| ORLEANS HOMEBUILDERS INC Item 1A Risk Factors |
| 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 including, without limitation, statements with respect to potential liabilities relating to litigation currently pending against us, anticipated future dividends, anticipated delivery of homes in backlog, expected warranty costs, future land acquisitions and the availability of sufficient capital for us to meet our operating needs are made only as of the date of this report |
| We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise |
| 13 ______________________________________________________________________ [71]Back to Contents Forward-looking statements are based on current expectations and involve risks and uncertainties and our future results could differ significantly from those expressed or implied by our forward-looking statements |
| Many factors, including those listed below, could cause our actual consolidated results to differ materially from those expressed in any of our forward-looking statements: The competitive conditions in the homebuilding industry could increase our costs, reduce our total earned revenues and earnings and otherwise adversely affect our results of operations or limit our growth |
| The homebuilding industry is highly competitive and fragmented |
| We compete in each of our markets with a number of national, regional and local builders for customers, undeveloped land and homesites, raw materials and labor |
| Some of our competitors have greater financial resources, more established market positions and better opportunities for land and homesite acquisitions than we do and have lower costs of capital, labor and material than us |
| The competitive conditions in the homebuilding industry could, among other things: • make it difficult for us to acquire suitable land or homesites at acceptable prices and terms which could adversely affect our ability to build homes; • require us to increase selling commissions and other incentives which could reduce our profit margins; • result in delays in construction if we experience a delay in procuring materials or hiring trades people or laborers; • result in lower sales volume and total earned revenues; and • increase our costs and reduce our earnings |
| We also compete with resales of existing homes, available rental housing and, to a lesser extent, condominium resales |
| An oversupply of competitively priced resale or rental homes in the markets in which we operate could adversely affect our ability to sell homes profitably |
| Future increases in interest rates, a decrease in the availability of mortgage financing and other economic factors outside our control, such as consumer confidence and declines in employment levels, could lead to fewer home sales, which could adversely affect our total earned revenues and earnings |
| 14 ______________________________________________________________________ [72]Back to Contents The large majority of our customers finance their purchases through mortgage financing obtained through us or other sources and our business and earnings, therefore, depend on the ability of our customers to obtain mortgages for their home purchases |
| While mortgage interest rates remain very low when viewed in an historical context, they have recently increased and contributed to the challenging market conditions faced by us and the housing industry |
| Further increases in mortgage interest rates or decreases in the availability of mortgage financing could cause additional declines in the market for our homes as potential homebuyers may not be able to obtain affordable financing |
| In particular, because the availability of mortgage financing is an important factor in marketing many of our homes, any limitations or restrictions on the availability of mortgage financing or increases in mortgage interest rates could reduce our home sales, the lending volume at our mortgage brokerage subsidiary and our total earned revenues, earnings and future backlog |
| Even if our potential customers do not need financing, changes in interest rates and mortgage availability could make it harder for them to sell their existing homes to potential buyers who need financing |
| In addition, there have been discussions of possible changes in the federal income tax laws which would remove or limit the deduction for home mortgage interest |
| Any limitations or restrictions on the availability of mortgage financing, further interest rate increases or limits on the deductibility of home mortgages could adversely affect our sales, which would reduce our revenues |
| The homebuilding industry historically has been cyclical and, in addition to increases in interest rates, has been affected significantly by adverse changes in general and local economic conditions such as employment levels and job growth, consumer confidence and income and housing demand |
| Sales of new homes are also affected by the supply of alternatives to new homes, such as rental properties and used homes, including foreclosed homes |
| Recent changes in these economic variables have had an adverse affect on consumer demand for, and the pricing of, our homes, causing our sales and revenues to decline and future changes could have further adverse effects |
| We may need additional financing to fund our operations or to expand our business, and if we are unable to obtain sufficient financing or such financing is obtained on adverse terms, we may not be able to operate or expand our business as planned, which could adversely affect our results of operations and future growth |
| Our operations require significant amounts of cash |
| If our business does not achieve the levels of profitability or generate the amount of cash that we anticipate or if we expand through acquisitions or organic growth faster than anticipated, we may need to seek additional debt or equity financing to operate and expand our business |
| If we are unable to obtain sufficient financing to fund our operations or expansion, it could adversely affect our results of operations and future growth |
| Our significant level of debt could make it more difficult for us to obtain additional debt financing in the future |
| We may be unable to obtain additional financing on satisfactory terms or at all |
| If we raise additional funds by incurring additional debt, we will incur increased debt service costs and may become subject to restrictive financial and other covenants which could limit our ability to operate our business as we desire |
| Also, increases in interest rates can make it more difficult and expensive for us to obtain the funds we need to operate our business |
| 15 ______________________________________________________________________ [73]Back to Contents The financing agreements governing our debt contain various covenants that limit our discretion in the operation of our business and could lead to acceleration of debt |
| Our senior secured revolving credit facility contains financial and other restrictive covenants and requirements that limit our ability to engage in certain activities |
| For example, we are subject to covenants requiring us to maintain a minimum consolidated tangible net worth and minimum leverage ratios and there are various financial covenants with respect to the value of land in certain stages of development that we may own and limits on the number of units which are not subject to a bona-fide agreement of sale that may be in our inventory |
| In addition, the agreements and instruments governing our other debt, such as our trust preferred securities, contain other covenants and requirements |
| Failure to comply with any of the covenants or requirements in our existing or future financing agreements or instruments could result in an event of default under those agreements or instruments |
| Our senior secured revolving credit facility also contains a cross-default provision so that a default under the agreements or instruments governing our other debt could cause a default under our senior secured revolving credit facility |
| Further, a default under our senior secured revolving credit facility could prevent us from making payments required by our trust preferred securities |
| If not cured, a payment default of other event of default could result in the acceleration of all or most of our debt and permit lenders to foreclose upon any collateral securing that debt |
| In addition, lenders may be able to terminate any commitments they made to supply us with further funds |
| Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations |
| The limitations imposed by our financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing |
| We cannot assure you that we will be able to obtain waivers or amendments of the covenants in our financing agreements and instruments, if necessary, upon acceptable terms or at all |
| We may not be able to acquire suitable land at reasonable prices, which could result in cost increases we are unable to recover and reduce our total earned revenues and earnings |
| We have experienced an increase in competition for available land and developed homesites in some of our markets as a result of a reduced availability of suitable parcels of land and developed homesites in these markets |
| Our ability to continue our homebuilding activities over the long-term depends upon our ability to locate and acquire suitable parcels of land or developed homesites to support our homebuilding operations |
| As competition for land increases, the cost of acquiring it may rise and the availability of suitable parcels at acceptable prices may decline |
| If we are unable to acquire suitable land or developed homesites at reasonable prices, it could limit our ability to develop new communities or result in increased land costs that we may not be able to pass through to our customers |
| Consequently, this competition could reduce the number of homes we sell or our profit margins and lead to a decrease in our total earned revenues and earnings |
| 16 ______________________________________________________________________ [74]Back to Contents To service our indebtedness, we will require a significant amount of cash |
| Our ability to generate cash depends on many factors beyond our control |
| Our ability to make payments on and to refinance our indebtedness and to acquire land will depend on our ability to generate cash in the future |
| This, to a certain extent, is subject to general economic, competitive, legislative, regulatory and other factors that are beyond our control |
| We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs |
| We may need to refinance all or a portion of our indebtedness on or before the maturity thereof or incur additional debt |
| We cannot assure you that we will be able to refinance any of our indebtedness, including our senior secured revolving credit facility on commercially reasonable terms or at all |
| We are subject to substantial risks with respect to the land and home inventories we maintain and fluctuations in market conditions may affect our ability to sell our land and home inventories at expected prices, if at all, which could reduce our total earned revenues and earnings |
| As a homebuilder, we must constantly locate and acquire new tracts of land for development and developed homesites to support our homebuilding operations |
| There is a lag between the time we acquire land for development or developed homesites and the time that we can bring the communities built on the acquired land to market and deliver homes |
| As a result, we face the risk that demand for housing may decline during this period (as has occurred recently) and that we will not be able to dispose of developed properties or undeveloped land or homesites acquired for development at expected prices or within anticipated time frames or at all |
| The market value of home inventories, undeveloped land and developed homesites can fluctuate significantly because of changing market conditions |
| In addition, inventory carrying costs (including interest on funds used to acquire land or build homes) can be significant and can adversely affect our performance |
| Because of these factors, we may be forced to sell homes, land or lots at a loss or for prices that generate lower profit than we anticipate |
| We may also be required to make material write-downs of the book value of our real estate assets in accordance with generally accepted accounting principles if values decline as we have recently done |
| We are subject construction defect, product liability and warranty claims arising in the ordinary course of business that could adversely affect our results of operations |
| As a homebuilder, we are subject in the ordinary course of our business to construction defect, product liability and home warranty claims |
| We generally provide our homebuyers with a one to two year limited warranty covering workmanship and materials and a ten year limited warranty covering major structural defects |
| Claims arising under these warranties and construction defect and general product liability claims are common in the homebuilding industry and can be costly |
| Although we maintain construction defect and product liability insurance, the coverage offered by, and availability of, this insurance is currently limited and, where coverage is available, it may be costly |
| As a result of increasing insurance costs and an analysis of our claims history, we, in certain regions, self insure the first dlra2 million of each construction defect and product liability claim, whereas until February 2004 these claims were fully insured by third party insurers, subject to applicable policy limits and exclusions |
| Our product liability insurance and homebuilder protective policies contain limitations with respect to coverage, and these insurance rights may not be adequate to cover all construction defect, product liability and warranty claims for which we may be liable |
| In addition, although we generally seek to require our subcontractors and design professionals to indemnify us for liabilities arising from their work, we may be unable to enforce any such contractual indemnities |
| Uninsured and unindemnified construction defect, product liability and warranty claims, as well as the cost of product liability insurance and our homebuilder protective policy, could adversely affect our results of operations and profitability |
| 17 ______________________________________________________________________ [75]Back to Contents We may be subject to mold litigation and mold claims arising in the ordinary course of business for which we have no insurance that could adversely affect our results of operations |
| Lawsuits have been filed against homebuilders and insurers asserting claims of property damage and personal injury caused by the presence of mold in homes |
| Some of these lawsuits have resulted in substantial monetary judgments or settlements against homebuilders and their insurers |
| While we are not currently subject to any claims relating to mold, we may in the future be subject to litigation asserting claims of property damage and personal injury relating to mold |
| Our insurance carriers have excluded coverage for claims arising from the presence of mold and we have not set aside any funds to pay for potential damages relating to mold claims |
| Uninsured mold liability and claims against us could adversely affect our results of operations and profitability |
| We may be subject to environmental liabilities that could adversely affect our results of operations or the value of our properties |
| Our operations are subject to a variety of environmental laws and regulations including those relating to discharges to air and water, storage and disposal of waste, disturbance of wetlands and clean up of contaminated soil or groundwater |
| Also, development and sale of real property creates a potential for environmental liability on our part as owner and developer, for our own acts as well as the acts of prior owners or operators |
| If we fail to comply with environmental requirements or regulated materials are discovered on, under or emanating from any of our current or former properties, we may be held liable for costs and liabilities relating to those materials |
| In addition, environmental hazards on parcels of land adjacent to any of our properties could also negatively impact the value of our properties or result in liabilities |
| Should a substantial environmental hazard be found on any of our properties or adjacent properties, our results of operations and the value of the contaminated property could be adversely affected |
| New requirements or more stringent enforcement of existing laws or regulations could also result in increased costs |
| 18 ______________________________________________________________________ [76]Back to Contents We are dependent on the services of certain key employees and the loss of their services could harm our business |
| Our success largely depends on the continuing services of certain key employees, including our Chairman and Chief Executive Officer, Jeffrey P Orleans, and our President and Chief Operating Officer, Michael T Vesey |
| Our continued success also depends on our ability to attract and retain qualified personnel |
| Orleans and Mr |
| Vesey each possess valuable industry knowledge, experience and leadership abilities that would be difficult in the short-term to replicate |
| The loss of these or other key employees could harm our operations and business plans |
| Shortages of labor or materials and increases in the price of materials can harm our business by delaying construction, increasing costs, or both |
| We and the homebuilding industry from time to time have experienced significant difficulties with respect to: • shortages of qualified trades people and other labor; • shortages of materials; and • increases in the cost of certain materials, including lumber, drywall and cement, which are significant components of home construction costs |
| These difficulties have in the past and likely will in the future cause unexpected short-term increases in construction costs and cause construction delays for us |
| We will not be able to recover unexpected increases in construction costs by raising our home prices because, typically, the price of each home is established at the time a customer executes a home sale contract |
| Furthermore, sustained increases in construction costs may, over time, erode our profit margins |
| We have historically been able to offset sustained increases in construction costs with increases in the prices of our homes and through operating efficiencies |
| However, in the future, pricing competition may restrict our ability to pass on any additional costs, and we may not be able to achieve sufficient operating efficiencies to maintain our current profit margins |
| 19 ______________________________________________________________________ [77]Back to Contents We depend on the continued availability and satisfactory performance of our subcontractors which, if unavailable, could have a material adverse effect on our business by limiting our ability to build and deliver homes |
| We conduct our construction operations only as a general contractor |
| Virtually all construction work is performed by unaffiliated third-party subcontractors |
| As a consequence, we depend on the continued availability of and satisfactory performance by these subcontractors for the construction of our homes |
| If these unaffiliated third-party subcontractors do not continue to be available and perform satisfactorily, our ability to build and deliver homes could be limited |
| This could lead to a reduction in our total earned revenues and earnings and have a material adverse effect on our business |
| Our business is subject to governmental regulations that may delay, increase the cost of, prohibit or severely restrict our development and homebuilding projects and reduce our total earned revenues and growth |
| We are subject to extensive and complex laws and regulations that affect the land development and homebuilding process, including laws and regulations related to zoning, permitted land uses, levels of density, building design, elevation of properties, water and waste disposal and use of open spaces |
| In addition, we and our subcontractors are subject to laws and regulations relating to worker health and safety |
| We also are subject to a variety of local, state and federal laws and regulations concerning the protection of health and the environment |
| In some of the markets in which we operate, we are required to pay environmental impact fees, use energy saving construction materials and give commitments to provide certain infrastructure such as roads and sewage systems |
| We must also obtain permits and approvals from local authorities to complete residential development or home construction |
| The laws and regulations under which we and our subcontractors operate, and our and their obligations to comply with them, may result in delays in construction and development, cause us to incur substantial compliance and other increased costs, and prohibit or severely restrict development and homebuilding activity in areas in which we operate |
| If we are unable to continue to develop communities and build and deliver homes as a result of these restrictions or if our compliance costs increase substantially, our total earned revenues and earnings may be reduced |
| States, cities and counties in which we operate have adopted, or may adopt, slow or no growth initiatives which would reduce our ability to build and sell homes in these areas and could adversely affect our total earned revenues and earnings |
| Several states, cities and counties in which we operate have approved, and others in which we operate may approve, various “slow growth” or “no growth” initiatives and other ballot measures that could reduce the amount of land and building opportunities within those localities |
| This could lead us to sell fewer homes and reduce our earnings |
| Approval of slow or no growth measures would reduce our ability to acquire land and to build and sell homes in the affected markets and create additional costs and administration requirements, which in turn could have an adverse effect on our total earned revenues and earnings |
| 20 ______________________________________________________________________ [78]Back to Contents Expansion of regulation in the housing industry has increased the time required to obtain the necessary approvals to begin construction and has prolonged the time between the initial acquisition of land or land options and the commencement and completion of construction |
| These delays can increase our costs, decrease our profitability and increase the risks associated with the land inventories we maintain |
| Municipalities may restrict or place moratoriums on the availability of utilities, such as water and sewer taps |
| In some areas, municipalities may enact growth initiatives that would restrict the number of building permits available in a given year |
| If municipalities in which we operate take actions like these, it could have an adverse effect on our business by causing delays, increasing our costs or limiting our ability to build in those municipalities |
| Increases in taxes or government fees could increase our costs and adverse changes in tax laws could reduce customer demand for our homes, either of which could reduce our total earned revenues or profitability |
| Increases in real estate taxes and other local government fees, such as fees imposed on developers to fund schools, open space, road improvements, and /or low and moderate income housing, could increase our costs and have an adverse effect on our operations |
| In addition, increases in local real estate taxes could adversely affect our potential customers who may consider those costs in determining whether to make a new home purchase and decide, as a result, not to purchase one of our homes |
| In addition, any changes in the income tax laws that would reduce or eliminate tax incentives to homeowners could make housing less affordable or otherwise reduce the demand for housing, which in turn could reduce our total earned revenues and earnings |
| We may not be successful in our effort to identify, complete or integrate acquisitions or to enter new markets through start-up operations, which could disrupt the activities of our current business, adversely affect our results of operations and future growth or cause losses |
| A principal component of our business strategy is to continue to grow profitably, including, when appropriate, by acquiring other homebuilders |
| We may not be successful in implementing our acquisition strategy, and growth may not continue at historical levels or at all |
| When acquiring another company, we may have difficulty assimilating the operations of acquired businesses, incur unanticipated liabilities or expenses, and our management’s attention may be diverted from our current business |
| The acquisition of other companies may also result in our entering markets in which we have limited or no experience |
| The failure to identify or complete business acquisitions, or successfully integrate the businesses we acquire, could adversely affect our results of operations and future growth |
| In addition, our acquisitions may not be as profitable as we anticipate or could even produce losses |
| 21 ______________________________________________________________________ [79]Back to Contents Furthermore, we may choose to enter new markets or expand operations in existing markets by starting new operations, rather than by acquiring an existing homebuilding company |
| If we chose to expand through start-up operations, we would not have the advantage of the experience and brand recognition of an established homebuilding company |
| As a result, we may incur substantial start-up costs in establishing our operations in new markets, and we may not be successful in taking operations from the start-up phase to profitability |
| If we are not successful in making start-up operations profitable, we may not be able to recover our investment and may incur losses |
| Jeffrey P Orleans, Chairman and Chief Executive Officer and our majority shareholder, can cause us to take certain actions or preclude use from taking actions without the approval of the other shareholders and may have interests that could conflict with your interests |
| Jeffrey P Orleans, our Chairman and Chief Executive Officer, as of June 30, 2006, beneficially owned approximately 61prca of the voting power of our common stock |
| Orleans has the ability to control the outcome of virtually all corporate actions, including the election of all directors, the approval of any merger, the commencement of bankruptcy proceedings, and other significant corporate actions |
| His interest in exercising control over our business may conflict with the interests of other shareholders |
| This voting power might also discourage someone from acquiring us or from making a significant equity investment in us, even if we need the investment to meet our obligations and to operate our business |
| Our business, total earned revenues and earnings may be adversely affected by adverse weather conditions or natural disasters |
| Adverse weather conditions, such as extended periods of rain, snow or cold temperatures and natural disasters, such as hurricanes, tornadoes, floods and fires, can delay completion and sale of homes, damage partially complete or other unsold homes in our inventory and/or negatively impact the demand for homes or increase the cost of building homes |
| To the extent that adverse weather conditions occur for extended periods or natural disasters occur, our business and quarterly results may be adversely affected |
| Furthermore, our expansion into Florida could increase our exposure to losses resulting from hurricanes |
| To the extent our insurance is not adequate to cover business interruption losses or repair costs resulting from these events, our total earned revenues and earnings may be adversely affected |
| Acts of war, any outbreak or escalation of hostilities between the United States and any foreign power, including the armed conflict with Iraq, or acts of terrorism, may cause disruption to the economy, our company, our employees and our customers, which could reduce demand for our homes and adversely impact our total earned revenues and earnings |