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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the transition period            to           

Commission File No. 1-6830

ORLEANS HOMEBUILDERS, INC.

(Exact name of registrant as specified in its charter)

3333 Street Road, Suite 101

Bensalem, PA 19020

(Address of principal executive offices)

Telephone:     (215) 245-7500

(Registrant’s telephone number, including area code)

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

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

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

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

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

(excluding 98,990 shares held in Treasury).

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ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES

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Orleans Homebuilders, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(dollars in thousands, except per share amounts)

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

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Orleans Homebuilders, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share amounts)

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

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Orleans Homebuilders, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity

And Total Comprehensive Loss

(Unaudited)

(dollars in thousands)

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

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Orleans Homebuilders, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(dollars in thousands)

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

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ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

1.               BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Orleans Homebuilders, Inc. and its subsidiaries (collectively, the “Company”) market, develop and build high-quality, single-family homes, townhomes and condominiums to serve various types of homebuyers, including move-up, luxury, empty nester, active adult and first-time homebuyers.  The Company also generates revenue from the sale of land.

Interim Financial Information

These condensed financial statements have been prepared in accordance with the rules of the Securities and Exchange Commission for interim financial statements and do not include all annual disclosures required by accounting principles generally accepted in the United States.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K/A for the fiscal year ended June 30, 2008.  The June 30, 2008, amounts were derived from the Company’s audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America.  The condensed financial information as of March 31, 2009, and for the three and nine months ended March 31, 2009 and 2008, is unaudited, but in the opinion of management includes all adjustments, consisting of normal recurring accruals, that management considers necessary for a fair presentation of the Company’s consolidated results of operations, financial position and cash flows.  Results for the three and nine months ended March 31, 2009, are not necessarily indicative of results to be expected for the full fiscal year 2009 or any other future periods.

During the third quarter of fiscal year 2009, the Company recognized additional tax expense of $3,794 reflecting the impact of cumulative out of period adjustments.  This error was related to an overstatement of tax refunds due the Company reflected in the income tax receivable account in the amount of $2,347, coupled with an overstatement of federal tax benefits in the amount of $1,447 related to a state tax liability.  These error corrections had the effect of increasing income tax expense and reducing net income by $3,794.  The Company concluded that this adjustment was not material to the consolidated financial statements for any prior period or to the third quarter of fiscal year 2009.

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

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

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

Certain prior year amounts have been reclassified to conform to the fiscal year 2009 presentation, with no effect on previously reported net loss or shareholders’ equity.

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2.               RECENT ACCOUNTING PRONOUNCEMENTS

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

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) broadens the guidance of SFAS No. 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses.  It broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations.  SFAS No. 141(R) expands on required disclosures to improve the statement users’ abilities to evaluate the nature and financial effects of business combinations.  SFAS No. 141(R) is effective for the Company’s fiscal year ending June 30, 2010.  The Company does not expect the adoption of SFAS No. 141(R) to have a material impact on its consolidated financial statements.

In June 2008, the FASB issued FASB Staff Position (“FSP”) Emerging Issues Task Force 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under the FSP, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method.  The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings.  The Company’s outstanding restricted stock awards will be considered participating securities under this FSP. The FSP is effective for the Company’s fiscal year beginning July 1, 2009 and requires retrospective application.  The Company does not expect the adoption of the FSP to have a material impact on its reported earnings per share.

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

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

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” The FSP amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” to require disclosure about fair value of financial instruments in interim financial statements. FSP FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009.   The Company is currently evaluating the disclosure impact of adopting this pronouncement on its consolidated financial statements.

In April 2009, the FASB issued FSP SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.”  This FSP changes existing guidance for determining whether an impairment of debt securities is other than temporary.  The FSP requires other than temporary impairments to be separated into the amount representing the decrease in cash flows expected to be collected from a security (referred to as credit losses) which is recognized in earnings and the amount related to other factors which is recognized in other comprehensive income.  This noncredit loss component of the impairment may only be classified in other comprehensive income if the holder of the security concludes that it does not

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intend to sell and it will not more likely than not be required to sell the security before it recovers its value.  If these conditions are not met, the noncredit loss must also be recognized in earnings.  When adopting the FSP, an entity is required to record a cumulative effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other than temporary impairment from retained earnings to accumulated other comprehensive income.  FSP SFAS 115-2 and FAS 124-2 is effective for interim and annual periods ending after June 15, 2009.  The Company does not expect the adoption of this FSP to have a material impact on its consolidated financial statements.

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

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

3.               CASH AND CASH EQUIVALENTS

Cash and cash equivalents consisted of cash on hand, demand deposits and money market funds at March 31, 2009 and June 30, 2008.

4.               MARKETABLE SECURITIES

In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, securities are classified into three categories: held-to-maturity, available-for-sale and trading.  The Company’s marketable securities consist of United States Treasury securities classified as available-for-sale securities.  Accordingly, they are carried at fair value in accordance with SFAS No. 115.  Further, according to SFAS No. 115 the unrealized holding gains and losses for available-for-sales securities are excluded from earnings and reported, net of deferred income taxes, in accumulated other comprehensive loss, unless the loss is classified as other than a temporary decline in market value.  At March 31, 2009, the amortized cost, gross unrealized gains (losses) and fair value of available-for-sale securities by major security type and class of security were as follows:

The treasury bills and treasury notes described above have maturities that range from three months to six months at time of purchase.

5.               RESIDENTIAL PROPERTIES COMPLETED OR UNDER CONSTRUCTION

Residential properties completed or under construction consist of the following:

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6 .               MORTGAGE AND OTHER NOTE OBLIGATIONS AND SUBORDINATED NOTES

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

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

Revolving Credit Facility

On December 22, 2004, Greenwood Financial, Inc., a wholly-owned subsidiary of the Company, and other wholly-owned subsidiaries of the Company, as borrowers, and Orleans Homebuilders, Inc., as guarantor, entered into a Revolving Credit Loan Agreement for a Senior Secured Revolving Credit and Letter of Credit Facility with various banks as lenders (as amended and restated and further amended, the “Revolving Credit Facility”). The Revolving Credit Loan Agreement was amended on January 24, 2006, via the Amended and Restated Revolving Credit Loan Agreement (the “Amended Credit Agreement”).  In connection with the Amended Credit Agreement, Orleans Homebuilders, Inc. executed a Guaranty, which was amended on September 6, 2007 and amended and restated on September 30, 2008. The Amended and Restated Credit Agreement was amended on November 1, 2006, February 7, 2007, May 8, 2007, September 6, 2007, December 21, 2007, May 9, 2008 by a limited waiver to the Amended Credit Agreement, which was extended on September 15, 2008, and amended and restated in the Second Amended and Restated Revolving Credit Loan Agreement, dated September 30, 2008 (the “Second Amended Credit Agreement”).  The Second Amended Credit Agreement was subsequently amended by a limited waiver letter dated January 30, 2009 (the “waiver letter”) and the First Amendment to Second Amended and Restated Revolving Credit Loan Agreement and First Amendment to Security Agreement dated February 11, 2009 (the “First Amendment”).

Waiver Letter

Absent the waiver letter described below, the Company would have continued to be in default of its obligation to, on or before January 23, 2009, make a principal repayment in an amount necessary to reduce the outstanding principal balance of the loans to the borrowing base availability (the “Repayment Covenant”).  While the Company made certain principal payments, the failure to make the repayment in full within the proscribed period constituted an event of default under the Second Amended Credit Agreement, of which the Company provided notice to the Lenders.  In addition, Wachovia Bank, N.A. (“Wachovia”) asserted that the borrowers breached the liquidity covenant in the Second Amended Credit Agreement (the “Liquidity Covenant”) for the quarter ended December 31, 2008.  The Company disagrees with Wachovia’s assertion that the borrowers breached the Liquidity Covenant and notified Wachovia of their disagreement.

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

First Amendment to the Second Amended Credit Agreement and Security Agreement:

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

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

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

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not subject to a qualifying agreement of sale), (iv) (lots part of land under development) and (v) (lots part of land approved for development), based on borrowing base certificates delivered before July 31, 2009, was increased to a maximum of 65% of the total borrowing base availability as shown on the borrowing base certificate.  For borrowing base certificates delivered on or after July 31, 2009, the maximum percentage is 55%.    The maximum dollar value of borrowing base availability attributable to asset classes (iii), (iv) and (v) were also adjusted to the following (with such limitations to be reduced dollar for dollar at the time and in the amounts of any impairments with respect to assets in asset classes (iii), (iv) and (v) and included in the borrowing base taken by borrowers):

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

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

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

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

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

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

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

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

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

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

·                   The Company’s ability to purchase up to $8,000 of unimproved real estate is no longer available; however, the Company’s ability to acquire lots through option take-downs remains unchanged.  The provision specifically allowing the Company to make new joint venture investments up to certain specified amounts was also eliminated.

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

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

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

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

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

·                   Additional provisions were added with respect to the allocation among the lenders of burdens and risks associated with defaulting lenders.

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

Terms of the Revolving Credit Facility:

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

From October 1, 2008 to February 10, 2009, borrowings and advances under the Revolving Credit Facility bore interest on a per annum basis equal to the LIBOR Market Index Rate plus 500 basis points.  Beginning on February 11, 2009, the interest rate increased to the LIBOR Market Index Rate plus 525 basis points.  Prior to October 1, 2008, the applicable spread had been 400 basis points. During the term of the Revolving Credit Facility, interest is payable monthly in arrears.  At March 31, 2009, the interest rate was 5.76%, which included a 525 basis point spread.  LIBOR Market Index Rate is defined by the Revolving Credit Facility as one-month LIBOR for dollar deposits as it may be adjusted pursuant to the terms of the Revolving Credit Facility to account for any applicable Federal Reserve euro currency reserve requirements or similar governmental requirements.

A fee will be earned and payable on September 15, 2009 equal to 8.0% per annum, calculated on a daily basis, of the difference between $250,000 and the aggregate level of the lenders’ lending commitments under the Revolving Credit Facility as they exist from time to time between September 30, 2008 and the earlier of September 15, 2009 and the date the commitments are permanently reduced to $250,000; however this fee will be reduced by 80% if the aggregate level of commitments on or before September 15, 2009 have been permanently reduced to $250,000 or less. Under this provision, the Company currently estimates that the minimum it will be required to pay is $0 and the maximum is $9,150. The Company expects that it will pay no amounts under this provision as it intends to refinance or otherwise modify the debt before the payment is due and payable. There can be no assurance that such refinancing will occur or will occur on terms favorable to the Company.  In addition, if all indebtedness under the Revolving Credit Facility is not fully repaid by December 20, 2009, a separate fee will be earned and payable on December 20, 2009 equal to 8.0% per annum of the amount by which the aggregate commitments under the Revolving Credit Facility that exist from time to time after September 15, 2009 exceed $250,000, calculated on a daily basis.  Under this provision, the Company currently estimates that the minimum it will be required to pay is $0 and the maximum is $2,630. The Company expects that it will pay no amounts under this provision as it intends to refinance the debt before the payment is due and payable. There can be no assurance that such refinancing or modification will occur or will occur on terms favorable to the Company.

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

Under and subject to the terms of the Revolving Credit Facility, the borrowers may borrow and re-borrow for the purpose of financing the acquisition and development of real estate, the construction of homes and improvements, for working capital and for such other appropriate corporate purposes as may be approved by the lenders. Under the Revolving Credit Facility, each lender is generally obligated to fund only its pro rata portion of each requested loan or advance.  As a result, if any lender refuses, or is unable, to fund its pro rata portion of a requested loan or advance, the borrowers may be unable to borrow the entire amount of the requested loan or advance despite the fact that if there are defaulting lenders, the borrowers are permitted to submit additional borrowing requests in an effort to make-up any borrowing shortfall caused by a defaulting lender failing to fund.  In addition, so long as no event of default has occurred and is continuing, pro-rata principal payments shall not be made to any defaulting lender, but instead shall be paid over to the master borrower.  The Revolving Credit Facility also provides for certain burden sharing measures to allocate among the lenders the burdens and risks associated with defaulting lenders in the event there are defaulting lenders.

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

Various conditions must be 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 agent for lenders and that all governmental approvals necessary to begin development of for-sale residential housing, other than building permits and certain other permits borrower in good faith believes will be issued within 120 days, have been obtained. Depending on the stage of development of the real estate, the loan to value or loan to cost advance rate in the borrowing base ranges from 50% to 95% of the appraised value or cost of the real estate. Based on these ranges, the Company is restricted as to the type of land it can have in various stages of development as well as the dollar value of land under development.

As security for all obligations of borrowers to lenders under the Revolving Credit Facility, lenders continue to have a first priority mortgage lien on all real estate owned by the Company or any borrower and included in the borrowing base under the Revolving Credit Facility. As further security, pursuant to the Second Amended Credit Facility, the Company has also agreed to grant to the lenders (i) a security interest in and assignment of all future tax refunds and proceeds thereof received or payable to the borrowers or the Company after the closing of the Second Amended Credit Agreement, (ii) mortgages in favor of lenders with respect to all real property owned by the borrowers or the Company that is not already subject to a lien in favor of the lenders under the Revolving Credit Facility and, (iii) a security interest in inter-company debt.  Pursuant to the First Amendment, all such tax refunds must be paid over to the lenders within one business day and will be used to prepay any indebtedness under the Revolving Credit facility.  Orleans Homebuilders, Inc. has guaranteed the obligations of the borrowers to lenders pursuant to a Guaranty executed by Orleans Homebuilders, Inc. on January 26, 2006, amended on September 6, 2007 and amended and restated on September 30, 2008.  Under the Guaranty, Orleans Homebuilders, Inc. granted lenders a security interest in any balance or assets in any deposit or other account that Orleans Homebuilders, Inc. has with any lender. However, the Company and its subsidiaries maintain a majority of the cash, cash equivalents and marketable securities available to them in accounts and as treasury securities outside of the lenders under the Revolving Credit Facility.

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

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

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

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

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

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

·       Pay any dividends;

·       Redeem any stock or subordinated debt; and

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

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

The Revolving Credit Facility also contains various financial covenants. Among other things, the financial covenants, as amended, require that:

·       Subject to a five day cure period, The Company must maintain a minimum consolidated tangible net worth of at least $25,000  (1) reduced by the sum of (a) any impairments or other charges under GAAP on assets in the borrowing base taken by the Company and recorded in respect of the financial quarters ended December 31, 2008 and March 31, 2009, plus (b)  any deferred tax assets valuation allowance reserves recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009, plus (c) any impairments or write-offs relating to tangible assets or pre-acquisition costs not contained in the borrowing base recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009 (provided, however, that the aggregate covenant level reduction pursuant to this clause (1) shall not exceed $15,000), and (2) increased by the sum of (x) any favorable adjustment to the deferred tax asset valuation allowance recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009, plus (y) 50% of positive quarterly net income after March 31, 2008.

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

·       The Company’s minimum cash flow from operations ratio based on cash flow from operations to interest incurred covenant, must exceed 1.25-to-1.00 for the quarter ending December 31, 2008; 0.40-to-1.00 for the quarter ending March 31, 2009; 0.50-to-1.00 for the quarter ending June 30, 2009; and 0.65-to-1.00 for the quarter ending September 30, 2009 and thereafter. Cash flow from operations is calculated based on the last twelve months cash flow from operations, adjusted for interest paid (excluding any amortized deferred financing costs related to all amendments to the Amended Credit Agreement, the Second Amended Credit Agreement and the trust preferred securities and any future amendments to any of the foregoing), amounts from the disposition of model homes that are subject to a sale-leaseback transaction to the extent such amounts are not otherwise included in net cash provided by operating activities, and interest income.

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

·       The Company may purchase improved land (i.e., finished lot takedowns and/or controlled rolling lot options) purchased by the borrowers in the normal course of business, consistent with the projections provided to the lenders, but otherwise limits the Company’s ability to purchase improved and unimproved land.

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

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

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

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

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

·       Dissolution or reorganization of any borrower or the Company;

·       The entry of a judgment or judgments against borrower(s) or the Company: (i) in an aggregate amount that is at least $500 in excess of available insurance proceeds, if such judgment or judgments are not dismissed or bonded within 30 days; or (ii) that prevents borrowers from conveying lots and units in the ordinary

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course of business if such judgment or judgments are not dismissed or bonded within 30 days; or the issuance of any writs of attachment, execution or garnishment against any borrower or the Company;

·       Any material adverse change in the financial condition 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 Revolving Credit Facility is impaired or doubtful for any reason; and

·       Specified cross defaults.

Upon the occurrence and continuation of an event of default, after completion of any applicable grace or cure period, lenders may demand immediate payment in full of all indebtedness outstanding under the Revolving Credit Facility, terminate their 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 or account of any borrower and foreclose upon any collateral.  In addition, upon the occurrence of certain events of bankruptcy or other insolvency events with respect to any borrower or the Company, all indebtedness outstanding under the Revolving Credit Facility shall be immediately due and payable without any act or action by lenders. A default under the Company’s Revolving Credit Facility could also prevent the Company from making required payments under the Company’s trust preferred securities, which would cause a default under those securities.

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

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

Trust Preferred Securities:

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

The trust’s preferred and common securities require quarterly distributions of interest by the trust to the holders of the trust securities at a fixed interest rate equal to 8.61% per annum through January 30, 2016 and, after January 30, 2016, at a variable interest rate (reset quarterly) equal to the three-month London Interbank Offered Rate (“LIBOR”) plus 360 basis points (“Regular Interest Rate”).  Since the Company failed to meet both the debt service ratio and minimum tangible net worth requirement set forth in the August 13, 2007 supplemental indenture as of the end of a fiscal quarter for at least three of the last four consecutive fiscal quarters ended on June 30, 2008, the applicable rate of interest was increased by 300 basis points (“Adjusted Interest Rate”). The Company began accruing for this increased interest rate on July 31, 2008, which was paid to holders for the first time with the coupon payable on October 31, 2008. The interest rate will return to the regularly applicable rate once the Company is in compliance with the debt service ratio and minimum tangible net worth requirements as of the end of any fiscal quarter.  The terms of the trust securities are governed by an Amended and Restated Trust Agreement, dated November 23, 2005, among OHI Financing, Inc., (“OHI Financing”) as depositor, JPMorgan Chase Bank, National Association, as property trustee, Chase Bank USA, National Association, as the Delaware trustee, and the administrative trustees named therein.

The trust used the proceeds from the sale of the trust’s securities to purchase $77,320 in aggregate principal amount of unsecured junior subordinated notes due January 30, 2036 issued by OHI Financing, which includes $2,300 of inter-company issuances. The junior subordinated notes were issued pursuant to a Junior Subordinated Indenture, dated November 23, 2005, as amended by a Supplemental Indenture dated August 13, 2007, collectively referred to herein as the “Indenture,” among OHI Financing, as issuer, and JPMorgan Chase Bank, National Association, as trustee. The terms of the junior subordinated notes are substantially the same as the terms of the trust’s preferred securities. The interest payments on the junior subordinated notes paid by OHI Financing will be used by the trust to pay the quarterly distributions to the holders of the trust’s preferred and common securities. Pursuant to the parent guarantee agreement dated November 23, 2005 by and

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between the Company and JPMorgan Chase Bank, National Association, as trustee, the Company has unconditionally guaranteed OHI Financing payment and other obligations under the indenture and the junior subordinated notes. The Company used the proceeds from the issuance and sale of the trust preferred securities and the subsequent purchase of the junior subordinated notes to partially repay indebtedness.

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

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

Under the Indenture, OHI Financing will generally have to make eight consecutive Adjusted Interest Rate coupon payments (other than the eight consecutive Adjusted Interest Rate coupon payments that could be made on each of the coupon payment dates from October 30, 2008 to and including July 30, 2010) to cause an event of default under the Indenture (or in some cases six consecutive coupon payments). More specifically, the Indenture provides that the earliest an event of default 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 Adjusted Interest Rate coupons paid by OHI Financing; (ii) on either the fiscal quarter ended March 31, 2010 or the fiscal year ended June 30, 2010, if at either date both the trailing twelve months’ interest coverage ratio is less than 1.25 to 1, and OHI Financing has made the six prior consecutive Adjusted Interest Rate coupon payments; or (iii) on the fiscal quarter ended September 30, 2010, if at such time both the trailing twelve months’ interest coverage ratio is less than 1.75 to 1, and OHI Financing has made the eight prior consecutive Adjusted Interest Rate coupon payments.  If the interest coverage ratio test and the minimum consolidated tangible net worth test are both met, OHI Financing would make the payment of the Regular Interest Rate for the next coupon, and the Adjusted Interest Rate test “resets” requiring OHI Financing to make eight (or in some instances six) new consecutive coupon payments at the Adjusted Interest Rate before triggering an event of default. The interest coverage ratio and minimum consolidated tangible net worth measure are not traditional financial maintenance covenants; they are only utilized in determining if the Adjusted Interest Rate or the Regular Interest Rate is applicable.

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

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

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

·       default in the performance, or breach, of any covenant or warranty made by OHI Financing in the indenture and the continuance of the default or breach for a period of 30 days after written notice to OHI Financing;

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

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

·       default in the performance, or breach, in any material respect of any covenant or warranty of any of the trustees in the Trust Agreement, which default or breach continues for a period of 30 days after written notice to the trustees and OHI Financing;

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

·       bankruptcy, insolvency or liquidation of the property trustee, if a successor property trustee has not been appointed within 90 days thereafter;

·       the bankruptcy or insolvency of OHI Financing; or

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

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

On September 20, 2005, the Company issued $30,000 of trust preferred securities which mature on September 30, 2035 and are callable, in whole or in part, at par plus accrued interest on or after September 30, 2010. For the first 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 plus 380 basis points per annum, resetting quarterly. The securities are treated as debt obligations for financial statement purposes. The Company used proceeds from the sale of these securities to fund land purchases and residential construction. The obligations relating to the trust preferred securities are subordinated to the Revolving Credit Facility.

On approximately July 30, 2009, pursuant to the terms of the first amendment to the $75,000 issue of trust preferred securities, the Company is generally required to provide a $2,500 increase in the reserve fund for the benefit of holders of the trust preferred securities by posting a letter of credit with the trustee.  The Company currently anticipates posting such letter of credit as is permitted under the existing terms of the credit facility, provided the Company has sufficient liquidity to do so at such time.  If posted, this letter of credit will reduce our liquidity otherwise determined at that time by $2,500.

7.               ASSET IMPAIRMENTS — REAL ESTATE HELD FOR DEVELOPMENT AND SALE

The Company accounts for its real estate held for development and sale in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”).  SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.  Recoverability of real estate held for development and sale is measured by comparing the carrying value to the future undiscounted net cash flows expected to be generated by the asset.  The impairment loss is the difference between the book value of the assets and the discounted future cash flows generated from expected revenue of the assets, less the associated cost to complete and direct costs to sell.  Estimated cash flows are discounted at a rate commensurate with the inherent risk of the assets and cash flows, which approximates fair value.  The estimates used in the determination of the estimated cash flows and fair value of the asset are based on factors known to the Company at the time such estimates are made and the Company’s expectations of future operations.  These estimates of cash flows are significantly impacted by estimates of the amounts and timing of revenues and costs and other factors, which, in turn, are impacted by local market economic conditions and the actions of competitors.  Should the estimates or expectations used in determining estimated cash flows or fair value decrease or differ from current estimates in the future, we may be required to recognize additional impairments related to these assets or other assets.

As of March 31, 2009, there were a number of parcels which were tested for impairment as a trigger was identified.  Some of these parcels included those that had previously been impaired.  In some cases, the undiscounted cash flow analysis prepared by management did not indicate an impairment.  However, these cash flows are subject to significant estimates and assumptions made by management.  In some cases, the results of whether an impairment is indicated from the undiscounted cash flow analysis is highly sensitive to changes in assumptions.  These parcels could suffer impairment in the future, and such impairment amounts could be material to the Company’s results of operations and financial position.  In conducting the review for indicators of impairment on a community level, the Company evaluates, among other things, the margins on homes that have been delivered, margins under sales contracts in backlog, projected margins with regard to future home sales over the life of the community, and the fair value of the land itself.  Inventory impairments are recorded in residential properties cost and expenses.

When impairment is indicated, the Company estimates the fair value of inventory under SFAS No. 144 based on current market conditions and current assumptions made by management, which may differ materially from actual results if market conditions change.  For example, further market deterioration may lead the Company to incur additional impairment charges on previously impaired inventory, as well as on inventory not currently impaired.

In determining the recoverability of the carrying value of the assets in a community that the Company has evaluated as requiring a test for impairment, significant quantitative and qualitative assumptions are made relative to the future home sales prices, sales incentives, direct and indirect costs (including interest expected to be capitalized) of home construction and land development and the pace of new home orders. In addition, these assumptions are dependent on the specific market conditions and competitive factors for the community being tested.  The Company’s estimates are made using information

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available at the date of the recoverability test.  However, as facts and circumstances may change in future reporting periods, the estimates of recoverability are subject to change.  For example, in certain communities, in response to current market conditions, we have introduced new smaller-value oriented product and we have also seen a shift in mix to our multi-family townhome products as well as lower priced single family communities.  When impairment is indicated, the Company estimates the fair value of its communities using a discounted cash flow model.  The determination of fair value also requires discounting the estimated cash flows at a rate commensurate with the inherent risks associated with the assets and related estimated cash flow streams.

The following table represents inventory impairments by region for continuing operations for the three and nine months ended March 31, 2009 and 2008:

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

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

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

8.               STOCK BASED COMPENSATION

The Company follows the provision of SFAS No. 123 (revised 2004) “Share-Based Payment” (“SFAS No. 123(R)”), which establishes the financial accounting and reporting standards for stock-based compensation plans.  SFAS No. 123(R) requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including stock options and restricted stock.  Under the provisions of SFAS No. 123(R), stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite service period of the entire award (generally the vesting period of the award).  The fair value based method in SFAS No. 123(R) is similar to the fair-value-based method in SFAS No. 123 in most respects, subject to certain differences.  The Company previously adopted the fair value recognition provisions of SFAS No. 123 prospectively for all stock awards granted and, as such, the impact of the modified prospective adoption of SFAS 123(R) did not have a significant impact on the financial position or results of operations of the Company.

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Stock Option Plans

On August 26, 2004, the Company’s Board of Directors adopted the Orleans Homebuilders, Inc. 2004 Omnibus Stock Incentive Plan (as subsequently amended, the “2004 Stock Incentive Plan”), which is intended to function as an amendment, restatement and combination of all stock option and award plans of the Company other than the Orleans Homebuilders, Inc. Stock Award Plan.  On December 6, 2007, the stockholders of the Company approved the second amendment and restatement of the 2004 Stock Incentive Plan to increase the number of shares of the Company’s common stock authorized for issuance under the plan from 400,000 to 2,000,000 shares.

During the three months ended March 31, 2009 and 2008, the Company recognized $313 and $535, respectively, of stock based compensation expense related to stock options.

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

The following summarizes stock option activity for the Company’s stock option plans during the nine months ended March 31, 2009:

There were no options exercisable at March 31, 2009 that had a strike price below the market value of the underlying shares of stock.

During the nine months ended March 31, 2009, the Company granted options to acquire 250,000 shares.  During the nine months ended March 31, 2008, the Company granted options to acquire 180,000 shares.  In addition, during the nine months ended March 31, 2008, options to acquire 240,000 shares at $15.60 were repriced to $4.65.

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

No options were exercised during the three and nine months ended March 31, 2009.  During the three and nine months ended March 31, 2008, 47,500 options were exercised.

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

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The aggregate intrinsic value as of March 31, 2009 for outstanding stock options and for stock options that were exercisable was $48 and $0, respectively.

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

As of March 31, 2009, there was a total of $1,449 of unrecognized compensation expense related to time based non-vested stock options.  That cost is expected to be recognized over a weighted average period of 3.1 years.

Stock Award Plans

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

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

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

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

Cash Bonus Plan

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

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9.               EMPLOYEE RETIREMENT PLAN

On December 1, 2005, the Company adopted an unfunded, non-qualified target defined benefit retirement plan, effective as of September 1, 2005, which covers a group of management employees of the Company.  The Company owns life insurance policies on all participants in the Supplemental Executive Retirement Plan (“SERP”).  This SERP, which was amended on March 13, 2006 and September 27, 2007, is intended to provide the participants with an annual supplemental retirement benefit based upon their years of service with the Company and highest average compensation for five consecutive years.  The annual supplemental benefit for each participant will be adjusted based on the actual performance of the SERP compared to the target.  The benefit is payable for life with a minimum of ten years guaranteed.  In order to qualify for normal retirement benefits, a participant must attain age 65 with at least five years of participation in the SERP.  Early retirement will be permitted beginning at age 55, after five years of participation in the SERP. Early retirement benefits will be adjusted actuarially to reflect the early retirement date.

If a participant terminates employment with the Company prior to attaining his or her normal retirement date, other than by reason of early retirement, death or disability, the participant will forfeit all benefits under the SERP, provided that certain terminations occurring after a change in control will not result in a forfeiture.  The Company can amend or terminate the SERP at any time. However, no amendment or termination will affect the participants’ accrued benefits as determined in accordance with the SERP or delay any payments to a participant beyond the time that such amount would otherwise be payable without regard to the amendment.

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

The Company recognized the following costs related to the SERP for the three and nine months ended March 31, 2009 and 2008:

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10.        LOSS PER SHARE

The weighted average number of shares used to compute basic loss per common share and diluted loss per common share and a reconciliation of the numerator and denominator used in the computation for the three and nine months ended March 31, 2009 and 2008 are shown in the following table: