ORLEANS HOMEBUILDERS INC - 10-Q Quarterly Report

ORLEANS HOMEBUILDERS, INC.
(Exact name of registrant as specified in its charter)

One Greenwood Square, Suite 101
3333 Street Road
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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes

Number of shares of common stock, par value $0.10 per share, outstanding as of
November 1, 2004: 18,031,463
(excluding 576,330 shares held in Treasury).

ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES

		PAGE

PART 1 — FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Consolidated Balance Sheets at September 30, 2004 and June 30, 2004	1

	Consolidated Statements of Operations for the Three Months Ended September 30, 2004 and 2003	2

	Consolidated Statements of Shareholders’ Equity for the Three Months Ended September 30, 2004	3

	Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2004 and 2003	4

	Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	29

PART II — OTHER INFORMATION

Item 6.	Exhibits	30

Back to Contents

Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(in thousands)

	September 30, 2004			June 30, 2004

Assets:
Cash and cash equivalents	$	15,491		$	32,962
Restricted cash — customer deposits		22,664			17,795
Real estate held for development and sale:
Residential properties completed or under construction		215,906			140,401
Land held for development or sale and improvements		288,817			161,265
Inventory not owned — Variable Interest Entities		107,025			88,995
Property and equipment, at cost, less accumulated depreciation		3,277			3,163
Deferred taxes		2,542			2,453
Goodwill and other intangible assets		20,307			7,187
Receivables, deferred charges and other assets		10,388			9,025
Land deposits and costs of future development		31,941			23,356

Total Assets	$	718,358		$	486,602


Liabilities and Shareholders’ Equity
Liabilities:
Accounts payable	$	34,196		$	26,246
Accrued expenses		42,876			46,981
Customer deposits		33,466			22,620
Obligations related to inventory not owned		97,491			81,992
Mortgage and other note obligations primarily secured by real estate held for development and sale		210,124			128,773
Unsecured line of credit		103,448			—
Notes payable and amounts due to related parties		7,868			2,879
Other notes payable		4,685			1,139

Total Liabilities		534,154			310,630


Commitments and contingencies (See Note I)

Redeemable common stock		1,067			1,067


Shareholders’ Equity:
Common stock, $.10 par, 20,000,000 shares authorized, 18,031,463 shares issued		1,803			1,803
Capital in excess of par value — common stock		68,584			68,554
Retained earnings		113,766			105,564
Treasury stock, at cost (576,330 shares held)		(1,016	)		(1,016	)

Total Shareholders’ Equity		183,137			174,905

Total Liabilities and Shareholders’ Equity	$	718,358		$	486,602

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

-1-

Back to Contents

Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Statements of Operations
and Changes in Retained Earnings
(Unaudited)
(in thousands, except per share amounts)

	Three Months Ended September 30,
	2004			2003

Earned revenues
Residential properties	$	138,312		$	98,383
Land sales		49			457
Other income		1,801			1,595

		140,162			100,435

Costs and expenses
Residential properties		109,591			74,809
Land sales		48			490
Other		937			1,223
Selling, general and administrative		16,095			11,448
Interest
Incurred		2,730			1,814
Less capitalized		(2,716	)		(1,742	)

		126,685			88,042

Income from operations before income taxes		13,477			12,393
Income tax expense		5,275			4,875

Net income	$	8,202		$	7,518


Net income		8,202			7,518
Preferred dividends		—			53

Net income available for common shareholders	$	8,202		$	7,465


Basic earnings per share	$	0.47		$	0.58


Diluted earnings per share	$	0.44		$	0.45

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

-2-

Back to Contents

Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(Unaudited)
(dollars in thousands)

	Common Stock				Capital in
	Shares				Excess of				Treasury Stock
	Issued and				Par Value –		Retained		Share
	Outstanding		Amount		Common Stock		Earnings		Held		Amount			Total

Balance at June 30, 2004		18,031,463	$	1,803	$	68,554	$	105,564		576,330	$	(1,016	)	$	174,905
Fair market value of stock options issued						30									30
Net income								8,202							8,202

Balance at September 30, 2004		18,031,463	$	1,803	$	68,584	$	113,766		576,330	$	(1,016	)	$	183,137

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

-3-

Back to Contents

Orleans Homebuilders, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

	Three Months Ended September 30,
	2004			2003

Cash flows from operating activities:
Net income	$	8,202		$	7,518
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization		350			131
Deferred taxes		(89	)		—
Stock based compensation expense		30			27
Changes in operating assets and liabilities:
Restricted cash — customer deposits		(596	)		(1,787	)
Real estate held for development and sale		(66,225	)		(14,659	)
Receivables, deferred charges and other assets		115			(8,350)
Land deposits and costs of future developments		(8,862	)		6,631
Accounts payable and other liabilities		(15,214	)		(5,924	)
Customer deposits		2,280			1,984

Net cash used in operating activities		(80,009	)		(14,429	)

Cash flows from investing activities:
Purchases of property and equipment		(195	)		(57	)
Acquisitions, net of cash acquired		(56,848	)		(4,932	)

Net cash used in investing activities		(57,043	)		(4,989	)

Cash flows from financing activities:
Borrowings from loans secured by real estate assets		70,262			75,073
Repayment of loans secured by real estate assets		(59,195	)		(58,909	)
Borrowings from unsecured line of credit		103,448			—
Borrowings from other note obligations		5,070			5,424
Repayment of other note obligations		(4	)		(2,017	)
Sale of treasury stock		—			240
Preferred stock dividend		—			(53	)

Net cash provided by financing activities		119,581			19,758

Net increase (decrease) in cash and cash equivalents		(17,471	)		340
Cash and cash equivalents at beginning of year		32,962			8,883

Cash and cash equivalents at end of period	$	15,491		$	9,223

Supplemental disclosure of cash flow activities:
Interest paid, net of amounts capitalized	$	14		$	72

Income taxes paid	$	9,817		$	5,988

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

-4-

Back to Contents

ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(A)	Summary of Significant Accounting Policies:

	The accompanying unaudited consolidated financial statements are presented in accordance with the requirements for Form 10-Q and do not include all the disclosures required by generally accepted accounting principles for complete financial statements. Reference is made to Form 10-K as of and for the year ended June 30, 2004 for Orleans Homebuilders, Inc. and subsidiaries (the “Company”) for additional disclosures, including a summary of the Company’s accounting policies.

	On July 28, 2004, the Company acquired all of the issued and outstanding partnership interests in Realen Homes, L.P., a Pennsylvania limited partnership (“Realen Homes”). Unless otherwise indicated, the term the “Company” includes the accounts of Realen Homes. Realen Homes is engaged in residential real estate development in Southeastern Pennsylvania and Chicago, Illinois. The Consolidated Statements of Operations and Changes in Retained Earnings and the Consolidated Statements of Cash Flows include the accounts of Realen Homes from July 28, 2004 through September 30, 2004. The Consolidated Balance Sheets include the accounts of Realen Homes as of September 30, 2004. All material intercompany transactions and accounts have been eliminated.

	In the opinion of management, the consolidated financial statements contain all adjustments, consisting only of normal recurring accruals, necessary to present fairly the consolidated financial position of the Company for the periods presented. The interim operating results of the Company may not be indicative of operating results for the full year.

	Certain prior year amounts have been reclassified to conform to the fiscal 2005 presentation.

	Recent accounting pronouncements:

	In January 2003, the FASB issued FASB Interpretation No. 46 “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46”). The FASB issued a revised FIN 46 in December 2003 which modifies and clarifies various aspects of the original interpretations. A Variable Interest Entity (“VIE”) is created when (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a VIE, pursuant to FIN 46, an enterprise that absorbs a majority of the expected losses of the VIE is considered the primary beneficiary and must consolidate the VIE. For VIEs created before January 31, 2003, FIN 46 was deferred to the end of the first interim or annual period ending after March 15, 2004. The Company fully adopted FIN 46 effective March 31, 2004.

-5-

Back to Contents

	Based on the provisions of FIN 46, the Company has concluded that whenever it enters into an option agreement to acquire land or lots from an entity and pays a significant deposit that is not unconditionally refundable, a VIE is created under condition (ii) (b) of the previous paragraph. The Company has been deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an entity’s expected theoretical losses if they occur. For each VIE created the Company will compute expected losses and residual returns based on the probability of future cash flows as outlined in FIN 46. If the Company is deemed to be the primary beneficiary of the VIE it will consolidate the VIE on its balance sheet. The fair value of the VIEs inventory will be reported as “Inventory Not Owned — Variable Interest Entities.”

	At September 30, 2004, the Company consolidated twenty-three VIEs as a result of its option to purchase land or lots from the selling entities. The Company paid cash or issued letters of credit deposits to these twenty-three VIEs totaling $9,121,000 and incurred additional pre-acquisition costs totaling $2,096,000. The Company’s deposits and any costs incurred prior to acquisition of the land or lots, represent our maximum exposure to loss. The fair value of the VIEs inventory will be reported as “Inventory Not Owned — Variable Interest Entities.” The Company recorded $107,025,000 in Inventory Not Owned — Variable Interest Entities as of September 30, 2004. The fair value of the property to be acquired less cash deposits and pre-acquisition costs, which totaled $97,491,000 at September 30, 2004, was reported on the balance sheet as “Obligations related to inventory not owned.” Creditors, if any, of these VIEs have no recourse against the Company.

	The Company will continue to secure land and lots using options. Including the deposits and other costs capitalized in connection with the VIEs above, the Company had total costs incurred to acquire land and lots at September 30, 2004 of approximately $29,909,000, including $20,078,000 of cash deposits. The total purchase price under these cancelable contracts or options is approximately $521,972,000. The maximum exposure to loss is limited to the deposits, although some deposits are refundable, and costs incurred prior to the acquisition of the land or lots.

	In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 “Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity” (“SFAS No. 150”). This standard requires issuers to classify as liabilities the following three types of freestanding financial instruments: (1) mandatory redeemable financial instruments, (2) obligations to repurchase the issuer’s equity shares by transferring assets; and (3) certain obligations to issue a variable number of shares. The Company adopted SFAS No. 150 effective July 1, 2003. The adoption of SFAS No. 150 did not have a material impact on the financial position or results of operations of the Company.

-6-

Back to Contents

	In December 2003, the SEC issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition” which supersedes SAB 101, “Revenue Recognition in Financial Statements.” SAB 104’s primary purpose is to rescind the accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21. The Company adopted the provisions of this statement immediately, as required, and it did not have a significant impact on the Company’s Consolidated Financial Statements.

	EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” issued during the third quarter of 2003, provides guidance on revenue recognition for revenues derived from a single contract that contain multiple products or services. EITF 00-21 also provides additional requirements to determine when these revenues may be recorded separately for accounting purposes. The Company adopted EITF 00-21 on July 1, 2003, as required, and it did not have a significant impact on the Company’s Consolidated Financial Statements.

(B)	Acquisitions:

	On July 28, 2004, pursuant to a Purchase Agreement of the same date, the Company completed its acquisition of all of the issued and outstanding partnership interests in Realen Homes, a Pennsylvania limited partnership, from Realen General Partner, LLC, a Pennsylvania limited liability company, and DB Homes Venture L.P., a Pennsylvania limited partnership. The Company acquired the limited partner’s interest in Realen Homes and a subsidiary of the Company, RHGP LLC, acquired the general partner’s interest and serves as the general partner of Realen Homes.

	In accordance with the Purchase Agreement, the consideration paid by the Company consisted of: (i) $53,348,000 in cash delivered at closing, (ii) a promissory note of the Company in the aggregate principal amount of $5 million, payable over a period of up to two years, with an interest rate of 3% per year and (iii) a warranty holdback of $1.5 million retained by the Company to be applied toward the administration of any warranty claims made against Realen Homes. The purchase price was determined based on Realen Homes’ book value at June 30, 2004, its management personnel, its profitability, its backlog and its land position. In addition to the consideration described above, the Company incurred approximately $311,000 in professional fees in connection with the acquisition of Realen Homes.

-7-

Back to Contents

	The Company evaluated the $5,000,000 3% note in accordance with APB 21 and determined that it was a below market rate note. In accordance with APB 21, the Company estimated, based on current market conditions that the Company would likely have been able to obtain similar fixed-rate financing from a third party at approximately 150 basis points higher than the note actually obtained. The Company imputed interest on the note at 4.5% and reduced the carrying value of the note from $5,000,000 to $4,863,000. The discount of $137,000 will be recorded as interest expense over the life of the note.

	The acquisition included, subject to specified exceptions, all assets and liabilities of Realen Homes, including land owned or under contract, homes under construction but not sold or sold but not delivered, sales offers and reservations, and model homes and furnishings. The acquired assets were used by Realen Homes in the homebuilding business in Pennsylvania and Illinois. The Company intends to continue to use the acquired assets in the homebuilding business.

	The Company accounted for the acquisition as a purchase in accordance with SFAS No. 141, “Business Combinations”. The purchase price was allocated to the fair value of assets and liabilities acquired with the excess purchase price of approximately $12,723,000 and $500,000 allocated to goodwill and other intangible assets, respectively. The intangible assets represent the intangible value of the backlog acquired from Realen Homes. The intangible value of the backlog will be amortized into cost of sales as the acquired backlog is delivered. The Company amortized $103,000 of the intangible value of the backlog acquired from Realen Homes for the three months ended September 30, 2004.

	If the Realen Homes acquisition occurred on July 1, 2003, pro forma information for the Company would have been as follows:

	Three Months Ended September 30,
	2004		2003

Earned revenues	$	145,588	$	131,905
Income from operations before income taxes		14,602		12,399
Net income		8,863		7,526
Earnings per share:
Basic		0.51		0.59
Diluted		0.47		0.46

On August 9, 2004, the Company entered into a letter of intent for the acquisition of all of the outstanding shares of Peachtree Residential Properties, Inc. (“Peachtree”). Peachtree is engaged in homebuilding business in Atlanta, Georgia and Charlotte, North Carolina. The Company anticipates completing the Peachtree acquisition during the second quarter ended December 31, 2004 but the Company cannot offer any assurance that it will be able to do so.

-8-

Back to Contents

(C)	Mortgage, Other Note Obligations, and Unsecured Lines of Credit:

	The maximum balance outstanding under construction and inventory loan agreements at any month end during the three months ended September 30, 2004 was $210,124,000. The average month end balance during the three months ended September 30, 2004 was $203,502,000. At September 30, 2004, the Company had approximately $174,071,000, available to be drawn under existing secured revolving and construction loans for planned development expenditures. Obligations under residential property and construction loans amounted to $131,222,000 at September 30, 2004 and are repaid at a predetermined percentage (approximately 85% on average) of the selling price of a unit when a sale is completed. The repayment percentage varies from community to community and over time within the same community. Mortgage obligations secured by land held for development and sale and improvements aggregating $8,923,000 at September 30, 2004 and are due in varying installments through fiscal 2005 with annual interest at variable rates based on 30-day LIBOR or the prime rate of interest plus a spread. Obligations relating to the $70,000,000 secured credit facility assumed from Realen Homes described below totaled $69,979,000 at September 30, 2004. The 30-day LIBOR and prime rate of interest at September 30, 2004 were 1.84% and 4.75%, per annum, respectively.

	On July 28, 2004 the Company obtained a $120,000,000 unsecured bridge loan to finance the acquisition of Realen Homes, refinance certain outstanding indebtedness of Realen Homes and provide the Company with short-term liquidity for land purchases and residential development and construction site improvements. The unsecured bridge loan has a maturity date of November 30, 2004. Interest is payable monthly at 30-day LIBOR plus 225 basis points on the portion of the outstanding principal balance that does not exceed $60,000,000 and 30-day LIBOR plus 250 basis points on the portion of the outstanding principal balance that exceeds $60,000,000. The unsecured bridge loan is included in the balance sheet caption “Unsecured line of credit” and has an outstanding balance of $103,448,000 as of September 30, 2004.

	As part of the acquisition Realen Homes, the Company assumed a $70,000,000 secured credit facility. The facility bears interest at a rate based upon the agent lender’s prime rate. The Company at its option, may elect to convert all or a portion of the outstanding facility to a fixed rate facility at 30-day LIBOR plus 187.5 basis points to 250 basis points per annum (based on certain lender ratios) in accordance with the lenders pricing formula for certain pre-defined periods up to 180 days. At September 30, 2004 the Company elected to allocate $4,800,000 and $65,179,000 of the total outstanding balance of the facility of $69,979,000 to 30-day LIBOR plus 200 basis points and prime, respectively. The $4,800,000 balance of the credit facility allocated to 30-day LIBOR plus 250 basis points will revert back to the prime rate on November 10, 2004. The secured credit facility is included in the balance sheet caption “Mortgage and other note obligations primarily secured by real estate held for development and sale.”

-9-

Back to Contents

(D)	Redeemable Common Stock:

	In connection with the Company’s acquisition of Parker and Lancaster Corporation on October 13, 2000, the Company issued 300,000 shares of common stock of the Company to the former shareholders of Parker and Lancaster Corporation. The former shareholders of Parker and Lancaster Corporation have the right to cause the Company to repurchase the common stock approximately five years after the closing of the acquisition at a price of $3.33 per share. As of March 31, 2004, a former shareholder of Parker and Lancaster Corporation sold 51,502 shares of the Company’s Common Stock thereby reducing the number of shares of redeemable common stock in connection with the Parker and Lancaster Corporation acquisition to 248,498 shares.

	In connection with the Company’s acquisition of Masterpiece Homes on July 28, 2003 (see Note B), the Company sold 30,000 shares of common stock of the Company to the president of Masterpiece Homes at $8 per share. The president of Masterpiece Homes has the right to cause the Company to repurchase the common stock at $8 per share by giving notice to the Company no later than the earlier of December 31, 2006 or 30 days after termination of his employment, as specified in his employment agreement.

(E)	Earnings Per Share:

	The weighted average number of shares used to compute basic earnings per common share and diluted earnings per common share and a reconciliation of the numerator and denominator used in the computation for the three months ended September 30, 2004 and 2003 are shown in the following table:

	Three Months Ended September 30,
	2004			2003

	(in thousands)
Total common shares issued		18,031			13,365
Unconditional shares issuable		68			136
Less: Average treasury shares
Outstanding		(576	)		(706	)

Basic EPS shares		17,523			12,795
Effect of assumed shares issued under treasury stock method for stock options		565			553
Effect of December 29, 2003 partial conversion of $3 million Convertible
Subordinated 7% Note		667			1,333
Effect of December 29, 2003 conversion of $3 million Series D Preferred Stock		—			2,000

Diluted EPS shares		18,755			16,681


Net income available for common shareholders	$	8,202		$	7,465
Effect of December 29, 2003 conversion of $3 million Series D Preferred Stock		—			53
Effect of December 29, 2003 partial conversion of $3 million Convertible
Subordinated 7% Note		11			22

Adjusted net income for diluted EPS	$	8,213		$	7,540

-10-

Back to Contents

(F)	Supplemental Cash Flow Disclosure:

On July 28, 2004, the Company acquired Realen Homes. The following is a summary of the effects of this transaction on the Company’s consolidated financial position:

	July 28, 2004

	(in thousands)
Assets acquired:
Cash	$	(3,174	)
Restricted cash — customer deposits		(4,273	)
Real estate held for development and sale		(136,832	)
Property and equipment, at cost, less accumulated depreciation		(166	)
Intangible assets, net of amortization		(13,223	)
Receivables, deferred charges and other assets		(1,478	)
Land deposits and costs of future development		(2,254	)

Total assets acquired		(161,400	)


Liabilities assumed:
Accounts payable		10,771
Accrued expenses		8,288
Customer deposits		8,566
Mortgage and other note obligations primarily secured by real estate held for development and sale		70,282
Other notes payable		3,471

Total liabilities assumed		101,378


Cash paid		(53,348	)
Note payable		(4,863	)
Warranty holdback		(1,500	)
Professional fees paid		(311	)
Less cash acquired		3,174

Net cash outflow for Realen Homes acquisition	$	(56,848	)

(G)	Residential Properties Completed or under Construction:

Residential properties completed or under construction consist of the following:

	September 30, 2004		June 30, 2004

	(in thousands)
Under contract for sale (backlog)	$	150,518	$	89,519
Unsold		65,388		50,882

Total residential properties completed or under construction	$	215,906	$	140,401

-11-

Back to Contents

(H)	Litigation:

	From time to time the Company is named as a defendant in legal actions arising from its normal business activities. Although the amount of liability that could arise with respect to currently pending actions cannot be accurately predicted, in the opinion of the Company any such liability will not have a material adverse effect on the financial position, operating results or cash flows of the Company.

(I)	Commitments and Contingencies:

	As of September 30, 2004, the Company owned or controlled approximately 15,930 building lots. As part of the aforementioned building lots, the Company had contracted to purchase, or has under option, undeveloped land and improved lots for an aggregate purchase price of approximately $521,972,000 which is expected to yield approximately 9,158 building lots. Generally, the Company structures its land acquisitions so that it has the right to cancel its agreements to purchase undeveloped land and improved lots by forfeiture of its deposit under the agreement. Furthermore, purchase of the properties is usually contingent upon obtaining all governmental approvals and satisfaction of certain requirements by the Company and the sellers.

(J)	Subsequent Events:

	On October 26, 2004 the Company awarded 16,778 shares of Common Stock under the Orleans Homebuilder’s Inc. Stock Award Plan. The shares of Common Stock will be issued from the Company’s Treasury Stock.

-12-

Back to Contents

ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Orleans Homebuilders, Inc. and its subsidiaries (collectively, the “Company”, “OHB” or “Orleans”) are currently engaged in residential real estate development in the following ten markets: Southeastern Pennsylvania; Central New Jersey; Southern New Jersey; Charlotte, Raleigh and Greensboro, North Carolina; Richmond and Tidewater, Virginia; Orlando, Florida; and Chicago, Illinois. The Company’s Charlotte, North Carolina market also includes operations in adjacent counties in South Carolina. The Company has operated in its Pennsylvania and New Jersey markets for over 85 years and began operations in its North Carolina and Virginia markets in fiscal 2001 through the acquisition of Parker & Lancaster Corporation, a privately-held residential homebuilder. The Company entered the Orlando, Florida market on July 28, 2003 through its acquisition of Masterpiece Homes, Inc. (“Masterpiece Homes”), a privately-held residential homebuilder. On July 28, 2004, the Company entered the Chicago, Illinois market through the acquisition of Realen Homes, L.P. (“Realen Homes”), an established privately-held homebuilder with operations in Southeastern Pennsylvania and Chicago, Illinois. The Results of Operations include the activity of Masterpiece Homes from July 28, 2003 through September 30, 2004 and Realen Homes from July 28, 2004 through September 30, 2004. Unless otherwise indicated, the term the “Company” includes the accounts of Realen Homes.

References to a given fiscal year in this Quarterly Report on Form 10-Q are to the fiscal year ended June 30th of that year. For example, the phrases “fiscal 2004” or “2004 fiscal year” refer to the fiscal year ended June 30, 2004. When used in this report, “northern region” refers to the Company’s Pennsylvania and New Jersey markets, which includes the Southeastern Pennsylvania operations of Realen Homes that were acquired on July 28, 2004; “southern region” refers to the Company’s North Carolina and Virginia markets; “Florida region” refers to the Company’s Florida market, and “midwestern region” refers to the Company’s Illinois market.

The Company believes it is well positioned for continued growth. At September 30, 2004, backlog was $594,097,000 representing 1,643 homes compared to a backlog of $360,088,000 representing 1,116 homes at September 30, 2003. At September 30, 2004, the Company was selling in 97 communities and owned or controlled approximately 15,930 building lots compared to 77 communities and 10,863 owned or controlled building lots at September 30, 2003.

The Company has entitled and developed lots in the highly regulated Pennsylvania and New Jersey markets for over 40 years. As a result, the Company believes it has expertise in all aspects of the site selection, land planning, entitlement and land development processes which can be leveraged across all markets in which the Company operates. In addition, the Company believes that it holds attractive land positions in the Pennsylvania and New Jersey markets and that the market value of these land positions will continue to grow due to the highly regulated environment in these markets.

The Company develops, builds and markets high-quality single-family homes, townhomes and condominiums to serve various homebuyer segments, including first-time, move-up, luxury, empty nester and active adult. The Company believes this broad range of home designs allows it to capitalize on favorable economic and demographic trends within its markets.

-13-

Back to Contents

Results of Operations

The following table sets forth certain details as to residential sales activity. The information provided is for the three months ended September 30, 2004 and 2003 in the case of residential revenue earned and new orders, and as of September 30, 2004 and 2003 in the case of backlog.

A sales contract or potential sale is classified as a new order and, therefore, becomes a part of backlog, at the time a homebuyer executes a contract to purchase a home from the Company.

	Three Months Ended September 30,
	2004						2003
	(Dollars in thousands)
	Amount		Homes		Average Price		Amount		Homes		Average Price
Northern Region (1)
New Jersey and Pennsylvania:
Residential revenue earned	$	67,283		155	$	434	$	53,020		140	$	379
New orders		77,437		164		472		62,555		146		428
Backlog		292,973		669		438		199,469		468		426

Southern Region
North Carolina, South Carolina and Virginia:
Residential revenue earned	$	40,448		116	$	349	$	34,416		111	$	310
New orders		47,428		130		365		56,038		167		336
Backlog		135,247		351		385		117,455		346		339

Florida Region (2)
Residential revenue earned	$	14,403		89	$	162	$	10,947		84	$	130
New orders		21,729		106		205		12,449		88		141
Backlog		60,174		336		179		43,164		302		143

Midwestern Region (3)
Residential revenue earned	$	16,178		45	$	360	$	—		—	$	—
New orders		24,203		66		367		—		—		—
Backlog		105,703		287		368		—		—		—

Combined Regions
Residential revenue earned	$	138,312		405	$	342	$	98,383		335	$	294
New orders		170,797		466		367		131,042		401		327
Backlog		594,097		1,643		362		360,088		1,116		323

(1)

Information on residential revenue earned and new orders for the three months ending September 30, 2004 includes Realen Homes’ Southeastern Pennsylvania operations for the period beginning July 28, 2004, the date the Company acquired Realen Homes, through September 30, 2004. The backlog at September 30, 2004, includes the backlog of Realen Homes’ Southeastern Pennsylvania operations.

(2)	Information on residential revenue earned and new orders for the three months ending September 30, 2003 is for the period beginning July 28, 2003, the date the Company entered this market through its acquisition of Masterpiece Homes, through September 30, 2004.

(3)	Information on residential revenue earned and new orders is for the period beginning July 28, 2004, the date the Company entered this this market through its acquisition of Realen Homes, through September 30, 2004.

-14-

Back to Contents

Three Months Ended September 30, 2004

Orders and Backlog

New orders for the three months ended September 30, 2004 increased $39,755,000, or 30.3%, to $170,797,000 on 466 homes, compared to $131,042,000 on 401 homes for the three months ended September 30, 2003. The average price per home of new orders increased by approximately 12.2% to $367,000 for the three months ended September 30, 2004 compared to $327,000 for the three months ended September 30, 2003.

The backlog at September 30, 2004 increased $234,009,000, or 65.0%, to $594,097,000 on 1,643 homes compared to the backlog at September 30, 2003 of $360,088,000 on 1,116 homes. The increase in backlog was attributable to an increase in new orders, the Company’s obtaining additional backlog of $170,785,000 on 463 homes through its acquisition of Realen Homes on July 28, 2004 and favorable economic conditions for the homebuilding industry in the regions where the Company operates. These favorable economic conditions, including historically low interest rates, have resulted in positive home pricing trends and consistent customer demand. The average price per home included in the Company’s backlog increased 12.1% to $362,000 at September 30, 2004 compared to $323,000 at September 30, 2003.

Northern Region: New orders for the three months ended September 30, 2004 increased $14,882,000 to $77,437,000, or 23.8% on 164 homes, compared to $62,555,000 on 146 homes for the three months ended September 30, 2003. The increase was primarily attributable to the acquisition of Realen Homes which contributed $12,300,000 on 30 new orders for the three months ended September 30, 2004. Excluding the acquisition of Realen Homes, new orders increased $2,582,000 to $65,137,000 and new orders decreased 12 homes to 134 homes for the three months ended September 30, 2004 when compared to the three months ended September 30, 2003. The increase in new order dollars and the decrease in new home orders is a result of the Company’s efforts to intentionally slow absorption through pricing increases in several new communities to ensure production, pricing and absorption rates are properly balanced. The average price per home of new orders increased by 10.3% to $472,000 for the three months ended September 30, 2004 compared to $428,000 for the three months ended September 30, 2003. In addition to the Company’s efforts to intentionally slow absorption, the Company believes that it has been able to increase sales prices due to the strong demand for new homes resulting from the growing population, fueled in part by immigration, and historically low interest rates which have made housing more affordable. The limited supply of entitled lots for residential housing in Pennsylvania and New Jersey due to increased governmental regulations has also positively impacted home pricing trends.

The Company had 28 active selling communities in the northern region as of September 30, 2004 compared to 19 active selling communities as of September 30, 2003. The increase in the number of active selling communities was primarily attributable to the acquisition of Realen Homes which resulted in the addition of eight active selling communities in the northern region.

-15-

Back to Contents

Southern Region: New orders for the three months ended September 30, 2004 decreased $8,610,000 to $47,428,000, or 15.4% on 130 homes, compared to $56,038,000 on 167 homes for the three months ended September 30, 2003. The decrease in new orders was primarily attributable to a decrease in the number of available building lots to sell for the three months ended September 30, 2004 when compared to the three months ended September 30, 2003. While the Company had 51 active selling communities in the southern region as of September 30, 2004 compared to 50 active selling communities as of September 30, 2003, several of the active selling communities included in the community count at September 30, 2004 are approaching the sell-out point at a faster rate than the opening of new selling communities.

The average price per home of new orders increased by 8.6% to $365,000 for the three months ended September 30, 2004 compared to $336,000 for the three months ended September 30, 2003. This increase in the average price per home of new orders is due to price increases in those communities open during the three months ended September 30, 2004 when compared with the same communities and products offered for sale in the comparable prior year period.

Florida Region: In spite of a series of hurricanes that struck the Florida region in September 2004, new orders for the three months ended September 30, 2004 increased $9,280,000 to $21,729,000, or 74.5% on 106 homes, compared to $12,449,000 on 88 homes for the three months ended September 30, 2003. The increase was attributable to the fact that the Florida region’s results of operations were included in the Company’s results of operations for the entire three months ended September 30, 2004 compared to the comparable prior year period wherein the Company acquired Masterpiece Homes and entered the Florida region on July 28, 2003. While the hurricanes slowed sales activities, they did not result in any substantial physical damage to the Company’s properties.

The average price per home of new orders increased by 45.4% to $205,000 for the three months ended September 30, 2004 compared to $141,000 for the three months ended September 30, 2003. This increase in the average price per home of new orders is due to price increases in those communities open during the three months ended September 30, 2004 when compared with the same communities and products offered for sale in the comparable prior year period.

The Company is continuing to expand its operations in the Florida region. The Company had 11 active selling communities in the Florida region as of September 30, 2004, compared to eight active selling communities as of September 30, 2003.

Midwestern Region: The Company entered the midwestern through the acquisition of Realen Homes on July 28, 2004. The Midwestern region accounted for $24,203,000 in new orders on 66 homes at an average price per home of new orders of $367,000. As of September 30, 2004, the midwestern region had seven active selling communities.

-16-

Back to Contents

Total Earned Revenues

Total earned revenues for the three months ended September 30, 2004 increased $39,727,000, to $140,162,000 or 39.6%, compared to $100,435,000 for the three months ended September 30, 2003. Residential revenue earned from the sale of residential homes included 405 homes totaling $138,312,000 during the three months ended September 30, 2004, as compared to 335 homes totaling $98,383,000 during the three months ended September 30, 2003. The average selling price per home delivered in the three months ended September 30, 2004 increased by approximately 16.3% to $342,000 for the three months ended September 30, 2004 compared to $294,000 for the three months ended September 30, 2003.

Northern Region: Residential revenue earned for the three months ended September 30, 2004 increased $14,263,000 to $67,283,000 or 26.9% on 155 homes delivered as compared to $53,020,000 on 140 homes delivered during the three months ended September 30, 2003. The increase was primarily attributable to the acquisition of Realen Homes which contributed $10,737,000 in residential revenue on 35 homes delivered for the three months ended September 30, 2004.

Excluding the acquisition of Realen Homes, residential revenue earned increased $3,526,000 to $56,546,000 and the number of homes delivered decreased 20 homes to 120 homes for the three months ended September 30, 2004 when compared to the three months ended September 30, 2003. The increase in residential revenue earned and the decrease in new home deliveries is a result of the mix of homes delivered. Specifically, single family homes, which typically have a longer building cycle than townhomes, comprised a larger percentage of the total homes delivered in the region during the three months ended September 30, 2004 than townhomes when compared to the three months ended September 30, 2003. The number of homes delivered also decreased due to delays in the opening of new communities as a result of increasingly restrictive regulations and moratoriums by state and local governmental authorities and the Company’s intentional slowing of absorption through pricing increases in several communities starting in the fourth quarter of fiscal 2004.

The average selling price per home delivered in three months ended September 30, 2004 increased by approximately 14.5% to $434,000 for the three months ended September 30, 2004 compared to $379,000 for the three months ended September 30, 2003. This increase in the average selling price per home delivered contributed to the increase in residential revenue earned described above. The increase in the average selling price per home delivered is attributable increases in the average price per home of new orders in fiscal 2004 resulting from sales price increases as well as the product mix of homes delivered. Specifically, single family homes, which have higher selling prices than townhomes, comprised a larger percentage of the total homes delivered in the region during the three months ended September 30, 2004 than townhomes when compared to the three months ended September 30, 2003.

-17-

Back to Contents

Southern Region: Residential revenue earned for the three months ended September 30, 2004 increased $6,032,000 to $40,448,000 or 17.5% on 116 homes delivered as compared to $34,416,000 on 111 homes delivered during the three months ended September 30, 2003.

The average price per home delivered increased 12.6% to $349,000 for the three months ended September 30, 2004 compared to $310,000 for the three months ended September 30, 2003. The increase in the average price per home delivered was attributable to increases in the average price per home of new orders in fiscal 2004 coupled with an increase in revenue attributable to customer-selected options, such as bonus rooms and flooring upgrades, for the three months ended September 30, 2004 when compared to the three months ended September 30, 2003. In addition, a change in the product mix of homes delivered during the three months ended September 30, 2004 compared to the three months ended September 30, 2003 contributed to the increase in the average price per home delivered. Specifically, the Company delivered a larger percentage of luxury and move-up homes during the three months ended September 30, 2004 than during the three months ended September 30, 2003.

Florida Region: In spite of a series of hurricanes that struck the Florida region in September 2004, residential revenue earned for the three months ended September 30, 2004 increased $3,456,000 to $14,403,000, or 31.6% on 89 homes, compared to $10,947,000 on 84 homes for the three months ended September 30, 2003. The increase was attributable to the fact that the Florida region’s results of operations were included in the Company’s results of operations for the entire three months ended September 30, 2004 compared to the comparable prior year period wherein the Company acquired Masterpiece Homes and entered the Florida region on July 28, 2003. Several homes that were scheduled for delivery in September 2004 were delayed due to poor weather conditions resulting from a series of hurricanes that struck the Florida region in September. These delays negatively impacted residential revenue for the three months ended September 30, 2004 and were primarily customer-related. Specifically, several customers were temporarily unable to obtain the necessary homeowners insurance due to the insurance industry’s regional practice of suspending its issuance of homeowners insurance policies in the days prior to and immediately following a hurricane.

The average selling price per home delivered increased by 24.6% to $162,000 for the three months ended September 30, 2004 compared to $130,000 for the three months ended September 30, 2003. The increase in the average selling price per home delivered is attributable to a change in product mix toward more homes for move-up buyers as well as increases in the average price per home of new orders in fiscal 2004.

Midwestern Region: The Company entered the midwestern region on July 28, 2004 through the acquisition of Realen Homes. For the three months ended September 30, 2004, the Midwestern region accounted for $16,178,000 in residential revenue earned on 45 homes at an average selling price per home delivered of $360,000.

-18-

Back to Contents

Costs and Expenses

Costs and expenses for the three months ended September 30, 2004 increased $38,643,000 to $126,685,000, or 43.9%, compared with the three months ended September 30, 2003. The cost of residential properties for the three months ended September 30, 2004 increased $34,782,000 to $109,591,000, or 46.5%, when compared with the three months ended September 30, 2003. The increase in cost of residential properties was primarily attributable to increased residential revenue in the Company’s northern, southern, and Florida regions as noted above as well as the increase in residential revenue resulting from the Company’s acquisition of Realen Homes. The consolidated gross profit margin for the three months ended September 30, 2004 decreased 3.2% to 20.8% compared to 24.0% for the three months ended September 30, 2003. The decrease in the consolidated gross profit margin was attributable to the following factors. The gross profit margin is affected when the acquired Realen Homes’ inventory is delivered because the value of the acquired Realen Homes’ inventory was increased to its fair market value as a result of the application of purchase accounting under SFAS 141. The additional costs recognized in connection with the first quarter deliveries of the acquired Realen Homes inventory as a result of the fair market value write-up of the acquired inventory was approximately $1,676,000 for the three months ended September 30, 2004. The additional costs recognized in connection with the amortization of the intangible value of the acquired Realen Homes backlog delivered during the three months ended September 30, 2004 was approximately $103,000. The northern region, which has significantly higher gross profit margins than the other regions in which the Company operates, comprised a smaller percentage of the consolidated residential properties revenue for the three months ended September 30, 2004 than for the three months ended September 30, 2003. Finally, overall raw material costs, particularly lumber and concrete, have increased during the three months ended September 30, 2004 when compared to the three months ended September 30, 2003.

The Company sells a variety of home types in various communities and regions, each yielding a different gross profit margin. As a result, depending on the mix of both communities and of home types delivered, the consolidated gross profit margin may fluctuate up or down on a periodic basis and periodic profit margins may not be representative of the consolidated gross profit margin for the year.

Interest included in the costs and expenses of residential properties and land sold for the three months ended September 30, 2004 and September 30, 2003 was $1,272,000 and $1,671,000, respectively. The decrease in the interest included in the costs and expenses of residential properties and land sold despite the overall increase in the cost of residential properties is attributable to continuing low interest rates during the construction periods for both the site improvements and the homes. The interest incurred during the construction periods is expensed to the cost of residential properties in the period in which the unit settles.

-19-

Back to Contents

For the three months ended September 30, 2004, selling, general and administrative expenses increased $4,647,000 to $16,095,000, or 40.6%, when compared with the three months ended September 30, 2003. The increase in selling, general and administrative expenses was due to an increase in Florida region expenses of $1,277,000 which resulted from the fact that the Florida region’s results of operations were included in the Company’s results of operations for the entire three months ended September 30, 2004 compared to the comparable prior year period wherein the Company acquired Masterpiece Homes and entered the Florida region on July 28, 2003. Additionally, the Company incurred $2,410,000 in selling, general and administrative expenses resulting from the Company’s expansion in the northern region and its expansion into the midwestern region through the acquisition of Realen Homes on July 28, 2004. The remaining increase in selling, general and administrative expenses was primarily attributable to increases in general and administrative payroll, incentive compensation and travel expenses. These increases are a result of the Company’s continued expansion into new regions.

The selling, general and administrative expenses as a percentage of residential revenue earned for the three months ended September 30, 2004 of 11.6% remained unchanged from the selling, general and administrative expenses as a percentage of residential revenue earned for the three months ended September 30, 2003.

Income Tax Expense

Income tax expense for the three months ended September 30, 2004 increased $400,000 to $5,275,000, or 8.2% from $4,875,000 for the three months ended September 30, 2003. The increase in income tax expense for the three months ended September 30, 2004 is attributable to an increase in income from operations.

Additionally, income tax expense as a percentage of income from operations before income taxes was 39.1% and 39.3% for the three months ended September 30, 2004 and 2003, respectively. The slight decrease in the effective tax rate is due to an increase in net income from operations before income taxes in the Florida region as a percentage of the consolidated income from operations before income taxes for the three months ended September 30, 2004 when compared to the three months ended September 30, 2003 as Florida has a lower state tax rate than a majority of the states in which the Company operates.

Net Income

Net income for the three months ended September 30, 2004 increased $684,000, or 9.1%, to $8,202,000, compared with $7,518,000 for the three months ended September 30, 2003. This increase in net income was attributable to an increase in residential revenue earned primarily as a result of favorable conditions in the homebuilding industry, resulting in strong customer demand and positive home pricing trends. The Company believes the primary factors resulting in favorable conditions in the homebuilding industry include: the strong demand for new homes as a result of an increase in immigration and new household formation; historically low interest rates which enhance the affordability of homes; and the limited supply of entitled lots for residential housing due to increased governmental regulation, which increases the value of lots already owned by the Company.

-20-

Back to Contents

The increase in net income for the three months ended September 30, 2004 was reduced by approximately $1,083,000 due to the additional costs recognized in connection with the first quarter deliveries of the acquired Realen Homes inventory, as a result of the fair market value write-up of the acquired inventory and backlog. This was partially offset by the recognition of approximately $765,000 of net income that was previously deferred pending the resolution of outstanding issues associated with one of the Company’s closed communities.

Liquidity and Capital Resources

On an ongoing basis, the Company requires capital to purchase and develop land, to construct units, to fund related carrying costs and overhead and to fund various advertising and marketing programs to facilitate sales. These expenditures include site preparation, roads, water and sewer lines, impact fees and earthwork, as well as the construction costs of the homes and amenities. The Company’s additional sources of capital include funds derived from operations, sales of assets and various borrowings, most of which are secured.

At September 30, 2004, the Company had approximately $190,623,000 available under existing secured and unsecured revolving and construction loans for planned development expenditures. A majority of the Company’s debt is variable rate, based on 30-day LIBOR or the prime rate, and therefore, the Company is exposed to market risk in connection with interest rate changes. At September 30, 2004, the 30-day LIBOR and prime rates of interest were 1.84% and 4.75%, respectively.

Generally, the Company has historically financed its development and construction activities on a community-by community basis so that, for each community the Company builds, it has a separate credit facility. Accordingly, the Company has numerous credit facilities. While the loan agreements relating to these facilities contain certain covenants, they generally contain few, if any, material financial covenants. Typically, the Company’s loan agreements contain covenants requiring it to:

•

obtain agreements of sale for a specified number of homes within a specified time period, with the number of homes and time period varying by community;


	•	not distribute dividends greater than 5% of each year’s net income;


	•	not permit a change in control of the Company or of any subsidiary that is a party to the applicable loan agreement;


	•	complete any construction which is the subject of the loan agreement without significant delay and in accordance with the previously submitted construction plans;


	•	notify the lender, in writing, immediately if the Company receives a claim of lien with respect to any services, labor, or material furnished in connection with applicable construction, and to remove any such lien within 10 days after the date the lien was filed;


	•	maintain certain minimum levels of insurance;

-21-

Back to Contents

•

when requested by lender, provide inventory status reports and financial statements and other inventory and financial information reasonably requested by lender;


	•	furnish the lender with copies of all notices received by the Company claiming any breach or potential breach of any contracts related to the construction, claiming or asserting a right to a lien for work performed or materials provided in connection with construction, or from any governmental authority asserting that the land or construction which is the subject of the loan agreements may or does violate any law or regulations;


	•	not enter into leases affecting the land or the construction which is the subject of the applicable loan documents without the prior written consent of the lender;


	•	not obtain subordinate financing on the land, construction or other property granted as security under applicable loan documents without the prior approval of the lender; and


	•	not sell or otherwise dispose of any of the land or the construction which is the subject of the applicable loan documents.

On July 28, 2004, pursuant to a Purchase Agreement of the same date, the Company completed its acquisition of all of the issued and outstanding partnership interests in Realen Homes, a Pennsylvania limited partnership. The terms of the Purchase Agreement are as follows: (i) $53,348,000 in cash delivered at closing, (ii) a promissory note of the Company in the aggregate principal amount of $5 million, payable over a period of up to two years, with an interest rate of 3% per year and (iii) a warranty holdback of $1.5 million retained by the Company to be applied toward the administration of any warranty claims made against Realen Homes. To finance the acquisition of Realen Homes, refinance certain outstanding indebtedness of Realen Homes and provide the Company with short-term liquidity for land purchases and residential development and construction site improvements, the Company obtained a $120,000,000 unsecured bridge loan. The unsecured bridge loan has a maturity date of November 30, 2004. Interest is payable monthly at 30-day LIBOR plus 225 basis points on the portion of the outstanding principal balance that does not exceed $60,000,000 and 30-day LIBOR plus 250 basis points on the portion of the outstanding principal balance that exceeds $60,000,000.

The Company anticipates replacing its community-by-community financing and its unsecured bridge loan with a $500,000,000 secured revolving loan facility that is expandable to $650,000,000 and contains a $100,000,000 letter of credit sublimit. The Company expects to have the new secured revolving loan facility in place by the November 30, 2004, although the Company cannot offer any assurance that it will be able to do so. The secured revolving loan facility would replace the $120,000,000 unsecured bridge loan described above and would be the primary source of financing for land acquisitions, land development, home construction, acquisitions, and working capital. The secured revolving loan facility will require the Company to adhere to a series of covenants including covenants pertaining to the financial position of the Company.

-22-

Back to Contents

Net cash used in operating activities for the three months ended September 30, 2004 was $80,009,000, compared to net cash used by operating activities for the prior fiscal year period of $14,429,000. The increase in net cash used in operating activities during the three months ended September 30, 2004 was primarily attributable to the acquisition of undeveloped land and improved building lots that will yield approximately 1,810 building lots with an aggregate purchase price of approximately $62,673,000. The remaining increase in net cash used in operating activities was attributable to increases in land deposits and costs of future development and customer deposits as well as decreases in receivables, deferred charges and other assets, and accounts payable and other liabilities partially offset by an increase in net income when compared with the prior fiscal year period. Net cash used in investing activities for the three months ended September 30, 2004 was $57,043,000, compared to $4,989,000 for the prior fiscal year period. This increase was primarily related to the acquisition of Realen Homes on July 28, 2004. Net cash provided by financing activities for the three months ended September 30, 2004 was $119,581,000, compared to $19,758,000 for the prior fiscal year period. The increase in net cash provided by financing activities is primarily attributable to $53,348,000 borrowed under a $120,000,000 unsecured bridge loan to finance the acquisition of Realen Homes and an increase in financing to support the acquisition of undeveloped land and improved building lots as noted above.

Lot Positions

As of September 30, 2004, the Company owned or controlled approximately 15,930 building lots. Included in the aforementioned lots, the Company had contracted to purchase, or has under option, undeveloped land and improved building lots for an aggregate purchase price of approximately $521,972,000 that are expected to yield approximately 9,158 building lots.

Undeveloped Land Acquisitions

In recent years, the process of acquiring desirable undeveloped land has become extremely competitive, particularly in the northern region, mostly due to the lack of available parcels suitable for development. In addition, expansion of regulation in the housing industry has increased the time it takes to acquire undeveloped land with all of the necessary governmental approvals required to begin construction. Generally, the Company structures its land acquisitions so that it has the right to cancel its agreements to purchase undeveloped land by forfeiture of its deposit under the agreement. For the three months ended September 30, 2004, the Company did not forfeit any land deposits related to the cancellation of purchase agreements. Included in the balance sheet captions “Inventory not owned — Variable Interest Entities” and “Land deposits and costs of future development,” at September 30, 2004 the Company had $23,617,000 invested in 58 parcels of undeveloped land, of which $13,919,000 is deposits, a portion of which is non-refundable. These undeveloped parcels of land have an aggregate purchase price of approximately $381,862,000 and are expected to yield approximately 7,421 building lots.

-23-

Back to Contents

The Company attempts to further mitigate the risks involved in acquiring undeveloped land by structuring its undeveloped land acquisitions so that the deposits required under the agreements coincide with certain benchmarks in the governmental approval process, thereby limiting the amount at risk. This process allows the Company to periodically review the approval process and make a decision on the viability of developing the acquired parcel based upon expected profitability. In some circumstances the Company may be required to make deposits solely due to the passage of time. This structure still provides the Company an opportunity to periodically review the viability of developing the parcel of land. In addition, the Company primarily structures its agreements to purchase undeveloped land to be contingent upon obtaining all governmental approvals necessary for construction. Under most agreements, the Company secures the responsibility for obtaining the required governmental approvals as the Company believes that it has significant expertise in this area. The Company intends to complete the acquisition of undeveloped land after all governmental approvals are in place. In certain circumstances, however, when all extensions have been exhausted, the Company must make a decision on whether to proceed with the purchase even though all governmental approvals have not yet been received. In these circumstances, the Company performs reasonable due diligence to ascertain the likelihood that the necessary governmental approvals will be granted. At September 30, 2004, the Company owned one parcel that is expected to yield 646 building lots for which preliminary governmental approval for the construction of homes has not been obtained. The $10,370,000 invested in the parcel, of which $9,263,000 pertains to land and $1,107,000 pertains to site improvements, is included in the balance sheet caption “Land deposits and costs of future development,” at September 30, 2004.

Improved Lot Acquisitions

The process of acquiring improved building lots from developers is extremely competitive. The Company competes with many national homebuilders to acquire improved building lots, some of which have greater financial resources than the Company. The acquisition of improved lots is usually less risky than the acquisition of undeveloped land as the contingencies and risks involved in the land development process are borne by the developer. In addition, governmental approvals are generally in place when the improved building lots are acquired.

At September 30, 2004, the Company had contracted to purchase or had under option approximately 1,737 improved building lots for an aggregate purchase price of approximately $140,110,000, including $6,159,000 of deposits.

The Company expects to utilize primarily the new secured revolving credit facility that it is currently being negotiating as described above as well as existing capital resources, to finance the acquisitions of undeveloped land and improved lots described above. Contingent on the aforementioned, the Company anticipates completing a majority of these acquisitions during the next several years.

-24-

Back to Contents

Critical Accounting Policies

For a discussion the Company’s critical accounting policies, see “Critical Accounting Policies” under Item 7 of the Company’s Annual Report on Form 10-K for fiscal year ended June 30, 2004 filed with the Securities and Exchange Commission.

Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46 “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46”). The FASB issued a revised FIN 46 in December 2003 which modifies and clarifies various aspects of the original interpretations. A Variable Interest Entity (“VIE”) is created when (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a VIE, pursuant to FIN 46, an enterprise that absorbs a majority of the expected losses of the VIE is considered the primary beneficiary and must consolidate the VIE. For VIEs created before January 31, 2003, FIN 46 was deferred to the end of the first interim or annual period ending after March 15, 2004. The Company fully adopted FIN 46 effective March 31, 2004.

Based on the provisions of FIN 46, the Company has concluded that whenever it enters into an option agreement to acquire land or lots from an entity and pays a significant deposit that is not unconditionally refundable, a VIE is created under condition (ii) (b) of the previous paragraph. The Company has been deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an entity’s expected theoretical losses if they occur. For each VIE created the Company will compute expected losses and residual returns based on the probability of future cash flows as outlined in FIN 46. If the Company is deemed to be the primary beneficiary of the VIE it will consolidate the VIE on its balance sheet. The fair value of the VIEs inventory will be reported as “Inventory Not Owned — Variable Interest Entities.”

At September 30, 2004, the Company consolidated twenty-three VIEs as a result of its option to purchase land or lots from the selling entities. The Company paid cash or issued letters of credit deposits to these twenty-three VIEs totaling $9,121,000 and incurred additional pre-acquisition costs totaling $2,096,000. The Company’s deposits and any costs incurred prior to acquisition of the land or lots, represent our maximum exposure to loss. The fair value of the VIEs inventory will be reported as “Inventory Not Owned — Variable Interest Entities.” The Company recorded $107,025,000 in Inventory Not Owned — Variable Interest Entities as of September 30, 2004. The fair value of the property to be acquired less cash deposits and pre-acquisition costs, which totaled $97,491,000 at September 30, 2004, was reported on the balance sheet as Obligations related to inventory not owned. Creditors, if any, of these VIEs have no recourse against the Company.

-25-

Back to Contents

The Company will continue to secure land and lots using options. Including the deposits and other costs capitalized in connection with the VIEs above, the Company had total costs incurred to acquire land and lots at September 30, 2004 of approximately $29,909,000, including $20,078,000 of cash deposits. The total purchase price under these cancelable contracts or options is approximately $521,972,000. The maximum exposure to loss is limited to the deposits, although some deposits are refundable, and costs incurred prior to the acquisition of the land or lots.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 “Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity” (“SFAS No. 150”). This standard requires issuers to classify as liabilities the following three types of freestanding financial instruments: (1) mandatory redeemable financial instruments, (2) obligations to repurchase the issuer’s equity shares by transferring assets; and (3) certain obligations to issue a variable number of shares. The Company adopted SFAS No. 150 effective July 1, 2003. The adoption of SFAS No. 150 did not have a material impact on the financial position or results of operations of the Company.

In December 2003, the SEC issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition” which supersedes SAB 101, “Revenue Recognition in Financial Statements.” SAB 104’s primary purpose is to rescind the accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21. The Company adopted the provisions of this statement immediately, as required, and it did not have a significant impact on the Company’s Consolidated Financial Statements.

EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” issued during the third quarter of 2003, provides guidance on revenue recognition for revenues derived from a single contract that contain multiple products or services. EITF 00-21 also provides additional requirements to determine when these revenues may be recorded separately for accounting purposes. The Company adopted EITF 00-21 on July 1, 2003, as required, and it did not have a significant impact on the Company’s Consolidated Financial Statements.

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

In addition to historical information, this report contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the Safe Harbor provisions created by statute. Generally words such as “may”, “will”, “should”, “could”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, and “believe” or the negative of or other variation on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this report. The Company does not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

-26-

Back to Contents

Forward-looking statements are based on current expectations and involve risks and uncertainties and the Company’s future results could differ significantly from those expressed or implied by the Company’s forward-looking statements.

Many factors, including those listed below, could cause the Company’s actual consolidated results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company:

•

Future increases in interest rates or a decrease in the availability of mortgage financing could lead to fewer home sales, which could adversely affect the Company’s total earned revenues and earnings.


	•	Changes in consumer confidence due to perceived uncertainty of future employment opportunities or other factors could lead to fewer home sales by the Company.


	•	The Company is subject to substantial risks with respect to the land and home inventories it maintains and fluctuations in market conditions may affect the Company’s ability to sell its land and home inventories at expected prices, if at all, which could reduce the Company’s total earned revenues and earnings.


	•	The Company’s business is subject to governmental regulations that may delay, increase the cost of, prohibit or severely restrict the Company’s development and homebuilding projects and reduce its total earned revenues and growth.


	•	States, cities and counties in which the Company operates have adopted, or may adopt, slow or no growth initiatives which would reduce the Company’s ability to build and sell homes in these areas and could adversely affect the Company’s total earned revenues and earnings.


	•	The Company may not be successful in its effort to identify, complete or integrate acquisitions, which could disrupt the activities of the Company’s current business and adversely affect the Company’s results of operations and future growth.


	•	The Company is dependent on the services of certain key employees and the loss of their services could harm the Company’s business.


	•	The Company may not be able to acquire suitable land at reasonable prices, which could result in cost increases the Company is unable to recover and reduce the Company’s total earned revenues and earnings.


	•	The Company’s significant level of debt could adversely affect its financial condition and prevent it from fulfilling its debt service obligations.

-27-

Back to Contents

•

The competitive conditions in the homebuilding industry could increase the Company’s costs, reduce its total earned revenues and earnings and otherwise adversely affect its results of operations or limit its growth.


	•	The Company may need additional financing to fund its operations or to expand its business, and if the Company is unable to obtain sufficient financing or such financing is obtained on adverse terms, the Company may not be able to operate or expand its business as planned, which could adversely affect the Company’s results of operations and future growth.


	•	Shortages of labor or materials and increases in the price of materials can harm the Company’s business by delaying construction, increasing costs, or both.


	•	The Company depends on the continued availability and satisfactory performance of its our subcontractors which, if unavailable, could have a material adverse effect on the Company’s business by limiting its ability to build and deliver homes.


	•	The Company is subject to construction defect, product liability and warranty claims arising in the ordinary course of business that could adversely affect its results of operations.


	•	The Company is subject to mold litigation and mold claims arising in the ordinary course of business for which the Company has no insurance that could adversely affect the Company’s results of operations.


	•	The Company’s business, total earned revenues and earnings may be adversely affected by natural disasters or adverse weather conditions.


	•	The Company may be subject to environmental liabilities that could adversely affect its results of operations or the value of its properties.


	•	Increases in taxes or government fees could increase the Company’s costs and adverse changes in tax laws could reduce customer demand for the Company’s homes, either of which could reduce the Company’s total earned revenues or profitability.


	•	There are a number of laws, regulations and accounting pronouncements, recently adopted or proposed, that could affect the Company’s corporate governance or accounting practices.


	•	Acts of war or terrorism may seriously harm the Company’s business.


	•	Jeffrey P. Orleans, Chairman and Chief Executive Officer and the Company’s majority shareholder, can cause the Company to take certain actions or preclude the Company from taking actions without the approval of the other shareholders and may have interests that could conflict with the interests of other shareholders.


	•	The Company has entered into several transactions with related parties, including entities controlled by Mr. Jeffrey P. Orleans, which may create conflicts of interest.

-28-

Back to Contents

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of the Company, due to adverse changes in financial and commodity market prices and interest rates. The Company’s principal market risk exposure continues to be interest rate risk. A majority of the Company’s debt is variable based on LIBOR or the prime rate, and, therefore, affected by changes in market interest rates. Based on current operations, an increase or decrease in interest rates of 100 basis points will result in a corresponding increase or decrease in cost of sales and interest charges incurred by the Company of approximately $3,100,000 in a fiscal year, a portion of which will be capitalized and included in cost of sales as homes are delivered. The Company believes that reasonably possible near-term interest rate changes will not result in a material negative effect on future earnings, fair values or cash flows of the Company. Generally, the Company has been able to recover any increased costs of borrowing through increased selling prices; however, there is no assurance the Company will be able to continue to increase selling prices to cover the effects of any increase in near-term interest rates.

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

Item 6.	Exhibits.

(a)	Exhibits.

	31.1*	Certification of Jeffrey P. Orleans pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

	31.3*	Certification of Joseph A. Santangelo pursuant to Section 302 Sarbanes-Oxley Act of 2002.

	32.1*	Certification of Jeffrey P. Orleans pursuant to Section 906 Sarbanes-Oxley Act of 2002.

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

	32.3*	Certification of Joseph A. Santangelo pursuant to Section 906 Sarbanes-Oxley Act of 2002.

		ORLEANS HOMEBUILDERS, INC. (Registrant)

	November 12, 2004	Michael T. Vesey Michael T. Vesey President and Chief Operating Officer

	November 12, 2004	Joseph A. Santangelo Joseph A. Santangelo Treasurer, Secretary and Chief Financial Officer

31.1	Certification of Jeffrey P. Orleans pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

31.3	Certification of Joseph A. Santangelo pursuant to Section 302 Sarbanes-Oxley Act of 2002.

32.1	Certification of Jeffrey P. Orleans pursuant to Section 906 Sarbanes-Oxley Act of 2002.

32.2	Certification of Michael T. Vesey pursuant to Section 906 Sarbanes-Oxley Act of 2002.

32.3	Certification of Joseph A. Santangelo pursuant to Section 906 Sarbanes-Oxley Act of 2002.