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| OHB > SEC Filings for OHB > Form 10-K/A on 3-Oct-2008 | All Recent SEC Filings |
3-Oct-2008
Annual Report
The Company primarily develops, builds and markets high quality single-family homes, townhouses and condominiums. As of June 30, 2008, the Company operated in four regions in the following 11 markets:
Northern region:
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º Southeastern Pennsylvania;
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º Central New Jersey;
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º Southern New Jersey; and
º •
º Orange County, New York
Southern region:
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º Charlotte, North Carolina (including adjacent counties in South
Carolina);
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º Richmond, Virginia;
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º Raleigh, North Carolina;
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º Greensboro, North Carolina; and
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º Tidewater, Virginia
Midwestern region:
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º Chicago, Illinois
Florida region:
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º Orlando, Florida
The Company has been in operation for approximately 90 years, starting out in the Philadelphia and New Jersey markets. We entered the North Carolina and Virginia markets in fiscal year 2001 through our acquisition of Parker & Lancaster Corporation, a privately-held residential homebuilder. The Company entered the Orlando, Florida market on July 28, 2003, through its acquisition of Masterpiece Homes, Inc. ("Masterpiece Homes"), a privately-held residential homebuilder. On July 28, 2004, we entered the Chicago, Illinois market through the acquisition of Realen Homes, L.P. ("Realen Homes"), an established privately-held homebuilder with operations in Chicago, Illinois and southeastern Pennsylvania. On December 23, 2004, the Company acquired, through a wholly-owned subsidiary, certain real estate assets from Peachtree Residential Properties, LLC, a North Carolina limited liability company and Peachtree Townhome Communities, LLC, a North Carolina limited liability company which, at the time we acquired the assets, were wholly-owned subsidiaries of Peachtree Residential Properties, Inc., a Georgia corporation (collectively, "Peachtree Residential Properties"). In December 2005, we entered the Phoenix, Arizona market as a start-up operation via the purchase of an undeveloped parcel of land. On December 31, 2007, the Company committed to exiting its Arizona market and, in connection with this decision, on that date we disposed of our entire land position and related work-in-process homes in Arizona, which constituted substantially all of our assets in the western region. The Consolidated Financial Statements have been reclassified for all prior periods presented to reflect this business as a discontinued operation (see Note 2-Discontinued Operations). We believe that we are one of the 50 largest homebuilders in the United States and are one of the top ten homebuilders in both the Philadelphia, Pennsylvania and Richmond, Virginia markets.
During the second half of fiscal year 2006, all of fiscal years 2007 and
2008 as well as subsequent to the fiscal year end, the Company faced several
challenges relating to unfavorable market conditions in the housing industry,
including (a) increased new and resale home inventory levels (including the
growing number of foreclosed homes offered at substantially reduced prices);
(b) decreased homebuyer demand due to lower consumer confidence in the overall
housing market; (c) increased uncertainty in the overall mortgage market; and
(d) increased mortgage underwriting standards. The decrease in homebuyer demand
as a result of lower consumer confidence can be attributed to concerns of
prospective buyers of new homes about the direction of home prices, which has increased general homebuyer uncertainty regarding whether it is the right time to buy a home. The uncertainty in the mortgage market is partially the result of concerns regarding the sub-prime mortgage market, which has experienced rising delinquencies and defaults by borrowers as they experience financial difficulties due to rising interest rates. This credit deterioration has led to the bankruptcies of major sub-prime mortgage lenders, reduced general availability of mortgage financing and the tightening of lending standards. While the Company has minimal exposure to the sub-prime markets, these factors may make it more difficult for our potential customers to sell their existing homes. These market challenges are evidenced by the overall reduction in new orders for the fiscal year ended June 30, 2008 as compared to the fiscal year ended June 30, 2007. New orders decreased $147,974, or 23.5%, which represents 242 homes.
As a result of these and other challenges, the Company recorded inventory impairments and write-offs of abandoned projects and other pre-acquisition costs. In addition to these charges, the Company continued to reduce headcount in all of its regions and take other steps to control increasing costs. The Company continues to respond to the uncertainties noted above by increasing sales incentives and offering limited time promotions with the objective of improving new orders and reducing home inventory levels.
Similarly, the Company assesses whether goodwill is impaired. This assessment is based on the estimated future cash flows. Actual results could differ from such estimates which could result in the determination that the goodwill is no longer recoverable.
During the fiscal year ended June 30, 2008, a valuation allowance was established in the amount of $53,642 for the deferred tax assets due to the lack of sufficient objective evidence regarding the realization of these assets in the foreseeable future. Statement of Financial Accounting Standards ("SFAS") No. 109 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a "more likely than not" standard. In making such judgments, significant weight is given to evidence that can be objectively verified. SFAS No. 109 provides that a cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable and also restricts the amount of reliance on projections of future taxable income to support the recovery of deferred tax assets. The ultimate realization of these deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time.
During the fourth quarter of fiscal year 2008, the Company recognized additional impairment charges of $2,825 reflecting the impact of cumulative out of period adjustments. This error was related to impairments taken on the Company's residential properties and had the effect of increasing residential property expenses and reducing net income by $2,825. The Company concluded that this adjustment is not material to the consolidated financial statements for any prior period nor to the fourth quarter of fiscal year 2008.
Results of Operations
The tables included in "Item 1-Business" summarize the Company's revenues, new orders and backlog data for fiscal year 2008 with comparable data for fiscal years 2007 and 2006. The Company classifies a sales contract as a new order for backlog purposes at the time a homebuyer executes a contract to purchase a home from the Company.
Orders and Backlog
New orders for the fiscal year ended June 30, 2008 decreased $147,974, or 23.5%, to $482,579 on 1,139 homes, compared to $630,553 on 1,381 homes for the fiscal year ended June 30, 2007. The average price per home of net new orders decreased by approximately 7.2% to $424 for the fiscal year ended June 30, 2008 compared to $457 for the fiscal year ended June 30, 2007, primarily due to the unfavorable market conditions. Increases in the availability of both new and existing homes, including the increased number of homes in foreclosure has contributed to the decline in the average price of new and existing homes, including homes sold by the Company. Approximately 83% of the Company's net new order activity during the past two fiscal years occurred in the northern and southern regions, while the Midwest and Florida region accounted for approximately 12% and 5% of the new order activity, respectively.
The decrease in the Company's net new orders during the fiscal year ended June 30, 2008, compared to the fiscal year ended June 30, 2007, primarily was attributable to the continued unfavorable market conditions in the housing industry, as noted above.
The backlog at June 30, 2008 decreased $79,604, or 25.0%, to $238,309 on 486 homes compared to the backlog at June 30, 2007 of $317,913 on 609 homes. At June 30, 2008, nearly 90% of the Company's backlog related to the northern and southern regions compared with nearly 87% for those regions at June 30, 2007. The average price per home included in the Company's backlog decreased 6.1% to $490 at June 30, 2008 compared to $522 at June 30, 2007. The decrease in the average price per home included in the Company's backlog is primarily attributable to increases in sales incentives offered by the Company in response to the difficult market conditions.
The Company experienced cancellation rates of approximately 26% and 23%, respectively for the fiscal years ended June 30, 2008 and 2007. Substantially all of the orders in sales backlog as of June 30, 2008 are scheduled to close during fiscal year 2009.
Northern Region:
New orders for the fiscal year ended June 30, 2008 decreased $55,135 to $196,217, or 21.9%, on 441 homes, compared to $251,352 on 490 homes for the fiscal year ended June 30, 2007. The decrease in new orders is primarily attributable to unfavorable market conditions noted above. The average price per home of new orders decreased by 13.3% to $445 for the fiscal year ended June 30, 2008 compared to $513 for the fiscal year ended June 30, 2007. The decrease in the average price per home of new orders is primarily the result of the increased sales incentives noted above.
The Company had 31 active selling communities in the northern region as of June 30, 2008 compared to 34 active selling communities at June 30, 2007.
Southern Region:
New orders for the fiscal year ended June 30, 2008 decreased $41,295 to $216,945, or 16.0%, on 487 homes compared to $258,240 on 520 homes for the fiscal year ended June 30, 2007. The decrease in new orders was mainly attributable to the downturn in the housing market. The average price per home of new orders decreased 10.3% to $445 for the fiscal year ended June 30, 2008 compared to $497 for the fiscal year ended June 30, 2007. The decrease in the average price per home of new orders is primarily the result of the increased sales incentives noted above.
The Company had 49 active selling communities in the southern region as of June 30, 2008 compared to 50 active selling communities at June 30, 2007.
New orders for the fiscal year ended June 30, 2008 decreased $30,246 to $52,157, or 36.7%, on 135 homes compared to $82,403 on 182 homes for the fiscal year ended June 30, 2007. The decrease in new orders was primarily the result of decreased homebuyer demand due to lower consumer confidence in the overall housing market. The Company has continued to respond to this decreased homebuyer demand by increasing sales incentives. The average price per home of new orders decreased by 14.7% to $386 for the fiscal year ended June 30, 2008 compared to $453 for the fiscal year ended June 30, 2007.
The Company had eight active selling communities in the midwestern region as of both June 30, 2008 and June 30, 2007.
Florida Region:
New orders for the fiscal year ended June 30, 2008 decreased $21,298 to $17,260, or 55.2%, on 76 homes, compared to $38,558 on 189 homes for the fiscal year ended June 30, 2007. The decrease in new orders for the fiscal year is primarily the result of the continued deterioration of market conditions in this region. New orders were also negatively impacted by our exit from the Palm Bay and Palm Coast markets. The average price per home of new orders increased by 11.3% to $227 for the fiscal year ended June 30, 2008 compared to $204 for the fiscal year ended June 30, 2007. The increase in the average price per home of new orders was primarily a result of our exit from the Palm Bay and Palm Coast markets and our focus on the more expensive Orlando market.
The Company had three active selling communities in the Florida region as of June 30, 2008, compared to six active selling communities as of June 30, 2007.
Total Earned Revenues
Total earned revenues, which includes residential revenue, land sale revenue and other income, for the fiscal year ended June 30, 2008 decreased $99,251 to $583,282, or 14.5%, compared to $682,533 for the fiscal year ended June 30, 2007.
Residential Revenue
Residential revenue earned from the sale of residential homes included 1,262 homes totaling $562,183 during the fiscal year ended June 30, 2008, as compared to 1,487 homes totaling $647,316 during the fiscal year ended June 30, 2007. The average selling price per home delivered increased by approximately 2.3% to $445 for the fiscal year ended June 30, 2008 compared to $435 for the fiscal year ended June 30, 2007.
Northern Region:
Residential revenue earned for the fiscal year ended June 30, 2008 increased $23,794 to $231,034, or 11.5%, on 486 homes delivered as compared to $207,240 on 429 homes delivered during the fiscal year ended June 30, 2007. The increase in residential revenue earned is primarily due to closings at communities opened late in fiscal year 2007 or during fiscal year 2008. The average selling price per home delivered for the fiscal year ended June 30, 2008 decrease by 1.6% to $475 compared to $483 for the fiscal year ended June 30, 2007.
Southern Region:
Residential revenue earned for the fiscal year ended June 30, 2008 decreased $37,642 to $243,714, or 13.4%, on 514 homes delivered as compared to $281,356 on 579 homes delivered during the fiscal year ended June 30, 2007. The decrease in residential revenue earned and homes delivered was
primarily attributable to the overall decline in market conditions, as noted above, that led to reductions in new order activity in the region. The average selling price per home delivered in the region decreased by 2.4% to $474 for the fiscal year ended June 30, 2008 compared to $486 for the fiscal year ended June 30, 2007.
Midwestern Region:
Residential revenue earned for the fiscal year ended June 30, 2008 decreased $32,804 to $59,005, or 35.7%, on 142 homes, compared to $91,809 on 208 homes for the fiscal year ended June 30, 2007. The decrease in residential revenue earned is primarily the result of the overall decline in market conditions, as noted above, that led to decreased new order activity in the region which began during the fourth quarter of fiscal year 2006 and continued throughout fiscal years 2007 and 2008. The average selling price per home delivered decreased 5.9% to $416 for the fiscal year ended June 30, 2008 compared to $441 for the fiscal year ended June 30, 2007.
Florida Region:
Residential revenue earned for the fiscal year ended June 30, 2008 decreased $38,481 to $28,430, or 57.5%, on 120 homes, compared to $66,911 on 271 homes for the fiscal year ended June 30, 2007. The decrease in residential revenue earned is primarily due to the overall decline in market conditions, coupled with our exit from the Palm Coast and Palm Bay markets. The average selling price per home delivered decreased 4.0% to $237 for the fiscal year ended June 30, 2008 compared to $247 for the fiscal year ended June 30, 2007.
Land Sales
During the fiscal year ended June 30, 2008, the Company received proceeds on the sale of land of $36,157. Of the $36,157 received during the fiscal year, $11,432 was recognized as land sales revenue; $11,300 related to proceeds in the Company's western region and was included in discontinued operations; and $13,425 related to two parcels of land that were sold and subsequently subject to an option agreement (see Note 5-Inventory). Due to the federal income tax losses recorded by the Company related to these transactions, the Company received approximately $34,000 of federal income tax refunds as a result of these transactions and other operations for its taxation year ended December 31, 2007. During the fiscal year ended June 30, 2007, the Company recorded land sale revenue of $25,170.
Other Income
Other income consists primarily of property management fees and mortgage processing income. Other income for the fiscal year ended June 30, 2008 decreased $380 or 3.8% to $9,667, compared to $10,047 for the fiscal year ended June 30, 2007.
Costs and Expenses
Costs and expenses for the fiscal year ended June 30, 2008 decreased $72,219 or 9.3% to $705,189, compared with $777,408 for the fiscal year ended June 30, 2007. Costs and expenses for the fiscal year ended June 30, 2008 included inventory impairments of $95,475 and write-off of abandoned projects and other pre-acquisition costs of $8,760. Costs and expenses for the fiscal year ended June 30, 2007 included inventory impairments of $62,787, goodwill impairments of $16,334 and write-off of abandoned projects and other pre-acquisition costs of $19,597. Decreases in costs and expenses are primarily the result of lower variable costs that decreased in conjunction with the decreases in residential revenues noted above, the reduction in selling, general and administrative costs and the
prior fiscal year impairment of goodwill. These reductions were partially offset by the impact of higher inventory impairments.
Cost of Residential Properties
The cost of residential properties for the fiscal year ended June 30, 2008 decreased $60,354 to $553,600, or 9.8%, when compared with $613,954 for the fiscal year ended June 30, 2007. The fiscal years ended June 30, 2008 and 2007 included residential property inventory impairments of $58,919 and $62,787, respectively. Decreases in cost of residential properties is primarily the result of lower variable costs that decreased in conjunction with the decreases in residential revenues noted above, coupled with the impact of lower residential property inventory impairments.
Cost of Land Sales
The cost of residential properties for the fiscal year ended June 30, 2008 increased $21,660 to $47,682, or 83.2%, when compared with $26,022 for the fiscal year ended June 30, 2007. The fiscal year ended June 30, 2008 included inventory impairments related to land sales of $36,556. These impairments include the land sales related to land which the Company maintained an option to purchase. See note 5 to the Consolidated Financial Statements contained in this report.
Inventory Impairments:
As a result of increased sales incentives offered during the fiscal year ended June 30, 2008, a decrease in anticipated absorption rates at various communities, increasing uncertainty with respect to the overall mortgage market, increased mortgage underwriting standards and a slower than anticipated pace of new orders, the Company recorded impairment charges of $83,836 related to land held for development or sale and improvements and $11,639 related to residential properties completed or under construction, for the fiscal year ended June 30, 2008. The impairment losses recorded in fiscal year 2008 were recorded in all of our homebuilding segments, most notable with respect to communities in the midwestern region, which had more than 40% of the impairments. The Company recorded impairment charges of $54,489 related to land held for development or sale and improvements for the fiscal year ended June 30, 2007, $7,318 related to residential properties completed or under construction and $980 related to prepaid sales and marketing expenses. The impairment losses recorded in fiscal year 2007 were recorded in all of our homebuilding regions. The impairment losses were charged to the cost of residential properties and represent the amounts by which the book values of the residential properties and land held for development or sale and improvements exceeded the estimated fair value of the assets.
The fiscal year 2007 impairment related to residential properties completed or under construction included $5,000 of impairments on model homes related to 51 specific model homes in three of the Company's regions.
Gross Profit Margin:
The Company's consolidated gross profit margin for the fiscal year ended June 30, 2008 decreased to (4.4)% compared to 5.3% for the fiscal year ended June 30, 2007. For the fiscal years ended June 30, 2008 and 2007, gross profit included inventory impairments of $95,475 or 16.4% of revenue, and $62,787 or 9.2% of revenue, respectively.
Gross profit is defined as earned revenue less residential property expense, land sale expense and other expense.
The decrease in the Company's consolidated gross profit margins was primarily attributable to reduced gross profit margins in all of the Company's regions. The decreases primarily resulted from the
unfavorable market conditions which led to an increase in sales incentives. In addition, the Company sells a variety of home types in various communities and regions, each yielding a different gross profit margin. As a result, depending on the mix of both communities and home types delivered, the consolidated gross profit margin may fluctuate up or down on a periodic basis and periodic profit margins may not be representative of the consolidated gross profit margin for future fiscal years.
Interest Included in Cost of Residential Properties and Land Sold:
Interest included in the costs and expenses of residential properties and land sold for the fiscal years ended June 30, 2008 and 2007 was $30,050 and $18,311, respectively. The increase of $11,739 in interest included in the costs and expenses of residential properties and land sold was primarily attributable to the land sales that took place during the second quarter of fiscal year 2008. The interest incurred during the construction periods is capitalized to inventory and then expensed to the cost of residential properties in the period in which the home settles. The fiscal 2008 interest included in cost of residential properties and land sales consists of $20,902 related to residential properties and $9,148 related to land sales.
Selling, General & Administrative Expenses
Selling, general and administrative expenses include selling and advertising costs, commissions and other general and administrative costs, which include write-offs of abandoned projects and other pre-acquisition costs. For the fiscal year ended June 30, 2008, selling, general and administrative expenses decreased $18,097 to $96,430, or 15.8%, when compared with $114,527 for the fiscal year ended June 30, 2007. This decrease was primarily due to cost-cutting measures taken in response to the continuing weakness in the market, coupled with lower write-offs of abandoned projects and other pre-acquisition costs. For the fiscal years ended June 30, 2008 and 2007, selling, general and administrative expenses included write-offs of abandoned projects and other pre-acquisition costs of $8,760 and $19,597, respectively. The selling, general and administrative expenses as a percentage of residential revenue earned for the fiscal year ended June 30, 2008, decreased to 17.2% as compared to the 17.7% for the year ended June 30, 2007.
Selling and Advertising:
For the fiscal year ended June 30, 2008, selling and advertising costs decreased $3,641 to $28,558, or 11.3%, when compared with $32,199 for the fiscal year ended June 30, 2007. Selling and advertising costs includes advertising, community sales office expense, model home expense, amortization of deferred marketing costs and other selling costs. During the fiscal year, the Company decreased spending on advertising in an effort to reduce costs in proportion to the reduction in residential revenue. As a percentage of residential revenue, selling and advertising was 5.1% and 5.0% in fiscal years 2008 and 2007, respectively.
Commissions:
The Company's commission expense for the fiscal year ended June 30, 2008, decreased $2,865 to $21,519, or 11.7%, when compared with $24,384 for the fiscal year ended June 30, 2007. This decrease is primarily the result of decreased residential revenue earned during the fiscal year ended June 30, 2008. Commission expense as a percentage of residential revenue earned was 3.8% in both fiscal years 2008 and 2007.
General and Administrative:
For the fiscal year ended June 30, 2008, general and administrative costs decreased $11,591 to $46,353, or 20.0%, when compared to $57,944 for the fiscal year ended June 30, 2007. General and
administrative costs included write-offs of abandoned projects and other pre-acquisition costs of $8,760 and $19,597 for the fiscal years ended June 30, 2008 and 2007, respectively. The decrease in general and administrative expenses was primarily due to the staff reductions that took place during fiscal year 2008, coupled with the lower write-offs of abandoned projects and other pre-acquisition costs.
As a result of the unfavorable market conditions discussed above, the Company reviewed its land under option and agreements of sale and other pre-acquisition costs to determine if the anticipated economics of the transactions remained acceptable to the Company given the state of the homebuilding industry. For those agreements deemed unfavorable, the Company attempted to renegotiate the transaction to more favorable terms. In those situations where the contract could not be renegotiated on terms the Company believed were favorable to the Company, the option or agreement of sale was written-off, resulting in write-offs of abandoned projects and pre-acquisition costs of $8,760 and $19,597 for the fiscal years ended June 30, 2008 and 2007, respectively.
Impairment of Goodwill
As of June 30, 2008, the Company performed an impairment evaluation related to the goodwill that arose from the PLC acquisition made in the southern region. This goodwill represents the remaining goodwill reflected in the Company's balance sheet after impairments taken in 2007. Based on the result of this evaluation there was no impairment to goodwill recorded in the fiscal year ended June 30, 2008.
During the fiscal year ended June 30, 2007, the Company performed impairment evaluations related to the goodwill that arose from the Realen Homes, PLC and Masterpiece Homes acquisitions.
The assessments were performed in accordance with SFAS No. 142. Management evaluated the recoverability of the goodwill by comparing the carrying value of the Company's reporting units to their fair value. Fair value was determined based on the discounted future cash flows. These cash flows are significantly impacted by estimates related to current and future economic conditions, including absorption rates and margins reflective of slowing demand, as well as anticipated future demand. The amounts included in the discounted cash flow analysis are based on management's best estimate of future results. Discount rates were based on the Company's weighted average cost of capital adjusted for business risks. Due to uncertainties in the estimation process, actual results could differ significantly from such estimates. Additionally, future changes in any of these factors could result in future impairments of the remaining goodwill
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