**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# **FORM 10-Q**

# ** **

**(MarkOne)**

| **x**                                                  | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.**                                                                                                                                                                                          |
|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                             |
| **For  the quarterly period ended September 30, 2007** |
| ** **                                             | ** ** | ** **                                                                                                                                                                                                                                                                             |
| **OR**                                                 |
| ** **                                             | ** ** | ** **                                                                                                                                                                                                                                                                             |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXHANGE ACT OF 1934.**                                                                                                                                                                                          |
| ** **                                             | ** ** | ** **                                                                                                                                                                                                                                                                             |
| ** **                                             | ** ** | **FOR  THE TRANSITION  PERIOD                      TO                      .** |

 

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

#### ** **

**ORLEANSHOMEBUILDERS, INC.**

(Exact name of registrant as specified in its charter)

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

 

**3333 Street Road, Suite 101**

**Bensalem, PA 19020**

(Address of principal executive offices)

 

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

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  No  o

 

Indicateby check mark whether the registrant is a  large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|---------------------------------|--------|--------------------------|--------|------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes o No x

 

Number of shares of common stock, par value$0.10 per share, outstanding as of November 6, 2007:                **18,501,641**

(excluding 196,490 shares held in Treasury).

 

 

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# **ORLEANSHOMEBUILDERS, INC. AND SUBSIDIARIES**

# ** **

| ** **                              | ** **                                                                                          | ** ** | **PAGE** |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------|------------|----------|
| **PART 1 – FINANCIAL INFORMATION** |                                                                                                |       |
|                                    |                                                                                                |       |     |
| Item  1.                                | Financial  Statements (unaudited)                                                                   |       |     |
|                                    |                                                                                                |       |     |
|                                    | Consolidated  Balance Sheets at September 30, 2007 and  June 30, 2007                               |       | 1        |
|                                    |                                                                                                |       |     |
|                                    | Consolidated  Statements of Operations for the Three  Months Ended September 30, 2007 and 2006      |       | 2        |
|                                    |                                                                                                |       |     |
|                                    | Consolidated  Statements of Shareholders’ Equity for the Three Months Ended September 30, 2007 |       | 3        |
|                                    |                                                                                                |       |     |
|                                    | Consolidated  Statements of Cash Flows for the ThreeMonths Ended September 30, 2007 and 2006        |       | 4        |
|                                    |                                                                                                |       |     |
|                                    | Notes  to Consolidated Financial Statements                                                         |       | 5        |
|                                    |                                                                                                |       |     |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations         |       | 17       |
|                                    |                                                                                                |       |     |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                         |       | 33       |
|                                    |                                                                                                |       |     |
| Item 4.                                 | Controls and  Procedures                                                                            |       | 34       |
|                                    |                                                                                                |       |     |
| **PART II – OTHER INFORMATION**    |                                                                                                |       |
|                                    |                                                                                                |       |     |
| Item 1A.                                | Risk Factors                                                                                        |       | 35       |
|                                    |                                                                                                |       |     |
| **Item 6.**                             | **Exhibits**                                                                                        | ** ** | **35**   |

 

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**OrleansHomebuilders, Inc. and Subsidiaries**

**Consolidated Balance Sheets**

**(unaudited)**

**(inthousands, except share amounts)**

 
| ** **                                                                                                               | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                                                               | ** ** | **2007**               | ** ** | **2007**          | ** ** |
| Assets                                                                                                                   |       |                   |       |              |       |
| Cash and cash equivalents                                                                                                |       | $                      | 28,734     |              | $          | 19,991 |   |
| Restricted cash - due from title company                                                                                 |       | 14,417                 |       | 25,483            |       |
| Restricted cash - customer deposits                                                                                      |       | 10,652                 |       | 11,362            |       |
| Real estate held for development and sale:                                                                               |       |                   |       |              |       |
| Residential properties completed or under  construction                                                                  |       | 241,331                |       | 228,146           |       |
| Land held for development or sale and  improvements                                                                      |       | 510,437                |       | 511,872           |       |
| Inventory not owned - Variable Interest  Entities                                                                        |       | 45,072                 |       | 47,214            |       |
| Property and equipment, at cost, less  accumulated depreciation                                                          |       | 2,264                  |       | 2,555             |       |
| Deferred taxes                                                                                                           |       | 20,392                 |       | 23,480            |       |
| Goodwill                                                                                                                 |       | 4,180                  |       | 4,180             |       |
| Receivables, deferred charges and other  assets                                                                          |       | 25,718                 |       | 23,559            |       |
| Land deposits and costs of future  development                                                                           |       | 12,104                 |       | 13,102            |       |
| Total Assets                                                                                                             |       | $                      | 915,301    |              | $          | 910,944 |   |
|                                                                                                                     |       |                   |       |              |       |
| Liabilities and Shareholders’ Equity                                                                                |       |                   |       |              |       |
| Liabilities:                                                                                                             |       |                   |       |              |       |
| Accounts payable                                                                                                         |       | $                      | 21,881     |              | $          | 30,891 |   |
| Accrued expenses                                                                                                         |       | 18,677                 |       | 26,303            |       |
| Customer deposits                                                                                                        |       | 16,166                 |       | 15,392            |       |
| Obligations related to inventory not owned  - Variable Interest Entities                                                 |       | 36,757                 |       | 38,914            |       |
| Mortgage and other note obligations                                                                                      |       | 494,126                |       | 469,123           |       |
| Subordinated notes                                                                                                       |       | 105,000                |       | 105,000           |       |
| Other notes payable                                                                                                      |       | 768                    |       | 787               |       |
| Total Liabilities                                                                                                        |       | 693,375                |       | 686,410           |       |
|                                                                                                                     |       |                   |       |              |       |
| Commitments and contingencies (See Note 10)                                                                              |       |                   |       |              |       |
|                                                                                                                     |       |                   |       |              |       |
| Redeemable common stock                                                                                                  |       | —                 |       | —            |       |
|                                                                                                                     |       |                   |       |              |       |
| Shareholders’ Equity:                                                                                               |       |                   |       |              |       |
| Common stock, $0.10 par, 23,000,000 shares  authorized, 18,698,131 shares issued at September 30, 2007 and June 30, 2007 |       | 1,870                  |       | 1,870             |       |
| Capital in excess of par value - common  stock                                                                           |       | 73,543                 |       | 73,012            |       |
| Accumulated other comprehensive income                                                                                   |       | (1,862                 | )          | (1,862            | )          |
| Retained earnings                                                                                                        |       | 150,864                |       | 154,003           |       |
| Treasury stock, at cost (196,490 shares  held at September 30, 2007 and June 30, 2007)                                   |       | (2,489                 | )          | (2,489            | )          |
| Total Shareholders’ Equity                                                                                          |       | 221,926                |       | 224,534           |       |
|                                                                                                                     |       |                   |       |              |       |
| Total Liabilities and Shareholders’ Equity                                                                          |       | $                      | 915,301    |              | $          | 910,944 |   |

 

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

 

1

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**OrleansHomebuilders, Inc. and Subsidiaries**

**ConsolidatedStatements of Operations**

**(unaudited)**

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

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **September 30,**           | ** ** |
| ** **                                           | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Earned revenues                                      |       |                             |       |   |   |
| Residential properties                               |       | $                                | 119,357    |   | $ | 161,772 |   |
| Land sales                                           |       | 1,186                            |       | 408 |   |
| Other income                                         |       | 2,333                            |       | 2,922 |   |
|                                                 |       | 122,876                          |       | 165,102 |   |
| Costs and expenses                                   |       |                             |       |   |   |
| Residential properties                               |       | 102,953                          |       | 131,313 |   |
| Land sales                                           |       | 1,258                            |       | 374 |   |
| Other                                                |       | 1,998                            |       | 1,999 |   |
| Selling, general and administrative                  |       | 18,753                           |       | 25,059 |   |
| Interest:                                            |       |                             |       |   |   |
| Incurred                                             |       | 13,532                           |       | 11,763 |   |
| Less capitalized                                     |       | (13,532                          | )          | (11,763 | ) |
|                                                 |       | 124,962                          |       | 158,745 |   |
|                                                 |       |                             |       |   |   |
| Income / (loss) from operations before  income taxes |       | (2,086                           | )          | 6,357 |   |
| Income tax expense / (benefit)                       |       | (31                              | )          | 2,458 |   |
|                                                 |       |                             |       |   |   |
| Net income / (loss)                                  |       | $                                | (2,055     | ) | $ | 3,899 |   |
|                                                 |       |                             |       |   |   |
| Basic earnings / (loss) per share                    |       | $                                | (0.11      | ) | $ | 0.21 |   |
|                                                 |       |                             |       |   |   |
| Diluted earnings / (loss) per share                  |       | $                                | (0.11      | ) | $ | 0.21 |   |
|                                                 |       |                             |       |   |   |
| Dividends declared per share                         |       | $                                | 0.02       |   | $ | 0.02 |   |
|                                                 |       |                             |       |   |   |
| Basic weighted average shares outstanding            |       | 18,502                           |       | 18,363 |   |
|                                                 |       |                             |       |   |   |
| Diluted weighted average shares outstanding          |       | 18,502                           |       | 18,673 |   |

 

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

 

2

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**Orleans Homebuilders, Inc. and Subsidiaries**

**Consolidated Statements of Shareholders’ Equity**

**(unaudited)**

**(dollars in thousands)**

 
| ** **                                 | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | **Capital in**       | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|------------|------------|--------------------|------------|---------------------------|------------|-------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | **Common Stock** | ** ** | ** ** | ** ** | **Excess of** | ** ** | ** **                | ** ** | **Treasury Stock** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Shares**            | ** ** | ** ** | ** ** | **Accumulated**    | ** ** | **Par Value -** | ** ** | **Retained**            | ** ** | **Shares** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Issued**            | ** ** | **Amount** | ** ** | **OCI**            | ** ** | **Common Stock**     | ** ** | **Earnings**            | ** ** | **Held**   | ** ** | **Amount** | ** ** | **Total**  | ** ** |
| Balance at June  30, 2007                  |       | 18,698,131            |       | $          | 1,870      |               | $          | (1,862                    | )          | $                       | 73,012     |       | $          | 154,003    |       | 196,490    |       | $ | (2,489 | ) | $ | 224,534 |   |
|                                       |       |                  |       |       |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| FIN 48 transition  adjustment              |       |                  |       |       |       |               |       |                      |       | (715                    | )          |       |       |       |       | (715       | )          |
|                                       |       |                  |       |       |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Shares awarded  under Stock Award Plan     |       |                  |       |       |       |               |       | 52                        |       |                    |       |       |       |       |       | 52         |       |
|                                       |       |                  |       |       |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Fair market value  of stock options issued |       |                  |       |       |       |               |       | 5                         |       |                    |       |       |       |       |       | 5          |       |
|                                       |       |                  |       |       |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Stock options,  net                        |       |                  |       |       |       |               |       | 474                       |       |                    |       |       |       |       |       | 474        |       |
|                                       |       |                  |       |       |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Dividends paid on  common stock            |       |                  |       |       |       |               |       |                      |       | (369                    | )          |       |       |       |       | (369       | )          |
|                                       |       |                  |       |       |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Net loss                                   |       |                  |       |       |       |               |       |                      |       | (2,055                  | )          |       |       |       |       | (2,055     | )          |
|                                       |       |                  |       |       |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Balance at  September 30, 2007             |       | 18,698,131            |       | $          | 1,870      |               | $          | (1,862                    | )          | $                       | 73,543     |       | $          | 150,864    |       | 196,490    |       | $ | (2,489 | ) | $ | 221,926 |   |

 

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

 

3

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**OrleansHomebuilders, Inc. and Subsidiaries**

**Consolidated Statements of Cash Flows**

**(unaudited)**

**(in thousands)**

 
| ** **                                                                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                              | ** ** | **September 30,**           | ** ** |
| ** **                                                                              | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                                                                    |       |                             |       |   |   |
| Cash flows from operating activities:                                                   |       |                             |       |   |   |
| Net income / (loss)                                                                     |       | $                                | (2,055     | ) | $ | 3,899 |   |
| Adjustments to reconcile net income /  (loss) to net cash used in operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                           |       | 291                              |       | 342 |   |
| Write-off of real estate held for  development and sale                                 |       | 712                              |       | 2,800 |   |
| Write-off of land deposits and costs of  future development                             |       | 400                              |       | 1,921 |   |
| Amortization of note discount                                                           |       | —                           |       | 6 |   |
| Deferred taxes                                                                          |       | 3,088                            |       | — |   |
| Stock based compensation expense                                                        |       | 531                              |       | 456 |   |
| Changes in operating assets and  liabilities:                                           |       |                             |       |   |   |
| Restricted cash - due from title company                                                |       | 11,066                           |       | 15,412 |   |
| Restricted cash - customer deposits                                                     |       | 710                              |       | 899 |   |
| Real estate held for development and sale                                               |       | (12,462                          | )          | (56,247 | ) |
| Receivables, deferred charges and other  assets                                         |       | (2,159                           | )          | 1,191 |   |
| Land deposits and costs of future  developments                                         |       | 583                              |       | 4,324 |   |
| Accounts payable and other liabilities                                                  |       | (17,351                          | )          | (35,181 | ) |
| Customer deposits                                                                       |       | 774                              |       | (2,509 | ) |
| Net cash used in operating activities                                                   |       | (15,872                          | )          | (62,687 | ) |
|                                                                                    |       |                             |       |   |   |
| Cash flows from investing activities:                                                   |       |                             |       |   |   |
| Purchases of property and equipment                                                     |       | —                           |       | (89 | ) |
| Net cash used in investing activities                                                   |       | —                           |       | (89 | ) |
|                                                                                    |       |                             |       |   |   |
| Cash flows from financing activities:                                                   |       |                             |       |   |   |
| Borrowings from loans secured by real  estate assets                                    |       | 25,000                           |       | 75,002 |   |
| Repayment of loans secured by real estate  assets                                       |       | 3                                |       | (18,496 | ) |
| Repayment of other note obligations                                                     |       | (19                              | )          | (21 | ) |
| Purchase of treasury stock                                                              |       | —                           |       | (847 | ) |
| Tax benefit from exercise of stock options                                              |       | —                           |       | 818 |   |
| Common stock cash dividend paid                                                         |       | (369                             | )          | (368 | ) |
| Net cash provided by financing activities                                               |       | 24,615                           |       | 56,088 |   |
|                                                                                    |       |                             |       |   |   |
| Net decrease in cash and cash equivalents                                               |       | 8,743                            |       | (6,688 | ) |
| Cash and cash equivalents at beginning of  year                                         |       | 19,991                           |       | 15,964 |   |
| Cash and cash equivalents at end of period                                              |       | $                                | 28,734     |   | $ | 9,276 |   |

 

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

 

4

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**ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

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

 

**1.****             ****BASIS OF PRESENTATION**

 

Theaccompanying unaudited consolidated financial statements are presented inaccordance with the requirements for Form 10-Q and do not include all thedisclosures required by generally accepted accounting principles for completefinancial statements. Reference is made to Form 10-K as of and for the yearended June 30, 2007 for Orleans Homebuilders, Inc. and subsidiaries (the“Company”) for additional disclosures, including a summary of the Company’saccounting policies.

 

Inthe opinion of management, the consolidated financial statements contain alladjustments, consisting of normal recurring accruals, necessary for a fairstatement of the consolidated financial position of the Company for the periodspresented. The interim operating results of the Company may not be indicativeof operating results for the full year.

 

InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes-An Interpretation of FASBStatement 109” (“FIN 48”). FIN 48 prescribes a more-likely than not recognitionthreshold as well as a measurement attribute for the financial statementrecognition and measurement of tax positions taken or expected to be taken in atax return. The Company adopted the provisions of FIN 48, as of July 1, 2007.See Note 8 below for additional discussion regarding the impact of theimplementation of FIN 48.

 

The effective income tax rates for the quarters ended September 30,2007 and 2006 were 37.3% and 38.7%, respectively, excluding the impact of twodiscrete items recorded during the quarter that had the effect of lowering thetotal income tax benefit – a revision to a prior year tax contingency reserveof approximately $520 and the prior year income tax return-to-accrualadjustment of approximately $228.

 

**2.****             ****RESIDENTIAL PROPERTIES COMPLETEDOR UNDER CONSTRUCTION**

 

Residentialproperties completed or under construction consist of the following:

 
| ** **                                                    | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| Under contract for sale                                       |       | $                            | 138,785    |                    | $          | 126,856 |   |
| Unsold                                                        |       | 102,546                      |       | 101,290                 |       |
| Total residential properties completed or  under construction |       | $                            | 241,331    |                    | $          | 228,146 |   |

 

**3.****             ****MORTGAGE AND OTHER NOTE OBLIGATIONSAND SUBORDINATED NOTES**

 

The$494,126 outstanding balance in mortgage and other note obligations atSeptember 30, 2007 consists of $493,950 outstanding under the Revolving CreditFacility, which is discussed below, and $176 under mortgage obligationscollateralized by land held for development and sale and improvements. Theaverage daily balance during the three months ended September 30, 2007 was$483,624.

 

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

 

5

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***Revolving Credit Facility***

 

OnSeptember 6, 2007 and effective June 30, 2007, the Company entered into anamendment to the Amended and Restated Credit Agreement described below (“FourthAmendment”). As discussed in detail below, the Fourth Amendment extended thematurity on a portion of the Credit Facility to December 20, 2009 and reducedthe total size to $585,000, as well as amended certain covenants. As of September30, 2007, the Company was in compliance will all of its covenants as they existpursuant to the Fourth Amendment.

 

TheCompany had $493,950 outstanding and $55,210 of borrowing capacity under itssecured revolving credit facility discussed below, of which, $5,675 wasavailable to be drawn based on the Company’s borrowing base. In addition,approximately $35,840 of letters of credit and other assurances of theavailability of funds have been provided under the Revolving Credit Facility,as defined below.

 

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

 

OnDecember 22, 2004, Greenwood Financial, Inc., a wholly-owned subsidiary of theCompany and other wholly-owned subsidiaries of the Company, as borrowers, andOrleans Homebuilders, Inc. as guarantor, entered into a Revolving Credit andLoan Agreement for a $500,000 Senior Secured Revolving Credit and Letter ofCredit Facility with various banks as lenders (as amended and restated andfurther amended, the “Revolving Credit Facility”). The Revolving Credit and LoanAgreement was amended on January 24, 2006 via the Amended and RestatedRevolving Credit and Loan Agreement (the “Amended Credit Agreement”). TheAmended Credit Agreement increased the borrowing limit from $500,000 to$650,000. A subsequent amendment reduced the borrowing limit to $585,000,subject to increase if certain conditions are met. In connection with theAmended Credit Agreement, Orleans Homebuilders, Inc. entered into an amendedGuaranty agreement, which was amended on September 6, 2007 by the FirstAmendment to Guaranty. The Amended and Restated Credit Agreement was amended onNovember 1, 2006 (the “First Amendment”), February 7, 2007 (the “SecondAmendment”), May 8, 2007 (the “Third Amendment”) and September 6, 2007 (the“Fourth Amendment”). The amendments were the result of non-compliance withcertain financial covenants in the prior year.

 

Underand subject to the terms of the Revolving Credit Facility, the borrowers mayborrow and re-borrow for the purpose of financing the acquisition and developmentof real estate, the construction of homes and improvements, for investment injoint ventures, for working capital and for such other appropriate corporatepurposes as may be approved by the lenders. Capitalized terms used below andnot otherwise defined have the meanings set forth in the Amended and RestatedCredit Agreement.

 

Pursuantto the Fourth Amendment, and subject to the terms of the Revolving CreditFacility, approximately $464,000 of the $585,000 Revolving Credit Facility hasa maturity date of December 20, 2009 and the remaining $121,000 has a maturitydate of December 20, 2008. Included in the $464,000 that will mature onDecember 20, 2009 is $16,200 related to one bank that accepted the extensionterms of the Fourth Amendment subsequent to September 30, 2007, but effectiveas of the effective date of the Fourth Amendment. Borrowings and advances underthe Revolving Credit Facility bear interest on a per annum basis equal to theLIBOR Market Index Rate plus a non-default variable spread ranging from 165basis points to 275 basis points, depending upon the Company’s leverage ratio.During the term of the Revolving Credit Facility, 

 

6

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interestis payable monthly in arrears. At September 30, 2007, the interest rate was7.874%, which included a 275 basis point spread.

 

Thetotal amount of loans and advances outstanding at any time under the RevolvingCredit Facility may not exceed the lesser of the then-current borrowing baseavailability or the revolving sublimit as defined in the Revolving CreditFacility. Pursuant to the Fourth Amendment, the revolving sublimit is $585,000,subject to reduction on December 20, 2008. The borrowing base availability isbased on the lesser of the appraised value or cost of real estate owned by theCompany that has been admitted to the borrowing base. Various conditions mustbe satisfied in order for real estate to be admitted to the borrowing base,including that a mortgage in favor of lenders has been delivered to the agentfor lenders and that all governmental approvals necessary to begin developmentof for-sale residential housing, other than building permits and certain otherpermits borrower in good faith believes will be issued within 120 days, havebeen obtained. Depending on the stage of development of the real estate, theloan to value or loan to cost advance rate ranges from 50% to 95% of theappraised value or cost of the real estate.

 

Assecurity for all obligations of borrowers to lenders under the Revolving CreditFacility, lenders have a first priority mortgage lien on all real estateadmitted to the borrowing base. In addition, Orleans Homebuilders, Inc. hasguaranteed the obligations of the borrowers to lenders pursuant to an amendedGuaranty executed by Orleans Homebuilders, Inc. on January 26, 2006 and amendedon September 6, 2007. Under the Guaranty, Orleans Homebuilders, Inc. grantedlenders a security interest in any balance or assets in any deposit or otheraccount that Orleans Homebuilders, Inc. has with any lender.

 

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

 

•                  Incur or assume other indebtedness, exceptcertain permitted indebtedness;

•                  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 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 dividends in excess of $0.08 per shareper year; or

•                  Redeem any stock.

 

TheRevolving Credit Facility also contains various financial covenants. Amongother things for periods ending after June 30, 2007, the financial covenants,as amended, require that:

 

•                  As of the last day of each fiscal quarter,the ratio of the Company’s adjusted EBITDA to debt service for the prior fourfiscal quarters cannot be not less than 0.50-to-1.00 for the periods endingMarch 31, 2008 and June 30, 2008; 0.70-to-1.00 for the periods ending September30, 2008, December 31, 2008, March 31, 2009 and June 30, 2009; and 1.00-to-1.00for the period ending September 30, 2009. As a result of the Fourth Amendment,the Adjusted EBITDA to debt service covenant was waived for the periods endingJune 30, 2007, September 30, 2007 and December 31, 2007;

•                  The Company had to maintain a minimumconsolidated adjusted tangible net worth equal to a minimum of $200,000 at June30, 2007. After June 30, 2007, the Company must maintain a minimum consolidatedtangible net worth of at least $192,000 plus 50% of the positive net incomeearned since June 30, 2007 and all of the net proceeds of equity securitiesissued by the Company after June 30, 2007;

 

7

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•                  As of the last day of each fiscal quarter,the Company’s leverage ratio cannnot exceed 3.00-to-1.00 for the fiscalquarters ending June 30, 2007, September 30, 2007, December 31, 2007 and March31, 2008. For fiscal quarters ending June 30, 2008 through maturity, theLeverage Ratio cannot exceed 2.75-to-1.00.

•                  As of the last day of each fiscal quarter,the ratio of the book value of all land that is not subject to a qualifyingagreement of sale and on which no unit has been or is being constructed to theCompany’s consolidated adjusted tangible net worth cannot exceed 2.10-to-1.00at June 30, 2007; 2.00-to-1.00 at September 30, 2007, December 31, 2007 andMarch 31, 2008; 1.85-to-1.00 at June 30, 2008, September 30, 2008 and December31, 2008; and 1.75-to-1.00 at March 31, 2009 through maturity.

•                  The Company must maintain a requiredliquidity level based on cash plus borrowing base availability and under thiscovenant, the Company must have (i) at least $10,000 of cash and cashequivalents (as defined) at all times, and (ii) at least $15,000 of liquidity(as defined and including cash and cash equivalents) as of the date of eachborrowing base certificate.

•                  Under a minimum cash flow from operationsratio based on cash flow from operations to interest incurred covenant, whichis applicable starting with the twelve-month period ending December 31, 2007,if the interest coverage ratio is less than 1.25-to-1.00, the Company must havea cash flow from operations to interest incurred ratio (as defined) of at least1.50-to-1.00. During the first four quarter periods during which this covenantis applicable, even if the interest coverage ratio is less than 1.25-to-1.00,the cash flow from operations ratio may be less than 1.50-to-1.00 during anyone period, so long as it is greater than 1.00-to-1.00. Cash flow fromoperations is calculated based on the last twelve months cash flow fromoperations and adjusted for interest expense and includes any 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.

 

Inaddition, the Revolving Credit Facility contains various financial covenantswith respect to the value of land in certain stages of development that may beowned by the Company, a borrower or any subsidiary of the Company and limitsthe number of units which are not subject to a bona-fide agreement of sale thatmay be in the inventory of any borrower, the Company or any subsidiary of theCompany.

 

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 at least $500 inexcess of available insurance proceeds, if such judgment or judgments are notdismissed or bonded within 30 days; or (ii) that prevents borrowers fromconveying lots and units in the ordinary course of business if such judgment orjudgments are not dismissed or bonded within 30 days; or the issuance of anywrits of attachment, execution or garnishment against any borrower or the Company;

 

8

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

•                  Specified cross defaults.

 

Uponthe occurrence and continuation of an event of default, after completion of anyapplicable grace or cure period, lenders may demand immediate payment in fullof all indebtedness outstanding under the Revolving Credit Facility, terminatetheir obligations to make any loans or advances or issue any letter of credit,set off and apply any and all deposits held by any lender for the credit oraccount of any borrower. In addition, upon the occurrence of certain events ofbankruptcy or other insolvency events with respect to any borrower or theCompany, all indebtedness outstanding under the Revolving Credit Facility shallbe immediately due and payable without any act or action by lenders.

 

***Trust Preferred Securities***

 

OnNovember 23, 2005, the Company issued $75,000 of trust preferred securitieswhich mature on January 30, 2036 and are callable, in whole or in part, at parplus accrued interest on or after January 30, 2011. For the first ten years,the securities have a fixed interest rate of 8.61% per annum, provided thatcertain covenant levels are maintained. Thereafter, the securities have afloating interest rate equal to three-month LIBOR plus 360 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 repay outstanding obligations under the Revolving Credit Facilitydiscussed above.

 

OnAugust 13, 2007, the Company entered into Supplemental Indenture No. 1 (the“Supplemental Indenture”), to the $75,000 of trust preferred securities, whichamended the terms of the securities, as follows:

 

•                  The Supplemental Indenture deferred the potentialstart of the payment of the “Adjusted Interest Rate”, which is 3% over the“Regular Interest Rate” of 8.61%, for four quarters so that the earliest thatthe Adjusted Interest Rate could be payable is with the coupon payable onOctober 30, 2008, rather than on October 30, 2007, the first date that OHIFinancing, Inc. (“OHI Financing”) would have been required to pay the AdjustedInterest Rate. Specifically, the Indenture was revised to provide that thefirst fiscal quarter end at which the applicable interest coverage ratio andminimum consolidated tangible net worth measure must be met for at least threeof the last four consecutive fiscal quarters for purposes of determining theapplicability of the Adjusted Interest Rate is the fiscal quarter ending June30, 2008. If the applicable interest coverage ratio or minimum consolidatedtangible net worth measure is not met as of the end of a fiscal quarter for atleast three of the last four consecutive fiscal quarters ending on or afterJune 30, 2008, the applicable rate of interest increases to the AdjustedInterest Rate.

•                  Under the Supplemental 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 October30, 2008 to and including July 30, 2010) to cause an event of default under theSupplemental Indenture (or in some cases six consecutive coupon payments)rather than the four consecutive coupon payments in the original Indenture.More specifically, the Supplemental Indenture provides that the earliest anevent of default could occur as a result of the payment of the AdjustedInterest Rate is (i) upon the 

 

9

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paymentof the Adjusted Interest Rate coupon for October 30, 2010, if applicable,provided there have been eight prior consecutive Adjusted Interest Rate couponspaid by OHI Financing; (ii) on either the fiscal quarter ended March 31, 2010or the fiscal year ended June 30, 2010, if at either date both the trailingtwelve months’ interest coverage ratio is less than 1.25 to 1, and OHIFinancing has made the six prior consecutive Adjusted Interest Rate couponpayments; or (iii) on the fiscal quarter ended September 30, 2010, if at suchtime both the trailing twelve months’ interest coverage ratio is less than 1.75to 1, and OHI Financing has made the eight prior consecutive Adjusted InterestRate coupon payments. The Adjusted Interest Rate must be paid for eight (or insome instances six) consecutive coupons in order to trigger an event ofdefault. If the interest coverage ratio test and the minimum consolidatedtangible net worth test are both met, OHI Financing will 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 Supplemental Indenture amended thedefinition of both “Adjusted EBITDA” and “Debt Service” and added the newdefined term,  “Consolidated Net Income”,all of which are utilized in the calculation of the interest coverage ratio (asdefined by the Indenture) for the determination of whether the AdjustedInterest Rate applies.

•                  The Supplemental Indenture provides thatConsolidated Net Income is to be used when determining Adjusted EBITDA underthe Indenture rather than net income determined in accordance with UnitedStates generally accepted accounting principles (“GAAP”). Consolidated NetIncome generally means the net income of the Company and itsmajority-controlled subsidiaries with respect to the relevant accountingperiod, provided that the after-tax impacts of certain items are generallyexcluded, such as: (i) any impairment charge, asset write-off, abandonmentcharge, deposit forfeiture or write-off of other pre-acquisition costs pursuantto GAAP or other similar amounts; (ii) any extraordinary, non-recurring orunusual gains, losses or expenses (including any gain or loss on assetdispositions such as land and other similar asset sales); (iii) any severancecosts, relocation costs and curtailments or modifications to pension andpost-retirement employee benefit plans; (iv) any net income or net loss fromdisposed of or discontinued operations; (v) the amortization of intangibles,the early extinguishment of debt or hedging obligations, any fees or expensesincurred for the issuance, refinancing or modification of any debt or equitysecurity; (vi) any non-cash compensation charges from stock options, stockappreciation rights, restricted stock or other similar rights; (vii) typicaladjustments for entities accounted for under the equity method of accounting;and (viii) typical purchase accounting adjustments for any acquisitionconsummated in the future.

•                  The definition of Debt Service used in thedetermination of the trailing twelve months’ interest coverage ratio wasmodified to exclude from Debt Service (i) any additional interest paid as aresult of the Adjusted Interest Rate being in effect, and (ii) the payment ofthe fee payable in connection with obtaining the consent necessary for theSupplemental Indenture.

•                  The optional redemption provisions of theIndenture were modified to generally provide that OHI Financing may, at itsoption, on any date that is on or after January 30, 2011, redeem the TrustPreferred issue in whole or in part at a redemption price equal to one hundredpercent (100%) of the principal amount, plus any accrued and unpaid interest. 

 

10

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Previously,redemption of the issue was permitted only on interest coupon payment dates onor after January 30, 2011.

•                  Provisions were added to the Indenturepermitting “legal defeasance” and “covenant defeasance”, subject to certainterms and conditions, including the posting of cash or certain governmentobligations in an amount sufficient to pay and discharge the payment obligationsof the securities to the stated maturity or the redemption date, as the casemay be. For purposes of these legal defeasance and covenant defeasanceprovisions, the interest rate at which the securities bear interest is a fixedrate equal to 8.61% per annum.

•                  To allow the Supplemental Indenture to becomeeffective, OHI Financing established a $5,000 reserve fund for the benefit ofthe holders of the trust preferred securities by posting a letter of creditwith the trustee under the Supplemental Indenture. If the Adjusted InterestRate 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 of thetrust preferred obligations. The Supplemental Indenture also provides for therelease of the reserve fund 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 SupplementalIndenture. This reserve fund has been established in accordance with the termsof the Supplemental Indenture.

 

OnSeptember 20, 2005, the Company issued $30,000 of trust preferred securitieswhich mature on September 30, 2035 and are callable, in whole or in part, atpar plus accrued interest on or after September 30, 2010. For the first tenyears, the securities have a fixed interest rate of 8.52% per annum.Thereafter, the securities have a floating interest rate equal to three-monthLIBOR plus 380 basis points per annum, resetting quarterly. The securities aretreated as debt obligations for financial statement purposes. The Company usedproceeds from the sale of these securities to fund land purchases andresidential construction. The obligations relating to the trust preferredsecurities are subordinated to the Revolving Credit Facility.

 

**4.****             ****STOCK BASED COMPENSATION**

 

***Stock Option Plans***

 

OnAugust 26, 2004, the board of directors of the Company adopted the OrleansHomebuilders, Inc. 2004 Omnibus Stock Incentive Plan (as subsequently amended,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 Award Plan.

 

InDecember 2004, the FASB revised SFAS No. 123 through the issuance of SFAS No.123-R “Share- Based Payment”, revised (“SFAS 123-R”). SFAS 123-R was effectivefor the Company commencing July 1, 2005. SFAS 123-R, among other things,eliminates the alternative to use the intrinsic value method of accounting forstock based compensation and requires entities to recognize the cost ofemployee services received in exchange for awards of equity instruments basedon the grant-date fair value of those awards (with limited exceptions). Thefair value based method in SFAS 123-R is similar to the fair-value-based methodin SFAS No. 123 in most respects, subject to certain key differences. TheCompany previously adopted the fair value recognition provisions of SFAS No.123 prospectively for all stock awards granted and, as such, the impact of themodified prospective adoption of SFAS 123-R did not have a significant impacton the financial position or results of operations of the Company.

 

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Duringthe three months ended September 30, 2007 and 2006, the Company recognized $474and $365, respectively, of stock based compensation expense related to stockoptions.

 

Thefollowing summarizes stock option activity for the Company’s stock option plansduring the three months ended September 30, 2007:

 
| ** **                        | ** ** | **Shares** | ** ** | **Weighted  Average Price** | ** ** |
|-----------------------------------|------------|------------|------------|----------------------------------|------------|
| Outstanding at June 30, 2007      |       | 645,000    |       | $                                | 13.46      |   |
| Granted                           |       | —     |       | N/A                              |       |
| Exercised                         |       | —     |       | N/A                              |       |
| Cancelled                         |       | —     |       | N/A                              |       |
| Outstanding at September 30, 2007 |       | 645,000    |       | $                                | 13.46      |   |
|                              |       |       |       |                             |       |
| Exercisable at September 30, 2007 |       | 210,625    | *          | $                                | 8.83       |   |

 

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*113,126of the 210,625 options exercisable at September 30, 2007 have a market value inexcess of the strike price.

 

Nostock options were exercised during the three months ended September 30, 2007.The intrinsic value of stock options exercised during the three months endedSeptember 30 2006 was $2,046.

 

Therewere no options granted during the three months ended September 30, 2007 and2006.

 

Thefollowing table summarizes information about the Company’s stock options atSeptember 30, 2007:

 
| ** **                             | ** ** | **Options Outstanding**                 | ** ** | **Options Exercisable**             | ** ** |
|----------------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|
| **Range of  Exercise Price** | ** ** | **Outstanding  at June 30,  2007** | ** ** | **Weighted  Average  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Exercisable  at June 30,  2007** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $                                      | 1.19       |                                         | 95,000     |                                     | 0.6        |   | $ | 1.19 |   | 95,000 |   | $ | 1.19 |   |
| 2.06                                   |       | 2,500                                        |       | 1.2                                      |       | 2.06 |   | 2,500 |   | 2.06 |   |
| 10.64                                  |       | 30,000                                       |       | 5.8                                      |       | 10.64 |   | 30,000 |   | 10.64 |   |
| 15.60 -  15.63                         |       | 490,000                                      |       | 9.1                                      |       | 15.62 |   | 62,500 |   | 15.63 |   |
| 21.60                                  |       | 27,500                                       |       | 6.9                                      |       | 21.60 |   | 20,625 |   | 21.60 |   |
|                                   |       | 645,000                                      |       | 7.5                                      |       | $ | 13.46 |   | 210,625 |   | $ | 8.83 |   |
|                                        |            |                                              |            |                                          |            |  |  |  |  |  |  |  |  |  |

 

Theaggregate intrinsic value for outstanding stock options and for stock optionsthat are exercisable as of September 30, 2007 was $443 and $443, respectively.

 

TheCompany uses the Black-Scholes option pricing model to determine the aggregatefair value of the stock options granted. The aggregate fair value of theCompany’s stock option grants are amortized to compensation expense over theirrespective vesting periods and included in selling, general and administrativeexpenses on the Consolidated Statements of Operations. The Company typicallyissues shares of common stock from treasury stock upon the exercise of stockoptions, but such shares may also be newly issued.

 

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***Stock Award Plans***

 

InOctober 2003, the Board of Directors adopted the Orleans Homebuilders, Inc.Stock Award Plan (the “Stock Award Plan”). The Stock Award Plan provides forthe grant of stock awards of up to an aggregate of 400,000 shares of theCompany’s common stock. The Stock Award Plan allows for the payment of all or aportion of the incentive compensation awarded under the Company’s bonuscompensation plans to be paid by means of a transfer of shares of common stock.The plan has a ten year life and is open to all employees of the Company andits subsidiaries. At September 30, 2007, the Company had awarded 155,904 sharesof common stock under the Stock Award Plan and the Company had 244,096 sharesof the common stock available to issue under the Stock Award Plan.

 

Duringthe three months ended September 30, 2007 and 2006, the Company did not grantany stock awards.

 

Duringthe three months ended September 30, 2007 and 2006, the Company recognized $85and $91, respectively, of stock based compensation expense related to stockawards.

 

**5.****             ****EMPLOYEE RETIREMENT PLAN**

 

OnDecember 1, 2005, the Company adopted an unfunded, non-qualified target definedbenefit retirement plan, effective as of September 1, 2005, which covers agroup of management employees of the Company. The Company owns life insurancepolicies on all participants in the Supplemental Executive Retirement Plan(“SERP”). This SERP, which was amended on March 13, 2006 and again on September27, 2007, is intended to provide the participants with an annual supplementalretirement benefit based upon their years of service with the Company andhighest average compensation for five consecutive years. The annualsupplemental benefit for each participant will be adjusted based on the actualperformance of the SERP compared to the target.

 

TheCompany adopted SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans” (“SFAS 158”) effective June 30, 2007.SFAS 158 requires companies to recognize the overfunded or underfunded statusof a single-employer defined benefit postretirement plan as an asset orliability in its statement of financial position and to recognize changes inthat funded status in comprehensive income in the year in which the changesoccur. In addition, SFAS 158 requires companies to measure the funded status ofa plan as of the date of its year-end statement of financial position, withlimited exceptions.

 

TheCompany used a 4% annual compensation increase and a 6.10% discount rate in itscalculation of the present value of its projected benefit obligation. The discountrate used represented the Moody’s AA bond rate for long-term bonds as of June2007.

 

TheCompany recognized the following costs related to the SERP for the three monthsended September 30, 2007 and 2006:

 
| ** **                         | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Net periodic pension cost:         |       |                                                 |       |   |   |
| Service cost                       |       | $                                                    | 153        |   | $ | 170 |   |
| Interest cost                      |       | 85                                                   |       | 94 |   |
| Amortization of prior service cost |       | 103                                                  |       | 90 |   |
| Amortization of actuarial gain     |       | (46                                                  | )          | — |   |
| Total net periodic pension cost    |       | $                                                    | 295        |   | $ | 354 |   |

 

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**6.****             ****EARNINGS (LOSS) PER SHARE**

 

Theweighted average number of shares used to compute basic earnings (loss) percommon share and diluted earnings (loss) per common share and a reconciliationof the numerator and denominator used in the computation for the three monthsended September 30, 2007 are shown in the following table:

 
| ** **                                                              | ** ** | **Three Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Weighted average common shares issued                                   |       | 18,698                                               |       | 18,698 |   |
| Less: Average treasury shares outstanding                               |       | (196                                                 | )          | (335 | ) |
| Basic EPS shares                                                        |       | 18,502                                               |       | 18,363 |   |
| Effect of assumed shares under treasury  stock method for stock options |       | —                                               | (1)        | 310 |   |
| Diluted EPS shares                                                      |       | 18,502                                               |       | 18,673 |   |
|                                                                    |       |                                                 |       |   |   |
| Net (loss) income for basic and diluted EPS                             |       | $                                                    | (2,055     | ) | $ | 3,899 |   |
|                                                                         |            |                                                      |            |  |  |  |  |

 

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 (1) For the three months ended September 30,2007, the Company used basic shares outstanding to compute diluted earnings percommon share as the use of the diluted shares outstanding was anti-dilutive onthe diluted earnings per common share calculation.

 

**7.****             ****COMPREHENSIVE INCOME**

 

Forthe three months ended September 30, 2007 and 2006, total comprehensive income(loss) equals net income (loss).

 

**8.****             ****INCOME TAXES**

 

Asdiscussed in Note 1 above, in June 2006, the FASB issued FIN 48. FIN 48prescribes a recognition threshold and measurement attribute for tax positionstaken or expected to be taken in a tax return. This interpretation alsoprovides guidance on de-recognition, classification, interest and penalties,accounting in interim periods, disclosure and transition. The evaluation of a taxposition in accordance with this interpretation is a two-step process. In thefirst step, recognition, the Company determines whether it ismore-likely-than-not that a tax position will be sustained upon examination,including resolution of any related appeals or litigation processes, based onthe technical merits of the position. The second step addresses measurement ofa tax position that meets the more-likely-than-not criteria. The tax positionis measured at the largest amount of benefit that is greater than 50 percentlikely of being realized upon ultimate settlement. Differences between taxpositions taken in a tax return and amounts recognized in the financialstatements will generally result in (a) an increase in a liability for incometaxes payable or a reduction of an income tax refund receivable, (b) areduction in a deferred tax asset or an increase in a deferred tax liability or(c) both (a) and (b). Tax positions that previously failed to meet themore-likely-than-not recognition threshold should be recognized in the firstsubsequent financial reporting period in which that threshold is met.Previously recognized tax positions that no longer meet themore-likely-than-not recognition threshold should be de-recognized in the firstsubsequent financial reporting period in which that threshold is no longer met.Use of a valuation allowance as described in FAS 109 is not an appropriatesubstitute for the de-recognition of a tax 

 

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position.The requirement to assess the need for a valuation allowance for deferred taxassets based on sufficiency of future taxable income is unchanged by thisinterpretation.

 

Asof July 1, 2007, the Company adopted the provisions of FIN 48. The Companyrecognized the cumulative effect of applying its provisions by reducing itsJuly 1, 2007 retained earnings opening balance by $715 with a correspondingincrease to the appropriate tax liability accounts. The amount of unrecognizedtax benefit as of July 1, 2007 after the FIN 48 adjustment was $2,535. Thisamount relates to unrecognized tax positions that, if recognized, would affectthe annual effective tax rate of the Company.

 

TheCompany’s unrecognized tax liability results primarily from the varyingapplication of statutes, regulations and interpretations including recent statetax cases regarding similar issues. The Company anticipates that it will paysubstantially all of the balance associated with its uncertain tax positionswithin the next six months as it has entered into a voluntary disclosureagreement to resolve an issue.

 

TheCompany files income tax returns at the U.S. federal level and in various statejurisdictions. The Company is no longer subject to U.S. federal, state or localincome tax examinations by tax authorities for years before 2002.

 

TheCompany recognizes interest and penalties accrued in relation to unrecognizedtax benefits in tax expense. At July 1, 2007, the Company had accruedapproximately $1,300 for the payment of interest and penalties.

 

Theimpact of the adoption of FIN 48 on retained earnings as of July 1, 2007 is asfollows (in thousands):

 

| Retained earning as of June 30, 2007                                  |   | $    | 154,003 |   |
|-----------------------------------------------------------------------|--------|------|---------|--------|
| Impact of adoption of FIN 48 on retained  earnings as of July 1, 2007 |   | (715 | )       |
| Retained earnings as of July 1, 2007                                  |   | $    | 153,288 |   |

 

**9.****             ****SEGMENT REPORTING**

 

SFASNo. 131 “Disclosures about Segments of an Enterprise and Related Information”establishes standards for the manner in which public enterprises report segmentinformation about operating segments. The Company has determined that itsoperations primarily involve five reportable homebuilding segments operating inthirteen markets. Revenues are primarily derived from the sale of homes whichthe Company constructs. The segments reported have been determined to havesimilar economic characteristics including similar historical and expectedfuture operating performance, employment trends, land acquisitions and landconstraints, municipality behavior and met the other aggregation criteria inSFAS 131. The reportable homebuilding segments include operations conductingbusiness in the following states:

 

Northern:  southeastern Pennsylvania, central NewJersey, southern New Jersey

andOrange County, New York

Southern:  Charlotte, Raleigh and Greensboro, North Carolina,Richmond

andTidewater, Virginia

Midwestern:  Chicago, Illinois

Florida:Orlando and Palm Coast, Florida

Western:  Phoenix, Arizona.

 

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TheCompany’s evaluation of segment performance is based on net income. Below is asummary of revenue and net income for each reportable segment for the threemonths ended September 30, 2007 and 2006:

 
| ** **                   | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **Total Revenue**            |       |                                                 |       |   |   |
| Northern                     |       | $                                                    | 51,140     |   | $ | 49,646 |   |
| Southern                     |       | 48,505                                               |       | 74,113 |   |
| Midwestern                   |       | 13,538                                               |       | 21,426 |   |
| Florida                      |       | 8,269                                                |       | 18,417 |   |
| Western                      |       | —                                               |       | — |   |
| Corporate and unallocated(1) |       | 1,424                                                |       | 1,500 |   |
| Consolidated Total           |       | $                                                    | 122,876    |   | $ | 165,102 |   |
|                         |       |                                                 |       |   |   |
| **Net Income (Loss)**        |       |                                                 |       |   |   |
| Northern                     |       | $                                                    | (405       | ) | $ | 1,220 |   |
| Southern                     |       | (392                                                 | )          | 4,382 |   |
| Midwestern                   |       | (918                                                 | )          | 1,047 |   |
| Florida                      |       | (689                                                 | )          | (579 | ) |
| Western                      |       | (291                                                 | )          | (143 | ) |
| Corporate and unallocated(1) |       | 640                                                  |       | (2,028 | ) |
| Consolidated Total           |       | $                                                    | (2,055     | ) | $ | 3,899 |   |

 

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(1)Corporate and unallocated includes the revenues and expenses of the Company’smortgage brokerage and property management operations as well as corporatelevel selling, general, administrative expenses. These selling, general, andadministrative expenses are primarily comprised of corporate salaries, bonuses,and benefits; accounting and consulting fees; corporate travel expenses; netperiodic pension costs; and compensation expense resulting from the fairvaluation of stock options.

 

**10.****      ****COMMITMENTS AND CONTINGENCIES**

 

AtSeptember 30, 2007, the Company had outstanding bank letters of credit, suretybonds and financial security agreements amounting to $136,160 as collateral forcompletion of improvements at various developments of the Company.

 

Asof September 30, 2007, the Company owned or controlled approximately 10,177building lots. As part of the aforementioned building lots, the Company hascontracted to purchase, or had under option, undeveloped land and improved lotsfor an aggregate purchase price of approximately $154,691, which are expectedto yield approximately 2,519 building lots. 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 of the properties is usually contingentupon obtaining all governmental approvals and satisfaction of certainrequirements by the Company and the sellers.

 

Fromtime to time, the Company is named as defendant in legal actions arising fromits normal business activities. Although the amount of any liability that couldarise with respect to currently pending actions cannot be accurately predicted,in the opinion of the Company any such liability will not have a materialadverse effect on the financial position or operating results of the Company.

 

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

 

OrleansHomebuilders, Inc., a Delaware corporation, and its subsidiaries (collectively,the “Company”, “OHB”, “Orleans”, “we”, “us” or “our”) 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 believes this broad range of home designsgives it flexibility to address economic and demographic trends within itsmarkets. The Company has been in operation since 1918 and is currently engagedin residential real estate development in the following thirteen markets:southeastern Pennsylvania; central New Jersey; southern New Jersey; OrangeCounty, New York; Charlotte, Raleigh and Greensboro, North Carolina; Richmondand Tidewater, Virginia; Chicago, Illinois; Orlando and Palm Coast, Florida;and Phoenix, Arizona. The Company’s Charlotte, North Carolina market alsoincludes operations in adjacent counties in South Carolina. The Company hasoperated in its Pennsylvania and New Jersey markets for nearly 90 years andbegan operations in its North Carolina and Virginia markets in fiscal 2001through the acquisition of Parker & Lancaster Corporation (“PLC”), aprivately-held residential homebuilder. The Company entered the Orlando andPalm Coast, Florida markets on July 28, 2003 through its acquisition ofMasterpiece Homes, Inc. (“Masterpiece Homes”), a privately-held residentialhomebuilder. On July 28, 2004, the Company entered the Chicago, Illinois marketthrough the acquisition of Realen Homes, L.P. (“Realen Homes”), an establishedprivately-held homebuilder with operations in Chicago, Illinois andsoutheastern Pennsylvania. On December 23, 2004, pursuant to an Asset PurchaseAgreement of the same date, the Company acquired, through a wholly-ownedsubsidiary, certain real estate assets from Peachtree Residential Properties,LLC, a North Carolina limited liability company and Peachtree TownhomeCommunities, LLC, a North Carolina limited liability company which, at the timethe Company acquired the assets, were wholly-owned subsidiaries of PeachtreeResidential Properties, Inc., a Georgia corporation (collectively, “PeachtreeResidential Properties”). In December 2005, the Company entered the Phoenix,Arizona market as a start-up operation via the purchase of an undevelopedparcel of land. In July 2007, the Company exited the Palm Bay, Florida market.

 

Referencesto a given fiscal year in this Quarterly Report on Form 10-Q are to the fiscalyear ended June 30th of that year. For example, the phrases “fiscal 2008”,“2008 fiscal year” or “year ended June 30, 2008” refer to the fiscal year endedJune 30, 2008. When used in this report, the “northern region” segment refersto the Company’s markets in Pennsylvania, New Jersey and New York, whichincludes the southeastern Pennsylvania operations of Realen Homes that wereacquired on July 28, 2004; the “southern region” segment refers to theCompany’s markets in North Carolina and Virginia, as well as the adjacentcounties in South Carolina; the “midwestern region” segment refers to the Company’smarket in Illinois; the “Florida region” segment refers to the Company’s marketin Florida; and the “western region” segment refers to the Company’s market inArizona.

 

**Resultsof Operations**

 

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

 

Duringthe second half of fiscal 2006 and all of fiscal 2007, the Company and theentire housing industry have faced several significant challenges in thehousing market as a whole. These challenges continued throughout the threemonths ended September 30, 2007 and include decreased homebuyer demand due tolower consumer confidence in the overall housing market, 

 

17

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increaseduncertainty in the overall mortgage market, increased underwriting standardsand an increase in foreclosures.

 

Despitethe challenges in the housing market, the Company has experienced an increasein net new orders as compared to the same period in the prior year for thethird consecutive quarter.

 

Forthe tables below setting forth certain details as to residential salesactivities, the information is provided for the three months ended September30, 2007 and 2006 in the case of residential revenue earned and new orders, andas of September 30, 2007 and 2006 in the case of backlog. The Company considersa sales contract or a potential sale to be classified as a new order.

 

| ** **                      | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                      | ** ** | **(in thousands)**                                 | ** ** |
| **New orders**                  |       |                                                    |       |       |       |       |       |   |   |
| Dollars                         |       | $                                                       | 132,576    |       | $          | 117,763    |       | $ | 14,813 |   | 12.6 | % |
| Units                           |       | 303                                                     |       | 249        |       | 54         |       | 21.7 | % |
| Average sales price             |       | $                                                       | 438        |       | $          | 473        |       | $ | (35 | ) | (7.4 | )% |
|                            |       |                                                    |       |       |       |       |       |   |   |
| **Residential revenues earned** |       |                                                    |       |       |       |       |       |   |   |
| Dollars                         |       | $                                                       | 119,357    |       | $          | 161,772    |       | $ | (42,415 | ) | (26.2 | )% |
| Units                           |       | 263                                                     |       | 363        |       | (100       | )          | (27.5 | )% |
| Average sales price             |       | $                                                       | 454        |       | $          | 446        |       | $ | 8 |   | 1.8 | % |
|                            |       |                                                    |       |       |       |       |       |   |   |
| **Backlog**                     |       |                                                    |       |       |       |       |       |   |   |
| Dollars                         |       | $                                                       | 331,132    |       | $          | 290,667    |       | $ | 40,465 |   | 13.9 | % |
| Units                           |       | 649                                                     |       | 601        |       | 48         |       | 8.0 | % |
| Average sales price             |       | $                                                       | 510        |       | $          | 484        |       | $ | 26 |   | 5.4 | % |

 

Theincrease in new orders noted above is primarily attributable to an increasedmarket presence through the addition of several new communities. As ofSeptember 30, 2007, the Company operated in 102 communities as compared to 94communities at September 30, 2006.

 

Thedecrease in residential revenues earned is primarily the result of sales andmarketing incentives, including price reductions, taken over the course of theend of the prior fiscal year in an effort to increase absorption rates andreduce completed home inventory levels. The Company believes that it has reducedits completed home inventory levels to appropriate levels given the currentmarket conditions in which it operates.

 

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

 

Cancellationsfor the three months ending September 30, 2007 were 21% of new orders comparedto 32% for the three months ending September 30, 2006. This decrease isprimarily the result of abnormally high cancellations during the three monthsended September 30, 2006 in the Company’s Florida region, which resulted fromthe exit of investors in this region. The Company believes that cancellationrates have stabilized and believes that most of the backlog at September 30,2007 will be delivered during fiscal year 2008.

 

18

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***Northern Region:***

*** ***

| ** **                      | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                      | ** ** | **(in thousands)**                                 | ** ** |
| **New orders**                  |       |                                                    |       |       |       |       |       |   |   |
| Dollars                         |       | $                                                       | 53,582     |       | $          | 55,492     |       | $ | (1,910 | ) | (3.4 | )% |
| Units                           |       | 113                                                     |       | 115        |       | (2         | )          | (1.7 | )% |
| Average sales price             |       | $                                                       | 474        |       | $          | 483        |       | $ | (9 | ) | (1.9 | )% |
|                            |       |                                                    |       |       |       |       |       |   |   |
| **Residential revenues earned** |       |                                                    |       |       |       |       |       |   |   |
| Dollars                         |       | $                                                       | 51,026     |       | $          | 48,591     |       | $ | 2,435 |   | 5.0 | % |
| Units                           |       | 105                                                     |       | 96         |       | 9          |       | 9.4 | % |
| Average sales price             |       | $                                                       | 486        |       | $          | 506        |       | $ | (20 | ) | (4.0 | )% |
|                            |       |                                                    |       |       |       |       |       |   |   |
| **Backlog**                     |       |                                                    |       |       |       |       |       |   |   |
| Dollars                         |       | $                                                       | 147,191    |       | $          | 107,424    |       | $ | 39,767 |   | 37.0 | % |
| Units                           |       | 263                                                     |       | 213        |       | 50         |       | 23.5 | % |
| Average sales price             |       | $                                                       | 560        |       | $          | 504        |       | $ | 56 |   | 11.1 | % |

 

TheCompany’s northern region is comprised of its Southeastern Pennsylvania,Central New Jersey, Southern New Jersey and Orange County, New York markets.The Company believes that its geographic mix in this market allows it tocompete better than if it were situated in one or two concentrated markets. Inthe northern region, the Company currently builds homes primarily targetedtoward move-up, luxury, empty nester and active adult homebuyers.

 

Thedecrease in new orders for the northern region noted above is primarily theresult of the decline in market conditions as noted above. Additionally, theCompany’s northern region experienced a decline in the average sales price asincentives were increased in an effort to stimulate new sales growth andincrease absorption.

 

Theincrease in residential revenues earned is primarily the result of newcommunities that were open during the three months ended September 30, 2007that were not open or were in the early sales stage and did not have closingsduring the three months ended September 30, 2006. The increase in residentialrevenues was partially offset by a decrease in the average sales price asincentives were increased to stimulate sales growth and product mix shiftedtowards lower priced homes.

 

***Southern Region:***

 

| ** **                      | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                      | ** ** | **(in thousands)**                                 | ** ** |
| **New orders**                  |       |                                                    |       |       |       |       |       |   |   |
| Dollars                         |       | $                                                       | 58,582     |       | $          | 47,670     |       | $ | 10,912 |   | 22.9 | % |
| Units                           |       | 121                                                     |       | 94         |       | 27         |       | 28.7 | % |
| Average sales price             |       | $                                                       | 484        |       | $          | 507        |       | $ | (23 | ) | (4.5 | )% |
|                            |       |                                                    |       |       |       |       |       |   |   |
| **Residential revenues earned** |       |                                                    |       |       |       |       |       |   |   |
| Dollars                         |       | $                                                       | 48,373     |       | $          | 73,693     |       | $ | (25,320 | ) | (34.4 | )% |
| Units                           |       | 100                                                     |       | 155        |       | (55        | )          | (35.5 | )% |
| Average sales price             |       | $                                                       | 484        |       | $          | 475        |       | $ | 9 |   | 1.9 | % |
|                            |       |                                                    |       |       |       |       |       |   |   |
| **Backlog**                     |       |                                                    |       |       |       |       |       |   |   |
| Dollars                         |       | $                                                       | 140,737    |       | $          | 127,621    |       | $ | 13,116 |   | 10.3 | % |
| Units                           |       | 264                                                     |       | 241        |       | 23         |       | 9.5 | % |
| Average sales price             |       | $                                                       | 533        |       | $          | 530        |       | $ | 3 |   | 0.6 | % |

 

TheCompany’s southern region is comprised of its Richmond and Tidewater, Virginiaand its Charlotte, Raleigh and Greensboro, North Carolina 

 

19

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markets.The Charlotte, North Carolina market also includes operations in adjacentcounties in South Carolina. The Company in the southern region currently buildshomes targeted toward move-up and luxury homebuyers.

 

Theincrease in new orders is primarily the result new communities that were openduring the three months ended September 30, 2007 that were not open during thethree months ended September 30, 2006. These new communities, on average, had alower average selling price, which resulted in the decrease in selling pricenoted above. Additionally, the Company’s southern region increased salesincentives in existing communities in an effort to drive sales growth.

 

Thedecrease in residential revenues earned is primarily the result of the declinein market conditions for this region during the second half of fiscal 2007 andinto the first quarter of fiscal 2008.

 

***Midwestern Region:***

 

| ** **                      | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                      | ** ** | **(in thousands)**                                 | ** ** |
| **New orders**                  |       |                                                    |       |       |       |       |       |   |   |
| Dollars                         |       | $                                                       | 13,436     |       | $          | 16,479     |       | $ | (3,043 | ) | (18.5 | )% |
| Units                           |       | 40                                                      |       | 38         |       | 2          |       | 5.3 | % |
| Average sales price             |       | $                                                       | 336        |       | $          | 434        |       | $ | (98 | ) | (22.6 | )% |
|                            |       |                                                    |       |       |       |       |       |   |   |
| **Residential revenues earned** |       |                                                    |       |       |       |       |       |   |   |
| Dollars                         |       | $                                                       | 12,836     |       | $          | 21,311     |       | $ | (8,475 | ) | (39.8 | )% |
| Units                           |       | 28                                                      |       | 48         |       | (20        | )          | (41.7 | )% |
| Average sales price             |       | $                                                       | 458        |       | $          | 444        |       | $ | 14 |   | 3.2 | % |
|                            |       |                                                    |       |       |       |       |       |   |   |
| **Backlog**                     |       |                                                    |       |       |       |       |       |   |   |
| Dollars                         |       | $                                                       | 28,532     |       | $          | 32,506     |       | $ | (3,974 | ) | (12.2 | )% |
| Units                           |       | 67                                                      |       | 71         |       | (4         | )          | (5.6 | )% |
| Average sales price             |       | $                                                       | 426        |       | $          | 458        |       | $ | (32 | ) | (7.0 | )% |

 

Inits midwestern region, the Company has operations in the Chicago area. TheCompany in the midwestern region currently builds homes primarily targetedtoward the move-up homebuyer.

 

Duringthe three months ended September 30, 2007, new order dollars decreased whilethe number of units sold increased. The decrease in the average selling priceis primarily the result of increased sales incentives offered in an effort todrive sales growth and improve absorption.

 

Thedecrease in residential revenues earned is primarily the result of the overalldecline in market conditions in this region.

 

***Florida Region:***

 

| ** **                      | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                      | ** ** | **(in thousands)**                                 | ** ** |
| **New orders**                  |       |                                                    |       |       |       |       |       |   |   |
| Dollars                         |       | $                                                       | 6,976      |       | $          | (1,878     | )          | $ | 8,854 |   | N/M |   |
| Units                           |       | 29                                                      |       | 2          |       | 27         |       | N/M |   |
| Average sales price             |       | $                                                       | 241        |       | N/M        |       | N/M        |   | N/M |   |
| ** **                      |       |                                                    |       |       |       |       |       |   |   |
| **Residential revenues earned** |       |                                                    |       |       |       |       |       |   |   |
| Dollars                         |       | $                                                       | 7,122      |       | $          | 18,177     |       | $ | (11,055 | ) | (60.8 | )% |
| Units                           |       | 30                                                      |       | 64         |       | (34        | )          | (53.1 | )% |
| Average sales price             |       | $                                                       | 237        |       | $          | 284        |       | $ | (47 | ) | (16.5 | )% |
|                            |       |                                                    |       |       |       |       |       |   |   |
| **Backlog**                     |       |                                                    |       |       |       |       |       |   |   |
| Dollars                         |       | $                                                       | 14,672     |       | $          | 23,116     |       | $ | (8,444 | ) | (36.5 | )% |
| Units                           |       | 55                                                      |       | 76         |       | (21        | )          | (27.6 | )% |
| Average sales price             |       | $                                                       | 267        |       | $          | 304        |       | $ | (37 | ) | (12.2 | )% |

 

20

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----

N/M– Not Meaningful

 

Theabove table reflects results from the Company’s Florida region for the threemonths ended September 30, 2007 and 2006. In its Florida region, the Companyhas operations in the Orlando and Palm Coast markets. The current and prioryear periods also reflect results from the Palm Bay market that was substantiallyexited during the first quarter of fiscal 2008. The Company in the Floridaregion currently builds homes primarily targeted toward first-time move-up andentry level homebuyers.

 

Theincrease in new orders for the three months ended September 30, 2007 isprimarily the result of substantially lower level of cancellations for thethree months ended September 30, 2007 when compared to the three months endedSeptember 30, 2006. The Company’s Florida region experienced a 31.0%cancellation rate during the three months ended September 30, 2007 as comparedwith a 96.6% cancellation rate for the three months ended September 30, 2006.The high cancellation rate for the three months ended September 30, 2006 wasprimarily the result of investors exiting the market due to the deterioratingmarket conditions. These cancellations contributed to negative new orderdollars for the three months ended September 30, 2006.

 

Thedecline in residential revenues earned is primarily the result of the overalldecline in market conditions. Additionally, during the three months endedSeptember 30, 2006, the Company’s Florida region offered sales incentives in aneffort to drive closings on completed inventory, which was inflated as a resultof the 96.6% cancellation rate for the three months ended September 30, 2006noted above. In response to the prevailing market conditions in the Floridaregion, the Company has continued to decrease its average selling price inorder to drive new sales and closings.

 

Additionally,demand in the Florida region for first-time buyers has decreased due to thetightening of the mortgage markets and the inability of a large portion of thedemographic to obtain financing for new home purchases. As the average salesprice in the Florida region is significantly less than the average sales pricein the Company’s other regions, the Company believes that the targeteddemographic in this region is more prone to uncertainties in the mortgagemarkets, especially the sub-prime mortgage market.

 

***Western Region:***

 

TheCompany’s western region has operations in the Phoenix, Arizona area. TheCompany entered the western region as a start-up operation via the purchase ofan undeveloped parcel of land in December 2005. The Company’s western regionhad its first new order in this region subsequent to September 30, 2007.

 

21

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***Costs and Expenses:***

 

***Residential Properties:***

 

| ** **                     | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | **(in thousands)**                                 | ** ** |
| **Residential Properties**     |       |                                                    |       |       |       |       |       |   |   |
| Earned revenues                |       | $                                                       | 119,357    |       | $          | 161,772    |       | $ | (42,415 | ) | (26.2 | )% |
| Cost of residential properties |       | 102,953                                                 |       | 131,313    |       | (28,360    | )          | (21.6 | )% |
| Gross profit margin            |       | $                                                       | 16,404     |       | $          | 30,459     |       | $ | (14,055 | ) | (46.1 | )% |
| Gross profit margin %          |       | 13.7                                                    | %          | 18.8       | %          |       |       |   |   |

 

Thecosts of residential properties decreased primarily as a result of thedecreases in residential units completed, as noted above. The decrease in grossprofit percentage is primarily the result of sales incentives offered in anattempt to generate sales growth and increase absorption rates. The decrease ingross profit percentage was experienced in all of the Company’s regions.

 

Inaddition, the Company sells a variety of home types in various communities andregions, each yielding a different gross profit margin. As a result, dependingon the mix of both communities and home types delivered, the consolidated grossprofit margin may fluctuate up and down on a periodic basis and periodic profitmargins may not be representative of the consolidated gross profit margin forfuture years.

 

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

 

| ** **                              | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                              | ** ** | **(in thousands)**                                 | ** ** |
| **Selling, General and Administrative** |       |                                                    |       |       |       |       |       |   |   |
| Selling and advertising                 |       | $                                                       | 6,672      |       | $          | 7,037      |       | $ | (365 | ) | (5.2 | )% |
| Commissions                             |       | 4,288                                                   |       | 6,026      |       | (1,738     | )          | (28.8 | )% |
| General and administrative              |       | 7,793                                                   |       | 11,996     |       | (4,203     | )          | (35.0 | )% |
| Total                                   |       | $                                                       | 18,753     |       | $          | 25,059     |       | $ | (6,306 | ) | (25.2 | )% |

 

Sellingand advertising costs include amortization of deferred marketing costs andother selling costs. These costs decreased primarily as a result of reducedsales office headcount, as part of headcount reductions that were completed inJuly 2007.

 

Thedecrease in commission expense is primarily attributable to the decrease inresidential revenues as noted above. Commission expense as a percentage ofresidential revenue decreased to 3.6% for the three months ended September 30,2007 from 3.7% for the three months ended September 30, 2006.

 

Thedecrease in general and administrative costs is attributable to decreases inpayroll expense, relating to the headcount reductions that were completed inJuly 2007 and overall decreases in controllable costs as the Company adjustedto the decline in market conditions. Included in general and administrativecosts for the three months ended September 30, 2007 and 2006 were $400 and$1,313, respectively, related to the write-off of abandoned projects and otherpre-acquisition costs.

 

Asnoted above, during the three months ended September 30, 2007, the Companycompleted a round of headcount reductions. The headcount reductions were takenin several stages 

 

22

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throughoutthe prior and current fiscal year and across all of the Company’s regions inresponse to the general downturn in the homebuilding industry.

 

TheCompany reviewed its land under option and agreements of sale and otherpre-acquisition costs to determine if the anticipated economics of thetransaction remained acceptable to the Company given the state of thehomebuilding industry. For those agreements deemed unfavorable, the Companyattempted to renegotiate the transaction to more favorable terms. In thosesituations where the contract could not be renegotiated on terms the Companybelieved were favorable to the Company, the option or agreement of sale waswritten-off, resulting in the write-off of abandoned projects andother-pre-acquisition costs noted above.

 

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

 
| ** **                 | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** |
|----------------------------|------------|---------------------------------------------------------|------------|------------|------------|
| ** **                 | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change** | ** ** |
| ** **                 | ** ** | **(in thousands)**                                 | ** ** |
| **Land sales**             |       |                                                    |       |       |       |   |   |
| Earned revenues            |       | $                                                       | 1,186      |       | $          | 408 |   | $ | 778 |   |
| Costs and expenses         |       | (1,258                                                  | )          | (374       | )          | (884 | ) |
| Gross (loss) profit        |       | $                                                       | (72        | )          | $          | 34 |   | $ | (106 | ) |
|                       |       |                                                    |       |       |       |   |   |
| **Other income (expense)** |       |                                                    |       |       |       |   |   |
| Other income               |       | $                                                       | 2,333      |       | $          | 2,922 |   | $ | (589 | ) |
| Other expense              |       | (1,998                                                  | )          | (1,999     | )          | 1 |   |

 

TheCompany continued to pursue land sales during the three months ended September30, 2007, in response to the overall decline in market conditions, as a way toincrease liquidity. The increase in land sales primarily relates to the sale oflots in the Florida region as the Company exited the Palm Bay market during thethree months ended September 30, 2007.

 

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. The decrease in other income is primarily attributable to decreases inproperty management fees and interest income earned. The decrease in otherexpenses is primarily related to decreased costs associated with the mortgageprocessing business.

 

TheCompany’s mortgage processing business assists homebuyers in obtainingfinancing directly from unaffiliated lenders. The Company does not fund orservice the mortgage loans, nor does it assume any credit or interest rate riskin connection with originating the mortgages.

 

***Income Taxes and Net Loss:***

 
| ** **                   | ** ** | **Three months ended September 30** | ** ** | ** ** | ** ** |
|------------------------------|------------|---------------------------------------------------------|------------|------------|------------|
| ** **                   | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change** | ** ** |
| ** **                   | ** ** | **(in thousands)**                                 | ** ** |
| Pre-tax (loss) income        |       | $                                                       | (2,086     | )          | $          | 6,357 |   | $ | (8,443 | ) |
| Income tax (benefit) expense |       | (31                                                     | )          | 2,458      |       | (2,489 | ) |
| Net (loss) income            |       | $                                                       | (2,055     | )          | $          | 3,899 |   | $ | (5,954 | ) |

 

Inall of the Company’s regions, the decrease in net (loss) income is the resultof the overall deterioration in market conditions in the housing industry. Thedeterioration in market conditions has led to decreases in residential revenueand gross profit margin.

 

23

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Theeffective income tax rate has decreased to 37.3% for the three months endedSeptember 30, 2007 from 38.7% for the three months ended September 30, 2006.The current year period also includes the impact of a revision to a prior yeartax contingency reserve of approximately $0.5 million and a prior year incometax return-to-accrual adjustment of approximately $0.2 million.

 

**Liquidityand Capital Resources**

 

Onan ongoing basis, the Company requires capital for expenditures to purchase anddevelop land, to construct homes, to fund related carrying costs and overheadand to fund various advertising and marketing programs to facilitatesales.  These expenditures include site preparation, roads, water andsewer lines, impact fees and earthwork, as well as the construction costs ofthe homes and amenities.  The Company’s sources of capital include fundsderived from operations, sales of assets and various borrowings, most of whichare secured.  In an effort to increase liquidity, the Company is activelypursuing the sales of various parcels of land, as well as several alternativesfor selling a portion of its model home portfolio; however, the Company canoffer no assurances as to whether or when such transactions will occur orwhether the transactions will be on terms advantageous to the Company. The Company believes that cash on hand, funds generated from operations andfinancial commitments from available lenders will provide sufficient capitalfor the Company to meet its existing operating needs.

 

***Revolving Credit Facility***

 

AtSeptember 30, 2007, the Company had $55.2 million of borrowing capacity underits secured revolving credit facility discussed below, of which approximately$5.7 million was available to be drawn based upon the Company’s borrowing base.A majority of the Company’s debt is variable rate, based on the 30-day LIBORrate, and therefore, the Company is exposed to market risk in connection withinterest rate changes. At September 30, 2007, the 30-day LIBOR rate of interestwas 5.124%.

 

OnDecember 22, 2004, Greenwood Financial, Inc., a wholly-owned subsidiary of theCompany and other wholly-owned subsidiaries of the Company, as borrowers, andOrleans Homebuilders, Inc., as guarantor, entered into a Revolving Credit andLoan Agreement for a $500.0 million Senior Secured Revolving Credit and Letterof Credit Facility with various banks as lenders (as amended and restated andfurther amended, the “Revolving Credit Facility”). The Revolving Credit andLoan Agreement was amended on January 24, 2006 via the Amended and RestatedRevolving Credit and Loan Agreement (the “Amended Credit Agreement”). TheAmended Credit Agreement increased the borrowing limit from $500.0 million to$650.0 million. A subsequent amendment reduced the borrowing limit to $585.0 million,subject to increase if certain conditions are met. In connection with theAmended Credit Agreement, Orleans Homebuilders, Inc. entered into an amendedGuaranty agreement, which was amended on September 6, 2007 by the FirstAmendment to Guaranty. The Amended and Restated Credit Agreement was amended onNovember 1, 2006 (the “First Amendment”), February 7, 2007 (the “SecondAmendment”), May 8, 2007 (the “Third Amendment”) and September 6, 2007 (the“Fourth Amendment”).

 

Underand subject to the terms of the Revolving Credit Facility, the borrowers mayborrow and re-borrow for the purpose of financing the acquisition anddevelopment of real estate, the construction of homes and improvements, forinvestment in joint ventures, for working capital and for such otherappropriate corporate purposes as may be approved by the lenders. Capitalized 

 

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termsused below and not otherwise defined have the meanings set forth in the Amendedand Restated Credit Agreement.

 

Pursuantto the Fourth Amendment, and subject to the terms of the Revolving CreditFacility, approximately $464.0 million of the $585.0 million Revolving CreditFacility has a maturity date of December 20, 2009 and the remaining $121.0million has a maturity date of December 20, 2008. Included in the $464.0million that will mature on December 20, 2009 is $16.2 million related to onebank that accepted the extension terms of the Fourth Amendment subsequent toSeptember 30, 2007, but effective as of the effective date of the FourthAmendment. Borrowings and advances under the Revolving Credit Facility bearinterest on a per annum basis equal to the LIBOR Market Index Rate plus anon-default variable spread ranging from 165.0 basis points to 275.0 basis points,depending upon the Company’s leverage ratio. During the term of the RevolvingCredit Facility, interest is payable monthly in arrears. At September 30, 2007,the interest rate was 7.874%, which included a 275.0 basis point spread.

 

Thetotal amount of loans and advances outstanding at any time under the RevolvingCredit Facility may not exceed the lesser of the then-current borrowing baseavailability or the revolving sublimit as defined in the Revolving CreditFacility. Pursuant to the Fourth Amendment, the revolving sublimit is $585.0million, subject to reduction on December 20, 2008. The borrowing baseavailability is based on the lesser of the appraised value or cost of realestate owned by the Company that has been admitted to the borrowing base. 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 rateranges from 50% to 95% of the appraised value or cost of the real estate.

 

Assecurity for all obligations of borrowers to lenders under the Revolving CreditFacility, lenders have a first priority mortgage lien on all real estate admittedto the borrowing base. In addition, Orleans Homebuilders, Inc. has guaranteedthe obligations of the borrowers to lenders pursuant to an amended Guarantyexecuted by Orleans Homebuilders, Inc. on January 26, 2006 and amended onSeptember 6, 2007. Under the Guaranty, Orleans Homebuilders, Inc. grantedlenders a security interest in any balance or assets in any deposit or otheraccount that Orleans Homebuilders, Inc. has with any lender.

 

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

 

•                  Incur or assume other indebtedness, exceptcertain permitted indebtedness;

•                  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 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 dividends in excess of $0.08 per shareper year; or

•                  Redeem any stock.

 

TheRevolving Credit Facility also contains various financial covenants. Amongother things for periods ending after June 30, 2007, the financial covenants,as amended, require that:

 

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•                  As of the last day of each fiscal quarter,the ratio of the Company’s adjusted EBITDA to debt service for the prior fourfiscal quarters cannot be not less than 0.50-to-1.00 for the periods endingMarch 31, 2008 and June 30, 2008; 0.70-to-1.00 for the periods ending September30, 2008, December 31, 2008, March 31, 2009 and June 30, 2009; and 1.00-to-1.00for the periods ending September 30, 2009 through maturity. As a result of theFourth Amendment, the Adjusted EBITDA to debt service covenant was waived forthe periods ending June 30, 2007, September 30, 2007 and December 31, 2007;

•                  The Company had to maintain a minimumconsolidated adjusted tangible net worth equal to a minimum of $200.0 millionat June 30, 2007. After June 30, 2007, the Company must maintain a minimumconsolidated tangible net worth of at least $192.0 million plus 50% of thepositive net income earned since June 30, 2007 and all of the net proceeds ofequity securities issued by the Company after June 30, 2007;

•                  As of the last day of each fiscal quarter,the Company’s leverage ratio cannnot exceed 3.00-to-1.00 for the fiscalquarters ending June 30, 2007, September 30, 2007, December 31, 2007 and March31, 2008. For fiscal quarters ending June 30, 2008 through maturity, theLeverage Ratio cannot exceed 2.75-to-1.00.

•                  As of the last day of each fiscal quarter,the ratio of the book value of all land that is not subject to a qualifyingagreement of sale and on which no unit has been or is being constructed to theCompany’s consolidated adjusted tangible net worth cannot exceed 2.10-to-1.00at June 30, 2007; 2.00-to-1.00 at September 30, 2007, December 31, 2007 andMarch 31, 2008; 1.85-to-1.00 at June 30, 2008, September 30, 2008 and December31, 2008; and 1.75-to-1.00 at March 31, 2009 through maturity.

•                  The Company must maintain a requiredliquidity level based on cash plus borrowing base availability and under thiscovenant, the Company must have (i) at least $10.0 million of cash and cashequivalents (as defined) at all times, and (ii) at least $15.0 million ofliquidity (as defined and including cash and cash equivalents) as of the dateof each borrowing base certificate.

•                  Under a minimum cash flow from operationsratio based on cash flow from operations to interest incurred covenant, whichis applicable starting with the twelve-month period ending December 31, 2007,if the interest coverage ratio is less than 1.25-to-1.00, the Company must havea cash flow from operations to interest incurred ratio (as defined) of at least1.50-to-1.00. During the first four quarter periods during which this covenantis applicable, even if the interest coverage ratio is less than 1.25-to-1.00,the cash flow from operations ratio may be less than 1.50-to-1.00 during anyone period, so long as it is greater than 1.00-to-1.00. Cash flow fromoperations is calculated based on the last twelve months cash flow fromoperations and adjusted for interest expense and includes any 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.

 

Inaddition, the Revolving Credit Facility contains various financial covenantswith respect to the value of land in certain stages of development that may beowned by the Company, a borrower or any subsidiary of the Company and limitsthe number of units which are not subject to a bona-fide agreement of sale thatmay be in the inventory of any borrower, the Company or any subsidiary of theCompany.

 

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;

 

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•                  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 at least $0.5million in excess of available insurance proceeds, if such judgment orjudgments are not dismissed or bonded within 30 days; or (ii) that preventsborrowers from conveying lots and units in the ordinary course of business ifsuch judgment or judgments are not dismissed or bonded within 30 days; or theissuance of any writs of attachment, execution or garnishment against anyborrower or the Company;

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

•                  Specified cross defaults.

 

Uponthe occurrence and continuation of an event of default, after completion of anyapplicable grace or cure period, lenders may demand immediate payment in fullof all indebtedness outstanding under the Revolving Credit Facility, terminatetheir obligations to make any loans or advances or issue any letter of credit,set off and apply any and all deposits held by any lender for the credit oraccount of any borrower. In addition, upon the occurrence of certain events ofbankruptcy or other insolvency events with respect to any borrower or theCompany, all indebtedness outstanding under the Revolving Credit Facility shallbe immediately due and payable without any act or action by lenders.

 

***Trust Preferred Securities***

 

OnNovember 23, 2005, the Company issued $75.0 million of trust preferredsecurities which mature on January 30, 2036 and are callable, in whole or inpart, at par plus accrued interest on or after January 30, 2011. For the firstten years, the securities have a fixed interest rate of 8.61% per annum,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.

 

OnAugust 13, 2007, the Company entered into Supplemental Indenture No. 1 (the“Supplemental Indenture”), to the $75.0 million of trust preferred securities,which amended the terms of the securities, as follows:

 

•                  The Supplemental Indenture deferred thepotential start of the payment of the “Adjusted Interest Rate”, which is 3%over the “Regular Interest Rate” of 8.61%, for four quarters so that theearliest that the Adjusted Interest Rate could be payable is with the couponpayable on October 30, 2008, rather than on October 30, 2007, the first datethat OHI Financing, Inc. (“OHI Financing”) would have been required to pay theAdjusted Interest Rate. Specifically, the Indenture was revised to provide thatthe first fiscal quarter end at which the applicable interest coverage ratio andminimum consolidated tangible net worth measure must be met for at least threeof the last four consecutive fiscal quarters for purposes of determining theapplicability of the Adjusted Interest Rate is the fiscal 

 

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quarterending June 30, 2008. If the applicable interest coverage ratio or minimumconsolidated tangible net worth measure is not met as of the end of a fiscalquarter for at least three of the last four consecutive fiscal quarters endingon or after June 30, 2008, the applicable rate of interest increases to theAdjusted Interest Rate.

•      Under the Supplemental 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 October30, 2008 to and including July 30, 2010) to cause an event of default under theSupplemental Indenture (or in some cases six consecutive coupon payments)rather than the four consecutive coupon payments in the original Indenture. Morespecifically, the Supplemental Indenture provides that the earliest an event ofdefault could occur as a result of the payment of the Adjusted Interest Rate is(i) upon the payment of the Adjusted Interest Rate coupon for October 30, 2010,if applicable, provided there have been eight prior consecutive AdjustedInterest Rate coupons paid by OHI Financing; (ii) on either the fiscal quarterended March 31, 2010 or the fiscal year ended June 30, 2010, if at either dateboth the trailing twelve months’ interest coverage ratio is less than 1.25 to1, and OHI Financing has made the six prior consecutive Adjusted Interest Ratecoupon payments; or (iii) on the fiscal quarter ended September 30, 2010, if atsuch time both the trailing twelve months’ interest coverage ratio is less than1.75 to 1, and OHI Financing has made the eight prior consecutive AdjustedInterest Rate coupon payments. The Adjusted Interest Rate must be paid for eight(or in some instances six) consecutive coupons in order to trigger an event ofdefault. If the interest coverage ratio test and the minimum consolidatedtangible net worth test are both met, OHI Financing will 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 Supplemental Indenture amended thedefinition of both “Adjusted EBITDA” and “Debt Service” and added the newdefined term,  “Consolidated Net Income”,all of which are utilized in the calculation of the interest coverage ratio (asdefined by the Indenture) for the determination of whether the AdjustedInterest Rate applies.

•      The Supplemental Indenture provides thatConsolidated Net Income is to be used when determining Adjusted EBITDA underthe Indenture rather than net income determined in accordance with UnitedStates generally accepted accounting principles (“GAAP”). Consolidated NetIncome generally means the net income of the Company and itsmajority-controlled subsidiaries with respect to the relevant accountingperiod, provided that the after-tax impacts of certain items are generallyexcluded, such as: (i) any impairment charge, asset write-off, abandonmentcharge, deposit forfeiture or write-off of other pre-acquisition costs pursuantto GAAP or other similar amounts; (ii) any extraordinary, non-recurring orunusual gains, losses or expenses (including any gain or loss on assetdispositions such as land and other similar asset sales); (iii) any severancecosts, relocation costs and curtailments or modifications to pension andpost-retirement employee benefit plans; (iv) any net income or net loss fromdisposed of or discontinued operations; (v) the amortization of intangibles,the early extinguishment of debt or hedging obligations, any fees or expensesincurred for the issuance, refinancing or modification of any debt or equitysecurity; (vi) any non-cash compensation charges from stock options, stockappreciation rights, restricted stock or other similar rights; (vii) typicaladjustments for entities accounted for under the equity method of accounting;and 

 

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(viii)typical purchase accounting adjustments for any acquisition consummated in thefuture.

•      The definition of Debt Service used in thedetermination of the trailing twelve months’ interest coverage ratio was modifiedto exclude from Debt Service (i) any additional interest paid as a result ofthe Adjusted Interest Rate being in effect, and (ii) the payment of the feepayable in connection with obtaining the consent necessary for the SupplementalIndenture.

•      The optional redemption provisions of theIndenture were modified to generally provide that OHI Financing may, at itsoption, on any date that is on or after January 30, 2011, redeem the TrustPreferred issue in whole or in part at a redemption price equal to one hundredpercent (100%) of the principal amount, plus any accrued and unpaid interest. Previously,redemption of the issue was permitted only on interest coupon payment dates onor after January 30, 2011.

•      Provisions were added to the Indenturepermitting “legal defeasance” and “covenant defeasance”, subject to certainterms and conditions, including the posting of cash or certain governmentobligations in an amount sufficient to pay and discharge the paymentobligations of the securities to the stated maturity or the redemption date, asthe case may be. For purposes of these legal defeasance and covenant defeasanceprovisions, the interest rate at which the securities bear interest is a fixedrate equal to 8.61% per annum.

•      To allow the Supplemental Indenture to becomeeffective, OHI Financing established a $5.0 million reserve fund for thebenefit of the holders of the trust preferred securities by posting a letter ofcredit with the trustee under the Supplemental Indenture. If the AdjustedInterest Rate is in effect for the four consecutive coupon payments ending July30, 2009, this reserve fund must be increased by $2.5 million. Under certainevents of default, this reserve fund may be drawn by the trustee and used inrespect of the trust preferred obligations. The Supplemental Indenture alsoprovides for the release of the reserve fund upon the earlier of compliancewith the applicable interest coverage ratio resulting in OHI Financing payinginterest at the regular interest rate rather than the Adjusted Interest Rate,or redemption or defeasance of the notes in accordance with the terms of theSupplemental Indenture. This reserve fund has been established in accordancewith the terms of the Supplemental Indenture.

 

OnSeptember 20, 2005, the Company issued $30.0 million of trust preferredsecurities which mature on September 30, 2035 and are callable, in whole or inpart, at par plus accrued interest on or after September 30, 2010. For thefirst ten years, the securities have a fixed interest rate of 8.52% per annum. Thereafter,the securities have a floating interest rate equal to three-month LIBOR plus380 basis points per annum, resetting quarterly. The securities are treated asdebt obligations for financial statement purposes. The Company used proceedsfrom the sale of these securities to fund land purchases and residentialconstruction. The obligations relating to the trust preferred securities aresubordinated to the Revolving Credit Facility.

 

***Employee Retirement Plan***

 

On December 1, 2005,the Company adopted an unfunded, non-qualified target defined benefitretirement plan, effective as of September 1, 2005, which covers a group ofmanagement employees of the Company. The Company owns life insurance policieson all participants in the Supplemental Executive Retirement Plan (“SERP”). ThisSERP, which was amended on March 13, 2006, is intended to provide theparticipants with an annual supplemental retirement benefit based upon theiryears of service with the Company and highest average compensation for fiveconsecutive years. The annual supplemental benefit for each participant will be

 

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adjusted based on theactual performance of the SERP compared to the target. The benefit is payablefor life with a minimum of 10 years guaranteed. In order to qualify for normalretirement benefits, a participant must attain age 65 with at least five yearsof participation in the SERP. Early retirement will be permitted beginning atage 55, after 5 years of participation in the SERP. Early retirement benefitswill be adjusted actuarially to reflect the early retirement date.

 

If a participantterminates employment with the Company prior to attaining his or her normalretirement age, other than by reason of early retirement, death or disability,the participant generally will forfeit all benefits under the SERP.

 

The Company can amendor terminate 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.

 

***Deferred Compensation Plan***

 

On December 1, 2005, the Company adopted an Executive Compensation Deferral Plan (the “Deferral Plan”) effective as of June 1, 2005. Under the Plan, participants will have the ability to defer a portion of their compensation which will be credited to an account maintained by the Company for the participant. Amounts contributed by participants are always vested. Participant deferral accounts will be maintained by the Company for recordkeeping purposes only. Participants will have no interest in any assets which may be set aside by the Company to meet its obligations under the Deferral Plan.

 

***Cash Flow Statement***

 

Netcash used in operating activities for the three months ended September 30, 2007was $15.9 million, compared to net cash used in operating activities for thethree months ended September 30, 2006 of $62.7 million. While the Companyincreased its real estate held for development and sale balance during thethree months ended September 30, 2007, the increase was not on pace with thesame period in the prior year. This slow down is the result of the overall slowdown of the market.

 

TheCompany did not have any cash used in investing activities for the three monthsended September 30, 2007, compared to cash used in investing activities of$89,000 for the three months ended September 30, 2006. Net cash used ininvesting activities related to the purchase of property and equipment.

 

Netcash provided by financing activities for the three months ended September 30,2007 was $24.6 million, compared to $56.1 million for the three months endedSeptember 30, 2006. The decrease in net cash provided by financing activitiesin the current year is primarily attributable to a reduction in borrowings anddraws against the revolving credit facility. Fewer borrowings were requiredduring the three months ended September 30, 2007, as compared to the threemonths ended September 30, 2006, as a result of the decrease in cash used inoperating activities, as noted above.

 

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***Summary of Outstanding Oblgations***

 

Thefollowing table summarizes the Company’s outstanding obligations as ofSeptember 30, 2007 and the effect such obligations are expected to have on itsliquidity and cash flow in future periods. For mortgage and other noteobligations, payments due by period are shown based on the expiration date ofthe loan.

 
| ** **                          | ** ** | **Payments due during fiscal year ending June 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                                                              | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** |
| Obligations:                        |       |                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage and other note obligations |       | $                                                                                      | 599,913    |   | $ | 250 |   | $ | 30,663 |   | $ | 464,000 |   | $ | — |   | $ | — |   | $ | 105,000 |   |
| Operating leases                    |       | 4,307                                                                                  |       | 1,316 |   | 1,282 |   | 602 |   | 472 |   | 359 |   | 276 |   |
| Affordable housing contributions    |       | 350                                                                                    |       | 175 |   | 100 |   | 75 |   | — |   | — |   | — |   |
| Tax obligation                      |       | 2,535                                                                                  |       | 2,535 |   | — |   | — |   | — |   | — |   | — |   |
| Total obligations                   |       | $                                                                                      | 607,105    |   | $ | 4,276 |   | $ | 32,045 |   | $ | 464,677 |   | $ | 472 |   | $ | 359 |   | $ | 105,276 |   |

 

**LotPositions**

 

Asof September 30, 2007, the Company owned or controlled 10,177 building lots. Includedin the aforementioned lots, the Company had contracted to purchase, or hasunder option, undeveloped land and improved building lots for an aggregatepurchase price of approximately $154.7 million that are expected to yieldapproximately 2,519 building lots.

 

***Undeveloped Land Acquisitions:***

 

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 ofregulation in the housing industry has increased the time it takes to acquireundeveloped land with all of the necessary governmental approvals required tobegin construction. Generally, the Company structures its land acquisitions sothat it has the right to cancel its agreements to purchase undeveloped land byforfeiture of its deposit under the agreement. As of September 30, 2007, allbut one of the Company’s agreements to purchase undeveloped land was structuredin this manner. Included in the balance sheet captions “Inventory not owned –Variable Interest Entities” and “Land deposits and costs of future development,”at September 30, 2007 the Company had $11.5 million invested in 21 parcels ofundeveloped land, of which $8.8 million is cash deposits, a portion of which isnon-refundable. At September 30, 2007, overall undeveloped parcels of land undercontract had an aggregate purchase price of approximately $111.7 million andwere expected to yield approximately 2,102 building lots.

 

TheCompany attempts to further mitigate the risks involved in acquiringundeveloped land by structuring its undeveloped land acquisitions so that thedeposits required under the agreements coincide with certain benchmarks in thegovernmental approval process, thereby limiting the amount at risk. Thisprocess allows the Company to periodically review the approval process and makea decision on the viability of developing the parcel to be acquired based uponexpected profitability. In some circumstances the Company may be required tomake deposits solely due to the passage of time. This structure still providesthe Company an opportunity to periodically review the viability of developingthe parcel of land. In addition, the Company primarily structures itsagreements to purchase undeveloped land to be contingent upon obtaining all 

 

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governmentalapprovals necessary for construction. Under most agreements, the Companysecures the responsibility for obtaining the required governmental approvals asthe Company believes that it has significant expertise in this area. TheCompany intends to complete the acquisition of undeveloped land only after allgovernmental approvals are in place. In certain rare circumstances, however,when all extensions have been exhausted, the Company must make a decision onwhether to proceed with the purchase even though all governmental approvalshave not yet been received. In these circumstances, the Company performsreasonable 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. The Company competes with many national homebuilders to acquireimproved building lots, some of which have greater financial resources than theCompany. The acquisition of improved lots is usually less risky than theacquisition of undeveloped land as the contingencies and risks involved in theland development process are borne by the developer rather than the Company. Inaddition, governmental approvals are generally in place when the improvedbuilding lots are acquired.

 

AtSeptember 30, 2007, the Company had contracted to purchase or had under optionapproximately 417 improved building lots for an aggregate purchase price ofapproximately $43.0 million. At September 30, 2007, the Company had $1.7million, all of which are deposits, invested in these improved building lots. Therewere no deposits forfeited during the three months ended September 30, 2007with respect to improved building lots.

 

TheCompany expects to utilize primarily the Revolving Credit Facility as describedabove as well as other existing capital resources, to finance the acquisitionsof undeveloped land and improved lots described above. The Company anticipatescompleting a majority of these acquisitions during the next several years.

 

**RecentAccounting Pronouncements**

 

***Fair Value Measurement:***

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS157”). SFAS 157 provides guidance for using fair value to measure assets andliabilities. SFAS 157 will be effective for the Company’s fiscal year endingJune 30, 2009. The Company is currently evaluating this standard and has notyet determined what impact it would have on our consolidated financialstatements.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities — Including an Amendment of FASBStatement No. 115” (“SFAS 159”). SFAS 159 provides an entity with the option tomeasure many financial instruments and certain other items at fair value. Underthe fair value option, an entity will report unrealized gains and losses onthose items at each subsequent reporting date. SFAS 159 is effective for fiscalyears beginning after November 15, 2007, which for the Company is the fiscalyear ending June 30, 2009. We are currently evaluating this standard and havenot yet determined what impact, if any, the fair value option would have on ourconsolidated financial statements.

 

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

 

Inaddition to historical information, this report contains statements relating tofuture events or our future results. These statements are forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), and are subject to the Safe Harbor provisions 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-looking statements including, without limitation,statements with respect to potential liabilities relating to litigationcurrently pending against us, anticipated future dividends, anticipateddelivery of homes in backlog, future market conditions, anticipated delivery ofbacklog, appropriateness of completed home inventory levels and the overalldirection of the housing market, expected warranty costs, future landacquisitions and the availability of sufficient capital for us to meet ouroperating needs are made only as of the date of this report. We do notundertake to update or revise the forward-looking statements, whether as aresult of new information, future events or otherwise. For additionalinformation on some potential risks, see the Company’s Annual Report on Form10-K for the fiscal year ended June 30, 2007.

 

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

 

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

 

**ITEM 3.****         ****QUANTITATIVE AND QUALITATIVE DISCLOSURES 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’sprincipal market risk exposure continues to be interest rate risk. A majorityof the Company’s debt is variable based on LIBOR, and, therefore, affected bychanges in market interest rates. Based on current operations, an increase ordecrease in interest rates of 100 basis points will result in a correspondingincrease or decrease in cost of sales and interest charges incurred by theCompany of approximately $4.9 million in a fiscal year, a portion of which willbe capitalized and included in cost of sales as homes are delivered. TheCompany believes that reasonably possible near-term interest rate changes willnot result in a material negative effect on future earnings, fair values orcash flows of the Company.

 

Changesin the prices of commodities that are a significant component of homeconstruction costs, particularly lumber, may result in unexpected short termincreases in construction costs. Since the sales price of the Company’s homesis fixed at the time the buyer enters into a contract to acquire a home andbecause the Company generally contracts to sell its homes before constructionbegins, any increase in costs in excess of those anticipated may result ingross margins lower than anticipated for the homes 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.

 

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Therehave been no material adverse changes to the Company’s (i) exposure to marketrisk and (ii) management of these risks, since June 30, 2007.

 

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

 

TheCompany’s management, with the participation of the Company’s Chief ExecutiveOfficer, President and Chief Operating Officer and Executive Vice President andChief Financial Officer, evaluated the effectiveness of the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport. Based upon that evaluation, the Chief Executive Officer, President andChief Operating Officer, Executive Vice President and Chief Financial Officerand Vice President and Controller concluded that the Company’s disclosurecontrols and procedures are functioning effectively to provide reasonableassurance that information required to be disclosed by the Company in reportsfiled under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the Security andExchange Commission’s rules and forms and also to ensure information requiredto be disclosed is accumulated and communicated to management. There has beenno change in the Company’s internal control over financial reporting during theCompany’s most recent fiscal quarter that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1A.****      ****RISK FACTORS**

 

Therehas been no material changes in our market risks during the three months endedSeptember 30, 2007. For additional information regarding market risk, see ourAnnual Report on Form 10-K for the year ended June 30, 2007.

 

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

 

10.1         Supplemental Indenture No. 1, dated as ofAugust 13, 2007, by and between OHI Financing, Inc. and the Bank of New YorkTrust Company, National Association (incorporated by reference to Exhibit 10.1to the Company’s Form 8-K filed with the Securities and Exchange Commission onAugust 14, 2007).

 

10.2         Fourth Amendment to Amended and RestatedRevolving Credit Loan Agreement, dated as of September 6, 2007 and effective asof June 30, 2007, by and among Greenwood Financial, Inc. and certainaffiliates, Orleans Homebuilders, Inc., Wachovia Bank, National Association andvarious other lenders party thereto (incorporated by reference to Exhibit 10.1to the Company’s Form 8-K filed with the Securities and Exchange Commission onSeptember 12, 2007).

 

10.3         FirstAmendment to Guaranty by Orleans Homebuilders, Inc. dated September 6, 2007(incorporated by reference to Exhibit 10.19(b) to the Company’s Form 10-K filedwith the Securities and Exchange Commission on September 13, 2007).

 

10.4         OrleansHomebuilders, Inc. Supplemental Executive Retirement Plan, amended and restated September 27, 2007,effective as of September 1, 2005 (incorporated by reference to Exhibit10.1 to the Company’s Form 8-K filed with the Securities and ExchangeCommission on October 3, 2007).

 

10.5         OrleansHomebuilders, Inc. Executive Compensation Deferral Plan, amended and restatedSeptember 27, 2007, effective as of June 1, 2005 (incorporated by reference toExhibit 10.2 to the Company’s Form 8-K filed with the Securities and ExchangeCommission on October 3, 2007).

 

10.6         OrleansHomebuilders, Inc. Incentive Compensation Plan, amended and restated effective July 1, 2002 and further amended effectiveOctober 1, 2003, July 1, 2007 and September 27, 2007 (incorporated byreference to Exhibit 10.3 to the Company’s Form 8-K filed with the Securitiesand Exchange Commission on October 3, 2007).

 

10.7*       Divisionand Regional Presidents 2008 Bonus Plan, effective as of September 27, 2007.

 

31.1*       Certificationof Jeffrey P. Orleans pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

31.2*       Certificationof Michael T. Vesey pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.3*       Certificationof Garry P. Herdler pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

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32.1*       Certificationof Jeffrey P. Orleans pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

 

32.2*       Certificationof Michael T. Vesey pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.3*       Certificationof Garry P. Herdler pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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*Exhibits filed herewith electronically

 

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SIGNATURES

 

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

 
|              | ORLEANS  HOMEBUILDERS, INC.            |
|-------------------|----------------------------------------|
|              | (Registrant)                           |
|              |                                   |
|              |                                   |
| November  7, 2007 | Michael  T. Vesey                      |   |
|              | Michael  T. Vesey                      |
|              | President  and Chief Operating Officer |
|              |                                   |
|              |                                   |
| November  7, 2007 | Garry  P. Herdler                      |   |
|              | Garry  P. Herdler                      |
|              | Executive  Vice President and          |
|              | Chief  Financial Officer               |

 

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**EXHIBIT INDEX**

 

10.7*       Divisionand Regional Presidents 2008 Bonus Plan, effective as of September 27, 2007.

31.1*       Certificationof Jeffrey P. Orleans pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

31.2*       Certificationof Michael T. Vesey pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.3*       Certificationof Garry P. Herdler pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*       Certificationof Jeffrey P. Orleans pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

32.2*       Certificationof Michael T. Vesey pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.3*       Certificationof Garry P. Herdler pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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*Exhibits filed herewith electronically

 

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