Orleans Homebuilders, Inc. F4Q08 (Qtr End 06/30/08)Earnings Call Transcript

| About: Orleans Homebuilders (OHB)

Orleans Homebuilders, Inc. (OHB) F4Q08 Earnings Call October 2, 2008 10:00 AM ET


Jeffrey Orleans – Chairman, Chief Executive Officer

Michael Vessey – Chief Operating Officer

Gary Herdler – Executive Vice President, Chief Financial Officer


Carl Reichardt – Wachovia

Jim Wilson – JMP Securities

Alex Berron – Agency Trading Group


Welcome to the Orleans Homebuilders Inc. fourth quarter 2008 earnings conference call. (Operator Instructions)

Except for historical information statements made in this presentation are forward-looking statements involving significant risks and uncertainties. These risks and uncertainties including those related to the company's future results, levels of activity, liquidity, impact of appraisals, cash, future head count reductions, land expenditures, tax refunds, future impairments, anticipated debt repayment, income tax evaluation allowance, debt covenants, debt refinancing alternatives, discontinued operations, performance or achievements among other things are detailed in the company's filings with the Securities and Exchange Commission.

This presentation contains non-GAAP measures including earnings and other items adjusted to exclude certain amounts. These measures are commonly used to compare operating results between periods or companies but are not generally accepted accounting principals. Definitions and discussions of these measures can be found in our most recent earnings release for the fourth quarter of fiscal 2008, a copy of which is available under Investor Relations at www.orleanshomes.com.

I would now like to turn your call over to your host, Jeffrey Orleans, Chairman and CEO.

Jeffrey Orleans

Thank you for joining us today and welcome to our fourth quarter fiscal 2008 earnings call. Joining me this morning are Mike Vessey, our President and Chief Operating Officer and Gary Herdler, our Executive Vice President and Chief Financial Officer.

We'll start the presentation on Slide 4. We are all well aware that the housing market has continued its downturn and conditions do remain difficult. Predicting when the market will get better, an interesting debate, and it really depends on consumer confidence. The economy is fragile. The capital markets are a mess. Oil prices are high. There is no apparent political leadership, and the news media loves the turmoil.

The mortgage business is also a concern, but the government take over of Fanny Mae and Freddie Mac was an important first step in correcting the problem. Our buyers generally have good credit scores, but fixed rate mortgages still have issues. Housing starts are at or below 50 year lows. We are certainly in the worst of times. However, all housing markets are not the same and inventory levels vary greatly. I actually believe that there is a pent up demand for new houses in some of the areas in which we build. In the past year, we at Orleans have made substantial progress. We have remained focused.

We are pleased to announce that we have just completed our amended credit facility. Five banks that otherwise would have matured in December 2008 have each extended their maturity to December 2009. We reduced the facility size by about 25% pro rata for all lenders. This was made possible due to the significant free cash flow we generated during fiscal '08.

We generated $174 million of net debt reduction in the last six quarters and $53 million of that were in the fourth quarter alone. The $120 million net debt reduction in fiscal 2008 was significantly higher than our internal projections as well as those provided to our banks in the summer of 2007. We expect our total cash flow to be less in fiscal '09 since we have also not included any asset sales in our projections.

Last year, as we said, we had significant asset sales and tax refunds. We believe the revised terms on our new banking facility will provide us with the necessary flexibility that we need. It certainly was an extremely difficult time to ask for an extension and an amendment. Therefore, I really want to thank our lenders and want them to know that we really do appreciate their support in these trying times. Gary will discuss the details of the banking facility in a few minutes.

We believe that our business is concentrated in markets that are more stable than others. We are in four regions and eight states. However, 90% of our backlog and 88% of our own lots are in Pennsylvania, New Jersey, North and South Carolina, Richmond, Virginia and Orange County, New York. The remaining 12% is divided between Chicago, Illinois and Orlando, Florida.

In this past year, we have really concentrated on reducing debt and improving our balance sheet. We have substantially reduced both our land and spec home inventory. We have improved our capital structure and have also increased our liquidity. Our communities are less capital intensive than most other home builders. We do not own golf courses. We do not build high rises, and we have minimal capital invested in large amenity projects. Our communities are typically smaller in size, but most important, they are in good locations.

We have continued to reduce our overhead and sales expenses. We had 90% head count reduction this past August. That is in addition to our 14% head count reduction in January. We have reduced head count by over 50% from the 2006 peak. We are constantly looking for ways to reduce all of our operating costs.

We do have a strong management team that has been able to reduce costs and successfully implement this hunker down plan, but I am an optimist at heart. The market will ultimately change and I have confidence that this team will be ready.

Turning to Slide 5, for the fiscal 2008 fourth quarter, our home building revenues were approximately $189 million compared with $203 million in the prior year. This represents a 7% decline in our year over year fourth quarter revenues.

For this period, new orders have decreased 28% to $114 million on 286 homes compared to $159 million on 328 homes in the prior year. The average price of our new orders decreased to approximately $400,000 due to the impact of sales incentives and shift in mix to more townhouses. In addition, we're actually selling smaller single family homes.

Our year over year order trends in the first fiscal quarter of 2009 have been weaker and we have not had the buyer traffic that we normally expect. However, that being said, it's important to note that our liquidity has remained at a relatively good level. Backlog at June 30 has decreased from the prior year to $238 million on 486 homes. This represents a 25% decrease compared to June 30, 2007. We expect back log in September 30 to decrease to approximately $200 million as new orders do remain slow.

We experienced a fiscal fourth quarter cancellation rate of 25% and a full fiscal year cancellation rate of 26%. These cancellation numbers are higher than our normal rates, but still we think compare favorably with other homebuilders.

Turning to Slide 6 – For the fiscal year 2008, our homebuilding revenues were $562 million compared to $647 million in fiscal 2007. This represents a 13% year over year decline in our revenues. New orders have decreased 24% in fiscal 2008 to $483 million on 1139 homes. This compares with $631 million on 1381 homes in the prior year. This represents an 18% decrease in terms of units.

There are factors that have contributed to the decline in new orders. We have reduced our active community account over the past year in all regions, and we currently have 91 communities compared with 100 communities last year. Generally we have reduced our spec inventory levels in all regions. We will, as we normally do, start more spec homes in the fall for delivery in the spring which is one of the reasons our fourth quarter is always our largest quarter.

Our year over year change in sales volume is quite favorable compared to most of the other builders. This is because we do build in more stable regions. We have actually accomplished a lot in this past year. We substantially reduced our debt, increased our liquidity and with the amendment to our credit facility, we are in a stronger position for this coming year.

This past December, we shed nine core assets to our portfolio optimization strategy which did generate cash proceeds of $69 million. That's $39 million from the actual sale of the land and $34 million in tax refunds that we have already received.

94% of the lots that we sold in December 2007 were in Florida, Chicago and Arizona. We exited Palm Bay and Palm Coast, both in Florida as well as Phoenix, Arizona. We also greatly reduced our exposure in Chicago and the Orlando area. We substantially reduced our overall lot count and we are focused on our core operating regions. We do not have any exposure in California, Arizona or Nevada.

Our operational philosophy is to be focused on the basics. We manage our business on a community by community, lot by lot basis. We have a very good sales and marketing team and we have introduced new product that is smaller and more valued and engineered.

Orleans has a 90 year history. We are very proud of that. I have personally been involved in the business over 40 years, and I have been through previous down turns. We know that the housing market will ultimately get better and we will have a lot of opportunity in the future.

Mike Vessey will now provide you with an overview of our regional operations. Gary Herdler will discuss financial performance and outlook and I will join Michael and Gary for questions and answers.

Michael Vessey

I'll start on Slide 9 – Residential Revenues for the Fiscal Fourth Quarter. Our residential revenues for the fiscal fourth quarter of 2008 were $189 million which is down nearly 7% from the fourth quarter of 2007. Regionally, the northern region had residential revenues of approximately $73 million in the fiscal fourth quarter which represents an increase of nearly $5 million, or 7% year over year.

This increase was driven predominantly by an increase in the number of units delivered which increased 15% over the prior year. The increase in units was partially offset by the decrease in the average sale price resulting from the increased incentives, particularly related to spec inventory as well as the change in mix to more town homes and smaller single family units. The northern region comprised nearly 40% of our total residential revenue for the quarter.

The southern region had residential revenues of approximately $86 million in the fourth quarter which represents a $5 million decrease or 5% from the prior year period. The number of units delivered was unchanged from last year so the decrease is entirely attributable to lower average selling prices due primarily to increased incentives. The southern region represents approximately 45% of the total revenues for the quarter.

The mid west region had residential revenues of approximately $24 million in the fourth quarter which represents a $9 million decrease or 27% year over year. The decrease is attributable to both the decrease in the number of units delivered and a decline in the average sales price. The mid west region was particularly impacted by pricing pressures resulting from economic softness as average selling prices dropped from $480,000 in the fourth quarter of 2007 to $380,000 in the current quarter.

The Florida region had residential revenues of approximately $6 million in fiscal fourth quarter of 2008 which represents a $5 million decrease or 45% year over year. The decrease was driven by a decrease in the number of units by 50% coupled by an offset in the increase in the average sale price. Those changes resulted in our exits from several under performing communities that generally had lower selling prices than our current active communities.

Slide 10 - to review the revenues for the full fiscal year. In total, revenues for fiscal year 2008 were $562 million which represents a 13% reduction in fiscal 2007 revenues of $647 million. The northern region had revenues of $231 million on 486 units for the year which represents 11.5% increase over the prior year. We generated additional deliveries during fiscal 2008 primarily as a result of a higher beginning backlog.

The southern region had revenues of $244 million for the fiscal year which represents a 13% decline over the prior year. The decrease was driven primarily by lower beginning backlog coupled with weaker new orders during the year.

Combined, the northern and southern regions represent approximately $475 million of our $562 million of residential revenue, or nearly 85%. Together, these regions on a combined basis were down only 3% versus the prior year.

The mid west region had revenues of $59 million for this fiscal year versus $92 million in the prior year, a 36% decline. This is primarily a result of tough market conditions in that region that led to a 32% decline in units closed coupled with a 6% decrease in the average selling price.

The northern region had revenues of $28 million for the full year which represents a 58% decline. This decline was primarily a result of weaker market conditions coupled with our exit from several communities and markets within the region including Palm Bay and Palm Coast.

Turning to Slide 11, you'll find a summary of net new orders for the fourth quarter. On a consolidated basis, our new orders declined over 28% to $114 million in the fourth quarter. In the northern region, new orders decreased to $48 million in the fourth quarter of fiscal 2008, a 32% decline from our fourth quarter 2007 levels.

The decrease is primarily a result of the decline in average selling price which dropped over $150,000 in the quarter. This reflects the use of increase incentives as well as the change in mix to the spec units that we were delivering for our fiscal year which typically are multi-family and smaller single family homes which is seasonally consistent with prior years.

The southern region's net new orders decreased to $49 million in the fourth quarter of fiscal 2008, a 19% decrease from the $61 million in orders during the fourth quarter of 2007. The decrease is primarily a result of a decline in average price to $409,000 from $482,000 which was due to increasing softness in the Richmond market and increased incentives throughout the region.

The mid west's orders decreased to $12.5 million for the fourth quarter, a 32% decline year over year. The region experienced both declines in units, average selling prices due to tough market conditions which affected both price and absorption.

Florida regions new orders decreased to $4 million in the fourth quarter of 2008, a 53% decline from the $9 million in the same period of fiscal 2007. Again, the Florida decline is a result of the exit of several communities and markets within Florida as previously discussed.

Turning to Slide 12 – I'd like to review new orders for the full fiscal year. In total, our net new orders declined 24% from the prior year to $483 million on 441 units in fiscal 2008. Regionally, the northern region's net new orders declined $196 million on 487 units, compared with $251 million in fiscal year 2007, a 22% decline year over year. This decline is attributable to both a 105 decline in the number of units sold and to a decrease in the average selling price. The average selling price decrease is due to the incentives offered and a shift to a mix of more multi-family and smaller single family homes.

New orders in the southern region declined to $217 million for fiscal year 2008 compared with $258 million for the previous year. Of our four regions, the southern region had the best results compared with the prior year with a 16% year over year decline in terms of dollars and only 6% in terms of units. This reflects our relative success in supporting absorptions at the expense of margins.

Combined, the northern and southern regions comprised $413 million of our $483 million in total new orders, or 86% of the total. The decline in these two regions of 19% in terms of dollars and 8% in terms of units compares favorably to the order data from our competitors.

The mid west region had net new orders of $52 million on 135 units with $82 million on 182 units for the previous year. The Florida region had net new orders of $17 million on 76 units for fiscal year 2008.

Unfortunately, with the current crisis in consumer confidence resulting from the financial crisis, the downturn in new orders has continued into our first quarter. New orders are off significantly as the political posturing has delayed much needed action to stabilize the economy. Hopefully, help will soon be on the way so that our market begins to stabilize.

Slide 13 provides a regional analysis of our June 30, 2008 backlog. On a consolidated basis, our total backlog at June 30, 2008 was $238 million which was down from $318 million in the previous year. In the northern region our backlog declined to $110 million on 210 units compared with $145 million on 255 units at June 30, 2007. The average selling price and backlog at June 30 is approximately $525,000 which is down slightly from the $567,000 in the prior year. In the southern region, our backlog declined to $104 million on 216 units as compared with $131 million on 243 units at June 30.

Combined, the northern and southern regions represent $214 million or approximately 90% of our total $238 million backlog. We've taken steps through our portfolio optimization process to minimize our exposure to the weaker performing mid west and Florida regions. The backlog in the mid west region declined to $21 million on 48 units compared with $28 million on 55 units in the previous year. Florida's backlog was at $4 million at June 30, 2008 compared with $15 million on 56 units in the prior year. At June 30, we now have only three communities in Florida.

Turning to Slide 14 – Residential Gross Profit Trends. Operationally we look at gross profits excluding the impact of inventory impairments. In the fourth quarter of 2008, our gross profits dropped below 10%. All of our regions' gross profits have been impacted by the downturn that is persistent. As you can see, our fourth quarter gross profits were impacted by additional incentives that were needed to sell and close our spec inventory by June 30.

Our margins have since recovered. We're currently running at around 13% for closed backlogged homes as of September 30.

On Slide 15, you'll see a summary of our cancellation rates. On a consolidated basis, our cancellation rates for the fourth quarter were approximately 25% which is higher than our historical average, but a slight improvement over the third quarter. Cancellations remain relatively stable. We've not seen a significant spike in the nominal number of cancellations but with the reduced gross orders the impact of each cancellation has a larger effect on the rate.

We also look at cancellations as a percentage of opening backlog. In the fourth quarter of 2008, this rate was approximately 14% which is consistent with our average, and again, is below the third quarter results.

Regionally, the northern region had a 22% cancellation rate in the fourth quarter. It's higher than our normal trend, but again is improved from the third quarter. The southern region had the highest cancellation rate the last two years at nearly 29%.

The mid west region had 30% rate in the fourth quarter, driven mostly by the decline in gross orders. The Florida region had the lowest cancellation rate of 5% but with only 12 units in backlog, it's easy to see that they could vary widely.

Turning to Slide 16, we've operated 91 communities at June 30, 2008. A large portion of the reduction of communities took place in December when we completed our portfolio optimization strategy which involved selling several active communities. Additionally, through our normal operations, we closed several others. We now have 31 communities operating in the northern region and 49 operating in the southern region. There are eight communities in the mid west and only three in Florida.

We remain focused on our northern and southern regions which make up the bulk of our business and represent more stable regions. We've reduced our exposure in Florida where we have half the communities we once had.

Slide 17 is a slide of our SG&A as a percentage of the revenue. SG&A excluding abandoned projects increased slightly to 15.6% for fiscal 2008 from 14.7% in the prior year. This percentage increase is predominantly a result of the decrease in revenues that outpaced our cost reductions.

Excluding the impact of write offs for abandoned projects and other pre-op costs which were included in SG&A for GAAP purposes, SG&A declined $7 million or 8% from the prior year. A portion of the decline relates to commission expense with the balance the result of cost cutting initiatives primarily reduction in forces.

We've implemented a 14% reduction in force this past January with another 9% that occurred in August of this year. Our SG&A budgets for the current year are projected to be reduced by approximately 15% to 20% over the prior year as we continue to implement cost reduction measures.

Slide 18 summarizes our mortgage operations. We provide a brief analysis of Alambry Mortgage Company. As you know, Alambry is a mortgage broker agent. It does not warehouse any loans. Our mortgage statistics are generally good with very few sub prime loans. I don't believe we had any in the pipeline at June 30. 86% of loans in our June 30 pipeline are conforming loans.

We also track recapture rate which remains strong at 70% for the fiscal year by filtering our mortgages through Alambry we have a better ability to predict the ability of our customers to obtain mortgages and monitor their progress through closing.

And now I would like to turn the presentation over to Gary Herdler to walk you through our financial performance and outlook including the details of our recent bank amendment.

Gary Herdler

Turning ahead to Slide 20 – Progress and All Objectives. As Jeffrey mentioned, we are focused on the basics. We believe that challenging times still lie ahead including challenges for financial institutions that also affect the consumer. Our main focus remains on managing risk and using capital prudently. The best assessment a management is experience and results versus our objectives.

I'm pleased to continue to report very good progress on the four key objectives we listed in our May 2007 earnings call for the third quarter fiscal '07. This progress is in spite of more difficult industry conditions than could be predicted. Our first objective is liquidity and cash flow. We measure net debt reduction as the change in gross debt amounts plus the change in cash and cash at title companies, but excluding restricted cash customer deposits.

We have reduced our net bank debt by approximately $174 million or 30% since January 1, 2007 while also improving our liquidity over that same period. In the fourth fiscal quarter, we reduced net debt by $53 million and we reduced our net debt by $119 million during fiscal 2008. The portfolio optimization land sale transactions in December 2007 are included in these amounts of debt reductions.

We received approximately $69 million in aggregate from this consisting of approximately $35 million in proceeds from the dispositions - $33 million in December 2007 and $2 million in January 2008 as well as approximately $34 million from tax refunds in March 2008 from these transactions and other operating tax losses. After the impact of all impairments in Q4, our liquidity consisting of cash and net borrowing base ability as of June 30, 2008 was approximately $71 million.

Our second objective is capital structure. We amended our $75 million trust preferred securities a year ago in August '07. We've amended our credit facility several times including the maturity extension in September 2007, our December portfolio optimization amendment and our most recent amendment which we signed on Monday, a very challenging day in the markets.

The plan for this amount was discussed in our Q3 earnings call previously. I'll discuss the amendment in more detail in a few minutes, but it was a very positive outcome overall both for the company as well as the banks. The basic concept is that five banks with 21% of commitments or $121 million of the previous $585 million facility that otherwise would have matured in December of '08 have each now extended maturity to a December 2009 maturity date.

We then reduced the overall $585 million facility amount by 25% to $440 million on a pro rata basis for all lenders including the other dozen banks. We eliminated several covenants significantly modified others, improved borrowing base availability and significantly improved the flexibility we felt we needed in today's challenging market.

We made good progress in our balance sheet portfolio review. In fiscal 2008 we shed some non core assets to refocus on our primary northern and southern markets and we reduced our land expenditures which we review regularly. Our December 2007 portfolio optimization had two objectives; cash to repay bank debt and cost reductions.

We also anticipated Federal tax refunds as a result. 94% of these lots sold in 10 transactions were in Florida, Chicago and Arizona. Through this strategy we received the $69 million in proceeds and tax refunds. Our total lots are down 67% since June of '06 and our spec count is also down by approximately 57% since October 1, 2006.

The final objective is our cost structure. From June 30, 2006 to August 31, 2008, we have reduced our head count by over 50% including a 14% reduction in January about two weeks after we completed portfolio optimization, more cuts in the spring and approximately 10% in August 2008. Improving the cost structure is more than just head count reductions. We will continue to take a hard look at all of our overhead expenditures in the coming months.

With real estate less profitable currently, we're also focused on two other legs to the stool; manufacturing and our retail efforts. Specifically, we want to improve our cycle times. This is the amount of time it takes us to build a house. And, improve the profitability and options in houses in the design center amongst other initiatives.

Improved net debt levels and improved liquidity on Slide 21. We demonstrated a good job of monetizing the balance sheet and improving liquidity. As I mentioned, we reduced our net bank debt by 30% or $174 million since January 1, 2007. The actual bank debt outstanding was reduced by $116 million over the same period and cash increased by approximately $58 million over this period. We generated this free cash flow through our portfolio optimization strategy as well as through the ordinary course of business.

We reduced net bank debt by $73 million in the second fiscal quarter which included $33 million of land sales and $18 million of tax refunds, by $20 million in the third fiscal quarter of 2008 which included $34 million of tax refunds, $2 million of asset sale proceeds, less some seasonal operating expenditures, and by $53 million in the fourth quarter.

Over the same period, our liquidity levels have increased nearly $34 million in spite of significant asset impairments over this period. Our liquidity at June 30 was approximately $71 million after the impact of fourth quarter impairment charges. Since June 30, our liquidity has decreased to $48 million at August 31 which is about equal to the level of September 30, 2007. The summer reduction in liquidity is primarily the result of payments made to our vendors for work associated with the fourth quarter deliveries, and interest coupon and $3.5 million of estate tax payments in July. This was anticipated by the company.

Turning ahead to Slide 22 – Spec Home Trends. Since September 2006, we have reduced our spec home levels by 57% or 290 units. Homes at or near completion which can generally be delivered in less than four weeks, decreased 45% over this period. Our community count has remained relatively level overall and we have improved from over five specs per community on average to only 2.4 specs per community at June 30, which is generally a little more weighted to multi-family product by its nature.

We measure our spec by community, by season, by options built and others. We're generally comfortable with our current level of specs although we will have some increase due to seasonal needs based on the budgets, plus we generally build foundations in the winter to deliver homes in the spring and summer.

Slide 23 – Regional Spec Home Trends. We have generally improved our spec count in all regions of the country although primarily in our southern, mid western and Florida regions. The north region has more multi-family townhouse communities which by its nature is a little more spec needed.

The two tables on the left indicate the year over year spec changes by units and percentage. You can see that the order declines in the December quarter were driven primarily by the October 1 year over year opening spec being lower by 46% overall. The January 1 year over year opening spec inventory levels were 33% lower on average. However, the March quarter also had more difficult market conditions impacting the orders.

Year over year inventory levels were relatively flat at 9% lower on April 1 for our fourth quarter. However, at June 30 our year over year spec count is lower by 55 units or 20% lower.

Slide 24 – Lots Owned and Controlled. We have taken significant steps to reduce our total owned and controlled lot count. Our lot count is down by over 57% from the 2005, '06 peak. Since June 30, 2007 we have reduced our owned lots by nearly 2500 lots or 31%. Our lot reduction includes the impact of the 1400 lots sold in our portfolio optimization strategy plus the 350 lots auctioned back, regular deliveries of actual homes sold, and abandoned lot option projects not favorable in today's market. The portfolio is appropriately refocused as 88% of the lots are in the north and south regions. Our owned control mix is higher than we would like at approximately 74% owned but we anticipate this to better rebalance over time.

Turning to Slide 25 – Selected Financial Information. Our total revenue for the fiscal 2008 fourth quarter was $192 million which was down from $214 million for the same period in the prior year. Total revenue for fiscal 2008 was $583 million which is down from $683 million. The $35 million of portfolio optimization land sale proceeds is included in three places in the financial statements; approximately $10.3 million of GAAP revenue, $13.4 million of other financial interests on the balance sheet due to continual involvement in the two projects optioned back and approximately $11.3 million in discontinued operations.

We've already discussed residential revenues and SG&A. We will separately review the impairment charges on the next slide. During the fourth quarter, the amount of interest expense incurred less interest capitalized was $700,000. Due to our cash balances as well as the calculation of qualifying assets versus qualifying liabilities under FAS 34. We anticipate this possibly could continue in fiscal 2009.

In fiscal 2008 we incurred a net loss of $143 million compared to a net loss of $67 million in fiscal 2007. Excluding the after tax impact of impairments both inventory and land sale related impairments, the write up of Advanta projects and other pre-acquisition costs and severance charges, and the impact of the deferred tax evaluation allowance, our net loss would have been just over $10 million for fiscal 2008 compared to net income of $4 million in fiscal 2007.

The adjusted fiscal 2007 net income also excludes the impact of good will impairment charges taken during that year.

In the fourth quarter of fiscal 2008 we incurred a net loss of $34 million compared to a net loss of $11 million for the same period of fiscal '07. Excluding the after tax impact of one time adjustments, including impairments, abandoned projects and severance charges and the impact of the DTA evaluation allowance, our net loss would have been $9 million in the fourth quarter compared to a net loss of $250,000 in the prior year period.

These losses are primarily attributable to the low gross margins as previously discussed in detail by Mike Vessey. Despite these losses, we generated positive cash flow from operations for both the year and the quarter.

Moving to Slide 26 – Fourth Quarter Impairments. We generally measure inventory impairments under FAS 144 using a discounted cash flow model which various assumptions by community for net sales price, absorption, costs and other factors. We recorded $20 million of inventory impairments during the fourth quarter, generally on 23 communities with 870 lots which brings the total impairments and assets for the year to $59 million.

Roughly $11 million or 55% of these fourth quarter impairments were in the north region, with the remaining 45% of the impairments split fairly evenly between the south, mid west and Florida divisions. This compares with the $19 million in the fourth quarter of 2007 and the $76.5 million for the full fiscal year 2007 which included impairments related to our discontinued operations in the west.

In addition, during the December second fiscal quarter we recorded land impairments of $57.3 million including $20.7 million in discontinued operations to reduce the book value properties disposed since there was no gain or loss in the sale. However, we received $34 million of income tax refunds in the Q3 primarily related to these dispositions.

In addition to these inventory impairment charges, we recorded write offs of Advanta projects and other pre-act costs of $7.8 million in the fourth quarter. The majority of this relates to one project for a total of $8.8 million in the fiscal year '08. In the fourth quarter of '07, we recorded a recovery of $600,000 which resulted in a total charge of nearly $20 million in the prior fiscal year.

In the third fiscal quarter of 2008, we recorded evaluation reserve on our deferred tax assets of $43.5 million. In the fourth quarter, the reserve was increased by $10.1 million to $53.6 million based on losses and other impairments recorded during the quarter. This reserve is based on the difficult GAAP standard under FAS 109 for objectively verifiable evidence that says that it is more likely than not that the DTA will not be realized. The analysis generally requires static assumptions for price absorption and cost structure.

Regardless of GAAP treatment, Orleans believes the DTA has valued Orleans' future increase in revenue through price absorption or otherwise, realization of our assets, cost reductions and debt reductions should allow us to fully recover our deferred tax assets before they ultimately expire.

Next we look at Slide 27 – Balance Sheet Metrics. We have significant debt reductions along with improved liquidity. I want to highlight the changes on the columns on the right. Again, we measure net debt reduction as a change in gross debt amount plus the change in cash and cash at title companies, but excluding restricted cash customer deposits.

On the right, since January 1, 2007, or in the last six fiscal quarters, we reduced our net bank debt by approximately $174 million or 30%. During fiscal 2008 we reduced net debt by $119 million. In the fourth fiscal quarter we reduced net debt by $53 million. We believe that we've done a good job monetizing the assets on our balance sheet, particularly in the current market.

The $119 million of debt reduction in 2008 compares to a reduction generally in inventory of $209 million over this period, or a reduction of $187 million excluding the VIE and similar controlled interests. However, this inventory reduction includes fiscal 2008 asset impairments of $59 million and land sale impairments of $57 million.

In the last six fiscal quarters we reduced our gross debt by approximately $116 million. We reduced our gross debt y $73 million in fiscal 2008 or $10 million in the fourth quarter. Given the conditions in the capital markets and in home building, we felt it was prudent throughout fiscal 2008 to hold more cash than the company has held historically. In the past six quarters, we have increased our cash and cash equivalents including cash due from title companies by $57.5 million including an increase of slightly over $43 million from March 31, 2008 to June 30, 2008.

At June 30, our cash balance was approximately $72 million and we had cash in transit of approximately $19 million for a total of almost $92 million combined cash. Subsequent to June 30, our cash liquidity has decreased as we anticipated, most as a result of paying vendors for work performed in conjunction with the fourth quarter deliveries, a $13 million revolver pay down in early July to approximately $383 million of bank debt and an interest coupon as well as $3.5 million of state income taxes due.

Our total liquidity at June 30, 2008 was $71 million which is up $34 million over the past six quarters. As of August 31, our cash balance is approximately $45 million and our liquidity is approximately $48 million, consistent with our anticipated liquidity and similar to the liquidity of September 30, 2008 of $48.8 million.

The obvious concern in today's market is the type of cash held and management's philosophy for this cash. We are focused on capital preservation right now. It's that simple. As of August 31, we held just over 80% of our cash that directly hold very short term U.S. Treasury Securities with no repo risk that we are aware of on any investment dealers.

We have minimized money market funds due to our concern for repo risk with our view of weakening financial institutions generally. However, the remaining cash is in typical operating accounts that should generally sweep to money market funds as needed. Our new credit agreement will limit the amount of cash that we hold to $32.5 million for any consecutive five business date period, obviously, excluding the cash in transit and title companies.

However, importantly, the credit agreement does not limit the company's ability to continue to directly hold U.S. Treasury Securities as we see necessary.

Page 28 – The second amendment restated credit agreement. This amended restated $440 million credit facility is a very positive event both for the company and the banks, notwithstanding that it is a challenging market for financial services industry today. We appreciate the continued support of our lenders.

We agreed to a detailed term sheet with the banks on September 11. In spite of the challenges in the markets and the environment for financial institutions since then, the document was completed and executed on Monday, September 29, which was obviously a volatile day in the markets, and the transaction closed on Tuesday, September 30.

With the amendment long ago planned, it also related to the May 9 waiver related to the DTA valuation reserve in Q3. We negotiated the facilities size reductions essentially in two steps. Five banks with 21% of the total commitments or $121 million of the previous $585 million facility that otherwise would have matured in December '08. Each extended their maturity date by one year to the same December 2009 maturity date.

We then reduced the overall $585 million facility by 25% to $240 million on a pro rata basis for all lenders including the other dozen banks. In line with seasonal needs, the facility availability varies slightly over time and it is still subject to the borrowing base. From the closing until December 31, 2008, the facility availability is limited to $425 million.

It increases back to $440 million from January 1, 2009 to June 30, 2009. On July 1, 2009 the facility will permanently reduce to $415 million unless the facility sizes otherwise reduce below the $415 million prior to that date.

We eliminated several financial covenants. We significantly modified others. We improved the borrowing base availability through formula improvements on two categories although land is subject to certain dollars caps and we significantly improved the flexibility needed until December 2009.

The amendment eliminated several covenants including the maximum leverage ratio, the minimum debt service covenant and the units in inventory covenant. Several definitions were modified and the borrowing base formulas were obviously improved.

The amended facility also decreased the minimum liquidity covenant to $15 million including cash title companies. We reduced the cash flow coverage ratio and significantly reduced the minimum consolidated tangible net worth covenant. This covenant includes a significant dollar for dollar reduction in net worth amount, in formula reductions for impairments, abandoned projects, future DTA reserves, interest not capitalized and other amounts with certain caps and an overall floor.

The amended credit facility contains additional covenants for maximum cash on a consolidated basis that we discussed as well as limitations on certain land acquisitions and joint ventures. The amended credit facility does not limit the acquisition of improved land, ie. finished lot take downs and/or rolling options purchased in the normal course of business. It also modifies mechanisms for borrowings and settlement of homes.

The interest rate under the amended facility was changed to [liber] plus 500 basis points an increase of 100 basis points. The amended credit facility also includes other terms and modifications, definition adjustments, charges, unused fees, and potentially additional fees not currently expected to be earned which are in the documents.

An important part of this process was appraisals and we had a positive outcome overall thus far in bank appraisals. As part of the anticipated amendment and extension process, in the summer of 2008, the bank lenders engaged appraisers on their behalf for 15 communities comprising approximately 35% of the borrowing base availability as of May 31, 2008 which we received in June through August.

The appraised communities included projects in every major division of the company including throughout the north, in Charlotte, Richmond and Raleigh in the south, one community in Chicago and one community in Orlando, Florida. The appraisers chosen by the agent bank included communities both active and future, communities impaired by the company as well as communities never impaired by the company.

The results of the bank appraisals included both individual reductions in appraised values as well as some increases in appraised values of projects and are generally to be used starting in the September 30 borrowing base certificate.

We were naturally concerned about the potential outcome of these appraisals and there were individual increases and decreases. The net borrowing base availability is always on the lower of GAAP costs or appraised value for each individual product category. However, the company, based on its internal borrowing base certificates, the company believes that its net borrowing base capacity would have increased by an estimated $1.5 million as of June 30, 2008 and $2.7 million increase as of August 31, 2008 respectively if these appraisal results were used.

Clearly, this is a pleasant positive surprise in today's environment. The company has permitted lenders to conduct future appraisals on a fair market value basis on all projects with a GAAP cost of at least $4 million to be phased in generally one-third each over the next three fiscal quarters ending June 30, 2009, but excluding the projects already recently appraised.

The results of these appraisals are subject to numerous factors, and accordingly no assurance can be given on the results of the recent or future appraisals and correspondingly liquidity impact to the company. The full bank amendment was filed as part of the 10-K.

In closing, we plan to remain focused on our objectives and our strategy. I'm going to turn the call back to Jeffrey for final comments before we open the floor to questions.

Jeffrey Orleans

Even though this has been an extremely difficult year, we really have accomplished a lot. We have paid down debt, reduced expenses and increased liquidity. We do have an extremely capable management team, great product and we are in more stable markets. We are focused. We are creative and we will outperform. Thank you.

We'd now like to open it up for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Carl Reichardt – Wachovia.

Carl Reichardt – Wachovia

You looked at the new line maturity date and the amount of standing now. How do you see your cash flows running out over the next five quarters or so, operations versus tax refunds or some other generation of cash in order to get that line squeezed down?

Gary Herdler

We personally feel that the facility gives us a lot of flexibility. Our cash flow is seasonally weighted to the fourth quarter. We're focused on debt reduction and reducing land expenditures and we frankly in the environment we see today, we continue to chop away at that.

Obviously there's challenges for financial institutions but we also have a support of a core group of banks and so we think that there's plenty of alternatives that exist for the company. Among those alternatives you could see us looking at other asset disposition alternatives just generating cash flow through operations as well as other alternatives. So I think we've got the flexibility to get what we need to get what we have accomplished.

If I look at last year, the cash flow projections we ran internally, we exceeded those projections by about $80 million. A lot of that was portfolio optimization but we otherwise hit our internal estimates or remained relatively close there. So we've just got to stay focused and keep our eye on the ball.

Michael Vessey

First off, Gary's done a good job in getting the extension in probably difficult times but the good news is that with our overhead structure, what we've reduced in cost and what I anticipate will be further reductions as we continue to navigate through this. We're producing positive cash flow. Our projections don't include right now any land sales but it doesn't mean that we're not going to do that, but from a conservative standpoint we're not projecting anything in our operating close from land sales.

The other thing is that we also have the flexibility as this market has tightened up, we've gotten leverage back on a lot of our land deals that we turned quite a few of our option deals into demand type deals such that we only have to take what we need at this point. So we're able to control the land spend. I think between our current operations, our abilities to reduce the expenses to the level that we have, we feel we can battle through the storm.

A lot of it has to do with the margins. Our margins are holding up fairly well. As I mentioned, orders are soft in this quarter. August and September, there was obviously so much news that paralyzed the buyers. Hopefully we get something done in Washington and people can breath a little bit and understand that the world isn't going to end.

Jeffrey Orleans

Right now, it's like the darkest before dawn, so right now the entire market is kind of paralyzed. We are creative. We are focused. There's going to be opportunities. Last year we saw the opportunity to get the tax refunds. This year there's going to be something. We are going to outperform. What ever the market yields, we're going to be able to work through.

Gary Herdler

If you look at the bail out bill that's swirling in the House and in the Senate, there's differing provisions between the two bills right now. We obviously prefer the House bill over the Senate bill. I think we're going to sit back and wait to see what happens there. Our strategy would change depending on which bill is passed.

Carl Reichardt – Wachovia

Mike you mentioned this $200 million in backlog that you have at the end of this September quarter. Is there a significant alteration in order price that's driven that number down between the end of June and the end of September or is that more unit driven, kind of a gradual change in price but more significant change in units.

Jeffrey Orleans

There's a number of different things. We are actually selling more first time buyer product than in general. We introduced a whole new smaller line of homes which are less expensive. It's a series of events. And, the market has been slow and we had to give some incentives.

We normally give more incentives on the spec homes. We have less spec homes that we're building and trying to build more first sales.

Michael Vessey

The other thing I would add to that, Jeff mentioned, there's two things. First of all, the unit reduction is a primary driver with softness in orders. We've also seen because of the jumbo mortgage rates the mix is changed in that we're selling more of our mid price move up product as opposed to our luxury product. So we are seeing some of the average price impacted by the buyers' ability to get mortgages, the jumbo mortgages at some kind of reasonable rates.

Carl Reichardt – Wachovia

On the appraisals that were done, you gave a net number in terms of adjustment to value. I'm curious as to what the negative appraisal was relative to – I don't know if it's carrying value or what, but what was the most negative there? Of the 5400 lots that you own right now, what percentage of those are you carrying or you believe are zero residual value lot or negative residual value lots given the compression in pricing.

Gary Herdler

What do you mean by zero residual?

Carl Reichardt – Wachovia

If you built an out right now, say you invested $200,000 or $300,000 in sticks and bricks on the dirt you could sell the actual package land dirt for $300,000, meaning that the implied residual value X whatever you earn on building the box is zero for the land. Basically the land is worth nothing.

Jeffrey Orleans

Is this selling the lots off to somebody else or is this us building them on our relatively slow but reasonable basis?

Carl Reichardt – Wachovia

It's just sort of today, if you were to actually take the land today and build a house on it, regardless of what you paid for it or what you're carrying it for, the only way you could generate out of investing in sticks and bricks would be for sticks and bricks back plus a small general contracting profit implying that the land is worth nothing.

Jeffrey Orleans

We just had 35% of our basis appraised and we've written down our lots. In Gary's presentation, we think our land does have value in today's market because of all the write downs that we had. If you're going to cost basis, that was $150 million or whatever number of dollars ago. We have written down our land.

Carl Reichardt – Wachovia

The carrying value is obviously what you've been impairing that and looking at that. What I'm asking is, forget the carrying value and forget GAAP and valuation analysis. If you paid $30,000 for a lot you might not be able to get $30,000 in cash out of that lot. If you built it out, you might be getting effectively zero. That's what I'm trying to get a sense of.

Michael Vessey

If you built it out, obviously GAAP requires you if you think you're going to build it out and you're going to incur a loss to impair the property so take a look. We just filed our 10-K.

Carl Reichardt – Wachovia

I know that. And you'd be taking it down from a GAAP perspective down to zero or a very thin value so that when you build it out you're going to report a GAAP profit. I understand that. What I'm asking is, from a cash perspective, you paid cash for the lot, but getting that cash out is effectively not feasible. Your residual is very thin.

Michael Vessey

We typically have a land value of somewhere around 25% on a consolidated basis so 25% of our land is coming in cash, so from a cash basis I think we certainly are generating good cash from sales. On a GAAP basis, book basis our values on our books in my own opinion, there's a disconnect between the economic value of that ground and what GAAP requires us to write it down. I think that too is a positive.

Gary Herdler

Having spent the last 10 years in investment banking, we look at the value of our communities very carefully and we look at it in several different ways, and we want information that reinforces each other. So I'll give you a bit of what we've done internally.

First of all, the current appraisals if I looked at it, I think that sometimes GAAP differs from economic reality at times, but obviously we run these analysis. We currently have several of these jobs that actually have been impaired below the appraised value which you would think a bank appraiser in today's environment would certainly not in any environment whether it's a positive or a negative, would not be appraising it at what somebody else engaged for the company would.

So I feel pretty comfortable there. And that's both on jobs we've never impaired as well as job we've impaired. And so then I'd say, what are some of the other things that we've done internally? We have had every job in our company has got an appraisal. That's unlike a lot of the other builders, because our facility has always been secure.

Those appraisals have essentially an 'as is' value and a finished lot value and a completed home value. We index the average selling price in backlog to every completed home appraisal and we run index ratios on that relative to the finished lot values and subtract out cost to complete and come up with as is market versus as is book. That's how I get myself comfortable as well on signing the 10-K.

Let's just say based on that analysis we think there's imbedded value. We had signed a deal in April that tied out to this analysis. Obviously the buyer had trouble financing otherwise we'd have closed it. But we also run other nominal cash value valuation flows on communities and other communities, but we do a lot of valuation work on it and maybe that's also because we sold several communities during the year. We obviously chose the right ones to sell.

Jeffrey Orleans

Where 88% of our market is, there is no excessive inventory, whereas if you drive around certain areas of the country, and even in Chicago where we don't have much left, you can drive around there and there's so many improved lots there, but we don't have that in most of our regions.

Carl Reichardt – Wachovia

I'm trying to get a sense from builders in general what percentage of their business are – when builders out there are telling me that they're able to buy lots at less than improvement cost, the implication is that the land is negative residual. And what I'm trying to figure out is what that kind of count is on builders' current books as they look at their positions and what the market is.

You've got some projects with a high degree of imbedded value regardless of GAAP and you have others that have less. So I'm trying to get sense of that balance.

Jeffrey Orleans

That's where I keep saying market by market. Clearly in areas in Chicago they're way west of downtown Chicago, there are lots there that you can buy for less than improvement costs. But if you go into Brooks County Pennsylvania, there are no more lots. You've really got to go market to market. Where there's excessive amounts of blacktop, lots after lots, the ground has no value. But we don't have any. We wrote that off. We're out of that business.

Gary Herdler

I would agree with your concept as it relates to Florida, Chicago, obviously Arizona, Nevada, some of those areas. That's not where we are though. And if you think about it, 51% of our lot count is in the Pennsylvania, New Jersey, New York region which is generally a much longer entitlement period. And then you've got 37% in the southern region which excludes Florida. I think that's a lot of the reason why things have held up.


Your next question comes from Jim Wilson – JMP Securities.

Jim Wilson – JMP Securities

Where do you stand today with September 30 relative to the borrowing base and what's outstanding? I know the conversation was to effectively pro forma it relative to June 30 since it's a June 30 document, but where do you stand today? Is it roughly at the borrowing base?

Gary Herdler

We also included August 31 based on the amendment. I'll just tell you that on Slide 27 the cash was $44.9 million as of August 31 and the borrowing base availability was $3.2 million. That's without the appraisal improvement. Otherwise that would have been closer to $6 million. So total liquidity is $48.1 million which you will see as of – well it won't be September 30 because we closed it on September 30, but basically after that, our cash will go down to, excluding cash at title companies, will go down to fairly close to that $32.5 million because we planned.

But your borrowing basis will go up if you pay down. If the borrowing base remains constant and you pay down debt, then the availability goes up. So the net liquidity would remain the same in that $48 million range. That's also disclosed in the K. I don't remember which page, but it's within the liquidity section on Page 44.

Jim Wilson – JMP Securities

Can you give a little color now that the quarter is over what margins look like for the quarter? Maybe you can't disclose that but at least what they were in backlog at June 30. Can we get some perspective on where they look like they've been trending since June 30 and whether you think or how much benefit you might receive from prior impairments into future margins you're seeing now or might see in the future?

Michael Vessey

In the presentation we had the gross profit trend and what you see there is that as we approach our fiscal year end which is June 30, we were selling and delivering into that time period, so it depressed our gross profits down to a little bit north of 9%. Since then, as I said in my presentation, we're running foreclosed homes and backlog homes in the first quarter, around 12.5% to 13% based upon what we closed and what we're projecting. That should give you some sense that it's fairly recovered and is recovering.

Jim Wilson – JMP Securities

Any benefit from impairments. You're not sure what you're going to be selling homes for in the way of margins in the future but any material benefit from prior improvements you expect to see on the margins compared to where you are today?

Gary Herdler

If you look at it from the standpoint of how much of the margin is relative to past impairments, we've looked at that. It's somewhat of a theoretical exercise, but I would say there's probably about 2% that we're generating from past impairments.

Jim Wilson – JMP Securities

2% from last year that you received from prior periods.

Gary Herdler

I'd say in that 2%, it could be as high as 3%. It obviously depends on where you're selling and whether those communities were impaired.

Jeffrey Orleans

And that's by region a little bit, because for example in Chicago I would say it's probably a higher rate and in Bucks County or Pennsylvania it would be a lower rate.

Gary Herdler

It's going to be by communities too. I'll give you a sense I think on a consolidated basis, I think that 2% to a max 3% is what we're probably recovering.

Michael Vessey

I think the number was 2.2% for fiscal 2008. It's going to go up closer to the three in fiscal '09 and in our estimations. It's higher in Chicago and Florida and it's lower in the south and the northern regions.

Jim Wilson – JMP Securities

In the K the obligation area obviously outside of your basis straight GAAP is affordable housing contributions. Could you discuss that a little bit and what it means, what it is and what it means to you?

Gary Herdler

You're talking about the down payment assistance to sellers, just the down payment assistance?

Jim Wilson – JMP Securities

It just refers to affordable housing contributions. $100 million for '09?

Gary Herdler

It's $100,000 actually.

Jeffrey Orleans

In New Jersey you have an affordable housing contribution. It comes from the [Laurel] decision. It was handed down which was a Supreme Court that you have to provide so many dollars for units for low and moderate housing and that was a contribution. But we think it was only $100,000 not $100 million.


Your next question comes from Alex Berron – Agency Trading Group.

Alex Barron – Agency Trading Group

I heard you mention you got a tax refund of $34 million in March. I was wondering if you got anything incremental in June.

Gary Herdler

I think our total tax refunds for the year were – I don't have the exact numbers in front of me but I think the aggregate for fiscal 2008 was about $58 million. That was received primarily. There was about $18 million in November. There was $34 million in March plus a little bit in April. We paid $3.5 million in July and we're anticipating roughly another $4 million to come before the end of the calendar year.

Obviously if the tax bill passes in Congress as opposed to the Senate, we think that that number goes up a lot. There's a differing tax bill right now. And if it's the tax bill that passes in the Congress as opposed to the Senate – the bail out bill. We would receive additional tax refunds depending which bill was passed.

Alex Barron – Agency Trading Group

What's in the provisions of the bill of the House that would allow you to have additional tax refunds?

Gary Herdler

I'll just say right now we're anticipating $4 million of tax refunds extra. So I would assume it's an immaterial amount.

Alex Barron – Agency Trading Group

On the down payment assistance, what percent of your closings this quarter were down payment assistance?

Gary Herdler

It's virtually nothing. It's 1% in the fourth quarter.

Alex Barron – Agency Trading Group

I heard you mention that the orders were off significantly in the September quarter. Can you give some sense of how much or what markets were down the most?

Michael Vessey

As far as the markets, there's been a general impact on the markets across the board which is the result of what's going on in the financial markets and the consumer confidence. We are probably on top of that. Charlotte's also experiencing some other issues. I don't know if you've seen the oil or the gasoline shortages where basically people are having difficulties for the past couple of weeks getting sufficient gas to get around town. That's slowed traffic.

September, with all that's going on, September is usually a pretty good month for us, and September has been grid locked so are the people going to come back in October that would normally be there in September? We hope so, but there's no guarantee. Summer was slow, but until this bill is passed I don't think that you're going to see much of a pick up.

Alex Barron – Agency Trading Group

On your new covenants, I was trying to read it and about the tangible net worth and it says $75 million plus or minus a bunch of other stuff. Can you help me out with that? Your book value right now is $82.5 million. Does that mean you only have $7 million or $8 million of cushion? How should I look at that?

Michael Vessey

I would read the last sentence on the line there because essentially, the floor is $35 million. That's the easiest way to read that covenant. If you notice, it's $75 million provided that the covenants reduced by, and then it says a, b, c, and d, and those types of things. So you reduce the covenant dollar for dollar for inventory and impairments on borrowing base assets after March 31. You then reduce it for the amount of interest expense incurred less the amount of interest capitalized under FAZ 34, so that's that $700,000 we talked about in the call.

You then reduce it for the deferred tax asset reserves which is the $10.1 million we talked about on the call. The sum of the DTA and the impairments is $30 million capped. You then reduce it as well for impairments and write offs of tangible assets or pre-act costs on assets essentially not in the borrowing base so that would cover your abandoned project charges. And then you add back 50% of income and those types of things.

However, and this says, "the assets notwithstanding the foregoing, at no time shall consolidated tangible net worth after taking into account the reductions and increases above be less than $35 million." I would read that as the operative statement.

Alex Barron – Agency Trading Group

I was wondering about the impairments you have taken to date. Obviously they've been pretty significant but yet you're margins are 9% gross margins. What is it about the impairment methodology or the auditors or whatever that doesn't allow you to impair further such that your margins would go back higher such that basically you'd start making money again on a paper basis.

Gary Herdler

You have to be careful when you're looking at our margins by quarter. There's seasonal mix in there. If you look at the fourth quarter margins the percentage of spec sales versus pre sales in those margins is significantly higher. That's in my mind the greatest decrease of margins in the fourth quarter. Simply, we build the foundations in the winter to close the homes in the spring and at this point we felt like cash flow was the best alternative there. Our incentives on a spec home were bigger than incentives on a pre sale obviously because many of our buyers would like to go through the design center and have the home of their dreams.

I would just be cautious that that's driven by spec that's in backlog and closed as opposed to the overall margin.

Gary Herdler

The margins that we have in the fourth quarter are not representative. What I said is we're running at a 12% to 13%. Your question about how we could further impair, the models are structured so you can't just take impairments based upon unrealistic assumptions. It's pretty structured. We have a model that we use consistently and that's what the accountants base their judgment on.

Although at times you could certainly challenge the assumptions that are made, I think we try to be as realistic and conservative as possible. But, we don't want to be unrealistically conservative to drive margins, impairments even further.


You have no further questions at this time.

Jeffrey Orleans

Thank you everyone. We appreciate your time. We appreciate your support and if there are any questions please call Gary. If Gary doesn't answer your question, I guess just give me a call then. Thank you.

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