposure to loss.  The fair value of the VIEs inventory,determined as of the date of consolidation, is reported as “Inventory notowned—Variable Interest Entities.”  TheCompany recorded $10,666 in Inventory Not Owned—Variable Interest Entities asof March 31, 2009.  The fair valueof the property to be acquired less cash deposits and pre-acquisition costs,which totaled $10,234 at March 31, 2009, was reported on the balance sheetas “Obligations related to inventory not owned—Variable Interest Entities.”Creditors, if any, of these VIEs have no recourse against the Company.

 

TheCompany will continue to secure land and lots using options.  Excluding the deposits and other costscapitalized in connection with the VIEs discussed in the prior paragraph, theCompany had total costs incurred to acquire land and lots at March 31,2009 of approximately $10,251, including $3,631 of cash deposits.

 

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| **ITEM 2.** | ** ** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**(Dollars in 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, and first-time homebuyers. The Company believes this broad rangeof home designs gives it flexibility to address economic and demographic trendswithin its markets.  The Company has beenin operation since 1918 and is currently engaged in residential real estatedevelopment in eight states in the following 11 markets: SoutheasternPennsylvania; Central New Jersey; Southern New Jersey; Orange County, New York;Charlotte, Raleigh and Greensboro, North Carolina; Richmond and Tidewater,Virginia; Chicago, Illinois; and Orlando, Florida.  The Company’s Charlotte, North Carolinamarket also includes operations in adjacent counties in South Carolina.  On December 31, 2007, the Companycommitted to exiting the Phoenix, Arizona market and, in connection with thatdecision, on that date disposed of its entire land position and its relatedwork-in-process homes in Phoenix, which constituted substantially all of itsassets 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:***

 

Sincethe latter part of fiscal 2006, we and the entire housing industry have facedseveral significant challenges in the housing and mortgage markets as awhole.  The U.S. economy is currently ina recession and national housing starts are at a five decade low.  Additionally and notwithstanding continuedchallenges for housing, the capital markets have improved during and subsequentto the quarter end and there has been some positive news and outlooks from thestill challenged financial services industry. Although the homebuilding marketremains challenging and order activity remains at relatively low levels, therehave been some early signs of improvement that provide a basis for cautiousoptimism.  We experienced a 56%sequential net new order increase in the third quarter of fiscal year 2009compared to the second quarter of fiscal year 2009, notwithstanding that thirdquarter net new orders decreased 47% year-over-year.  While this improvement in sequential netorders is consistent with the typical seasonality in our industry, they were substantiallybetter than the improvement that we experienced in the same period of the priorfiscal year (6% sequential net new order increase in third quarter versussecond quarter during fiscal 2008).  Despitethese signs, we remain cautious, as we cannot be certain that the worst of thehousing downturn is behind us, or that a real and sustained recovery in theeconomic and housing environment will not still be delayed for some time.  Elevated unemployment rates, homeforeclosures and the impact on consumer confidence remains a concern, as do thetighter credit markets, notwithstanding the improvement in homeowneraffordability from home price declines, and lower current mortgage rates andgovernment homebuyer incentives.  Wecontinue to respond to the current market conditions by attempting to driveabsorption through the use of sales incentives, reevaluating our individualland holdings, reducing our land expenditures, attempting to monitor andcontrol community spec unit levels and emphasizing operational cost reductionsto adjust for lower levels of production. Further decreases in demand for our homes or additional focus on cashflow may require us to further increase the use of sales incentives and to takeother steps to reduce cash expenditures and operating expenses.

 

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Forthe tables below setting forth certain details as to residential salesactivities, the information is provided for the three and nine months ended March 31,2009 and 2008 in the case of residential revenue earned and new orders, and asof March 31, 2009 and 2008 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 timea homebuyer executes a contract to purchase a home from the Company.  Sales contracts are usually accompanied by asales deposit.  In some instances,purchasers are permitted to cancel sales contracts if they are unable to closeon the sale of their existing home, fail to qualify for financing or undercertain other circumstances.

 
| ** **                     | ** ** | **Three months ended March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2009**                                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **New orders**                 |       |                                                 |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                    | 64,202     |       | $          | 121,170    |       | $ | (56,968 | ) | (47.0 | )% |
| Units                          |       | 168                                                  |       | 266        |       | (98        | )          | (36.8 | )% |
| Average sales price            |       | $                                                    | 382        |       | $          | 456        |       | $ | (74 | ) | (16.2 | )% |
|                           |       |                                                 |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                                 |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                    | 64,347     |       | $          | 109,018    |       | $ | (44,671 | ) | (41.0 | )% |
| Units                          |       | 163                                                  |       | 243        |       | (80        | )          | (32.9 | )% |
| Average sales price            |       | $                                                    | 395        |       | $          | 449        |       | $ | (54 | ) | (12.0 | )% |
|                           |       |                                                 |       |       |       |       |       |   |   |   |   |   |
| ** **                     | ** ** | **Nine months ended March 31,**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **2009**                                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **New orders**                 |       |                                                 |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                    | 159,066    |       | $          | 368,433    |       | $ | (209,367 | ) | (56.8 | )% |
| Units                          |       | 416                                                  |       | 853        |       | (437       | )          | (51.2 | )% |
| Average sales price            |       | $                                                    | 382        |       | $          | 432        |       | $ | (50 | ) | (11.6 | )% |
|                           |       |                                                 |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                                 |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                    | 240,702    |       | $          | 372,865    |       | $ | (132,163 | ) | (35.4 | )% |
| Units                          |       | 562                                                  |       | 829        |       | (267       | )          | (32.2 | )% |
| Average sales price            |       | $                                                    | 428        |       | $          | 450        |       | $ | (22 | ) | (4.9 | )% |
|                           |       |                                                 |       |       |       |       |       |   |   |   |   |   |
| ** **                     | ** ** | **As of March 31,**                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **2009**                                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Backlog**                    |       |                                                 |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                    | 156,673    |       | $          | 313,481    |       | $ | (156,808 | ) | (50.0 | )% |
| Units                          |       | 340                                                  |       | 633        |       | (293       | )          | (46.3 | )% |
| Average sales price            |       | $                                                    | 461        |       | $          | 495        |       | $ | (34 | ) | (6.9 | )% |

 

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Neworders for the three months ended March 31, 2009 decreased $56,968, or47.0%, to $64,202 on 168 homes, compared to $121,170 on 266 homes for the threemonths ended March 31, 2008.  Theaverage price per home decreased by approximately 16.2% to $382 for the threemonths ended March 31, 2009 compared to $456 for the three months ended March 31,2008.

 

Neworders for the nine months ended March 31, 2009 decreased $209,367, or56.8%, to $159,066 on 416 homes, compared to $368,433 on 853 homes for the ninemonths ended March 31, 2008.  Theaverage price per home decreased by approximately 11.6% to $382 for the ninemonths ended March 31, 2009 compared to $432 for the nine months ended March 31,2008.

 

Thedecrease in new orders for the three and nine months ended March 31, 2009was attributable to the continued deterioration in the overall housing andmortgage markets during the period, significant turmoil in the capital markets,weaker employment statistics and decreased consumer confidence.  The decrease in the average sales price onnew orders generally represents a response to the deterioration in marketconditions by us in an effort to increase absorption through the use ofmarketing incentives, price reductions and changes to our product mix towardsmaller-value oriented product..

 

Residentialrevenues earned for the three months ended March 31, 2009 decreased$44,671, or 41.0%, to $64,347 on 163 homes, compared to $109,018 on 243 homesfor the three months ended March 31, 2008. The average price per home decreased by approximately 12.0% to $395 forthe three months ended March 31, 2009 compared to $449 for the threemonths ended March 31, 2008.

 

Residentialrevenues earned for the nine months ended March 31, 2009 decreased$132,163, or 35.4%, to $240,702 on 562 homes, compared to $372,865 on 829 homesfor the nine months ended March 31, 2008. The average price per home decreased by approximately 4.9% to $428 forthe nine months ended March 31, 2009 compared to $450 for the nine monthsended March 31, 2008.

 

Thedecrease in residential revenues earned for the three and nine months ended March 31,2009 was also primarily attributable to the continued deterioration in the overallhousing and mortgage markets during the period, significant turmoil in thecapital markets, weaker employment statistics and decreased consumerconfidence.

 

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

 

Cancellationrates for the three and nine months ended March 31, 2009 were 26.6% and31.0%, respectively of new orders compared to 31.3% and 26.2% for the three andnine months ended March 31, 2008, respectively.  Cancellations declined from 303 in the ninemonths ended March 31, 2008 to 187 in the nine months ended March 31,2009.

 

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***Northern Region:***

*** ***
| ** **                     | ** ** | **Three months ended March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2009**                                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **New orders**                 |       |                                                 |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                    | 35,542     |       | $          | 48,478     |       | $ | (12,936 | ) | (26.7 | )% |
| Units                          |       | 90                                                   |       | 100        |       | (10        | )          | (10.0 | )% |
| Average sales price            |       | $                                                    | 395        |       | $          | 485        |       | $ | (90 | ) | (18.6 | )% |
|                           |       |                                                 |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                                 |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                    | 30,383     |       | $          | 49,761     |       | $ | (19,378 | ) | (38.9 | )% |
| Units                          |       | 74                                                   |       | 102        |       | (28        | )          | (27.5 | )% |
| Average sales price            |       | $                                                    | 411        |       | $          | 488        |       | $ | (77 | ) | (15.8 | )% |

 
| ** **                     | ** ** | **Nine months ended March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2009**                                            | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **New orders**                 |       |                                                |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                   | 77,501     |       | $          | 147,950    |       | $ | (70,449 | ) | (47.6 | )% |
| Units                          |       | 186                                                 |       | 322        |       | (136       | )          | (42.2 | )% |
| Average sales price            |       | $                                                   | 417        |       | $          | 459        |       | $ | (42 | ) | (9.2 | )% |
|                           |       |                                                |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                                |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                   | 110,210    |       | $          | 157,811    |       | $ | (47,601 | ) | (30.2 | )% |
| Units                          |       | 244                                                 |       | 325        |       | (81        | )          | (24.9 | )% |
| Average sales price            |       | $                                                   | 452        |       | $          | 486        |       | $ | (34 | ) | (7.0 | )% |

 
| ** **          | ** ** | **As of  March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|---------------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **2009**                  | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **          | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Backlog**         |       |                      |       |       |       |       |       |   |   |
| Dollars             |       | $                         | 77,109     |       | $          | 134,774    |       | $ | (57,665 | ) | (42.8 | )% |
| Units               |       | 152                       |       | 252        |       | (100       | )          | (39.7 | )% |
| Average sales price |       | $                         | 507        |       | $          | 535        |       | $ | (28 | ) | (5.2 | )% |

 

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 thismarket allows us to compete better than if we were situated in one or twoconcentrated markets.  In the northernregion, we currently build homes primarily targeted toward move-up, luxury,empty nester and active adult homebuyers.

 

Thedecrease in new orders for the northern region noted above for the three andnine months ended March 31, 2009, was the result of a large decrease inthe number of units sold, coupled with a slight decline in the average salesprice.  The decrease in the number ofunits was primarily the result of deteriorating market conditions.  The decrease in residential revenue earnedfor the three and nine months ended March 31, 2009, was also the result ofboth decreases in the units sold and the average sale price.  In response to these market conditions, wehave introduced new smaller-value oriented product in the region and we havealso seen a shift in mix to our multi-family townhome products as well as lowerpriced single family communities.

 

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***Southern Region:***

*** ***
| ** **                     | ** ** | **Three months ended March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2009**                                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **New orders**                 |       |                                                 |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                    | 22,804     |       | $          | 59,124     |       | $ | (36,320 | ) | (61.4 | )% |
| Units                          |       | 62                                                   |       | 127        |       | (65        | )          | (51.2 | )% |
| Average sales price            |       | $                                                    | 368        |       | $          | 466        |       | $ | (98 | ) | (21.0 | )% |
|                           |       |                                                 |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                                 |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                    | 27,471     |       | $          | 47,715     |       | $ | (20,244 | ) | (42.4 | )% |
| Units                          |       | 72                                                   |       | 104        |       | (32        | )          | (30.8 | )% |
| Average sales price            |       | $                                                    | 382        |       | $          | 459        |       | $ | (77 | ) | (16.8 | )% |

 
| ** **                     | ** ** | **Nine  months ended March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2009**                                        | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **New orders**                 |       |                                            |       |       |       |       |       |   |   |
| Dollars                        |       | $                                               | 58,501     |       | $          | 167,889    |       | $ | (109,388 | ) | (65.2 | )% |
| Units                          |       | 165                                             |       | 367        |       | (202       | )          | (55.0 | )% |
| Average sales price            |       | $                                               | 355        |       | $          | 457        |       | $ | (102 | ) | (22.3 | )% |
|                           |       |                                            |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                            |       |       |       |       |       |   |   |
| Dollars                        |       | $                                               | 98,976     |       | $          | 157,915    |       | $ | (58,939 | ) | (37.3 | )% |
| Units                          |       | 236                                             |       | 331        |       | (95        | )          | (28.7 | )% |
| Average sales price            |       | $                                               | 419        |       | $          | 477        |       | $ | (58 | ) | (12.2 | )% |

 
| ** **          | ** ** | **As of  March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|---------------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **2009**                  | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **          | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Backlog**         |       |                      |       |       |       |       |       |   |   |
| Dollars             |       | $                         | 63,284     |       | $          | 140,502    |       | $ | (77,218 | ) | (55.0 | )% |
| Units               |       | 145                       |       | 279        |       | (134       | )          | (48.0 | )% |
| Average sales price |       | $                         | 436        |       | $          | 504        |       | $ | (68 | ) | (13.5 | )% |

 

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 and nine months ended March 31, 2009,compared to the three and nine months ended March 31, 2008, was the resultof significant decreases in both the number of units sold and the average priceper unit.  The decrease in residentialrevenues earned for the three and nine months ended March 31, 2009,compared to the three and nine months ended March 31, 2008, was also dueto significant decreases in the number of units sold and the average sale priceper unit.  The decrease in average salesprice has been particularly significant in our Richmond market, where in prioryears we were primarily selling luxury product. The decrease in the number of units sold has also been significant inRichmond, as well as our Charlotte market.

 

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***Midwestern Region:***

 
| ** **                     | ** ** | **Three months ended March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2009**                                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **New orders**                 |       |                                                 |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                    | 5,435      |       | $          | 12,704     |       | $ | (7,269 | ) | (57.2 | )% |
| Units                          |       | 14                                                   |       | 34         |       | (20        | )          | (58.8 | )% |
| Average sales price            |       | $                                                    | 388        |       | $          | 374        |       | $ | 14 |   | 3.7 | % |
|                           |       |                                                 |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                                 |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                    | 5,738      |       | $          | 6,501      |       | $ | (763 | ) | (11.7 | )% |
| Units                          |       | 13                                                   |       | 17         |       | (4         | )          | (23.5 | )% |
| Average sales price            |       | $                                                    | 441        |       | $          | 382        |       | $ | 59 |   | 15.4 | % |

 
| ** **                     | ** ** | **Nine  months ended March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2009**                                        | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **New orders**                 |       |                                            |       |       |       |       |       |   |   |
| Dollars                        |       | $                                               | 20,362     |       | $          | 39,672     |       | $ | (19,310 | ) | (48.7 | )% |
| Units                          |       | 52                                              |       | 107        |       | (55        | )          | (51.4 | )% |
| Average sales price            |       | $                                               | 392        |       | $          | 371        |       | $ | 21 |   | 5.7 | % |
|                           |       |                                            |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                            |       |       |       |       |       |   |   |
| Dollars                        |       | $                                               | 26,414     |       | $          | 35,062     |       | $ | (8,648 | ) | (24.7 | )% |
| Units                          |       | 61                                              |       | 79         |       | (18        | )          | (22.8 | )% |
| Average sales price            |       | $                                               | 433        |       | $          | 444        |       | $ | (11 | ) | (2.5 | )% |

 
| ** **          | ** ** | **As of  March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|---------------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **2009**                  | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **          | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Backlog**         |       |                      |       |       |       |       |       |   |   |
| Dollars             |       | $                         | 15,032     |       | $          | 32,542     |       | $ | (17,510 | ) | (53.8 | )% |
| Units               |       | 39                        |       | 83         |       | (44        | )          | (53.0 | )% |
| Average sales price |       | $                         | 385        |       | $          | 392        |       | $ | (7 | ) | (1.8 | )% |

 

Inour midwestern region, we have operations in the Chicago area.  In our midwestern region we currently buildhomes primarily targeted toward the move-up homebuyer.

 

Duringthe three and nine months ended March 31, 2009, both new order dollars andthe number of units sold decreased as compared to the same periods in the prioryear.  This decrease was primarily theresult of the deteriorating economic and market conditions noted above.  Average sales price for both new orders andresidential revenue was up during the three months ended March 31,2009.   For the nine months ended March 31,2009, average sale price was up slightly for new orders and down slightly forresidential revenue.

 

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***Florida Region:***

 
| ** **                     | ** ** | **Three months ended March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2009**                                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **New orders**                 |       |                                                 |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                    | 421        |       | $          | 864        |       | $ | (443 | ) | (51.3 | )% |
| Units                          |       | 2                                                    |       | 5          |       | (3         | )          | (60.0 | )% |
| Average sales price            |       | $                                                    | 211        |       | $          | 173        |       | $ | 38 |   | 22.0 | % |
|                           |       |                                                 |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                                 |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                    | 755        |       | $          | 5,041      |       | $ | (4,286 | ) | (85.0 | )% |
| Units                          |       | 4                                                    |       | 20         |       | (16        | )          | (80.0 | )% |
| Average sales price            |       | $                                                    | 189        |       | $          | 252        |       | $ | (63 | ) | (25.0 | )% |

 
| ** **                     | ** ** | **Nine months ended March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2009**                                            | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **New orders**                 |       |                                                |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                   | 2,702      |       | $          | 12,922     |       | $ | (10,220 | ) | (79.1 | )% |
| Units                          |       | 13                                                  |       | 57         |       | (44        | )          | (77.2 | )% |
| Average sales price            |       | $                                                   | 208        |       | $          | 227        |       | $ | (19 | ) | (8.4 | )% |
|                           |       |                                                |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                                |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                   | 5,102      |       | $          | 22,077     |       | $ | (16,975 | ) | (76.9 | )% |
| Units                          |       | 21                                                  |       | 94         |       | (73        | )          | (77.7 | )% |
| Average sales price            |       | $                                                   | 243        |       | $          | 235        |       | $ | 8 |   | 3.4 | % |

 
| ** **          | ** ** | **As of March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|--------------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **2009**                 | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **          | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Backlog**         |       |                     |       |       |       |       |       |   |   |
| Dollars             |       | $                        | 1,248      |       | $          | 5,663      |       | $ | (4,415 | ) | (78.0 | )% |
| Units               |       | 4                        |       | 19         |       | (15        | )          | (78.9 | )% |
| Average sales price |       | $                        | 312        |       | $          | 298        |       | $ | 14 |   | 4.7 | % |

 

Theabove table reflects results from our Florida region for the three and ninemonths ended March 31, 2009 and 2008. In the Florida region, we have operations in the Orlando market.  The nine months ended March 31, 2008,also reflects 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 and nine months ended March 31, 2009,as compared to the three and nine months ended March 31, 2008, wasprimarily the result of the continued deterioration of market conditions inthis region.  New orders were alsonegatively impacted by our exit from the Palm Bay and Palm Coast markets, asnoted above.  The decline in residentialrevenue earned was also the result of the overall decline in market conditions,as well as our exit from the Palm Bay and Palm Coast markets, as noted above.

 

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***Costs and Expenses:***

 

***Residential Properties:***

 
| ** **                     | ** ** | **Three months ended March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2009**                                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
|                           |       |                                                 |       |       |       |       |       |   |   |
| **Residential Properties**     |       |                                                 |       |       |       |       |       |   |   |
| Earned revenue                 |       | $                                                    | 64,347     |       | $          | 109,018    |       | $ | (44,671 | ) | (41.0 | )% |
| Cost of residential properties |       | 62,558                                               |       | 110,908    |       | (48,350    | )          | (43.6 | )% |
| Gross profit margin            |       | $                                                    | 1,789      |       | $          | (1,890     | )          | $ | 3,679 |   | (194.7 | )% |
| Gross profit margin %          |       | 2.8                                                  | %          | (1.7       | )%         |       |       |   |   |

 
| ** **                     | ** ** | **Nine months ended March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2009**                                            | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
|                           |       |                                                |       |       |       |       |       |   |   |
| **Residential Properties**     |       |                                                |       |       |       |       |       |   |   |
| Earned revenue                 |       | $                                                   | 240,702    |       | $          | 372,865    |       | $ | (132,163 | ) | (35.4 | )% |
| Cost of residential properties |       | 237,513                                             |       | 361,286    |       | (123,773   | )          | (34.3 | )% |
| Gross profit margin            |       | $                                                   | 3,189      |       | $          | 11,579     |       | $ | (8,390 | ) | (72.5 | )% |
| Gross profit margin %          |       | 1.3                                                 | %          | 3.1        | %          |       |       |   |   |

 

Thecosts of residential properties for the three and nine months ended March 31,2009, compared to the three and nine months ended March 31, 2008 decreasedprimarily as a result of decreased residential revenue earned.  Impairments of residential property in theamount of $3,009 and $15,267 were recorded in the three months ended March 31,2009 and 2008, respectively.  Impairmentsof residential property in the amount of $21,097 and $38,896 were recorded inthe nine months ended March 31, 2009 and 2008, respectively.  Gross profit percentage for the three andnine months ended March 31, 2009 was 2.8% and 1.3%, as compared to (1.7)%and 3.1% for the three and nine months ended March 31, 2008.  Without recording the impairments, the grossprofit percentage would have been 7.5% and 10.1% for the three and nine monthsended March 31, 2009, as compared to 12.3% and 13.5% for the three andnine months ended March 31, 2008.

 

Wesell a variety of home types in various communities and regions, each yieldinga different gross profit margin. As a result, depending on the mix of bothcommunities and home types delivered, the consolidated gross profit margin mayfluctuate up and down on a periodic basis and periodic profit margins may notbe representative of the consolidated gross profit margin for the entire yearor 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 onlyaccelerated 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 endedMarch 31, 2009 and March 31, 2008 was $3,831 and $7,817,respectively. Interest included in the costs and expenses of residentialproperties and land sold for the nine months ended March 31, 2009 and March 31,2008 was $12,510 and $16,740, respectively. Interest charged directly to interest expense during the three and ninemonths ended March 31, 2009 was $1,955 and $4,838, respectively.  Included in interest expense during the threeand nine months ended March 31, 2009, was the write-off of debtacquisition costs in the amount of $274 and $1,058.  These charges were recognized due to thedecreases in borrowing capacity as a result of both the September 30, 2008and February 11, 2009 amendments to the Revolving Credit Facility.  There was no interest charged directly tointerest expense during the three and nine months ended March 31, 2008.

 

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

 
| ** **                              | ** ** | **Three months ended March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | **2009**                                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                              | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Selling, General and Administrative** |       |                                                 |       |       |       |       |       |   |   |
| Selling and advertising                 |       | $                                                    | 4,065      |       | $          | 6,629      |       | $ | (2,564 | ) | (38.7 | )% |
| Commissions                             |       | 2,549                                                |       | 4,181      |       | (1,632     | )          | (39.0 | )% |
| General and administrative              |       | 4,865                                                |       | 8,499      |       | (3,634     | )          | (42.8 | )% |
| Total                                   |       | $                                                    | 11,479     |       | $          | 19,309     |       | $ | (7,830 | ) | (40.6 | )% |

 
| ** **                              | ** ** | **Nine months ended March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | **2009**                                            | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                              | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Selling, General and Administrative** |       |                                                |       |       |       |       |       |   |   |
| Selling and advertising                 |       | $                                                   | 13,863     |       | $          | 21,303     |       | $ | (7,440 | ) | (34.9 | )% |
| Commissions                             |       | 9,643                                               |       | 14,102     |       | (4,459     | )          | (31.6 | )% |
| General and administrative              |       | 20,672                                              |       | 26,767     |       | (6,095     | )          | (22.8 | )% |
| Total                                   |       | $                                                   | 44,178     |       | $          | 62,172     |       | $ | (17,994 | ) | (28.9 | )% |

 

Sellingand advertising costs include amortization of deferred marketing costs andother selling costs.  These costsdecreased primarily as a result of reduced headcount reductions that took placeduring the first nine months of fiscal year 2009.  During this time, the Company has had threeheadcount reductions, which have reduced the total number of employees at theCompany from 544 at June 30, 2008 to 368 at March 31, 2009, areduction of 32%.  From June 30,2006 to March 31, 2009, headcount has been reduced from 988 to 368, areduction of 63%.  Since the end of thethird quarter of fiscal year 2009, the Company has had an additional headcountreduction.  As of April 30, 2009,the Company had 338 employees, which is a 38% reduction since June 30,2008.

 

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% and 4.0% for the three and nine months ended March 31, 2009 from 3.8%and 3.8% for the three and nine months ended March 31, 2008.  The increased rate was due to increasedincentives to the Company’s sales force.

 

Thedecrease in general and administrative costs was due to the aforementionedheadcount reductions.  Write-offs ofabandoned projects and other pre-acquisition costs were $82 and $1,880 for thethree and nine months ended March 31, 2009 as compared to $69 and $931 forthe three and nine months ended March 31, 2008.

 

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

 
| ** **                 | ** ** | **Three months ended March 31,** | ** ** | ** ** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                 | ** ** | **2009**                                             | ** ** | **2008**   | ** ** | **Change** | ** ** |
| ** **                 | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Land sales**             |       |                                                 |       |       |       |   |   |
| Earned revenue             |       | $                                                    | —     |       | $          | 1,912 |   | $ | (1,912 | ) |
| Costs and expenses         |       | —                                               |       | 1,635      |       | (1,635 | ) |
| Gross profit (loss)        |       | $                                                    | —     |       | $          | 277 |   | $ | (277 | ) |
|                       |       |                                                 |       |       |       |   |   |
| **Other income (expense)** |       |                                                 |       |       |       |   |   |
| Other income               |       | $                                                    | 2,347      |       | $          | 2,364 |   | $ | (17 | ) |
| Other expense              |       | $                                                    | 1,551      |       | $          | 1,566 |   | $ | (15 | ) |

 
| ** **                 | ** ** | **Nine months ended March 31,** | ** ** | ** ** | ** ** |
|----------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                 | ** ** | **2009**                                            | ** ** | **2008**   | ** ** | **Change** | ** ** |
| ** **                 | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Land sales**             |       |                                                |       |       |       |   |   |
| Earned revenue             |       | $                                                   | 58         |       | $          | 11,322 |   | $ | (11,264 | ) |
| Costs and expenses         |       | 26                                                  |       | 47,677     |       | (47,651 | ) |
| Gross profit (loss)        |       | $                                                   | 32         |       | $          | (36,355 | ) | $ | 36,387 |   |
|                       |       |                                                |       |       |       |   |   |
| **Other income (expense)** |       |                                                |       |       |       |   |   |
| Other income               |       | $                                                   | 6,483      |       | $          | 6,926 |   | $ | (443 | ) |
| Other expense              |       | $                                                   | 5,191      |       | $          | 5,001 |   | $ | 190 |   |

 

TheCompany had land sales revenue of $0 and $58 during the three and nine monthsended March 31, 2009, respectively as compared to $1,912 and $11,322during the three and nine month ended March 31, 2008, respectively.  During the nine months ended March 31,2008, the Company received proceeds on the sale of land of $36,047.  Of the $36,047 received during this period,$11,322 was recognized as land sales revenue; $11,300 related to proceeds inthe Company’s western region and was included in discontinued operations; and$13,425 related to two parcels of land that were sold and subsequently subjectto an option agreement.  Due to thefederal income tax losses recorded by the Company related to thesetransactions, the Company received approximately $34,000 of federal income taxrefunds as a result of these transactions and other operations for its taxationyear ended December 31, 2007.

 

Prior to the completionof the land sales discussed above, we recorded asset impairments on the land tobe sold.  The total impairment charge related to these land sales were$36,556 for the nine months ended March 31, 2008.  These assetimpairment losses are included in the costs of land sales.

 

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 March 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                  | ** ** | **2009**                                             | ** ** | **2008**   | ** ** | **Change** | ** ** |
|                                        |       |                                                 |       |       |       |   |   |
| Pre-tax loss from continuing operations     |       | $                                                    | (10,849    | )          | $          | (20,124 | ) | $ | 9,275 |   |
| Income tax benefit                          |       | 4,120                                                |       | 26,987     |       | (22,867 | ) |
| Loss from continuing operations, net of tax |       | $                                                    | (14,969    | )          | $          | (47,111 | ) | $ | 32,142 |   |

 
| ** **                                  | ** ** | **Nine months ended March 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                  | ** ** | **2009**                                            | ** ** | **2008**   | ** ** | **Change** | ** ** |
|                                        |       |                                                |       |       |       |   |   |
| Pre-tax loss from continuing operations     |       | $                                                   | (48,683    | )          | $          | (85,023 | ) | $ | 36,340 |   |
| Income tax benefit                          |       | 3,843                                               |       | 2,458      |       | 1,385 |   |
| Loss from continuing operations, net of tax |       | $                                                   | (52,526    | )          | $          | (87,481 | ) | $ | 34,955 |   |

 

The Company had incometax expense from continuing operations for the nine months ended March 31,2009 of $3,843 as compared to $2,458 for the nine months ended March 31,2008.  These amounts represent effectivetax rates for the nine months ended March 31, 2009 and 2008 of (7.9)% and(2.9)%, respectively.  The significantchanges in the Company’s effective tax rate resulted primarily from therecording of a correction to the accrued income tax account in the amount of$2,347, as well as a $20,360 net valuation reserve in the first nine months offiscal year 2009 as compared with the initial establishment of a valuationreserve in the nine months ended March 31, 2008 in the amount of$43,544.  The $20,360 net valuationreserve includes a correction related to the impact of a federal tax benefit inthe amount of $1,447, related to a state liability recorded prior to theCompany establishing a valuation reserve in the third quarter of fiscal year2008, for which the Company did not take taking a valuation reserve until thethird quarter of fiscal year 2009.  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 weight is 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.

 

Duringthe third quarter of fiscal year 2009, the Company recognized additional taxexpense of $3,794 reflecting the impact of cumulative out of periodadjustments.  This error was related toan overstatement of tax refunds due the Company reflected in the income tax receivableaccount in the amount of $2,347, coupled with an overstatementof federal tax benefits in the amount of $1,447 related to a state taxliability.  These error corrections had theeffect of increasing income tax expense and reducing net income by $3,794.  The Company concluded that this adjustmentwas not material to the consolidated financial statements for any prior periodor to the third quarter of fiscal year 2009.

 

***Loss from 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 inArizona.  We have historically reportedthis 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.

 

Lossfrom discontinued operations was $8,634 and $21,704, or a loss of $0.47 pershare and $1.17 per share for the three and nine months ended March 31,2008, respectively.  See Note 12 to ourconsolidated financial statements in Item 1 of this Part 1.

 

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**Liquidity and Capital Resources**

 

Onan ongoing basis, we require capital for expenditures to develop land, toconstruct homes, to fund related carrying costs and overhead and to fundvarious advertising and marketing programs to facilitate sales.  Theseexpenditures include site preparation, roads, water and sewer lines, impactfees and earthwork, as well as the construction costs of the homes andamenities.

 

Asof March 31, 2009, we had $27,331 of borrowing capacity under our securedRevolving Credit Facility discussed below, subject to borrowing baseavailability.  At March 31, 2009, we had borrowings in excess of netborrowing base availability of $2,754.  The negative borrowing baseavailability at that time was repaid in full on a timely basis after March 31,2009 and did not have any adverse impact on the Company.  As of March 31,2009, the Company’s liquidity (as described in the table below) wasapproximately $15,767.  As of April 30,2009, the Company estimates that its liquidity was approximately $18,100, anincrease of approximately $2,333 since March 31, 2009.  The Company holds, and it currentlyanticipates continuing to hold, the majority of the aggregate of cash and cashequivalents and marketable securities in short-term U.S. Treasury bills forcapital preservation.  At March 31,2009, the 30-day LIBOR rate of interest was 0.51%.

 

Duringthe nine months ended March 31, 2009, our liquidity decreased by $55,432 asshown in the table below:

 
| ** **                                 | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **2009**           | ** ** | **2008**          | ** ** |
| Cash and cash equivalents                  |       | $                  | 13,260     |              | $          | 72,341 |   |
| Restricted cash - due from title companies |       | 4,764              |       | 19,269            |       |
| Marketable securities                      |       | 497                |       | —            |       |
| Net borrowing base availability            |       | (2,754             | )          | (20,411           | )          |
| Liquidity                                  |       | $                  | 15,767     |              | $          | 71,199 |   |

 

Thedecrease in liquidity was primarily due to cash used for operations, loweryear-over-year backlog and decreased year-over-year net new orders, which havethe impact of reducing our gross borrowing base, and inventory impairmentsduring the nine months ended March 31, 2009, which decreased our borrowingbase availability.  These items decreasing our liquidity were partiallyoffset by adjustments for certain category reductions made in the calculationof the borrowing base pursuant to the First Amendment to the Second AmendedCredit Agreement, discussed below, a planned increase in our accounts payableaging, and decreases in acquisitions of land.

 

Oursources of capital include, but are not limited to, funds derived fromoperations, sales of various land assets, reductions in speculative inventorylevels through completed home deliveries and reductions in new speculative unitstarts, borrowings under our Revolving Credit Facility, the issuance of debt orequity securities or other possible recapitalization transactions.  Ourshort-term and long-term liquidity depend primarily upon the net cash recoveryof our land investment upon completed home deliveries, working capitalmanagement (cash, accounts receivable, inventory of units under construction,accounts payable and other liabilities), bank borrowings, land relatedexpenditures, net new orders and deliveries.  In an effort to increaseliquidity, we may pursue sales of parcels of land, model homes and other assets,amendments to our Revolving Credit Facility, or we may pursue sales of debt orequity securities or other recapitalization transactions, or seek otherexternal sources of funds.  However, we can offer no assurances as towhether or when such transactions will occur or whether the transactions willbe on terms advantageous to us.

 

Asthe downturn in the housing industry has continued, we have reduced the size ofour business operations through lot count reductions for both owned andcontrolled lots, the abandonment or renegotiation of land option contracts, thereduction in the total number of existing speculative units, the sale ofcertain model homes, limited construction of new speculative units in order tomaintain reasonable speculative unit levels relative to lower new orders, andactively shifted our speculative unit mix wherever possible to price andproducts that are in better relative demand today.  We have alsosignificantly reduced our land expenditures and land expenditure budgets,including, given the more recent market conditions experienced since the fallof 2008, significantly reducing these expenditures for the balance of thefiscal year in order to minimize the impacts of lower net new orders on cashflow generated.  Pursuant to the First Amendment to the Second AmendedCredit Agreement, the Company’s ability to purchase unimproved real estate isno longer available; however, the Company continues to be able to acquire lotsthough option take-downs.  Further, we have significantly reduced our workforce,with headcount reductions in the current fiscal year from June 30, 2008through April 30, 2009 of approximately 38%, or 206 people, and headcountreductions of approximately 65% between June 30, 2006 and April 30,2009.

 

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FromJanuary 1, 2007 to March 31, 2009, we reduced our net debt levels by$142,344, or 24% (where net debt is defined for each period as total mortgageand other note obligations plus subordinated notes less the aggregate of cashand cash equivalents, marketable securities, restricted cash — due from titlecompany, but excluding restricted cash — customer deposits).  During thissame period, the aggregate amount of our work-in-process and owned landinventories have decreased by $344,799 (from $857,242 to $512,443), whichimpacts our gross borrowing base availability.  A significant portion ofthis net inventory decrease is due to impairments of $203,948 (including discontinuedoperations) recorded during this period, although a portion of previouslyimpaired inventory has since been sold, either through land sales or normaloperations.  During this same period, our total liquidity (as definedabove) decreased by $21,824, from $37,615 to $15,791.  The net debtreduction from January 1, 2007 to March 31, 2009 described above hasbeen generated through various means, including operations, the reduction inthe total number of speculative units, offering incentives to buyers in orderto help keep orders and deliveries at higher relative levels notwithstandingchallenging industry conditions, selective lands sales, decreases in landacquisitions and other land expenditures, the abandonment or renegotiation ofland option contracts, income tax refunds and a planned increase in ouraccounts payable aging.

 

Wecontinue to focus on cash generation and preservation to allow sufficientliquidity to be available to fund our continuing operations.  There are,however, several factors that may affect our liquidity in the comingmonths.  First, as described below under “FirstAmendment to the Second Amended Credit Agreement and Security Agreement”executed on February 11, 2009,  themaximum percentages of borrowing base availability that may be attributable tospeculative inventory and land under development, as well as the maximum dollaramount of borrowing that may be attributable to land under development, weretemporarily increased (resulting in an increase in borrowing base availability)for all borrowing base certificates delivered before July 31, 2009. For borrowing base certificates delivered on or after July 31, 2009 (wherethe borrowing base certificate as of July 31, 2009 is anticipated to bedelivered and is due on August 15, 2009), the maximum relative percentagesand maximum dollar amounts for certain borrowing base categories return totheir lower pre-amendment levels, the effect of which could be to potentiallyreduce our borrowing base availability, depending on several different factors,including the relative levels of backlog, speculative inventory and land underdevelopment at such time, as well as cash generated from operations andreduction in bank debt outstanding prior to such time.  We anticipatethat, absent an amendment to our Revolving Credit Facility or significantimprovement in net new orders, backlog or land sales, or a refinancing orrecapitalization transaction, the borrowing base availability determined on thebasis of the borrowing base certificate dated before or as of July 31,2009 (which is required to be delivered to the lenders on or before August 15,2009) may be significantly less than the outstanding borrowings at suchtime.  Under those circumstances, we may not be able to reduce theoutstanding borrowings at such time by an amount sufficient to repay in fullsuch future potential negative borrowing base availability within the timeperiod required by the Revolving Credit Facility without a further amendment tothe Revolving Credit Facility to otherwise increase the net borrowing baseavailability before August 15, 2009.  Additionally, such reductionsto borrowing base availability, absent an amendment, could result in our netliquidity at that time being less than the $10,000 of minimum net liquidity nowrequired by the Revolving Credit Facility.  We have in the past obtainedamendments to the Revolving Credit Facility to address similar borrowing baseand liquidity issues, including under the “First Amendment to the SecondAmended Credit Agreement and Security Agreement,” and we currently believe thatwe should be able to obtain an amendment to temporarily increase the borrowingbase availability to provide sufficient liquidity to allow us to fund ouroperations and meet the net liquidity covenant for a period of time, if such anamendment is needed.  However, we can offer no assurance that we will beable to obtain such an amendment or obtain such an amendment on termsadvantageous to us.

 

On-goingbank reappraisals of our borrowing base assets may also affect ourliquidity.  As part of the terms of theRevolving Credit Facility, appraisals are performed by appraisers engageddirectly by the banks on the collateral assets included in the borrowingbase.  Such appraisals are also required upon admission of assets into theborrowing base.  Approximately 35% of the borrowing base collateral assetswere reappraised during the summer of 2008.  These reappraisals werecollectively reflected in the borrowing base certificate dated as of September 30,2008, and had the net impact of improving borrowing base availability byapproximately $2,700.  Approximately one third of the total assets in theborrowing base with a book value in excess of $4,000 and not reappraised in thesummer of 2008 have just been reappraised, are currently being reappraised orare anticipated to be reappraised during the next quarter.  Of thesenew reappraisals, those that have been completed (approximately 1/3 of thetotal assets to be reappraised after the summer of 2008) were collectivelyreflected in the March 31, 2009 borrowing base certificate, which resultedin a net reduction in our borrowing base availability of approximately$1,000.  Of the remaining 2/3 of the assets to be reappraised after thesummer of 2008, approximately 1/3 of the reappraisals to be conducted after thesummer of 2008 are currently in process and we anticipate the balance of theremaining 1/3 of the borrowing base assets subject to reappraisal will bereappraised in our fourth quarter or shortly thereafter.  We anticipatethat the remaining reappraisals that are currently underway or anticipated tobe completed in our fourth quarter may cause further net reductions in our netborrowing base and borrowing base availability, which net reductions may be material. If the net reductions in borrowing base availability are material, we currentlyanticipate that we would seek and should receive a temporary amendment to ourRevolving Credit Facility that would allow us to have

 

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sufficientliquidity available to fund our operations for a period of time.  However,we can offer no assurance that we would be able to obtain such an amendment orthat such an amendment would be on terms favorable to us.

 

Inaddition to changes related to the borrowing base described above, if one ormore additional lenders default under our Revolving Credit Facility, ourliquidity could be adversely affected. Under the Revolving Credit Facility, each lender has an individualaggregate facility commitment level and no lender is required to fund beyondits individual pro rata overall facility commitment level, even if one or moreother lenders fail to fund a draw request.  If one or more of our lendersunder the Revolving Credit Facility defaults on their commitment, our abilityto access the credit facility may be limited.  One lender (less than 3% ofthe total commitments) was closed by state regulators, is subject to FederalDeposit Insurance Corporation (“FDIC’) receivership, has defaulted on its remaining unfunded commitments underthe facility, and is not currently funding its pro rata portion of newborrowings and advances under the Revolving CreditFacility.  Principal repayments otherwise payable to this defaultinglender presently are generally payable directly to the Company, but subject tothe maximum cash and cash equivalents covenant.  Currently, the Company’sliquidity and borrowing base availability provide sufficient liquidity, despitethis one defaulting lender that is holding less than 3% of the aggregatefacility commitments.  If, however, additional lenders default on theircommitments, or other conditions relating to our liquidity or borrowing baseavailability change, our liquidity and borrowing base availability may nolonger be sufficient to provide sufficient liquidity and our ability to borrowand our liquidity could be significantly restricted.

 

OnJuly 16, 2009, the aggregate Revolving Credit Facility size will bereduced from $405,000 to $375,000, unless otherwise permanently reduced to anamount less than or equal to $375,000 before that date.  Based on ourcurrent internal projections, we anticipate that this reduction of creditfacility size will not adversely affect the Company’s operations, but cannotoffer any assurance that the reduction will not adversely affect ouroperations.

 

Onapproximately July 30, 2009, pursuant to the terms of the first amendmentto the $75,000 issue of trust preferred securities, the Company is generallyrequired to provide a $2,500 increase in the reserve fund for the benefit ofholders of the trust preferred securities by posting a letter of credit withthe trustee.  The Company currently anticipatesposting such letter of credit as is permitted under the existing terms of thecredit facility, provided the Company has sufficient liquidity to do so at suchtime.  If posted, this letter of creditwill reduce our liquidity otherwise determined at that time by $2,500.

 

Inaddition, on September 15, 2009, the Company will be required to pay anadditional loan fee to its lender group, in an amount up to $12,500, unless thebalance outstanding under the Revolving Credit has been repaid in full or theRevolving Credit Facility is otherwise amended.  The amount of the paymentwill be reduced by 80% if the aggregate commitment level of the lenders isreduced to $250,000 or below prior to September 15, 2009.  TheCompany can offer no assurances that it will be able to amend the RevolvingCredit Facility to avoid such loan fee or be able to reduce the aggregatecommitment level to $250,000 or less before September 15, 2009, or be ableto do so on commercially reasonable terms.

 

Finally,the Revolving Credit Facility also matures on December 20, 2009.  While we currently anticipate that we will beable to refinance or extend our Revolving Credit Facility before that time, wecan offer no assurance that we will be able to do so, or be able to do so oncommercially reasonable terms.  In the event that we are not successful inexecuting our plans discussed above, including potentially obtaining anamendment to our Revolving Credit Facility increasing certain categoryreduction percentages or otherwise increasing borrowing base availability on orprior to August 15, 2009 (the date we anticipate delivering our borrowingbase certificate dated as of July 31, 2009), we may need to consideralternative sources of capital to finance our operations.   In anyevent, we can make no assurances that our business will generate sufficientcash flow from operations or that future borrowings will be available to us inan amount sufficient to enable us to pay our indebtedness, or to fund our otherliquidity needs.

 

Inaddition to the factors and circumstances discussed above, any materialvariance from our internally projected operating results (including net neworders, cancellations, backlog, deliveries and expenditures), material declinesin the book or appraised value of our real estate held for development and sale(which may lead to additional inventory impairments), or significant declinesin the pending or future bank appraised values relative to existing individualappraisals for certain of our assets to be appraised on behalf of the banks inthe coming quarters, could result in a reduction in available borrowingcapacity under our Revolving Credit Facility (either before or after August 15,2009).  Such a reduction in available borrowing capacity could constrainliquidity and require us to seek additional amendments and/or waivers under ourRevolving Credit Facility which we may or may not be able to obtain.

 

Inaddition to exploring a refinancing of our Revolving Credit Facility, we arealso exploring a variety of alternative financing options, including anextension of our existing Revolving Credit Facility, as well as other possibledebt or equity financings or recapitalization transactions, and potentialselected land sales.   However, should the Company not otherwisebe able amend, modify, extend, or refinance the Revolving Credit Facility (orbe able to do so on commercially reasonable 

 

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terms)on or prior to August 15, 2009 (the date its July 31, 2009 borrowingbase certificate is due); by September 15, 2009 (the due date of theadditional loan fee under the facility); or by December 20, 2009 (theexisting maturity date of the credit facility), then our liquidity may not besufficient to fund our operations and our operations could be adverselyaffected.

 

TheCompany currently believes that funds generated from operations, anticipatedavailability under our Revolving Credit Facility, cash and cash equivalents andmarketable securities on hand, and potential funds generated from asset saleswill provide sufficient capital for us to meet our operating needs for the next12 months.  This belief is, however,based upon our belief that the Company will be able to obtain one or moreamendments or modifications to its Revolving Credit Facility (including anextension of the maturity date) or otherwise obtain outside funding throughdebt or equity financings or recapitalization transactions, as needed, prior tothe maturity or our Revolving Credit Facility or any material reduction in ourliquidity resulting from the occurrence of various events, including any of the events described above.  Without one or more amendments ormodifications to our Revolving Credit Facility, a maturity date extension, orother alternative outside financing, we may not have sufficient capitalresources available to meet all of our operating needs for the next 12months.  We can offer no assurance thatwe will be able to obtain any amendments, modifications or maturity dateextensions to our Revolving Credit Facility, or obtain any outside financing,on commercially reasonable terms, or at all.

 

***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, February 7, 2007, May 8,2007, September 6, 2007, December 21, 2007, May 9, 2008 by alimited waiver to the Amended Credit Agreement, which was extended on September 15,2008, and amended and restated in the Second Amended and Restated RevolvingCredit Loan Agreement, dated September 30, 2008 (the “Second AmendedCredit Agreement”).  The Second AmendedCredit Agreement was subsequently amended by a limited waiver letter dated January 30,2009 (the “waiver letter”) and the First Amendment to Second Amended andRestated Revolving Credit Loan Agreement and First Amendment to SecurityAgreement dated February 11, 2009 (the “First Amendment”).

 

***Waiver Letter***

 

Absent the waiver letterdescribed below, the Company would have continued to be in default of itsobligation to, on or before January 23, 2009, make a principal repaymentin an amount necessary to reduce the outstanding principal balance of the loansto the borrowing base availability (the “Repayment Covenant”).  While the Company made certain principalpayments, the failure to make the repayment in full within the proscribedperiod constituted an event of default under the Second Amended CreditAgreement, of which the Company provided notice to the Lenders.  In addition, Wachovia Bank, N.A. (“Wachovia”)asserted that the borrowers breached the liquidity covenant in the SecondAmended Credit Agreement (the “Liquidity Covenant”) for the quarter ended December 31,2008.  The Company disagrees withWachovia’s assertion that the borrowers breached the Liquidity Covenant andnotified Wachovia of their disagreement.

 

The waiver lettertemporarily waived compliance with the Repayment Covenant and the LiquidityCovenant generally from December 31, 2008 through and including February 6,2009, unless another event of default occurred.  With the termination ofwaiver period without the First Amendment described below having been enteredinto, the failure of the borrowers to have complied with the Repayment Covenanton or before that date, the borrowers were again in breach of the RepaymentCovenant and, to the extent there had been a breach of the Liquidity Covenantas asserted by Wachovia (an assertion with which the Company disagrees), theborrowers were also in breach of that covenant.  Any such breaches were,however, cured by the First Amendment described below.

 

There can be noassurances that we will be able to comply with the financial covenantscontained in the Revolving Credit Facility for future periods.  In the future, we may not be successful inobtaining a waiver of non-compliance with these financial covenants.  If we are unable to comply with the financialcovenants, absent a waiver, we will be in default of the Revolving CreditFacility and the lenders can take any of the actions described below.

 

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***First Amendment to the Second Amended Credit Agreement andSecurity Agreement:***

 

On February 11,2009, the Company entered into the First Amendment to the Second Amended CreditAgreement which provides, among other things, that:

 

·      The categoryreductions applicable to the determination of borrowing base availability wereadjusted so that the maximum borrowing base availability attributable to assetclass (ii) (units not subject to a qualifying agreement of sale)determined on the basis of any borrowing base certificate that is deliveredbefore July 31, 2009, was increased to a maximum of 58% of the aggregateborrowing base availability attributable to asset classes (i) (unitssubject to a qualifying agreement of sale) and (ii) (units not subject toa qualifying agreement of sale) as shown on the borrowing basecertificate.  For borrowing basecertificates delivered on or after July 31, 2009, the maximum percentageremains unchanged at 45%.

·      The categoryreductions applicable to the determination of the borrowing base availabilitywere adjusted so that the maximum borrowing base availability attributable toasset classes (iii) (lots part of improved land not subject to aqualifying agreement of sale), (iv) (lots part of land under development)and (v) (lots part of land approved for development), based on borrowingbase certificates delivered before July 31, 2009, was increased to amaximum of 65% of the total borrowing base availability as shown on theborrowing base certificate.  Forborrowing base certificates delivered on or after July 31, 2009, themaximum percentage is 55%.    The maximumdollar value of borrowing base availability attributable to asset classes(iii), (iv) and (v) were also adjusted to the following (with suchlimitations to be reduced dollar for dollar at the time and in the amounts ofany impairments with respect to assets in asset classes (iii), (iv) and (v) andincluded in the borrowing base taken by borrowers):

(i)            Beginning with the Borrowing Base Certificatedelivered on or after the effective date of the First Amendment: $235,000;

(ii)           Beginning with the Borrowing Base Certificatedelivered on or after July 31, 2009: $200,000; and

(iii)          Beginning with the Borrowing Base Certificatedelivered after September 30, 2009: $190,000.

·      Under the FirstAmendment, the aggregate effect of (i) the modification of the borrowingbase category reductions applicable to units not subject to a qualifyingagreement of sale (described above); (ii) the modification of theborrowing base category reductions for land under development (describedabove); and (iii)  the inventory impairments during the second fiscalquarter of approximately $8,670, was an increase in net borrowing baseavailability of $16,065 as of December 31, 2008, from a negative $14,567to a positive $1,498.

·      The amount ofthe Revolving Credit Facility was reduced from $440,000 to $405,000, exceptthat the amount of the Revolving Credit Facility will be reduced to $375,000beginning on July 16, 2009 and through maturity, unless otherwisepermanently reduced as a result of certain prepayments required by theRevolving Credit Facility.  The letter ofcredit sublimit was reduced to $30,000 from $60,000, and the financial letterof credit sublimit was reduced to $15,000 from $25,000. The amount actuallyavailable under the Revolving Credit Facility is also subject to the borrowingbase availability requirements in the Revolving Credit Facility.

·      In the eventthere is one or more defaulting lenders, so long as there is no event ofdefault that has occurred and is continuing, pro-rata principal payments shallnot be made to such defaulting lender, but instead shall be paid over to themaster borrower.

·      The minimumconsolidated tangible net worth level was adjusted to a minimum of at least$25,000 (1) reduced by the sum of (a) any impairments or othercharges under GAAP on assets in the borrowing base taken by the Company andrecorded in respect of the financial quarters ended December 31, 2008 and March 31,2009, plus (b)  any deferred tax assets valuation allowance reservesrecorded in respect of the fiscal quarters ended December 31, 2008 and March 31,2009, plus (c) any impairments or write-offs relating to tangible assetsor pre-acquisition costs not contained in the borrowing base recorded inrespect of the fiscal quarters ended December 31, 2008 and March 31,2009****(provided, however, that the aggregatecovenant level reduction pursuant to this clause (1) shall not exceed$15,000), and (2) increased by the sum of (x) any favorableadjustment to the deferred tax asset valuation allowance recorded in respect ofthe fiscal quarters ended December 31, 2008 and March 31, 2009, plus (y) 50%of positive quarterly net income after March 31, 2008.

·      The definitionof liquidity was revised to provide that negative borrowing base availabilityis deducted from cash and cash equivalents when determining liquidity and theminimum required liquidity covenant was reduced from $15,000 to $10,000.  A five business day cure period in the eventof a breach of the minimum liquidity covenant was also added.

 

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·      The maximumamount of cash or cash equivalents (excluding cash in transit at titlecompanies) that the Company is allowed to maintain was set at a maximum of$15,000 for any consecutive five-day period.

·      The cash flowfrom operations covenant ratio was adjusted downward for the quarter ending June 30, 2009 to 0.50:1.00 and for the quarter ending September 30, 2009 andthereafter to 0.65:1.00.

·      The Company’sability to purchase up to $8,000 of unimproved real estate is no longeravailable; however, the Company’s ability to acquire lots through optiontake-downs remains unchanged.  Theprovision specifically allowing the Company to make new joint ventureinvestments up to certain specified amounts was also eliminated.

·      The interestrate was increased by 25 basis points, to the one month LIBOR interest rateplus 5.25%.

·      Generally, theability to obtain letters of credit for general working capital or corporatepurposes and the ability to obtain letters of credit in connection withprojects outside the borrowing base were eliminated (provided, however, thatexisting letters of credit can be renewed, subject to the other terms of theLoan Agreement).

·      Provisions wereadded providing that no letter of credit will be issued or renewed and that notri-party agreement will be executed or maintained while any lender is adefaulting lender, except if the borrowers have delivered to the agent cashcollateral equal to the defaulting lenders’ pro rata share of the letter ofcredit or tri-party agreement.  The cashcollateral is to be used to reimburse lenders in the event of draws underletters of credit or tri-party agreements.

·      Letter ofcredit advances (that is, payments pursuant to a letter of credit that resultin the making of a loan to borrowers in excess of the then available borrowingbase) must be repaid within five business days, or earlier under certaincircumstances.

·      Provisions wereadded to the Second Amended Credit Agreement and related Security Agreementproviding that, in the event of receipt of any tax refund by any obligor thatconstitutes collateral, the amount received must be used to prepay the loansunder the facility.  Any such collateralreceived by the agent will likewise be applied to the outstandingindebtedness.  However, such reduction ofthe outstanding indebtedness would have the effect of then increasing the netborrowing base availability immediately thereafter.

·      Additionalprovisions were added with respect to the allocation among the lenders ofburdens and risks associated with defaulting lenders.

·      Inconsideration of entering into the First Amendment to the Second Amended CreditAgreement, the Company paid a fee equal to 0.25% of such approving lenders’reduced commitments effective on the closing of the amendment.

 

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

 

The borrowing limit underthe Revolving Credit Facility is $405,000, except that the amount of the RevolvingCredit Facility will be reduced to $375,000 beginning July 16, 2009,unless otherwise permanently reduced to an amount less than or equal to$375,000, as a result of certain required prepayments. The total amount ofloans and advances outstanding at any time under the Revolving Credit Facilitymay not exceed the lesser of the then-current borrowing base availability orthe 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.

 

From October 1, 2008to February 10, 2009, borrowings and advances under the Revolving CreditFacility bore interest on a per annum basis equal to the LIBOR Market IndexRate plus 500 basis points.  Beginning onFebruary 11, 2009, the interest rate increased to the LIBOR Market IndexRate plus 525 basis points.  Prior to October 1,2008, the applicable spread had been 400 basis points. During the term of theRevolving Credit Facility, interest is payable monthly in arrears.  At March 31, 2009, the interest rate was5.76%, which included a 525 basis point spread. LIBOR Market Index Rate is defined by the Revolving Credit Facility asone-month LIBOR for dollar deposits as it may be adjusted pursuant to the termsof the Revolving Credit Facility to account for any applicable Federal Reserveeuro currency reserve requirements or similar governmental requirements

 

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 orless. Under this provision, the 

 

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Company currentlyestimates that the minimum it will be required to pay is $0 and the maximum is$9,150. The Company expects that it will pay no amounts under this provision asit intends to refinance or otherwise modify the debt before the payment is dueand payable. There can be no assurance that such refinancing will occur or willoccur on terms favorable to the Company. In addition, if all indebtedness under the Revolving Credit Facility isnot fully repaid by December 20, 2009, a separate fee will be earned andpayable on December 20, 2009 equal to 8.0% per annum of the amount bywhich the aggregate commitments under the Revolving Credit Facility that existfrom time to time after September 15, 2009 exceed $250,000, calculated ona daily basis.  Under this provision, theCompany currently estimates that the minimum it will be required to pay is $0and the maximum is $2,630. The Company expects that it will pay no amountsunder this provision as it intends to refinance the debt before the payment isdue and payable. There can be no assurance that such refinancing ormodification will occur or will occur on terms favorable to the Company.

 

In addition to anyinterest that may be payable with respect to amounts advanced by the lenders pursuantto a letter of credit, the Company will be required to pay to the lender(s) issuingletters of credit an issuance fee of 0.125% of the amount of the letters ofcredit.

 

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 working capital and for suchother appropriate corporate purposes as may be approved by the lenders. Under theRevolving Credit Facility, each lender is generally obligated to fund only itspro rata portion of each requested loan or advance.  As a result, if any lender refuses, or isunable, to fund its pro rata portion of a requested loan or advance, the borrowersmay be unable to borrow the entire amount of the requested loan or advancedespite the fact that if there are defaulting lenders, the borrowers arepermitted to submit additional borrowing requests in an effort to make-up anyborrowing shortfall caused by a defaulting lender failing to fund.  In addition, so long as no event of defaulthas occurred and is continuing, pro-rata principal payments shall not be madeto any defaulting lender, but instead shall be paid over to the masterborrower.  The Revolving Credit Facilityalso provides for certain burden sharing measures to allocate among the lendersthe burdens and risks associated with defaulting lenders in the event there aredefaulting lenders.

 

Approximately 35% of theborrowers’ borrowing base assets have been reappraised pursuant to the terms ofthe waiver letter and approximately one third of the total assets in theborrowing base with a book value in excess of $4,000 that were not previouslyreappraised, have just been reappraised, are currently being reappraised, orare anticipated to be reappraised during the next quarter. The reappraisalsthat have been done to date have not had a material impact on the Company’sborrowing base availability, but there can be no assurance that futurereappraisals will not reduce borrowing base availability.

 

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,have been obtained. Depending on the stage of development of the real estate,the loan to value or loan to cost advance rate in the borrowing base rangesfrom 50% to 95% of the appraised value or cost of the real estate. Based onthese ranges, 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 (i) 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, (ii) 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, (iii) a security interest in inter-company debt.  Pursuant to the First Amendment, all such taxrefunds must be paid over to the lenders within one business day and will beused to prepay any indebtedness under the Revolving Credit facility.  Orleans Homebuilders, Inc. hasguaranteed the obligations of the borrowers to lenders 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, OrleansHomebuilders, Inc. granted lenders a security interest in any balance orassets in any deposit or other account that Orleans Homebuilders, Inc. haswith any lender. However, the Company and its subsidiaries maintain a majorityof the cash, cash equivalents and marketable securities available to them inaccounts and as treasury securities outside of the lenders under the RevolvingCredit Facility.

 

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

 

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·      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 $25,000  (1) reduced by the sum of (a) anyimpairments or other charges under GAAP on assets in the borrowing base takenby the Company and recorded in respect of the financial quarters ended December 31,2008 and March 31, 2009, plus (b)  any deferred tax assets valuationallowance reserves recorded in respect of the fiscal quarters ended December 31,2008 and March 31, 2009, plus (c) any impairments or write-offsrelating to tangible assets or pre-acquisition costs not contained in theborrowing base recorded in respect of the fiscal quarters ended December 31,2008 and March 31, 2009****(provided,however, that the aggregate covenant level reduction pursuant to this clause (1) shallnot exceed $15,000), and (2) increased by the sum of (x) anyfavorable adjustment to the deferred tax asset valuation allowance recorded inrespect of the fiscal quarters ended December 31, 2008 and March 31,2009, plus (y) 50% of positive quarterly net income after March 31,2008.

·      Subject to a five day cure period, theCompany must maintain a required liquidity level based on cash plus borrowingbase availability of at least $10,000 of cash and cash equivalents (includingcash held at a title company) on a consolidated basis at all times, minus theamount by which the then-outstanding principal balance of the Company’s loansplus any swing line loans exceeds the then-current borrowing base availability.

·      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 quarter ending December 31,2008; 0.40-to-1.00 for the quarter ending March 31, 2009; 0.50-to-1.00 forthe quarter ending June 30, 2009; and 0.65-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, the 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.

·      The maximum amount of cash or cashequivalents (excluding cash at title companies) the Company is allowed tomaintain for any consecutive five-day period is $15,000.

·      The Company may purchase 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, but otherwise limits the Company’sability to purchase improved and unimproved land.

 

At the fiscal quartersended September 30, 2006, December 31, 2006, March 31, 2007, June 30,2007, March 31, 2008, June 30, 2008 and December 31, 2008, theCompany would have been in violation of certain financial covenants in theAmended and Restated Credit Agreement if not for the first, second, third andfourth amendments to and waiver letter with respect to the Amended and RestatedCredit Agreement, the Second Amended Credit Agreement, the waiver letter andthe First Amendment to the Second Amended Credit Agreement, respectively.

 

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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 or agreementunder the Revolving Credit Facility or any other loan document;

·      Bankruptcy and other insolvency eventswith respect 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 within30 days; or the issuance of any writs of attachment, execution orgarnishment against any 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 and foreclose upon any collateral.  In addition, upon the occurrence of certainevents of bankruptcy or other insolvency events with respect to any borrower orthe Company, all indebtedness outstanding under the Revolving Credit Facilityshall be immediately due and payable without any act or action by lenders. Adefault under the Company’s Revolving Credit Facility could also prevent theCompany from making required payments under the Company’s trust preferredsecurities, which would cause a default under those securities.

 

The Revolving CreditFacility currently provides for certain adjustments to the manner in whichborrowing base availability is to be calculated to take effect withrespect to borrowing base certificates delivered on or after July 31, 2009which will have the effect of reducing borrowing base availability.  Inaddition, a portion of the Company’s borrowing base assetsare currently subject to reappraisal by the Company’slenders.  As a result, the Company may need to obtain an amendment to itsRevolving Credit Facility providing additional liquidity on or before August 15,2009.  If the Company is unable to obtain such an amendment, the Company’sfuture borrowings may exceed the then available borrowing base.  Undersuch circumstances, absent a wavier or an amendment from its lenders,

 

 the Company could be in default under itsRevolving Credit Facility and, as a result, its debt could become due whichwould have a material adverse effect on the Company’s financial position andresults of operations.

 

As of March 31,2009, the Company was in compliance with all of its financial covenants underthe Second Amended Credit Agreement, as amended.

 

***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 (“Regular Interest Rate”).  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 (“AdjustedInterest Rate”). The Company began accruing for this increased interest rate onJuly 31, 2008, which was paid to holders for the first time with thecoupon payable on October 31, 2008. The interest rate will return to theregularly applicable rate once the Company is in compliance with the debtservice ratio and minimum tangible net worth requirements as of the end of anyfiscal 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,

 

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National Association, asproperty trustee, Chase Bank USA, National Association, as the Delawaretrustee, and the administrative trustees named therein.

 

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 will be used by the trustto pay the quarterly distributions to the holders of the trust’s preferred andcommon securities. Pursuant to the parent guarantee agreement dated November 23,2005 by and between the Company and JPMorgan Chase Bank, National Association, astrustee, the Company has unconditionally guaranteed OHI Financing payment andother obligations under the indenture and the junior subordinated notes. TheCompany used the proceeds from the issuance and sale of the trust preferredsecurities and the subsequent purchase of the junior subordinated notes topartially 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. 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 in the indenture and thecontinuance of the default or breach for a period of 30 days after writtennotice to OHI Financing;

·      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 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;

·      default in the performance, or breach(which default or breach must be material in certain cases), of any covenant orwarranty made by OHI Financing. In the purchase agreement pursuant to which thetrust securities and the junior subordinated notes were sold and purchased andthe continuation of such default or breach for a period of 30 days afterwritten notice to OHI Financing;

·      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; 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 theadjusted interest rate, or redemption or defeasance of the notes in accordancewith the terms 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.

 

Onapproximately July 30, 2009, pursuant to the terms of the first amendmentto the $75,000 issue of trust preferred securities, the Company is generallyrequired to provide a $2,500 increase in the reserve fund for the benefit ofholders of the trust preferred securities by posting a letter of credit withthe trustee.  The Company currentlyanticipates posting such letter of credit as is permitted under the existingterms of the credit facility, provided the Company has sufficient liquidity todo so at such time.  If posted, thisletter of credit will reduce our liquidity otherwise determined at that time by$2,500.

 

***Cash Flow Statement***

 

Netcash used by operating activities for the nine months ended March 31, 2009was $13,594, compared to net cash provided by operating activities of $63,680for the nine months ended March 31, 2008. The change was primarily due to a use of cash related to accountspayable and other liabilities in the current fiscal year of $27,972 as comparedto a source in the comparable period in the prior fiscal year in the amount of$40,961.

 

Netcash provided by investing activities for the nine months ended March 31,2009 was $536 as compared to $11,465 in the nine months ended March 31,2008.  The Company had proceeds of$11,300 related to the sale of the Western region in the nine months ended March 31,2008.

 

Netcash used in financing activities for the nine months ended March 31, 2009was $46,023, compared to $56,069 for the nine months ended March 31,2008.  Cash used in financing activitiesprimarily relates to net paydowns on our credit facility during the nine monthsended March 31, 2009 and 2008.

 

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**Lot Positions**

 

Asof March 31, 2009, we owned or controlled approximately 5,893 buildinglots.  Included in the aforementionedlots, we had contracted to purchase, or have under option, undeveloped land andimproved building lots for an aggregate purchase price of approximately $85,743that are expected to yield approximately 1,020 building lots.  The table below shows our lots by region:

 
| ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | **Lots under** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **   | ** ** |
|------------|------------|------------|------------|-------------|------------|----------------|------------|----------------|------------|----------------|------------|--------------|------------|
| ** ** | ** ** | ** ** | ** ** | **Percent** | ** ** | **options of** | ** ** | **Percent**    | ** ** | **Total lots** | ** ** | ** **   | ** ** |
| ** ** | ** ** | **Lots**   | ** ** | **of lots** | ** ** | **agreement**  | ** ** | **of lots**    | ** ** | **owned or**   | ** ** | **Percent**  | ** ** |
| **Region** | ** ** | **owned**  | ** ** | **owned**   | ** ** | **of sale**    | ** ** | **controlled** | ** ** | **controlled** | ** ** | **of total** | ** ** |
| Northern   |       | 2,571      |       | 52.8        | %          | 498            |       | 48.8           | %          | 3,069          |       | 52.1         | %          |
| Southern   |       | 1,747      |       | 35.8        | %          | 264            |       | 25.9           | %          | 2,011          |       | 34.1         | %          |
| Midwestern |       | 317        |       | 6.5         | %          | 228            |       | 22.4           | %          | 545            |       | 9.2          | %          |
| Florida    |       | 238        |       | 4.9         | %          | 30             |       | 2.9            | %          | 268            |       | 4.6          | %          |
| Total      |       | 4,873      |       | 100.0       | %          | 1,020          |       | 100.0          | %          | 5,893          |       | 100.0        | %          |

 

Asnoted above in our discussion of our Revolving Credit Facility, pursuant to theterms of the First Amendment to the Second Amended Credit Agreement, we cannotpurchase any of real estate with the exception of 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 March 31, 2009 we had $9,534 investedin 7 parcels of undeveloped land, of which $2,935 is cash deposits, a portionof which is non-refundable.  At March 31,2009, overall undeveloped parcels of land under contract had an aggregatepurchase price of approximately $35,672 and were expected to yieldapproximately 378 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 of land.  In addition, we primarily structure ouragreements to purchase undeveloped land to be contingent upon obtaining allgovernmental 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 the necessarygovernmental 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.

 

AtMarch 31, 2009, we had contracted to purchase or had under optionapproximately 642 improved building lots, which include lots that were sold,but for accounting purposes are treated as a financing obligation because theyare subject to an

 

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optionagreement, for an aggregate purchase price of approximately $50,071.  At March 31, 2009, we had $717 invested,of which $696 is cash deposits, invested in these improved building lots.

 

Subjectto the restrictions in our Revolving Credit Facility, we expect to utilizeprimarily the Revolving Credit Facility as described above as well as otherexisting capital resources, to finance the acquisitions of undeveloped land andimproved lots described above.  Thetiming of these acquisitions will depend on market conditions.  We have substantially reduced our land expendituresboth to-date and our planned expenditures for the next several quarters toreflect current market conditions.

 

**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 the Company’s 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 the Company’s fiscal year ending June 30, 2010.  The Company does not expect the adoption ofSFAS No. 141(R) to have a material impact on its consolidatedfinancial statements.

 

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.

 

In December 2008,the FASB issued FSP SFAS 132R-1, “Employers’ Disclosures aboutPostretirement Benefit Plan Assets”. This statement provides additional guidance regarding disclosures aboutplan assets of defined benefit pension or other postretirement plans.  This FSP is effective for financialstatements issued for fiscal years ending after December 15, 2009.  Accordingly, the Company will adopt FSP SFAS132R-1 in fiscal year 2010.  The Companyis currently evaluating the disclosure impact of adopting this FSP on itsconsolidated financial statements.

 

InApril 2009, the FASB issued FSP SFAS 141R-1, “Accounting for AssetsAcquired and Liabilities Assumed in a Business Combination That Arise fromContingencies”, (FSP SFAS 141R-1).  ThisFSP amends and clarifies SFAS No. 141(R), to require that an acquirerrecognize at fair value, at the acquisition date, an asset acquired or aliability assumed in a business combination that arises from a contingency ifthe acquisition-date fair value of that asset or liability can be determinedduring the measurement period.  If theacquisition-date fair value of such an asset acquired or liability assumedcannot be determined, the acquirer should apply the provisions of SFAS No. 5,“Accounting for Contingencies”, to determine whether the contingency should berecognized at the acquisition date or after it. FSP SFAS 141R-1 is effective for assets or liabilities arising fromcontingencies in business combinations for which the acquisition date is afterthe beginning of the first annual reporting period beginning after December 15,2008.  Accordingly, the Company willadopt FSP SFAS 141R-1 in fiscal year 2010. The Company does not expect the adoption of FSP SFAS 141R-1 to have amaterial impact on its consolidated financial statements.

 

In April 2009, theFASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures aboutFair Value of Financial Instruments.” The FSP amends SFAS No. 107, “Disclosuresabout Fair Value of Financial Instruments” to require disclosure about fairvalue of financial instruments in interim financial statements. FSP FAS 107-1and APB 28-1 is effective for interim and annual periods ending after June 15,2009 with early adoption permitted for periods ending after March 15,2009. 

 

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TheCompany is currently evaluating the disclosure impact of adopting thispronouncement on its consolidated financial statements.

 

In April 2009, theFASB issued FSP SFAS 115-2 and SFAS 124-2, “Recognition and Presentation ofOther-Than-Temporary Impairments.”  ThisFSP changes existing guidance for determining whether an impairment of debtsecurities is other than temporary.  TheFSP requires other than temporary impairments to be separated into the amountrepresenting the decrease in cash flows expected to be collected from asecurity (referred to as credit losses) which is recognized in earnings and theamount related to other factors which is recognized in other comprehensiveincome.  This noncredit loss component ofthe impairment may only be classified in other comprehensive income if theholder of the security concludes that it does not intend to sell and it willnot more likely than not be required to sell the security before it recoversits value.  If these conditions are notmet, the noncredit loss must also be recognized in earnings.  When adopting the FSP, an entity is requiredto record a cumulative effect adjustment as of the beginning of the period ofadoption to reclassify the noncredit component of a previously recognized otherthan temporary impairment from retained earnings to accumulated othercomprehensive income.  FSP SFAS 115-2 andFAS 124-2 is effective for interim and annual periods ending after June 15,2009.  The Company does not expectthe adoption of this FSP to have a material impact on its consolidatedfinancial statements.

 

In April 2009, theFASB issued FSP SFAS 157-4, “Determining Fair Value When the Volume and Levelof Activity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly.” This FSP provides additional guidance on estimating fair value when thevolume and level of activity for an asset or liability have significantlydecreased in relation to normal market activity for the asset or liability. TheFSP also provides additional guidance on circumstances that may indicate that atransaction is not orderly.  FSP SFAS157-4 is effective for interim and annual periods ending after June 15,2009.  The Company does not expectthe adoption of this FSP to have a material impact on its consolidatedfinancial statements.

 

The Company does notbelieve that any other recently issued, but not yet effective, accountingstandards if currently adopted would have a material effect on the accompanyingfinancial statements.

 

Cautionary Statement forPurposes of the “Safe Harbor” Provisions of the Private Securities LitigationReform Act of 1995

 

In addition to historicalinformation, this report and other Company reports and statements containstatements relating to future events or our future results. These statementsare forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934, as amended (the “Exchange Act”), and are subject to the Safe Harborprovisions created by statute.  Generallywords such as “may”, “will”, “should”, “could”, “would”, “anticipate”, “expect”,“intend”, “estimate”, “plan”, “continue” and “believe” or the negative of orother variation on these and other similar expressions identify forward-lookingstatements.  These forward-lookingstatements including, without limitation, statements concerning anticipated orexpected conditions in or recovery of the housing market, and economicconditions; the Company’s long-term opportunities; continuing overall economicconditions and conditions in the housing and mortgage markets and industryoutlook; anticipated or expected operating results, revenues, sales, net neworders, pace of sales, spec unit levels, and traffic; future or expectedliquidity, financial resources, debt or equity financings, amendments to orextensions of our existing revolving credit facility, strategic transactions orother alternative recapitalization transactions; the anticipated impact of bankreappraisals; future impairment charges, future tax valuation allowance and itsvalue; anticipated or possible federal and state stimulus plans or otherpossible future government support for the housing and financial servicesindustries; anticipated legislation and its impact; expected tax refunds;anticipated use of proceeds from transactions; anticipated cash flow from operations;reductions in land expenditures; the Company’s ability to meet its internalfinancial objectives or projections, and debt covenants; potential future landsales; the Company’s future liquidity, capital structure and finances; theCompany’s response to market conditions; potential effects of changes infinancial and commodity market prices and interest rates; potential liabilitiesrelating to litigation currently pending against us; anticipated delivery ofhomes in backlog; fluctuations in market conditions; appropriateness ofcompleted home inventory levels; the overall direction of the housing market;expected warranty costs; future land acquisitions; and the availability ofsufficient capital for us to meet our operating needs, are made only as of thedate of this report.

 

We do not undertake toupdate or revise the forward-looking statements, whether as a result of newinformation, future events or otherwise. Forward-looking statements are based on current expectations and involverisks and uncertainties and our future results could differ significantly fromthose expressed or implied by our forward-looking statements.  Many factors or potential risks could causeour actual consolidated results to differ materially from those expressed inany of our forward-looking statements. For additional information on some potential risks, see Item 1A of theCompany’s Annual Report on Form 10-K/A for the fiscal year ended June 30,2008, Item 1A of this report and subsequently filed quarterly reports.

 

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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 $3,548,789 in afiscal year, a portion of which may be capitalized and included in cost ofsales as homes 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 4T.****              ****CONTROLSAND 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 or submitted under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the Security and Exchange Commission’s rules and forms and also toensure information 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 controlover financial reporting.

 

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**PART II. OTHERINFORMATION**

 

**ITEM1A.****      ****RISKFACTORS**

 

Therehas been no material changes in our risk factors during the nine months ended March 31,2009, except as noted below.  Foradditional information regarding risk factors, see our Annual Report on Form 10-K/Afor the year ended June 30, 2008.

 

***Absent an equityor debt financing, an extension of our existing Revolving Credit Facility orentering into a new credit facility or another financing or recapitalizationtransaction, on or before December 20, 2009, we will be unable to meet ourdebt obligations at that time.  If we areunsuccessful in completing a new financing, extending our existing creditfacility or entering into a new credit facility on favorable terms to us, or atall, our financial condition and operations will be materially adverselyaffected.***

 

Weare exploring a variety of alternative financing options, including anextension of our existing Revolving Credit Facility or a new credit facility toreplace our existing Revolving Credit Facility as well as other possibledebt or equity financing or recapitalization transactions, and potentialselected land sales.  There can be no assurances that we will be able tocomplete an equity or debt financing or enter into a new creditfacility or an extension to the existing Revolving Credit Facility onterms that are favorable to us, or at all.  If we are unable toobtain a new credit facility, an extension of the existing Revolving CreditFacility, or engage in another financing or recapitalization transaction by December 20,2009, we will be unable to meet our debt obligations by the existingmaturity date under the Revolving Credit Facility.  If we cannotcomplete a new financing or enter into a new credit facility or anextension of our existing Revolving Credit Facility on termsfavorable to us or on commercially reasonable terms, our financial conditionand operations will be materially adversely affected.

 

***We may need anamendment to our Revolving Credit Facility providing additional borrowing baseliquidity on or before August 15, 2009 (the due date for the July 31,2009 borrowing base certificate).  If we are unable to obtain such anamendment we could potentially be in default under the Revolving CreditFacility which could have a material adverse affect on ouroperations.***

 

Under the termsof our Revolving Credit Facility, the maximumrelative percentages and maximum dollar amounts applicable to certaincategories of borrowing base assets reset to lower amounts for any borrowingbase certificate delivered on or after July 31, 2009.  Inaddition, certain assets in our borrowing base are currently being reappraisedwhich could result in reductions in our borrowing base availability.  As aresult, we may need to obtain an amendment to our Revolving CreditFacility on or before August 15, 2009 (the date the Company’s July 31,2009 borrowing base is due) to provide additional liquidity.  If we areunable to obtain such an amendment on a timely basis on or before August 15,2009, the resetting of these effective borrowing base advanceamounts or possible negative borrowing base adjustments resultingfrom updated bank reappraisals, could result in our future borrowingsexceeding the then available net borrowing base.  Under suchcircumstances, we anticipate that we may not be able toreduce the outstanding borrowings by an amount sufficient to repay in full suchfuture potential negative borrowing base availability as required by theRevolving Credit Facility within the required time period. If we fail toreduce the outstanding borrowings to an amount less than or equal to anyborrowing base availability within the required period and are unable to obtainan amendment to the Revolving Credit Facility to increase future netborrowing base availability and liquidity, an event of default could potentiallyoccur under the Revolving Credit Facility which may materially andadversely affect our financial condition and operations.

 

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

 
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                               | ** ** | **Incorporated by Reference** | ** ** | ** ** | ** ** |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|------------|------------|
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                             | ** ** | **Form**                      | ** ** | **Date**   | ** ** | **Exhibit  Number** | ** ** | **Filed  Herewith** | ** ** |
| 10.1                |       | Waiver Letter, dated  January 28, 2009, by and among Greenwood Financial, Inc. and  certain affiliates, Orleans Homebuilders, Inc., Wachovia Bank, National  Association and various other lenders party thereto.                                                                                                                         |       | 8-K                           |       | 1/26/09    |       | 10.1 |   |   |   |
| 10.2                |       | First Amendment to Second  Amended and Restated Revolving Credit Loan Agreement and First Amendment to  Security Agreement dated as of February 11, 2009, by and among  Greenwood Financial, Inc. and certain affiliates, Orleans  Homebuilders, Inc., Wachovia Bank, National Association and various  other lenders party thereto. |       | 8-K                           |       | 2/7/09     |       | 10.1 |   |   |   |
| 10.3                |       | Employment Agreement with  Michael T. Vesey dated March 10, 2009                                                                                                                                                                                                                                                                                    |       | 8-K                           |       | 3/10/09    |       | 10.1 |   |   |   |
| 10.4                |       | Non-Competition and  Confidentiality Agreement with Michael T. Vesey dated March 10, 2009                                                                                                                                                                                                                                                           |       | 8-K                           |       | 3/10/09    |       | 10.2 |   |   |   |
| 31.1                |       | Certification of Jeffrey  P. Orleans pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                     |       |                          |       |       |       |   |   | X |   |
| 31.2                |       | Certification of  Michael T. Vesey pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                                                                 |       |                          |       |       |       |   |   | X |   |
| 31.3                |       | Certification of Garry P.  Herdler pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                       |       |                          |       |       |       |   |   | X |   |
| 32.1                |       | Certification of Jeffrey  P. Orleans pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                     |       |                          |       |       |       |   |   | X |   |
| 32.2                |       | Certification of  Michael T. Vesey pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                                                                 |       |                          |       |       |       |   |   | X |   |
| 32.3                |       | Certification of Garry P.  Herdler pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                       |       |                          |       |       |       |   |   | X |   |

 

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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)                          |
|              |                                  |
| May 15, 2009 | Jeffrey P. Orleans                    |
|              | Jeffrey P. Orleans                    |
|              | Chairman of the Board and Chief       |
|              | Executive Officer                     |
|              | (Principal Executive Officer)         |
|              |                                  |
| May 15, 2009 | Michael T. Vesey                      |
|              | Michael T. Vesey                      |
|              | President and Chief Operating Officer |
|              |                                  |
| May 15, 2009 | Garry P. Herdler                      |
|              | Garry P. Herdler                      |
|              | Executive Vice President and          |
|              | Chief Financial Officer               |
|              | (Principal Financial Officer)         |
|              |                                  |
| May 15, 2009 | 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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