UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
( X )ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the twelve months ended OCTOBER 31, 2001
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number: 1-8551
Hovnanian Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-1851059
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
10 Highway 35, P.O. Box 500, Red Bank, N. J. 07701
(Address of principal executive offices)
732-747-7800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- -------------------- ------------------------
Class A Common Stock, $.01 par value New York Stock Exchange
per share
Securities registered pursuant to Section 12(g) of the Act - None
Indicate by check mark whether the registrant (l) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
( X )Yes ( ) No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
As of the close of business on January 4, 2002, there were outstanding
20,607,178 shares of the Registrant's Class A Common Stock and
7,471,640 shares of its Class B Common Stock. The approximate
aggregate market value (based upon the closing price on the New York
Stock Exchange) of these shares held by non-affiliates of the
Registrant as of January 4, 2002 was $254,417,000. (The value of a
share of Class A Common Stock is used as the value for a share of
Class B Common Stock as there is no established market for Class
B Common Stock and it is convertible into Class A Common Stock on
a share-for-share basis.)
Documents Incorporated by Reference:
Part III - Those portions of registrant's definitive proxy statement
to be filed pursuant to Regulation l4A in connection with registrant's
annual meeting of shareholders to be held on March 8, 2002 which are
responsive to Items l0, ll, l2 and l3.
HOVNANIAN ENTERPRISES, INC.
FORM 10-K
TABLE OF CONTENTS
Item Page
PART I
1 and 2 Business and Properties...................... 4
3 Legal Proceedings............................ 15
4 Submission of Matters to a Vote of
Security Holders........................... 15
Executive Officers of the Registrant......... 15
PART II
5 Market for the Registrant's Common Equity
and Related Stockholder Matters............ 15
6 Selected Consolidated Financial Data......... 16
7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 18
8 Financial Statements and Supplementary
Data....................................... 36
9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................. 36
PART III
10 Directors and Executive Officers of the
Registrant................................. 37
Executive Officers of the Registrant......... 37
11 Executive Compensation....................... 38
12 Security Ownership of Certain Beneficial
Owners and Management...................... 38
13 Certain Relationships and Related
Transactions............................... 38
PART IV
14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K....................... 39
SIGNATURES................................... 41
PART I
ITEMS 1 AND 2 - BUSINESS AND PROPERTIES
BUSINESS OVERVIEW
We design, construct and market high quality single-family detached
homes and attached condominium apartments and townhouses in planned
residential developments in the Northeast (New Jersey, southern New
York state, and eastern Pennsylvania), North Carolina, Metro D.C.
(northern Virginia and Maryland), southern California, Texas, and
the Mid South (Tennessee, Alabama, and Mississippi). We market
our homes to first-time buyers, first-time and second-time move-up
buyers, luxury buyers, active adult buyers and empty nesters.
We offer a variety of homestyles in the United States at prices
ranging from $43,000 to $950,000 with an average sales price
in fiscal 2001 of $255,000. We are currently offering homes
for sale in 172 communities. Since the incorporation of our
predecessor company in 1959, we have delivered in excess of
106,000 homes, including 6,791 homes in fiscal 2001.
In addition, we provide financial services (mortgage loans
and title insurance) to our homebuilding customers.
We employed approximately 1,945 full-time associates as of
October 31, 2001. We were incorporated in New Jersey in 1967 and
we reincorporated in Delaware in 1982.
BUSINESS STRATEGIES, OPERATING POLICIES AND PROCEDURES
Over the past few years, our strategies have included several
initiatives to fundamentally transform our traditional practices used
to design, build and sell homes and focus on "building better." We
believe that the adoption and implementation of processes and
systems successfully used in other manufacturing industries, such
as rapid cycle times, vendor consolidation, vendor partnering and
just-in-time material procurement, will dramatically improve our
business and give us a clear advantage over our competitors.
Our concentration in selected markets is a key factor that enables
us to achieve powers and economies of scale and differentiate
ourselves from most of our competitors. These performance enhancing
strategies are designed to achieve operational excellence through
the implementation of standardized and streamlined "best practice
processes."
Strategic Initiatives - To improve our homebuilding gross
profit margins, we have introduced a number of strategic initiatives,
including: Partners In Excellence, Process Redesign and Training.
Partners In Excellence, our total quality management
initiative, is intended to focus on improving the way operations
are performed. It involves all of our associates through a
systematic, team-oriented approach to improvement. It increases
our profits by streamlining processes and by reducing costly errors.
We were recognized for our efforts by receiving the 1997 Gold
National Housing Quality Award from Professional Builder magazine
and the NAHB Research Center.
Process Redesign is the fundamental rethinking and radical
redesign of our processes to achieve dramatic improvements in
performance. Our Process Redesign efforts are currently focused
on streamlining and standardizing all of our key business processes.
In addition, we are working to streamline our processes and
implement SAP's enterprise-wide "Enterprise Resource Package"
computer software system throughout our organization.
Training is designed to provide our associates with the
knowledge, attitudes, skill and habits necessary to succeed at
their jobs. Our Training Department regularly conducts training
classes in sales, construction, administration, and managerial
skills. In addition, as Process Redesign develops new processes,
the Training Department is responsible for educating our
associates on the processes, procedures and operations.
Land Acquisition, Planning and Development - Before entering
into a contract to acquire land, we complete extensive comparative
studies and analyses which assist us in evaluating the economic
feasibility of such land acquisition. We generally follow a policy
of acquiring options to purchase land for future community developments.
We attempt to acquire land with a minimum cash investment and negotiate
takedown options, thereby limiting the financial exposure to the
amounts invested in property and predevelopment costs. This policy
significantly reduces the risk and generally allows us to obtain
necessary development approvals before acquisition of the land, thereby
enhancing the value of the options and the land eventually acquired.
Our option and purchase agreements are typically subject to
numerous conditions, including, but not limited to, our ability to
obtain necessary governmental approvals for the proposed community.
Generally, the deposit on the agreement will be returned to us if all
approvals are not obtained, although predevelopment costs may not be
recoverable. By paying an additional, nonrefundable deposit, we have
the right to extend a significant number of our options for varying
periods of time. In most instances, we have the right to cancel any
of our land option agreements by forfeiture of our deposit on the
agreement. In such instances, we generally are not able to recover
any predevelopment costs.
Our development activities include site planning and
engineering, obtaining environmental and other regulatory approvals
and constructing roads, sewer, water and drainage facilities, and
for our residential developments, recreational facilities and other
amenities. These activities are performed by our staff, together
with independent architects, consultants and contractors. Our staff
also carries out long-term planning of communities.
Design - Our residential communities are generally located in
suburban areas near major highways. The communities are designed as
neighborhoods that fit existing land characteristics. We strive to
create diversity within the overall planned community by offering a
mix of homes with differing architecture, textures and colors.
Recreational amenities such as swimming pools, tennis courts, club
houses and tot lots are often included.
Construction - We design and supervise the development and
building of our communities. Our homes are constructed according
to standardized prototypes which are designed and engineered to
provide innovative product design while attempting to minimize costs
of construction. We employ subcontractors for the installation of
site improvements and construction of homes. Agreements with
subcontractors are generally short term and provide for a fixed price
for labor and materials. We rigorously control costs through the
use of a computerized monitoring system. Because of the risks
involved in speculative building, our general policy is to construct
an attached condominium or townhouse building only after signing
contracts for the sale of at least 50% of the homes in that building.
A majority of our single family detached homes are constructed after
the signing of a contract and mortgage approval has been obtained.
Materials and Subcontractors - We attempt to maintain
efficient operations by utilizing standardized materials available
from a variety of sources. In addition, we contract with
subcontractors to construct our homes. Hovnanian has reduced
construction and administrative costs by consolidating
the number of vendors serving our Northeast market and by executing
national purchasing contracts with select vendors. Hovnanian plans
to implement this strategy throughout all of our markets. In recent
years, Hovnanian has experienced no significant construction delays
due to shortages of materials or labor. Hovnanian cannot predict,
however, the extent to which shortages in necessary materials or
labor may occur in the future.
Marketing and Sales - Our residential communities are sold
principally through on-site sales offices. In order to respond to
our customers' needs and trends in housing design, we rely upon our
internal market research group to analyze information gathered from,
among other sources, buyer profiles, exit interviews at model sites,
focus groups and demographic data bases. We make use of newspaper,
radio, magazine, our website, billboard, video and direct mail
advertising, special promotional events, illustrated brochures,
full-sized and scale model homes in our comprehensive marketing
program. In addition, we have opened home design galleries in our
Northeast region, Virginia, Maryland, Texas, North Carolina, and
California, which have increased option sales and profitability in
these markets. We plan to open similar galleries in each of
our markets.
Customer Service and Quality Control - Associates responsible
for customer service participate in pre-closing quality control
inspections as well as responding to post-closing customer needs.
Prior to closing, each home is inspected and any necessary completion
work is undertaken by us. In some of our markets, we are enrolled in
a standard limited warranty program which, in general, provides a
homebuyer with a one-year warranty for the home's materials and
workmanship, a two-year warranty for the home's heating, cooling,
ventilating, electrical and plumbing systems and a ten-year warranty
for major structural defects. All of the warranties contain standard
exceptions, including, but not limited to, damage caused by the customer.
Customer Financing - We sell our homes to customers who
generally finance their purchases through mortgages. During the year
ended October 31, 2001, over 57% of our non-cash customers obtained
mortgages originated by our wholly-owned mortgage banking subsidiaries.
Mortgages originated by our wholly-owned mortgage banking subsidiaries
are sold in the secondary market.
RESIDENTIAL DEVELOPMENT ACTIVITIES
Our residential development activities include evaluating and
purchasing properties, master planning, obtaining governmental
approvals and constructing, marketing and selling homes. A
residential development generally includes a number of residential
buildings containing from two to twenty-four individual homes per
building and/or single family detached homes, together with amenities
such as recreational buildings, swimming pools, tennis courts and
open areas.
We attempt to reduce the effect of certain risks inherent
in thehousing industry through the following policies and procedures:
- Through our presence in multiple geographic markets, our goal is
to reduce the effects that housing industry cycles, seasonality and
local conditions in any one area may have on our business. In
addition, we plan to achieve a significant market presence in each
of our markets in order to obtain powers and economies of scale.
- We typically acquire land for future development principally
through the use of land options which need not be exercised before
the completion of the regulatory approval process. We structure
these options in most cases with flexible takedown schedules rather
than with an obligation to takedown the entire parcel upon approval.
Additionally, we purchase improved lots in certain markets by
acquiring a small number of improved lots with an option on
additional lots. This allows us to minimize the economic costs
and risks of carrying a large land inventory, while maintaining
our ability to commence new developments during favorable
market periods.
- - We generally begin construction on an attached condominium or
townhouse building only after entering into contracts for the sale
of at least 50% of the homes in that building. A majority of our
single family detached homes are started after a contract is signed
and mortgage approvals obtained. This limits the build-up of
inventory of unsold homes and the costs of maintaining and carrying
that inventory.
- We offer a broad product array to provide housing to a wide range
of customers. Our customers consist of first-time buyers, first-
and second-time move-up buyers, luxury buyers, active adult buyers
and empty nesters.
- We offer a wide range of customer options to satisfy individual
customer tastes. We have large regional home design galleries in New
Jersey, Virginia, Maryland, North Carolina, Texas, and California.
Current base prices for our homes in contract backlog at
October 31, 2001 (exclusive of upgrades and options) range from
$43,000 to $950,000 in our Northeast Region, from $245,000 to
$344,000 in Metro D.C., from $148,000 to $216,000 in North Carolina,
from $124,000 to $195,000 in the Mid South, from $123,000 to
$680,000 in Texas, and from $194,000 to $877,000 in California.
Closings generally occur and are typically reflected in revenues from
two to nine months after sales contracts are signed.
Information on homes delivered by market area is set forth
below:
Year Ended
----------------------------------
October October October
31, 2001 31, 2000 31, 1999
---------- -------- --------
(Housing Revenue in Thousands)
Northeast Region:
Housing Revenues........$ 570,647 $ 561,422 $560,586
Homes Delivered......... 1,860 1,939 2,063
Average Price...........$ 306,799 $ 289,542 $271,733
North Carolina:
Housing Revenues........$ 255,390 $ 126,596 $145,153
Homes Delivered......... 1,449 653 756
Average Price...........$ 176,253 $ 193,868 $192,001
Metro D.C.:
Housing Revenues........$ 310,815 $ 66,137 $ 45,493
Homes Delivered......... 1,294 263 198
Average Price...........$ 240,197 $ 251,471 $229,762
California:
Housing Revenues........$ 280,582 $ 143,729 $105,941
Homes Delivered......... 760 480 514
Average Price...........$ 369,187 $ 299,435 $206,110
Texas:
Housing Revenues........$ 215,045 $ 186,294 $ 13,184
Homes Delivered......... 1,003 914 66
Average Price........... 214,402 $ 203,823 $199,757
Mid South:
Housing Revenues........$ 44,372 -- --
Homes Delivered......... 290 -- --
Average Price........... 153,007 -- --
Other:
Housing Revenues........$ 16,866 $ 21,288 $ 38,196
Homes Delivered......... 135 118 171
Average Price...........$ 124,933 $ 180,407 $223,368
Combined Total:
Housing Revenues........$1,693,717 $1,105,466 $908,553
Homes Delivered........ 6,791 4,367 3,768
Average Price...........$ 249,406 $ 253,141 $241,123
The value of our net sales contracts increased 46.9% to
$1,619,000 for the year ended October 31, 2001 from $1,102,000 for
the year ended October 31, 2000. This increase was the net result
of a 48.0% increase in the number of homes contracted to 6,722 in
2001 from 4,542 in 2000. By United States market, on a dollar
basis, Metro D. C. increased 292.7%, North Carolina increased
117.1%, Texas increased 9.4%, and California increased 61.2%. The
increase in Metro D. C. and North Carolina was primarily due to the
merger with Washington Homes, Inc. The increase in Texas was due
to slight increases in sales and average home prices. The increase
in California was primarily the result of increased sales.
These increases were slightly offset by a 2.0% decrease in sales
in the Northeast Region due to fewer active selling communities.
The following table summarizes our active communities under
development as of October 31, 2001. The contracted not delivered
and remaining home sites available in our active communities under
development are included in the 36,805 total home lots under the
total residential real estate chart in Item 7 Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
(1) (2)
Contracted Remaining
Commun- Approved Homes Not Home Sites
ities Lots Delivered Delivered Available
------- -------- --------- --------- ----------
Northeast Region...... 23 8,599 3,038 1,136 4,425
North Carolina........ 54 7,963 3,699 534 3,730
Metro D.C............. 34 5,959 3,337 779 1,843
California............ 8 2,696 1,197 172 1,327
Texas................. 35 4,040 2,252 263 1,525
Mid South............. 18 2,057 778 122 1,157
Other................. -- 147 130 3 14
------- -------- --------- --------- ----------
Total 172 31,461 14,431 3,009 14,021
======= ======== ========= ========= ==========
(1) Includes 484 lots under option.
(2) Of the total home sites available, 801 were under construction
or completed (including 164 models and sales offices), 9,628
were under option, and 157 were financed through purchase
money mortgages.
The following table summarizes our total started or completed
unsold homes as of October 31, 2001:
Unsold
Homes Models Total
------ ------ -----
Northeast Region.................. 69 48 117
North Carolina.................... 205 41 246
Metro D.C......................... 27 27 54
California........................ 60 11 71
Texas............................. 215 15 230
Mid South......................... 54 22 76
Other............................. 7 -- 7
------ ------ -----
Total 637 164 801
====== ====== =====
BACKLOG
At October 31, 2001 and October 31, 2000, we had a backlog of
signed contracts for 3,033 homes and 2,096 homes, respectively, with
sales values aggregating $773,074,000 and $538,546,000, respectively.
Substantially all of our backlog at October 31, 2001 is expected to
be completed and closed within the next twelve months. At
November 30, 2001 and 2000, our backlog of signed contracts was
3,025 homes and 2,190 homes, respectively, with sales values
aggregating $770,930,000 and $572,452,000, respectively.
Sales of our homes typically are made pursuant to a standard
sales contract and provides the customer with a statutorily mandated
right of rescission for a period ranging up to 15 days after
execution. This contract requires a nominal customer deposit at the
time of signing. In addition, in the Northeast Region and Metro
D. C. we typically obtain an additional 5% to 10% down payment due
30 to 60 days after signing. The contract may include a
financing contingency, which permits the customer to cancel his
obligation in the event mortgage financing at prevailing interest
rates (including financing arranged or provided by us) is
unobtainable within the period specified in the contract.
This contingency period typically is four to eight weeks following
the date of execution.
RESIDENTIAL LAND INVENTORY
It is our objective to control a supply of land, primarily
through options, consistent with anticipated homebuilding
requirements in each of our housing markets. Controlled land as of
October 31, 2001, exclusive of communities under development
described under "Business and Properties -- Residential Development
Activities," is summarized in the following table. The proposed
developable lots in communities under development are included in
the 36,805 total home lots under the total residential real estate
chart in Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Number
of Proposed Total Land
Proposed Developable Option Book
Communities Lots Price Value(1)(2)
----------- ----------- ----------- -----------
(In Thousands)
Northeast Region:
Under Option........ 60 9,603 $ 354,246 53,193
Owned............... 6 711 31,757
--------- ----------- -----------
Total............ 66 10,314 84,950
--------- ----------- -----------
North Carolina:
Under Option........ 29 2,312 $ 72,619 4,430
--------- ----------- -----------
Metro D.C.:
Under Option........ 22 2,614 $ 115,104 7,993
Owned............... 14 2,332 36,767
-------- ----------- -----------
Total............ 36 4,946 44,760
-------- ----------- -----------
California:
Under Option........ 5 171 $ 36,370 4,662
-------- ----------- -----------
Texas:
Under Option........ 13 1,040 $ 38,962 1,999
-------- ----------- -----------
Other:
Owned............... 2 992 1,496
-------- ----------- -----------
Totals:
Under Option........ 129 15,740 72,277
Owned............... 22 4,035 70,020
--------- ----------- -----------
Combined Total........ 151 19,775 142,297
======== =========== ===========
(1) Properties under option also includes costs incurred on properties
not under option but which are under investigation. For properties
under option, we paid, as of October 31, 2001, option fees and
deposits aggregating approximately $33,739,000. As of October 31,
2001, we spent an additional $38,538,000 in non-refundable
predevelopment costs on such properties.
(2) The book value of $142,297,000 is identified on the balance sheet
as "Inventories - land, land options, and cost of projects in
planning", and does not include inventory in Poland amounting to
$4,668,000.
In our Northeast Region, our objective is to control a supply
of land sufficient to meet anticipated building requirements for at
least three to five years. We typically option parcels of unimproved
land for development.
In North Carolina, Metro D.C., and the Mid South, a portion of
the land we acquired was from land developers on a lot takedown basis.
In Texas, we primarily acquire improved lots from land developers.
Under a typical agreement with the lot developer, we purchase a minimal
number of lots. The balance of the lots to be purchased are covered
under an option agreement or a non-recourse purchase agreement. Due
to the dwindling supply of improved lots in these markets, we are
currently optioning parcels of unimproved land for development.
In California, historically we have focused our development
efforts in the southern portion of the state. Where possible, we
plan to option developed or partially developed lots. With a
limited supply of developed lots in California, we are currently
optioning parcels of unimproved land for development.
CUSTOMER FINANCING
At our communities, on-site personnel facilitate sales by
offering to arrange financing for prospective customers through our
mortgage subsidiaries. We believe that the ability to offer
financing to customers on competitive terms as a part of the sales
process is an important factor in completing sales.
Our business consists of providing our customers with
competitive financing and coordinating and expediting the loan
origination transaction through the steps of loan application, loan
approval and closing. We originate loans in New Jersey, New York,
Pennsylvania, Maryland, Virginia, North Carolina, Mississippi,
Alabama, Tennessee, Texas, and California.
Like other mortgage bankers, we customarily sell nearly all
of the loans that we originate. Additionally, we sell virtually
all of the loan servicing rights to loans we originate. Loans are
sold either individually or in pools to GNMA, FNMA, or FHLMC or
against forward commitments to institutional investors, including
banks, mortgage banking firms, and savings and loan associations.
We plan to grow our mortgage banking operations. Our
objective is to increase the capture rate of non-cash homebuyers
from the 57% rate achieved in fiscal 2001 to 70% over the next
several years.
COMPETITION
Our residential business is highly competitive. We compete
with numerous real estate developers in each of the geographic areas
in which we operate. Our competition range from small local builders
to larger regional and national builders and developers, some of
which have greater sales and financial resources than us.
Previously owned homes and the availability of rental housing
provide additional competition. We compete primarily on the basis
of reputation, price, location, design, quality, service and
amenities.
REGULATION AND ENVIRONMENTAL MATTERS
General. We are subject to various local, state and federal
statutes, ordinances, rules and regulations concerning zoning,
building design, construction and similar matters, including local
regulations which impose restrictive zoning and density requirements
in order to limit the number of homes that can eventually be built
within the boundaries of a particular locality. In addition, we
are subject to registration and filing requirements in connection
with the construction, advertisement and sale of our communities
in certain states and localities in which we operate even if all
necessary government approvals have been obtained. We may also be
subject to periodic delays or may be precluded entirely from
developing communities due to building moratoriums that could be
implemented in the future in the states in which we operate.
Generally, such moratoriums relate to insufficient water or
sewerage facilities or inadequate road capacity.
Environmental. We are also subject to a variety of local,
state and federal statutes, ordinances, rules and regulations
concerning protection of health and the environment ("environmental
laws"). The particular environmental laws which apply to any given
community vary greatly according to the community site, the site's
environmental conditions and the present and former uses of the
site. These environmental laws may result in delays, may cause us
to incur substantial compliance and other costs, and prohibit or
severely restrict development in certain environmentally sensitive
regions or areas.
Fair Housing Act. In July 1985, New Jersey adopted the Fair
Housing Act which established an administrative agency to adopt
criteria by which municipalities will determine and provide for their
fair share of low and moderate income housing. This agency adopted
such criteria in May 1986. Its implementation thus far has caused
some delay in approvals for some of our New Jersey communities and
may result in a reduction in the number of homes planned for some
properties.
Both prior to the enactment of the Fair Housing Act and in
its implementation thus far, municipal approvals in some of the
New Jersey municipalities in which we own land or land options
required us to set aside up to 22% of the approved homes for sale
at prices affordable to persons of low and moderate income. In
order to comply with such requirements, we must sell these homes
at a loss. We attempt to reduce some of these losses through
increased density, certain cost saving construction measures and
reduced land prices from the sellers of property. Such losses are
absorbed by the market priced homes in the same developments.
State Planning Act. Pursuant to the 1985 State Planning Act,
the New Jersey State Planning Commission has adopted a State
Development and Redevelopment Plan ("State Plan"). The State Plan,
if fully implemented, would designate large portions of the state
as unavailable for development or as available for development only
at low densities, and other portions of the state for more intense
development. State government agencies would be required to make
permitting decisions in accordance with the State Plan, if it
is fully implemented. The state government agencies have not yet
adopted policies and regulations to fully implement the State Plan.
The Governor has issued an Executive Order to all state agencies
requiring compliance with the State Plan. It is unclear what
effect this Executive Order may have on our ability to develop
our land.
The California Environmental Quality Act (CEQA) requires
that every community comply with the CEQA. Compliance with CEQA
may result in delay in obtaining the necessary approvals for
commencement of the community, a reduction in the density permitted
in the community, additional costs in developing the community, or
denial of the permits necessary to construct the community.
Conclusion. Despite our past ability to obtain necessary
permits and approvals for our communities, it can be anticipated
that increasingly stringent requirements will be imposed on
developers and homebuilders in the future. Although we cannot
predict the effect of these requirements, they could result in
time-consuming and expensive compliance programs and substantial
expenditures for pollution and water quality control, which could
have a material adverse effect on us. In addition, the continued
effectiveness of permits already granted or approvals already
obtained is dependent upon many factors, some of which are beyond
our control, such as changes in policies, rules and regulations and
their interpretation and application.
Company Offices. We own our corporate headquarters, a
four-story, 24,000 square feet office building located in Red Bank,
New Jersey and 19,992 square feet in a Middletown, New Jersey
condominium office building. We lease office space consisting of
106,549 square feet in various New Jersey and Pennsylvania locations,
59,216 square feet in the Metro D. C. area, 51,094 square feet in
various North Carolina locations, 11,448 square feet in various
Mid South locations, 13,505 square feet in West Palm Beach, Florida,
17,359 square feet in southern California, and 25,025 square feet
in various Texas locations.
ITEM 3 - LEGAL PROCEEDINGS
We are involved from time to time in litigation arising in the
ordinary course of business, none of which is expected to have a
material adverse effect on us.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended October 31, 2001
nomatters were submitted to a vote of security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information on executive officers of the registrant is
incorporated herein from Part III, Item 10.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
Our Class A Common Stock is traded on the New York Stock
Exchange and was held by 620 shareholders of record at January 4,
2002. There is no established public trading market for our
Class B Common Stock, which was held by 450 shareholders of record
at January 4, 2002. In order to trade Class B Common Stock, the
shares must be converted into Class A Common Stock on a one-for-one
basis. The high and low sales prices for our Class A Common Stock
were as follows for each fiscal quarter during the years ended
October 31, 2001, 2000, and 1999:
Class A Common Stock
------------------------------------------------
Oct. 31, 2001 Oct. 31, 2000 Oct. 31, 1999
-------------- -------------- --------------
Quarter High Low High Low High Low
- ------- ------ ------ ------ ------ ------ ------
First........ $ 9.99 $ 7.19 $ 6.88 $ 5.25 $ 9.25 $ 7.75
Second....... $18.75 $ 8.75 $ 6.62 $ 5.44 $ 8.94 $ 6.81
Third........ $19.34 $13.00 $ 6.38 $ 5.44 $ 9.50 $ 7.88
Fourth....... $15.00 $ 9.71 $ 7.94 $ 5.88 $ 8.88 $ 6.00
On August 7, 1999 and October 1, 1999 we acquired two
homebuilding companies. As part of the purchase price 1,845,359
shares of unregistered Class A Common Stock were issued to the
sellers. At October 31, 2001, 241,651 of these shares are being
held in escrow (and thus not reported as issued and outstanding).
There were no underwriters associated with these transactions.
These shares were issued in private transactions in reliance upon
Section 4(2) of the Securities Act of 1933.
Certain debt instruments to which we are a party contain
restrictions on the payment of cash dividends. As a result of the
most restrictive of these provisions, approximately $66,013,000 was
free of such restrictions at October 31, 2001. We have never paid
a cash dividend nor do we currently intend to pay dividends.
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data and
should be read in conjunction with the financial statements included
elsewhere in thisForm 10-K. Per common share data and weighted
average number of common shares outstanding reflect all stock
splits.
Year Ended
----------------------------------------------------
Summary Consolidated October October October October October
Income Statement Data 31, 2001 31, 2000 31, 1999 31, 1998 31, 1997
- ------------------------------- ---------- ---------- -------- -------- --------
(In Thousands Except Per Share Data)
Revenues....................... $1,741,963 $1,135,559 $946,414 $937,729 $770,379
Expenses....................... 1,635,609 1,083,741 895,797 896,437 782,503
---------- ---------- -------- -------- --------
Income(loss) before income
taxes and extraordinary loss. $ 106,354 51,818 50,617 41,292 (12,124)
State and Federal income taxes. 42,668 18,655 19,674 15,141 (5,154)
Extraordinary loss............. (868) (748) --
---------- ---------- -------- -------- --------
Net income (loss).............. $ 63,686 $ 33,163 $ 30,075 $ 25,403 $ (6,970)
========== ========== ======== ======== ========
Per Share Data:
Basic:
Income (loss) before
extraordinary loss......... $ 2.38 $ 1.51 $ 1.45 $ 1.20 $ (0.31)
Extraordinary loss........... (.04) (0.03) --
---------- ---------- -------- -------- --------
Net income (loss)............ $ 2.38 $ 1.51 $ 1.41 $ 1.17 $ (0.31)
========== ========== ======== ======== ========
Weighted average number of
common shares outstanding.. 26,810 21,933 21,404 21,781 22,409
Assuming Dilution:
Income (loss) before
extraordinary loss......... $ 2.29 $ 1.50 $ 1.43 $ 1.19 $ (0.31)
Extraordinary loss........... (.04) (0.03)
---------- ---------- -------- -------- --------
Net income (loss)............ $ 2.29 $ 1.50 $ 1.39 $ 1.16 $ (0.31)
========== ========== ======== ======== ========
Weighted average number of
common shares outstanding.. 27,792 22,043 21,612 22,016 22,506
Summary Consolidated October October October October October
Balance Sheet Data 31, 2001 31, 2000 31, 1999 31, 1998 31, 1997
- ------------------------------- ---------- ---------- -------- -------- --------
Total assets................... $1,064,258 $ 873,541 $712,861 $589,102 $637,082
Mortgages and notes payable.... $ 111,795 $ 78,206 $110,228 $150,282 $184,519
Senior notes, participating
senior subordinated
debentures and subordinated
notes........................ $ 396,544 $ 396,430 $250,000 $145,449 $190,000
Stockholders' equity........... $ 375,646 $ 263,359 $236,426 $201,392 $178,762
Note: See Item 7 "Results of Operations" for impact of our 1999 and 2001
acquisitions in our operating results.
RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
For purposes of computing the ratios of earnings to fixed
charges and earnings to combined fixed charges and preferred
dividends, earnings consist of earnings (loss) from continuing
operations before income taxes, minority interest, extraordinary
items and cumulative effect of accounting changes, plus fixed
charges (interest charges and preferred share dividend requirements
of subsidiaries, adjusted to a pretax basis), less interest
capitalized, less preferred share dividend requirements of
subsidiaries adjusted to a pretax basis and less undistributed
earnings of affiliates whose debt is not guaranteed by us.
The following table sets forth the ratios of earnings to fixed
charges and earnings to combined fixed charges and preferred dividends
for the periods indicated:
Years Ended October 31,
-------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- ---------
Ratio of earnings to
fixed charges............ 3.1 2.2 3.0 2.5 (a)
Ratio of earnings to
combined fixed charges
and preferred stock
dividends................. 3.1 2.2 3.0 2.5 (a)
(a) No ratio is presented for the year ended October 31, 1997 as the
earnings for such period were insufficient to cover fixed charges
by $9,197,000.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Our cash uses during the twelve months ended October 31, 2001
were for operating expenses, seasonal increases in housing inventories,
construction, income taxes, interest, the repurchase of common stock,
and the merger with Washington Homes, Inc. We provided for our cash
requirements from housing and land sales, the revolving credit
facility, financial service revenues, and other revenues. We
believe that these sources of cash are sufficient to finance our
working capital requirements and other needs.
Our net income historically does not approximate cash flow
from operating activities. The difference between net income and
cash flow from operating activities is primarily caused by changes
in inventory levels, mortgage loans and liabilities, and non-cash
charges relating to depreciation, impairment losses and goodwill
amortization. When we are expanding our operations, which was the
case in fiscal 2001 and 2000, inventory levels increase causing
cash flow from operating activities to decrease. Liabilities
also increase as inventory levels increase. The increase in
liabilities partially offsets the negative effect on cash flow
from operations caused by the increase in inventory levels.
As our mortgage warehouse loan asset increases, cash flow from
operations decreases. Conversely, as such loans decrease, cash
flow from operations increases. Depreciation and impairment
losses always increase cash flow from operating activities since
they are non-cash charges to operations. We expect to be in an
expansion mode in fiscal 2002. As a result, we expect cash flow
from operations to be less than net income in fiscal 2002.
On December 31, 2000, our stock repurchase program to
purchase up to 4 million shares of Class A Common Stock expired.
As of December 31, 2000, 3,391,047 shares had been purchased under
this program. On July 3, 2001, our Board of Directors authorized
a revision to our stock repurchase program to purchase up to
2 million shares of Class A Common Stock. As of October 31, 2001,
458,700 have been purchased under this program.
Our homebuilding bank borrowings are made pursuant to a
revolving credit agreement (the "Agreement") that provides a
revolving credit line and letter of credit line of up to
$440,000,000 through July 2004. Interest is payable monthly
and at various rates of either the prime rate plus .40% or Libor
plus 1.85%. We believe that we will be able either to extend the
Agreement beyond July 2004 or negotiate a replacement facility,
but there can be no assurance of such extension or replacement
facility. We currently are in compliance and intend to maintain
compliance with the covenants under the Agreement. As of
October 31, 2001, borrowings under the Agreement were zero.
The subordinated indebtedness issued by us and outstanding
as of October 31, 2001 was $99,747,000 9 3/4% Subordinated Notes
due June 2005. In April 2001, we retired $253,000 of these
Subordinated Notes. On October 2, 2000, we issued $150,000,000
10 1/2% Senior Notes due October 2007. The proceeds were used
to repay outstanding debt under our "Revolving Credit Facility".
On May 4, 1999, we issued $150,000,000 9 1/8% Senior Notes due
April 2009. We believe that we will be able either to repay the
subordinated indebtedness and senior notes at their respective
maturity dates through cash flows generated from operations or
through subsequent debt issuances.
Our mortgage banking subsidiary borrows under a $110,000,000
bank warehousing arrangement which expires in July 2002. Interest
is payable monthly at the Federal Funds Rate plus 1.125%. We believe
that we will be able either to extend this agreement beyond July 2002
or negotiate a replacement facility, but there can be no assurance
of such extension or replacement facility. Other finance subsidiaries
formerly borrowed from a multi-builder owned financial corporation
and a builder owned financial corporation to finance mortgage backed
securities but in fiscal 1988 decided to cease further borrowing
from multi-builder and builder owned financial corporations. These
non-recourse borrowings have been generally secured by mortgage loans
originated by one of our subsidiaries. As of October 31, 2001, the
aggregate outstanding principal amount of such borrowings was
$100,704,000.
Total inventory increased $125,131,000 from October 31, 2000
to October 31, 2001. This increase was primarily due to the merger
with Washington Homes, Inc. and significant land purchases in the
Northeast Region. In addition, inventory increased in most of our
other markets except in California where inventory decreased due to
strong home deliveries. Substantially, all homes under construction
or completed and included in inventory at October 31, 2001 are
expected to be closed during the next twelve months. Most inventory
completed or under development is financed through our revolving
credit facility, senior notes, and subordinated indebtedness.
We usually option property for development prior to
acquisition. By optioning property, we are only subject to the
loss of a small option fee and predevelopment costs if we choose
not to exercise the option. As a result, our commitment for major
land acquisitions is reduced.
The following table summarizes housing lots included in our total
residential real estate:
Total Contracted Remaining
Home Not Lots
Lots Delivered Available
-------- ---------- ---------
October 31, 2001:
Northeast Region............. 15,875 1,136 14,739
North Carolina............... 6,576 534 6,042
Metro D. C................... 7,568 779 6,789
California................... 1,670 172 1,498
Texas........................ 2,828 263 2,565
Mid South.................... 1,279 122 1,157
Other........................ 1,009 3 1,006
-------- ---------- ---------
Total................... 36,805 3,009 33,796
======== ========== =========
Owned........................ 10,970 2,525 8,445
Optioned..................... 25,835 484 25,351
-------- ---------- ---------
Total................... 36,805 3,009 33,796
======== ========== =========
October 31, 2000:
Northeast Region............. 15,957 1,149 14,808
North Carolina............... 2,731 215 2,516
Metro D. C................... 5,583 215 5,368
California................... 2,591 151 2,440
Texas........................ 2,380 282 2,098
Other........................ 2,560 84 2,476
-------- ---------- ---------
Total................... 31,802 2,096 29,706
======== ========== =========
Owned........................ 10,012 1,963 8,049
Optioned..................... 21,790 133 21,657
-------- ---------- ---------
Total................... 31,802 2,096 29,706
======== ========== =========
We expect to fund future acquisitions of home lots contracted
not delivered and remaining lots available principally through cash
flows from operations and through our revolving credit agreement.
The following table summarizes our started or completed unsold
homes in active, substantially completed and suspended communities:
October 31, October 31,
2001 2000
---------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ------ ------ ------ ------
Northeast Region.... 69 48 117 133 48 181
North Carolina...... 205 41 246 102 31 133
Metro D.C........... 27 27 54 6 7 13
California.......... 60 11 71 136 32 168
Texas............... 215 15 230 238 8 246
Mid South........... 54 22 76 -- -- --
Other............... 7 -- 7 58 -- 58
------ ------ ------ ------ ------ ------
Total 637 164 801 673 126 799
====== ====== ====== ====== ====== ======
Financial Services - mortgage loans held for sale consist of
residential mortgages receivable of which $105,174,000 and $61,549,000
at October 31, 2001 and October 31, 2000, respectively, are being
temporarily warehoused and awaiting sale in the secondary mortgage
market. The balance of mortgage loans held for sale are being held
as an investment. We may incur risk with respect to mortgages that
are delinquent, but only to the extent the losses are not covered by
mortgage insurance or resale value of the house. Historically, we
have incurred minimal credit losses.
RESULTS OF OPERATIONS
Our operations consist primarily of residential housing
development and sales in our Northeast Region (New Jersey, southern
New York state, and eastern Pennsylvania), North Carolina, Metro D. C.
(northern Virginia and Maryland), southern California, Texas, and
the Mid South (Tennessee, Alabama, and Mississippi). In addition,
we provide financial services to our homebuilding customers.
Total Revenues
Compared to the same prior period, revenues increased
(decreased) as follows:
Year Ended
-----------------------------
October October October
31, 2001 31, 2000 31, 1999
--------- --------- ---------
(Dollars in Thousands)
Homebuilding:
Sale of homes....................$ 588,251 $ 196,913 $ 12,909
Land sales and other revenues.... 6,049 (6,334) 1,692
Financial services................. 12,104 (1,434) 977
Other Operations................... (6,893)
--------- --------- ---------
Total change..................$ 606,404 $ 189,145 $ 8,685
========= ========= =========
Percent change.................. 53.4% 20.0% 1.0%
========= ========= =========
Homebuilding
Compared to the same prior period, housing revenues increased
$588.3 million or 53.2% for the year ended October 31, 2001,
increased $196.9 million or 21.7% for the year ended October 31, 2000,
and increased $12.9 million or 1.4% for the year ended October 31,
1999. Housing revenues are recorded at the time each home is
delivered and title and possession have been transferred to the buyer.
Information on homes delivered by market area is set
forth below:
Year Ended
-----------------------------------
October October October
31, 2001 31, 2000 31, 1999
----------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Housing Revenues............$ 570,647 $ 561,422 $560,586
Homes Delivered............. 1,860 1,939 2,063
North Carolina:
Housing Revenues............$ 255,390 $ 126,596 $145,153
Homes Delivered............. 1,449 653 756
Metro D.C.:
Housing Revenues............$ 310,815 $ 66,137 $ 45,493
Homes Delivered............. 1,294 263 198
California:
Housing Revenues............$ 280,582 $ 143,729 $ 105,941
Homes Delivered............. 760 480 514
Texas:
Housing Revenues............$ 215,045 $ 186,294 $ 13,184
Homes Delivered............. 1,003 914 66
Mid South:
Housing Revenues............$ 44,372 -- --
Homes Delivered............. 290 -- --
Other:
Housing Revenues............$ 16,866 $ 21,288 $ 38,196
Homes Delivered............. 135 118 171
Totals:
Housing Revenues............$1,693,717 $1,105,466 $ 908,553
Homes Delivered............. 6,791 4,367 3,768
The increase in housing revenues was primarily due to the
merger with Washington Homes, Inc. (comprising a portion of the
North Carolina and Metro D.C. markets and all of the Mid South
market), increased deliveries in California and Texas, and an
increase in average sales prices in the Northeast Region, California,
and Texas markets. Continued strong housing demand in our major
markets enables us to increase home prices and home sales.
Unaudited quarterly housing revenues and net sales contracts
using base sales prices by market area for the years ending October 31,
2001, 2000, and 1999 are set forth below:
Quarter Ended
------------------------------------------
October July April January
31, 2001 31, 2001 30, 2001 31, 2001
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region......... $163,955 $156,366 $126,700 $123,626
North Carolina........... 77,248 85,887 60,457 31,798
Metro D.C................ 89,472 109,535 74,263 36,691
California............... 109,099 61,830 65,339 44,314
Texas.................... 68,441 62,360 46,434 37,810
Mid South................ 10,675 18,774 11,846 3,077
Other.................... 830 2,539 8,262 6,089
--------- --------- --------- ---------
Total................ $519,720 $497,291 $393,301 $283,405
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region......... $109,585 $119,073 $155,693 $125,433
North Carolina........... 55,041 59,873 109,483 41,651
Metro D. C............... 75,384 77,253 138,957 32,009
California............... 38,350 66,794 88,620 65,547
Texas.................... 45,299 63,640 64,343 37,177
Mid South................ 11,801 12,394 20,299 3,806
Other.................... 287 279 442 857
--------- --------- --------- ---------
Total................ $335,747 $399,306 $577,837 $306,480
========= ========= ========= =========
Quarter Ended
------------------------------------------
October July April January
31, 2000 31, 2000 30, 2000 31, 2000
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region......... $188,770 $131,668 $113,732 $127,252
North Carolina........... 35,016 33,319 30,891 27,370
Metro D.C................ 18,932 13,901 17,459 15,845
California............... 39,725 48,055 30,313 25,636
Texas.................... 52,188 47,318 37,573 49,215
Other.................... 7,658 3,743 5,087 4,800
--------- --------- --------- ---------
Total................ $342,289 $278,004 $235,055 $250,118
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region......... $121,179 $115,649 $174,126 $109,040
North Carolina........... 29,317 32,338 33,980 26,892
Metro D. C............... 20,354 23,459 25,144 13,449
California............... 43,551 41,350 52,114 23,839
Texas.................... 51,251 54,708 46,671 39,830
Other.................... 4,571 4,412 10,685 4,193
--------- --------- --------- ---------
Total................ $270,223 $271,916 $342,720 $217,243
========= ========= ========= =========
Quarter Ended
------------------------------------------
October July April January
31, 1999 31, 1999 30, 1999 31, 1999
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region (1)..... $164,899 $142,503 $126,501 $126,683
North Carolina........... 47,251 38,269 30,553 29,080
Metro D.C................ 15,541 11,400 6,005 12,547
California............... 37,290 24,792 26,548 17,311
Texas.................... 13,184 -- -- --
Other.................... 9,294 10,107 9,531 9,264
--------- --------- --------- ---------
Total................ $287,459 $227,071 $199,138 $194,885
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region (1)..... $135,514 $111,083 $114,924 $ 90,163
North Carolina........... 25,757 33,078 50,673 31,111
Metro D.C................ 12,246 14,338 16,201 11,077
California............... 36,197 37,788 24,135 17,817
Texas.................... 5,416 -- -- --
Other.................... 3,230 4,643 9,050 12,012
--------- --------- --------- ---------
Total................ $218,360 $200,930 $214,983 $162,180
========= ========= ========= =========
(1) Includes $31,961,000 housing revenues and $12,922,000 sales
contracts in the quarter ended October 31, 1999 from a New
Jersey homebuilder acquired on August 7, 1999.
Our contract backlog using base sales prices by market area is
set forth below:
October October October
31, 2001 31, 2000 31, 1999
--------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Total Contract Backlog........$322,100 $311,539 $286,149
Number of Homes............... 1,160 1,149 1,125
North Carolina:
Total Contract Backlog........$103,616 $ 40,635 $ 44,534
Number of Homes............... 534 215 207
Metro D.C.:
Total Contract Backlog........$208,888 $ 52,339 $ 34,484
Number of Homes............... 779 215 149
California:
Total Contract Backlog........$ 53,338 $ 58,089 $ 34,313
Number of Homes............... 172 151 129
Texas:
Total Contract Backlog........$ 64,961 $ 61,703 $ 51,610
Number of Homes............... 263 282 261
Mid South:
Total Contract Backlog........$ 19,734 -- --
Number of Homes............... 122 -- --
Other:
Total Contract Backlog........$ 437 $ 14,241 $ 9,570
Number of Homes............... 3 84 50
Totals:
Total Contract Backlog........$773,074 $538,546 $460,660
Number of Homes............... 3,033 2,096 1,921
We have written down or written off certain inventories
totaling $4.4, $1.8, and $2.1 million during the years ended
October 31, 2001, 2000, and 1999, respectively, to their estimated
fair value. See "Notes to Consolidated Financial Statements -
Note 11" for additional explanation. These writedowns and write-offs
were incurred primarily because of lower property values, a change
in the marketing strategy to liquidate a particular property, or the
decision not to exercise an option to purchase land.
During the years ended October 31, 2001 and 2000, we wrote off
residential land options including approval and engineering costs
amounting to $1.9 and $1.8 million, respectively. We did not
exercise those options because the communities' proforma profitability
did not produce adequate returns on investment commensurate with the
risk. Those communities were located in New Jersey, New York,
Metro D. C., North Carolina, and California.
During the year ended October 31, 2001, we wrote down two residential
communities in the Northeast Region, one community in North Carolina,
and two land parcels in Florida. The writedown in the Northeast
Region was attributed to two communities that were part of a large
land acquisition, which resulted in a loss. The writedowns in North
Carolina and Florida were based upon changes in market conditions.
The result of the above decisions was a reduction in inventory
carrying amounts to fair value, resulting in a $2.5 million
impairment loss.
During the year ended October 31, 1999 we wrote off one
residential land option including approval and engineering costs
amounting to $0.3 million. We did not exercise this option because
the community's proforma profitability did not produce an adequate
return on investment commensurate with the risk. In addition, we
wrote down one land parcel in Florida, one residential community
in New York and two residential communities in North Carolina.
The Florida land parcel was written down based on recent purchase
offers. The communities were written down based on our decision to
discontinue selling homes and offer the remaining lots for sale.
The result of the above decisions was a reduction in inventory
carrying amounts to fair value, resulting in a $1.8 million
impairment loss.
Cost of sales includes expenses for housing and land and lot
sales. A breakout of such expenses for housing sales and housing
gross margin is set forth below:
Year Ended
-----------------------------------
October October October
31, 2001 31, 2000 31, 1999
----------- --------- ---------
(Dollars In Thousands)
Sale of homes.............. $1,693,717 $1,105,466 $908,553
Cost of sales.............. 1,344,708 876,492 717,953
----------- --------- ---------
Housing gross margin....... $ 349,009 $ 228,974 $190,600
=========== ========= =========
Gross margin percentage.... 20.6% 20.7% 21.0%
=========== ========= =========
Cost of sales expenses as a percentage of home sales revenues
are presented below:
Year Ended
---------------------------------
October October October
31, 2001 31, 2000 31, 1999
--------- --------- ---------
Sale of homes.............. 100.0% 100.0% 100.0%
--------- --------- ---------
Cost of sales:
Housing, land and
development costs....... 71.5 71.1 71.0
Commissions.............. 2.3 2.2 2.0
Financing concessions.... 1.0 0.9 0.8
Overheads................ 4.6 5.1 5.2
--------- --------- ---------
Total cost of sales........ 79.4 79.3 79.0
--------- --------- ---------
Gross margin percentage.... 20.6% 20.7% 21.0%
========= ========= =========
We sell a variety of home types in various local communities,
each yielding a different gross margin. As a result, depending on the
mix of both the communities and of home types delivered, consolidated
gross margin will fluctuate up or down. During the year ended
October 31, 2001, our gross margin percentage decreased 0.1% from the
previous year. This decrease was due to the Washington Homes, Inc.
merger, which significantly increased our activity in Metro D. C.
and North Carolina and added markets in the Mid South region that
collectively have a lower average sales price and gross margin
than the averages for our other markets. On an individual market
basis all of our markets showed an increase in gross margin primarily
resulting from increased sales prices. During the year ended
October 31, 2000, our gross margin percentage decreased 0.3% from
the previous year. This decrease was primarily attributed to a full
year of operations from our Texas division where they report lower
margins (acquired in October 1999). During the year ended October 31,
1999, our gross margin percentage increased 3.6% from the previous
year. This can be attributed to higher gross margins being achieved
in each of our markets. The dollar increases for each of the three
years ended October 31, 2001, 2000, and 1999 was attributed to
increased sales, primarily resulting from the acquisition of
Washington Homes in 2001 and the Texas division at the end of 1999.
Selling and general administrative expenses as a percentage
of homebuilding revenues decreased to 8.2% for the year ended
October 31, 2001 and increased to 9.4% for the year ended October 31,
2000 from 8.8% for the year ended October 31, 1999. The dollar
amount of selling and general expenses has increased the last two
years to $140.1 million for the year ended October 31, 2001 from
$104.8 million for the year ended October 31, 2000 which increased
from $81.4 million for the previous year. The percentage decrease
during the year ended October 31, 2001 was due to increased deliveries
and the in market merger with Washington Homes, Inc., which resulted
in administrative efficiencies. The percentage increase in 2000 was
primarily attributable to a full year of operations from our Texas
division and increases in the number of active selling communities
in California. The percentage increase in 1999 was attributable
to increases in all our markets but primarily due to fewer
deliveries in our Northeast Region and due to Northeast Region and
California administrative cost increases.
Land Sales and Other Revenues
Land sales and other revenues consist primarily of land and
lot sales, interest income, contract deposit forfeitures, cash
discounts, and corporate owned life insurance benefits.
A breakout of land and lot sales is set forth below:
Year Ended
----------------------------
October October October
31, 2001 31, 2000 31, 1999
-------- -------- --------
(In Thousands)
Land and lot sales................... $11,356 $ 6,549 $12,077
Cost of sales........................ 10,646 3,971 11,766
-------- -------- --------
Land and lot sales gross margin...... $ 710 $ 2,578 $ 311
======== ======== ========
Land and lot sales are incidental to our residential housing
operations and are expected to continue in the future but may
significantly fluctuate up or down.
Year ended October 2000 land and lot sales gross margin
includes a legal settlement in California amounting to $1,924,000.
Financial Services
Financial services consists primarily of originating mortgages
from our homebuyers, selling such mortgages in the secondary market,
and title insurance activities. During the year ended October 31,
2001, financial services provided a $10.0 million pretax profit.
During the years ended 2000 and 1999, financial services resulted in
$0.5 million loss and a $1.0 million profit, respectively, before
income taxes. The increase from 2000 to 2001 was primarily due to a
change in management, reduced costs, increased mortgage loan amounts,
and the addition of a mortgage operation from the merger with
Washington Homes. In the market areas served by our wholly-owned
mortgage banking subsidiaries, approximately 57%, 54%, and 57% of
our non-cash homebuyers obtained mortgages originated by these
subsidiaries during the years ended October 31, 2001, 2000, and
1999, respectively. Our mortgage banking goals are to improve
profitability by increasing the capture rate of our homebuyers to
70%. Most servicing rights on new mortgages originated by us will
be sold as the loans are closed.
Corporate General and Administrative
Corporate general and administrative expenses includes the
operations at our headquarters in Red Bank, New Jersey. Such
expenses include our executive offices, information services, human
resources, corporate accounting, training, treasury, process redesign,
internal audit, and administration of insurance, quality, and safety.
As a percentage of total revenues, such expenses were 2.5%, 2.9%, and
3.0% for the years ended October 31, 2001, 2000, and 1999,
respectively. The percentage decrease during the year ended October 31,
2001 was due to increased housing revenues. The decrease in fiscal year
2000 was due to increased housing revenues and the adoption of SOP 98-1,
"Accounting For the Cost of Computer Software Development For or
Obtained For Internal Use." See "Notes to Consolidated Financial
Statements - Note 2" for additional explanation. Our long term
improvement initiatives include total quality, process redesign
(net of capitalized expenses), and training. Such initiatives
resulted in additional expenses for the years ended October 31,
2001, 2000, and 1999 which were not capitalized amounting to $7.2
million, $6.9 million, and $7.5 million, respectively.
Interest
Interest expense includes housing, and land and lot interest.
Interest expense is broken down as follows:
Year Ended
-------------------------------
October October October
31, 2001 31, 2000 31, 1999
--------- --------- ---------
(In Thousands)
Sale of homes.................. $ 51,046 $ 34,541 $29,261
Land and lot sales............. 400 415 1,082
--------- --------- ---------
Total.......................... $ 51,446 $ 34,956 $30,343
========= ========= =========
Housing interest as a percentage of sale of home revenues amounted to
3.0%, 3.1%, and 3.2% for the years ended October 31, 2001, 2000, and
1999, respectively.
Other Operations
Other operations consist primarily of miscellaneous senior
residential rental operations, amortization of senior and subordinated
note issuance expenses, amortization of goodwill, earnout payments
from homebuilding company acquisitions, corporate owned life insurance
loan interest, reserves for bad debts, and contributions to a
foundation for victims of the September 11, 2001 World Trade
Center attack.
Restructuring Charges
Restructurig charges are estimated expenses associated with
the integration of our operations with those of Washington Homes, Inc.
These expenses are salaries, severance and outplacement costs for the
termination of associates and costs to close and relocate existing
administrative offices, and lost rent and leasehold improvements.
At October 31, 2001, $1.5 million has been charged against the $2.0
million accrual for termination and related costs while $0.5 million
has been charged against the $1.2 million accrual established for
closing and relocation costs.
Total Taxes
Total taxes as a percentage of income before income taxes
amounted to 40.1%, 36.0%, and 38.9% for the years ended October 31,
2001, 2000, and 1999, respectively. The increased percentage is due
primarily to higher amounts of expenses in 2001 not deductible for
federal taxes and a reduced effect of our senior rental tax credits.
Although the credits are the same in 2001 and 2000, they reduce our
effective tax rate less when pretax profits are higher. Deferred
federal and state income tax assets primarily represent the deferred
tax benefits arising from temporary differences between book and tax
income which will be recognized in future years as an offset against
future taxable income. If for some reason the combination of future
years income (or loss) combined with the reversal of the timing
differences results in a loss, such losses can be carried back to
prior years to recover the deferred tax assets. As a result,
management is confident such deferred tax assets are recoverable
regardless of future income. (See "Notes to Consolidated Financial
Statements - Note 10" for an additional explanation of taxes.)
Extraordinary Loss
On June 7, 1999, we redeemed $45,449,000 of our outstanding
11 1/4% Subordinated Notes due 2002 at an average price of 101.875%
of par which resulted in an extraordinary loss of $868,000 net of
income taxes of $468,000.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations," and No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001.
Use of the pooling-of-interests method is no longer permitted.
SFAS No. 141 also includes guidance on the initial recognition
and measurement of goodwill and other intangible assets acquired
in a business combination that is completed after June 30, 2001.
We adopted SFAS No. 141 for all future acquisitions.
SFAS No. 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must be
reviewed annually (or more frequently under certain conditions) for
impairment in accordance with this statement. This impairment test
uses a fair value approach rather than the undiscounted cash flows
approach previously required by SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." The amortization of goodwill included in other
expenses will also no longer be recorded upon adoption of the new
rules. Intangible assets that do not have indefinite lives will
continue to be amortized over their useful lives and reviewed for
impairment in accordance with SFAS No. 121. We adopted SFAS 142
on November 1, 2001. Upon adoption of SFAS No. 142, goodwill
amortization of $3,764,000, which was incurred in 2001
will no longer be incurred in the future. We do not anticipate
that the adoption of the new statement will have a material effect
on the financial position or results of operations of our Company.
In October 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards (SFAS) No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS No. 144 provides accounting guidance for financial accounting
and reporting for impairment or disposal of long-lived assets.
SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of."
It also supersedes the accounting and reporting of APB Opinion No. 50
"Reporting the Results of Operations - Reporting the Events and
Transactions" related to the disposal of a segment of a business.
SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. We do not anticipate that the adoption of the new statement
will have a material effect on the financial position or results of
operations of our Company.
Inflation
Inflation has a long-term effect on us because increasing
costs of land, materials and labor result in increasing sales prices
of our homes. In general, these price increases have been commensurate
with the general rate of inflation in our housing markets and have not
had a significant adverse effect on the sale of our homes. A
significant inflationary risk faced by the housing industry generally
is that rising housing costs, including land and interest costs,
will substantially outpace increases in the income of potential
purchasers. In recent years, in the price ranges in which we sell
homes, we have not found this risk to be a significant problem.
Inflation has a lesser short-term effect on us because we
generally negotiate fixed price contracts with our subcontractors
and material suppliers for the construction of our homes. These
prices usually are applicable for a specified number of residential
buildings or for a time period of between four to twelve months.
Construction costs for residential buildings represent approximately
58% of our homebuilding cost of sales.
Merger with Washington Homes, Inc.
On January 23, 2001 we merged with Washington Homes, Inc. for
a total purchase price of $87.4 million, of which $38.5 was paid in
cash and 6,352,900 shares of our Class A common stock valued at
$44.9 million were issued and options issued to Washington Homes,
Inc. employees with an intrinsic value of $3.4 million were converted
to 738,785 of our options. (See "Notes To Consolidated Financial
Statements - Note 15" for an additional explanation of our merger
with Washington Homes, Inc.). The merger with Washington Homes,
Inc. did not result in a new segment.
Acquisition of a California Homebuilder
On January 10, 2002 we acquired certain homebuilding assets
and assumed related liabilities from The Forecast Group, L.P. ("TFG")
for an estimated purchase price of $176.0 million plus the
assumption of debt net of cash acquired. The final purchase
price is subject to adjustment based on financial performance
through January 31, 2002. Under the terms of the agreement the
partners in TFG received $45.5 million of Hovnanian restricted
Class A Common Stock and the balance in cash. To fund the
acquisition we are planning to raise $150 million through a five
year term loan. We believe our line of credit is adequate to
provide working capital for our new TFG operations. The addition
of the TFG operations for almost 10 months of fiscal 2002 is expected
to add approximately $0.50 per share to our net earnings. We expect
total revenues to increase more than 30% in fiscal 2002 from 2001
levels, largely as a result of the purchase of the TFG operations.
Safe Harbor Statement
Certain statements contained in this Form 10-K that are not
historical facts should be considered as "Forward-Looking
Statements" within the meaning of the Private Securities Litigation
Act of 1995. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to
differ materially. Such risks, uncertainties and other factors
include, but are not limited to:
. Changes in general economic and market conditions
. Changes in interest rates and the availability of mortgage
financing
. Changes in costs and availability of material, supplies
and labor
. General competitive conditions
. The availability of capital
. The ability to successfully effect acquisitions
These risks, uncertainties, and other factors are described in
detail in Item 1 and 2 Business and Properties in this Form 10-K for
the year ended October 31, 2001.
Item 7(A) - Quantitative and Qualitative Disclosures About
Market Risk.
The primary market risk facing us is interest rate risk on
our long term debt. In connection with our mortgage operations,
mortgage loans held for sale and the associated mortgage warehouse
line of credit are subject to interest rate risk; however, such
obligations reprice frequently and are short-term in duration.
In addition, we hedge the interest rate risk on mortgage loans by
obtaining forward commitments from FNMA, FHLMC, GNMA securities
and private investors. Accordingly the risk from mortgage loans is
not material. We do not hedge interest rate risk other than on
mortgage loans using financial instruments. We are also subject
to foreign currency risk but this risk is not material. The
following tables set forth as of October 31, 2001 and 2000, our
long term debt obligations, principal cash flows by scheduled
maturity, weighted average interest rates and estimated fair
market value ("FMV"). There have been no significant changes in
our market risk from October 31, 2000 to October 31, 2001.
As of October 31, 2001 for the
Year Ended October 31,
--------------------------------------
FMV @
2002 2003 2004 2005 2006 Thereafter Total 10/31/01
------ ------ ------ ------ ------ ---------- -------- ---------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate.......$ 8,919 $2,577 $ 75 $ 81 $ 88 $ 400,193 $411,933 $406,192
Average interest
rate........... 6.65% 7.04% 8.38% 8.38% 8.38% 9.80% 9.71% --
As of October 31, 2000 for the
Year Ended October 31,
--------------------------------------
FMV @
2001 2002 2003 2004 2005 Thereafter Total 10/31/00
------ ------ ------ ------ ------ ---------- -------- ---------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate.......$11,797 $ 138 $2,594 $ 74 $ 81 $400,534 $415,218 $379,629
Average interest
rate........... 4.63% 7.63% 7.04% 8.38% 8.38% 9.79% 9.63% --
(1) Does not include bonds collateralized by mortgages receivable.
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements of Hovnanian Enterprises, Inc. and its
consolidated subsidiaries are set forth herein beginning on Page F-1.
Item 9 - CHANGES IN OR DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
During the years ended October 31, 2001, 2000, and 1999, there
have not been any changes in or disagreements with accountants on
accounting and financial disclosure.
PART III
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item l0, except as set forth
below under the heading "Executive Officers of the Registrant", is
incorporated herein by reference to our definitive proxy statement
to be filed pursuant to Regulation l4A, in connection with the
Company's annual meeting of shareholders to be held on March 8,
2002, which will involve the election of directors.
Executive Officers of the Registrant
Our executive officers are listed below and brief summaries
of their business experience and certain other information with
respect to them are set forth following the table. Each executive
officer holds such office for a one year term.
Year Started
Name Age Position With Company
Kevork S. Hovnanian 78 Chairman of the Board and l967
Director of the Company.
Ara K. Hovnanian 44 Chief Executive Officer, President 1979
and Director of the Company.
Paul W. Buchanan 51 Senior Vice President-Corporate l981
Controller and Director of the
Company.
Geaton A. DeCesaris, Jr.46 President of Homebuilding Operations
And Chief Operating Officer and
Director of the Company 2001
Kevin C. Hake 42 Vice President, Finance and 2000
Treasurer
Peter S. Reinhart 51 Senior Vice President and General 1978
Counsel and Director of the
Company.
J. Larry Sorsby 46 Executive Vice President and 1988
Chief Financial Officer and
Director of the Company
Mr. K. Hovnanian founded the predecessor of the Company in
l959 (Hovnanian Brothers, Inc.) and has served as Chairman of the
Board of the Company since its incorporation in l967. Mr. K. Hovnanian
was also Chief Executive Officer of the Company from 1967 to July 1997.
Mr. A. Hovnanian was appointed President in April 1988, after
serving as Executive Vice President from March 1983. He has also
served as Chief Executive Officer since July 1997. Mr. A. Hovnanian
was elected a Director of the Company in December l98l. Mr. A. Hovnanian
is the son of Mr. K. Hovnanian.
Mr. Buchanan has been Senior Vice President-Corporate
Controller since May l990. Mr. Buchanan was elected a Director of the
Company in March l982.
Mr. DeCesaris was appoiinted President of Homebuilding Operations and
Chief Operating Officer in January 2001. From August 1988 to January
2001, he was President, Chief Executive Officer and a Director of
Washington Homes, Inc. ("WHI") and from April 1999 Chairman of the
Board of WHI.
Mr. Hake joined the Company in July 2000 as Vice President,
Finance and Treasurer. Prior to joining the Company, Mr. Hake was
Director, Real Estate Finance at BankBoston Corporation from 1994 to
June 2000.
Mr. Reinhart has been Senior Vice President and General Counsel since
April 1985. Mr. Reinhart was elected a Director of the Company in
December l98l.
Mr. Sorsby was appointed Executive Vice President and Chief
Financial Officer of the Company in October 2000 after serving as Senior
Vice President, Treasurer, and Chief Financial Officer from February
1996 and as Vice President-Finance/Treasurer of the Company since
March 1991.
Item 11 - EXECUTIVE COMPENSATION
The information called for by Item ll is incorporated herein
by reference to our definitive proxy statement to be filed pursuant to
Regulation l4A, in connection with our annual meeting of shareholders to
be held on March 8, 2002, which will involve the election of directors.
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item l2 is incorporated herein
by reference to our definitive proxy statement to be filed pursuant to
Regulation l4A, in connection with our annual meeting of shareholders to
be held on March 8, 2002, which will involve the election of directors.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item l3 is incorporated herein
by reference to our definitive proxy statement with the exception of
the information regarding certain relationships as described below to
be filed pursuant to Regulation l4A, in connection with our annual
meeting of shareholders to be held on March 8, 2002, which will involve
the election of directors.
The weighted average interest rate on Mr. K. Hovnanian and
Mr. A. Hovnanian related party debt was 3.90%, 5.87%, and 4.62% for the
years ended October 31, 2001, 2000, and 1999, respectively. The
largest amount of debt outstanding held by Mr. K. Hovnanian for the
years ending October 31, 2001, 2000, and 1999 was $56,000, $386,000,
and $1,026.000, respectively. The largest amount of debt outstanding
held by Mr. A. Hovnanian for the years ending October 31, 2001, 2000,
and 1999 was $3,002,000, $3,124,000, and $2,407,000, respectively.
The interest rate on six month Treasury bills at October 31, 2001,
2000, and 1999 was 2.01%, 6.08%, and 5.12%. During the years ended
October 31, 2001, 2000, and 1999, we received $76,000, $85,000, and
$80,000, respectively, from our affected partnerships.
PART IV
Item 14 - EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
Page
Financial Statements:
Index to Consolidated Financial Statements.................. F-1
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at October 31, 2001 and 2000.... F-3
Consolidated Statements of Income for the years ended
October 31, 2001, 2000, and 1999......................... F-5
Consolidated Statements of Stockholders' Equity for the years
ended October 31, 2001, 2000, and 1999................... F-6
Consolidated Statements of Cash Flows for the years ended
October 31, 2001, 2000, and 1999......................... F-7
Notes to Consolidated Financial Statements.................. F-8
No schedules are applicable to us or have been omitted because
the required information is included in the financial statements or
notes thereto.
Exhibits:
2(a) Asset Purchase Agreement, dated as of January 4, 2002
between Hovnanian Enterprises, Inc. and The Forecast
Group.
2(b) Securities Purchase Agreement, dated as of January 4,
2002 between Hovnanian Enterprises, Inc. and The
Forecast Group.
3(a) Certificate of Incorporation of the Registrant.(1)
3(b) Certificate of Amendment of Certificate of Incorporation
of the Registrant.(5)
3(c) Bylaws of the Registrant.(5)
4(a) Specimen Class A Common Stock Certificate.(5)
4(b) Specimen Class B Common Stock Certificate.(5)
4(c) Indenture dated as of May 28, 1993, relating to 9 3/4%
Subordinated Notes between Registrant and First Fidelity
Bank, National Association, New Jersey, as Trustee,
including form of 9 3/4% Subordinated Note due 2005.(3)
4(d) Indenture dated as of May 4, 1999, relating to 9 1/8%
Senior Notes between the Registrant and First Fidelity
Bank, including form of 9 1/8% Senior Notes due May 1,
2009.(6)
4(e) Indenture dated as of October 2, 2000, relating to
10 1/2% Senior Notes between the Registrant and First
Union National Bank, including form of 10 1/2% Senior
Notes due October 1, 2007.(11)
10(a) $440,000,000 Revolving Credit Agreement dated August 28,
2001 among K. Hovnanian Enterprises, Inc., Hovnanian
Enterprises, Inc., certain subsidiaries Thereof, PNC
Bank, National Association, First Union National Bank,
Fleet National Bank, Bank of America, National
Association, Bank One, National Association, Comerica
Bank, Guaranty Bank, AmSouth Bank, Key Bank, National
Association, Credit Suisse First Boston, Washington
Mutual Bank FA, and Sun Trust Bank. (7)
10(b) Description of Management Bonus Arrangements.(5)
10(c) Description of Savings and Investment Retirement
Plan.(1)
10(d) 1999 Stock Incentive Plan.(8)
10(e) 1983 Stock Option Plan (as amended and restated May 4,
1990, and amended through May 14, 1998).(9)
10(f) Management Agreement dated August 12, 1983 for the
management of properties by K. Hovnanian Investment
Properties, Inc.(1)
10(g) Management Agreement dated December 15, 1985, for the
management of properties by K. Hovnanian Investment
Properties, Inc.(2)
10(h) Description of Deferred Compensation Plan.(4)
10(i) Senior Executive Short-Term Incentive Plan.(10)
12 Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors
(1) Incorporated by reference to Exhibits to Registration
Statement (No. 2-85198) on Form S-1 of the Registrant.
(2) Incorporated by reference to Exhibits to Annual Report
on Form 10-K for the year ended February 28, 1986 of
the Registrant.
(3) Incorporated by reference to Exhibits to Registration
Statement (No. 33-61778) on Form S-3 of the Registrant.
(4) Incorporated by reference to Exhibits to Annual Report
on Form 10-K for the year ended February 28, 1990 of
the Registrant.
(5) Incorporated by reference to Exhibits to Annual Report
on Form 10-K for the year ended February 28, 1994 of
the Registrant.
(6) Incorporated by reference to Exhibits to Registration
Statement (No. 333-75939) on Form S-3 of the
Registrant.
(7) Incorporated by reference to Exhibits to Quarterly
Report on Form 10Q for the quarter ended July 31, 2001
of the Registrant.
(8) Incorporated by the Proxy Statement of the Registrant
Filed on Schedule 14A dated January 15, 1999.
(9) Incorporated by reference to Exhibit A of the Proxy
Statement of the Registrant filed on Schedule 14A
dated January 26, 2000.
(10) Incorporated by reference to Exhibit B of the Proxy
Statement of the Registrant filed on Schedule 14A
dated January 26, 2000.
(11) Incorporated by reference to Exhibits to Registration
Statement (No. 333-52836-01) on Form S-4 of the
Registrant.
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended October 31, 2001.
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities
Exchange Act of l934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Hovnanian Enterprises, Inc.
By:
/S/KEVORK S. HOVNANIAN
Kevork S. Hovnanian
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act
of l934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates
indicated.
/S/KEVORK S. HOVNANIAN Chairman of The Board 1/18/02
Kevork S. Hovnanian and Director
/S/ARA K. HOVNANIAN Chief Executive Officer, 1/18/02
Ara K. Hovnanian President and Director
/S/PAUL W. BUCHANAN Senior Vice President 1/18/02
Paul W. Buchanan Corporate Controller and
Director
/S/GEATON A. DECESARIS, JR. President of Homebuilding 1/18/02
Geaton A. DeCesaris, Jr. Operations and Chief Operating
Officer and Director
/S/KEVIN C. HAKE Vice President, Finance 1/18/02
Kevin C. Hake and Treasurer
/S/PETER S. RENHART Senior Vice President and 1/18/02
Peter S. Reinhart General Counsel and Director
/S/J.LARRY SORSBY Executive Vice President, 1/18/02
J. Larry Sorsby Chief Financial Officer
and Director
HOVNANIAN ENTERPRISES, INC.
Index to Consolidated Financial Statements
Page
Financial Statements:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of October 31, 2001 and 2000. F-3
Consolidated Statements of Income for the Years Ended
October 31, 2001, 2000, and 1999............................ F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended October 31, 2001, 2000, and 1999...................... F-6
Consolidated Statements of Cash Flows for the Years Ended
October 31, 2001, 2000, and 1999............................ F-7
Notes to Consolidated Financial Statements.................. F-8
No schedules have been prepared because the required information of
such schedules is not present, is not present in amounts sufficient
to require submission of the schedule or because the required
information is included in the financial statements and notes thereto.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and
Board of Directors of
Hovnanian Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of
Hovnanian Enterprises, Inc. and subsidiaries as of October 31,
2001 and 2000, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in
the period ended October 31, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Hovnanian Enterprises, Inc. and subsidiaries at
October 31, 2001 and 2000 and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended October 31, 2001 in conformity with accounting
principles generally accepted in the United States.
/S/Ernst & Young LLP
New York, New York
December 11, 2001
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
October 31, October 31,
ASSETS 2001 2000
------------ ------------
Homebuilding:
Cash and cash equivalents(Note 5)............. $ 10,173 $ 40,131
------------ ------------
Inventories - At the lower of cost or fair
value (Notes 7, 11, and 12):
Sold and unsold homes and lots under
development............................... 593,149 525,116
Land and land options held for future
development or sale....................... 146,965 89,867
------------ ------------
Total Inventories......................... 740,114 614,983
------------ ------------
Receivables, deposits, and notes (Note 12).... 75,802 36,190
------------ ------------
Property, plant, and equipment - net (Note 4). 30,756 35,594
------------ ------------
Senior residential rental properties - net (Notes 4
and 7)..................................... 9,890 10,276
------------ ------------
Prepaid expenses and other assets (Note 15)... 78,796 64,897
------------ ------------
Total Homebuilding........................ 945,531 802,071
------------ ------------
Financial Services:
Cash.......................................... 5,976 3,122
Mortgage loans held for sale (Notes 6 and 7).. 105,567 61,860
Other assets.................................. 6,465 6,488
------------ ------------
Total Financial Services.................. 118,008 71,470
------------ ------------
Income Taxes Receivable - Including deferred tax
benefits (Note 10)............................ 719
------------ ------------
Total Assets.................................... $1,064,258 $873,541
============ ============
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
October 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
------------ ------------
Homebuilding:
Nonrecourse land mortgages (Note 7)................. $ 10,086 $ 18,166
Accounts payable and other liabilities (Note 16).... 124,125 82,205
Customers' deposits (Note 5)........................ 39,114 31,475
Nonrecourse mortgages secured by operating
properties (Note 7)............................... 3,404 3,554
------------ ------------
Total Homebuilding.............................. 176,729 135,400
------------ ------------
Financial Services:
Accounts payable and other liabilities.............. 5,264 5,085
Mortgage warehouse line of credit (Notes 6 and 7)... 98,305 56,486
------------ ------------
Total Financial Services........................ 103,569 61,571
------------ ------------
Notes Payable:
Revolving credit agreement (Note 7).................
Senior notes (Note 8)............................... 296,797 296,430
Subordinated notes (Note 8)......................... 99,747 100,000
Accrued interest (Notes 7 and 8).................... 11,770 12,709
------------ ------------
Total Notes Payable............................. 408,314 409,139
------------ ------------
Income Taxes Payable - Net of deferred tax benefits
(Note 10)........................................... 4,072
------------ ------------
Total Liabilities............................... 688,612 610,182
------------ ------------
Commitments and Contingent Liabilities (Notes 5, 9, 12,
14 and 15)
Stockholders' Equity (Notes 13 and 15):
Preferred Stock,$.01 par value-authorized 100,000
shares; none issued..............................
Common Stock,Class A,$.01 par value-authorized
87,000,000 shares; issued 24,599,379 shares in 2001
and 17,309,369 shares in 2000 (including 4,195,621
shares in 2001 and 3,736,921 shares in 2000 held
in Treasury)...................................... 246 173
Common Stock,Class B,$.01 par value
(convertible to Class A at time of sale)
-authorized 13,000,000 shares; issued 7,818,927
shares in 2001 and 7,978,903 shares in 2000
(both years include 345,874 shares held in
Treasury)......................................... 78 79
Paid in Capital..................................... 100,957 46,086
Retained Earnings (Note 8).......................... 310,106 246,420
Deferred Compensation............................... (127)
Treasury Stock - at cost............................ (35,614) (29,399)
------------ ------------
Total Stockholders' Equity...................... 375,646 263,359
------------ ------------
Total Liabilities and Stockholders' Equity............ $1,064,258 $873,541
============ ============
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
Year Ended
-------------------------------------
October October October
31, 2001 31, 2000 31, 1999
----------- ----------- -----------
Revenues:
Homebuilding:
Sale of homes.............................$1,693,717 $1,105,466 $ 908,553
Land sales and other revenues (Notes 12
and 14)................................ 16,818 10,769 17,103
----------- ----------- -----------
Total Homebuilding...................... 1,710,535 1,116,235 925,656
Financial Services.......................... 31,428 19,324 20,758
----------- ----------- -----------
Total Revenues.......................... 1,741,963 1,135,559 946,414
----------- ----------- -----------
Expenses:
Homebuilding:
Cost of sales............................. 1,355,354 880,463 729,719
Selling, general and administrative....... 140,126 104,771 81,396
Inventory impairment loss (Note 11)....... 4,368 1,791 2,091
----------- ----------- -----------
Total Homebuilding...................... 1,499,848 987,025 813,206
----------- ----------- -----------
Financial Services.......................... 21,443 19,750 19,699
----------- ----------- -----------
Corporate General and Administrative(Note 3) 44,278 33,309 28,652
----------- ----------- -----------
Interest (Notes 7 and 8).................... 51,446 34,956 30,343
----------- ----------- -----------
Other operations (Note 15).................. 15,347 8,701 3,897
----------- ----------- -----------
Restructuring charges (Note 16)............. 3,247
----------- ----------- -----------
Total Expenses.......................... 1,635,609 1,083,741 895,797
----------- ----------- -----------
Income Before Income Taxes and
Extraordinary Loss.......................... 106,354 51,818 50,617
----------- ----------- -----------
State and Federal Income Taxes:
State (Note 10)............................. 4,024 2,495 5,093
Federal (Note 10)........................... 38,644 16,160 14,581
----------- ----------- -----------
Total Taxes............................... 42,668 18,655 19,674
----------- ----------- -----------
Extraordinary Loss From Extinguishment of
Debt, Net of Income Taxes (Note 8).......... (868)
----------- ----------- -----------
Net Income....................................$ 63,686 $ 33,163 $ 30,075
=========== =========== ===========
Per Share Data:
Basic:
Income Per Common Share Before
Extraordinary Loss......................$ 2.38 $ 1.51 $ 1.45
Extraordinary Loss........................ (.04)
----------- ----------- -----------
Income....................................$ 2.38 $ 1.51 $ 1.41
=========== =========== ===========
Weighted Average Number of Common Shares
Outstanding............................... 26,810 21,933 21,404
=========== =========== ===========
Assuming Dilution:
Income Per Common Share Before
Extraordinary Loss...................... $ 2.29 $ 1.50 $ 1.43
Extraordinary Loss........................ (.04)
----------- ----------- -----------
Income.................................... $ 2.29 $ 1.50 $ 1.39
=========== =========== ===========
Weighted Average Number of Common Shares
Outstanding............................... 27,792 22,043 21,612
=========== =========== ===========
See notes to consolidated financial statements
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
A Common Stock B Common Stock
------------------- -------------------
Shares Shares
Issued and Issued and Paid-In Retained Deferred Treasury
Outstanding Amount Outstanding Amount Capital Earnings Comp Stock Total
----------- ------ ----------- ------ ------- -------- --------- --------- ---------
Balance, October 31, 1998... 13,865,923 $ 157 7,694,297 $ 80 $34,561 $183,182 $ $(16,588) $ 201,392
Acquisitions................ 1,362,057 13 11,237 11,250
Sale of common stock under
employee stock option
plan...................... 10,000 1 58 59
Conversion of Class B to
Class A common stock...... 43,088 1 (43,088) (1)
Treasury stock purchases.... (772,900) (6,350) (6,350)
Net Income.................. 30,075 30,075
----------- ------ ----------- ------ ------- -------- --------- --------- ---------
Balance, October 31, 1999... 14,508,168 172 7,651,209 79 45,856 213,257 (22,938) 236,426
Acquisitions................ 47,619 1 (270) (269)
Sale of common stock under
employee stock option
plan...................... 346 346
Stock bonus plan............ 25,128 154 154
Conversion of Class B to
Class A common stock...... 18,180 (18,180)
Treasury stock purchases.... (1,026,647) (6,461) (6,461)
Net Income ................. 33,163 33,163
----------- ------ ----------- ------ ------- -------- --------- --------- ---------
Balance, October 31, 2000... 13,572,448 173 7,633,029 79 46,086 246,420 (29,399) 263,359
----------- ------ ----------- ------ ------- -------- --------- --------- ---------
Acquisitions................ 6,546,932 66 51,361 51,427
Sale of common stock under
employee stock option
plan...................... 519,673 5 2,885 2,890
Stock bonus plan............ 63,429 1 625 626
Conversion of Class B to
Class A common stock...... 159,976 1 (159,976) (1)
Deferred compensation....... (127) (127)
Treasury stock purchases.... (458,700) (6,215) (6,215)
Net Income ................. 63,686 63,686
----------- ------ ----------- ------ ------- -------- --------- --------- ---------
Balance, October 31, 2001... 20,403,758 $ 246 7,473,053 $ 78 $100,957 $310,106 $ (127) $(35,614) $ 375,646
=========== ====== =========== ====== ======= ======== ========= ========= =========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended
----------------------------------
October October October
31, 2001 31, 2000 31, 1999
---------- ---------- ----------
Cash Flows From Operating Activities:
Net Income...................................... $ 63,686 $ 33,163 $ 30,075
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation................................ 8,164 6,423 6,314
Amortization of Goodwill.................... 3,764 2,513 261
Loss (gain) on sale and retirement of
property and assets....................... 641 (728) 283
Extraordinary loss from extinguishment of
Debt net of income taxes.................. 868
Deferred income taxes....................... (6,265) 2,551 3,056
Impairment losses........................... 4,368 1,791 2,091
Decrease (increase) in assets:
Mortgage notes receivable................. (42,573) (27,703) 46,012
Receivables, prepaids and other assets.... (35,805) (13,256) (9,736)
Inventories............................... 12,540 (89,544) (53,592)
Increase (decrease) in liabilities:
State and Federal income taxes............ 7,004 3,244 3,020
Tax effect from exercise of stock options. (566)
Customers' deposits....................... 4,543 6,240 (1,269)
Interest and other accrued liabilities.... 15,466 8,222 9,203
Post development completion costs......... 5,120 (2,555) 3,293
Accounts payable.......................... (3,018) 8,994 (4,400)
Net cash provided by (used in) ---------- ---------- ----------
operating activities.................... 37,069 (60,645) 35,479
---------- ---------- ----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets... 5,325 1,517 18,251
Purchase of property, equipment, and other
fixed assets.................................. (6,777) (15,607) (13,381)
Acquisition of homebuilding companies........... (37,905) (3,845) (12,249)
Investment in and advances to unconsolidated
affiliates.................................... (372) 249
Net cash (used in) ---------- ---------- ----------
investing activities.................... (39,729) (17,935) (7,130)
---------- ---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes............... 1,472,789 1,433,150 850,320
Proceeds from senior debt....................... 146,430 150,000
Principal payments on mortgages and notes.......(1,494,528) (1,470,805) (972,265)
Principal payments on subordinated debt......... (46,302)
Purchase of treasury stock...................... (6,215) (6,461) (6,350)
Proceeds from sale of stock and employee stock
plan.......................................... 3,510 154 59
Net cash (used in) provided by ---------- ---------- ----------
financing activities.................... (24,444) 102,468 (24,538)
---------- ---------- ----------
Net (Decrease) Increase In Cash................... (27,104) 23,888 3,811
Cash and Cash Equivalents Balance, Beginning
Of Year......................................... 43,253 19,365 15,554
---------- ---------- ----------
Cash and Cash Equivalents Balance, End Of Year.....$ 16,149 $ 43,253 $ 19,365
========== ========== ==========
Supplemental Disclosures Of Cash Flow:
Cash paid during the year for:
Interest...................................... $ 53,100 $ 33,814 $ 23,731
========== ========== ==========
Income Taxes.................................. $ 45,498 $ 12,858 $ 16,395
========== ========== ==========
Stock issued for acquisitions/extension of options
granted......................................... $ 50,530 $ 721 $ 11,250
========== ========== ==========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2001, 2000,
AND 1999.
1. BASIS OF PRESENTATION AND SEGMENT INFORMATION
Basis of Presentation - The accompanying consolidated financial
statements include our accounts and all wholly-owned subsidiaries
after elimination of all significant intercompany balances and
transactions.
Segment Information - Statement of Financial Accounting
Standards (SFAS) No. 131 "Disclosures About Segments of an Enterprise
and Related Information" established new standards for segment
reporting based on the way management organizes segments within a
company for making operating decisions and assessing performance.
Our financial reporting segments consist of homebuilding, financial
services, and corporate. Our homebuilding operations comprise the
most substantial part of our business, with approximately 97% of
consolidated revenues in years ended October 31, 2001 and 2000 and
approximately 96% in the year ended October 31, 1999 contributed
by the homebuilding operations. We are a Delaware corporation,
currently building and selling homes in more than 172 new home
communities in New Jersey, Pennsylvania, New York, Virginia,
Maryland, North Carolina, Tennessee, Alabama, Mississippi, Texas,
and California. We offer a wide variety of homes that are designed
to appeal to first time buyers, first and second time move up
buyers, luxury buyers, active adult buyers and empty nesters. Our
financial services operations provide mortgage banking and title
services to the homebuilding operations' customers. We do not
retain or service the mortgages that we originate but rather, sell
the mortgages and related servicing rights to investors.
Corporate primarily includes the operations of our corporate
office whose primary purpose is to provide executive services,
information services, human resources, management reporting,
training, cash management, internal audit, risk management, and
administration of process redesign, quality and safety. Assets,
liabilities, revenues and expenses of our reportable segments
are separately included in the consolidated balance sheets and
consolidated statements of income.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
Statesrequires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates and these differences could have a significant impact on
the financial statements.
Business Combinations - When we make an acquisition of another
company, we use the purchase method of accounting in accordance with
Accounting Principal Board Opinion 16 ("APB 16") "Business
Combinations". Under APB 16 we record as our cost the acquired assets
less liabilities assumed. Any difference between the cost of an
acquired company and the sum of the fair values of tangible and
identified intangible assets less liabilities is recorded as
goodwill. The reported income of an acquired company includes the
operations of the acquired company after acquisition, based on the
acquisition costs. See "Accounting Pronouncements Not Yet Adopted."
Income Recognition - Income from home sales is recorded when
title is conveyed to the buyer, subject to the buyer's financial
commitment being sufficient to provide economic substance to the
transaction.
Cash and Cash Equivalents - Cash and cash equivalents include
cash deposited in checking accounts, overnight repurchase agreements,
certificates of deposit, Treasury bills and government money market
funds with original maturities of 90 days or less when purchased.
Fair Value of Financial Instruments - The fair value of
financial instruments is determined by reference to various market
data and other valuation techniques as appropriate. Our financial
instruments consist of cash equivalents, mortgages and notes
receivable, mortgages and notes payable, and the senior and
subordinated notes payable. Unless otherwise disclosed, the fair
value of financial instruments approximates their recorded values.
Inventories - For inventories of communities under development,
a loss is recorded when events and circumstances indicate impairment
and the undiscounted future cash flows generated are less than the
related carrying amounts. The impairment loss is based on expected
revenue, cost to complete including interest, and selling costs.
Inventories and long-lived assets held for sale are recorded at the
lower of cost or fair value less selling costs. Fair value is defined
in Statement of Financial Accounting Standard (SFAS)No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" as the amount at which an asset could be
bought or sold in a current transaction between willing parties, that
is, other than in a forced or liquidation sale. See "Accounting
Pronouncements Not Yet Adopted." Construction costs are accumulated
during the period of construction and charged to cost of sales under
specific identification methods. Land, land development, and common
facility costs are allocated based on buildable acres to product
types within each community, then amortized equally based upon the
number of homes to be constructed in the community.
Interest costs related to properties under development are
capitalized during the land development and home construction period
and expensed along with the associated cost of sales as the related
inventories are sold (see Note 7).
The cost of land options is capitalized when incurred and
either included as part of the purchase price when the land is
acquired or charged to operations when we determine we will not
exercise the option.
Intangible Assets - Any intangible assets acquired by us are
amortized on a straight line basis over their useful life. Goodwill
resulting from company acquisitions during the years ended October 31,
2001 and October 31, 1999 is being amortized over 5 to 10 years and
reported in the consolidated statements of income as "Other
Operations". During the years ended October 31, 2001, 2000, and
1999, goodwill amortization amounted to $3,764,000, $2,513,000,
and $261,000, respectively. The carrying amount of goodwill is
reviewed if facts and circumstances suggest that it may be impaired.
If this review indicates that goodwill will not be recoverable, as
determined based on the estimated undiscounted cash flows of the
company acquired over the remaining amortization period, the carrying
amount of the goodwill is reduced by the estimated shortfall of cash
flows. In addition, we assess long-lived assets for impairment under
SFAS 121. Under those rules, goodwill associated with assets
acquired in a purchase business combination is included in
impairment evaluations when events or circumstances exist that
indicate the carrying amount of those assets may not be recoverable.
Total accumulated amortization at October 31, 2001 and 2000 was
$7,579,000 and $3,815,000, respectively. See "Accounting
Pronouncements Not Yet Adopted."
Deferred Bond Issuance Costs - Costs associated with the
issuance of our Senior and Subordinated Notes are capitalized and
amortized over the associated term of each note issuance into other
operations on the consolidated statements of income.
Debt Issued At a Discount - Debt issued at a discount to the
face amount is accredited back up to its face amount utilizing the
effective interest method over the term of the note and recorded as
a component of Interest on the consolidated statements of income.
Post Development Completion Costs - In those instances where
a development is substantially completed and sold and we have
additional construction work to be incurred, an estimated liability
is provided to cover the cost of such work.
Advertising Costs - Advertising costs are treated as period
costs and expensed as incurred. During the years ended October 31,
2001, 2000, and 1999, advertising costs expensed amounted to
$18,536,000, $14,418,000, and $11,995,000, respectively.
Deferred Income Tax - Deferred income taxes or income tax
benefits are provided for temporary differences between amounts
recorded for financial reporting and for income tax purposes.
Common Stock - Each share of Class A Common Stock entitles
its holder to one vote per share and each share of Class B Common
Stock entitles its holder to ten votes per share. The amount of any
regular cash dividend payable on a share of Class A Common Stock
will be an amount equal to 110% of the corresponding regular cash
dividend payable on a share of Class B Common Stock. If a
shareholder desires to sell shares of Class B Common Stock, such
stock must be converted into shares of Class A Common Stock.
On December 31, 2000, our stock repurchase program to
purchase up to 4 million shares of Class A Common Stock expired.
As of December 31, 2000 3,391,047 shares had been purchased under
this program. On July 3, 2001, our Board of Directors authorized
a revision to our stock repurchase program to purchase up to
2 million shares of Class A Common Stock. As of October 31,
2001, 458,700 have been purchased under this program.
Depreciation - The straight-line method is used for
financial reporting purposes and MACRS is used for tax
reporting purposes.
Prepaid Expenses - Prepaid expenses which relate to
specific housing communities (model setup, architectural fees,
homeowner warranty, etc.) are amortized to costs of sales as the
applicable inventories are sold. All other prepaid expenses are
amortized over a specific time period or as used and charged
to overhead expense.
Stock Options - Statement of Financial Accounting
Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation"
establishes a fair value-based method of accounting for stock-based
compensation plans, including stock options. Registrants may elect
to continue accounting for stock option plans under Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees," but are required to provide pro forma
net income and earnings per share information "as if" the new fair
value approach had been adopted. We intend to continue accounting
for our stock option plan under APB 25. Under APB 25, no
compensation expense is recognized when the exercise price of
our employee stock options equals the market price of the
underlying stock on the date of grant (see Note 13).
Per Share Calculations - Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings Per Share" requires the
presentation of basic earnings per share and diluted earnings
per share. Basic earnings per common share is computed using
the weighted average number of shares outstanding and is the same
calculation as reported in prior years. Basic weighted average
shares outstanding at October 31, 2001, 2000, and 1999 amounted
to 26,809,668 shares, 21,933,022 shares, and 21,404,473 shares,
respectively. Diluted earnings per common share is computed using
the weighted average number of shares outstanding adjusted for
the incremental shares attributed to outstanding options to purchase
common stock shares of 982,000, 110,000, and 208,000 for the years
ended October 31, 2001, 2000, and 1999, respectively.
Computer Software Development - On November 1, 1999 we
adopted SOP-98-1, Accounting For the Costs of Computer Software
Developed For or Obtained For Internal Use. The SOP-98-1 requires
the capitalization of certain costs incurred in connection with
developing or obtaining software for internal use. Prior to the
adoption of SOP-98-1, we expensed such internal use software
related costs as incurred. The effect of adopting SOP-98-1 was to
increase net income for the year ended October 31, 2000 by
$2,570,000 or $0.12 per share. Upon entering the application and
development phase, the capitalized costs are amortized over the
systems estimated useful life. For the year ended October 31, 2001
we recorded amortizatation expense in the amount of approximately
$2.0 million based on an estimated useful life of 10 years.
Accounting for Derivative Instruments and Hedging Activities - On
November 1, 2000, we adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by Statement of Financial
Accounting Standards (SFAS) No. 138, which addresses the accounting
for and disclosure of derivative instruments, including derivative
instruments imbedded in other contracts, and hedging activities.
The statement requires us to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must
be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair
value of derivatives are either offset against the change in fair
value of assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the hedged item
is recognized in earnings. The ineffective portion of a
derivative's change is recognized in earnings.
We manage our interest rate risk on mortgage loans held for
sale and our estimated future commitments to originate and close
mortgage loans at fixed prices through the use of best-efforts
whole loan delivery commitments. These instruments are classified
as derivatives and generally have maturities of three months or
less. Accordingly, gains and losses are recognized in current
earnings during the period of change. The impact of the adoption
of the new statement as of November 1, 2000 did not have a
significant impact on our earnings or financial position. The
effect of SFAS 133 is immaterial to our financial statements.
Accounting Pronouncements Not Yet Adopted - In June 2001, the
Financial Accounting Standards Board issued Statements of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Use
of the pooling-of-interests method is no longer permitted. SFAS
No. 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets acquired in a
business combination that is completed after June 30, 2001. We
adopted SFAS No. 141 for all acquisitions subsequent to
June 30, 2001.
SFAS No. 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must
be reviewed annually (or more frequently under certain conditions)
for impairment in accordance with this statement. This impairment
test uses a fair value approach rather than the undiscounted cash
flows approach previously required by SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." The amortization of goodwill included
in other expenses will also no longer be recorded upon adoption
of the new rules. Intangible assets that do not have indefinite
lives will continue to be amortized over their useful lives and
reviewed for impairment in accordance with SFAS No. 121. We
adopted SFAS 142 on November 1, 2001. Upon adoption of SFAS No. 142,
goodwill amortization of $3,764,000, which was incurred in 2001,
will no longer be incurred in the future. We do not anticipate
that the adoption of the new statement will have a material effect
on the financial position or results of operations of our Company.
In October 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards (SFAS) No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS No. 144 provides accounting guidance for financial accounting
and reporting for impairment or disposal of long-lived assets.
SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of."
It also supersedes the accounting and reporting of APB Opinion
No. 50 "Reporting the Results of Operations - Reporting the
Events and Transactions" related to the disposal of a segment
of a business. We will adopt SFAS No. 144 effective for our
fiscal year beginning November 1, 2002. We do not anticipate
that the adoption of the new statement will have a material effect
on the financial position or results of operations of our Company.
Reclassifications - Certain amounts in the 2000 and 1999
consolidated financial statements have been reclassified to
conform to the 2001 presentation.
3. CORPORATE INITIATIVES
We have embarked on long term improvement initiatives of total
quality, process redesign, and training. Included in Corporate
General and Administrative is $7,200,000, $6,902,000, and $7,502,000
for the years ended October 31, 2001, 2000, and 1999, respectively,
related to such initiatives. These amounts are in addition to
software development costs capitalized in those years.
4. PROPERTY
Homebuilding property, plant, and equipment consists of land,
land improvements, buildings, building improvements, furniture and
equipment used to conduct day to day business. Homebuilding
accumulated depreciation related to these assets at October 31, 2001
and October 31, 2000 amounted to $18,367,000 and $22,164,000,
respectively. In addition we have two senior citizen residential
rental communities recorded as senior residential rental
properties on the balance sheets. Accumulated depreciation on senior
residential rental properties at October 31, 2001 and October 31,
2000 amounted to $2,688,000 and $2,294,000, respectively.
5. ESCROW CASH
We hold escrow cash amounting to $4,420,000 and $3,424,000 at
October 31, 2001 and October 31, 2000, respectively, which primarily
represents customers' deposits which are restricted from use by us.
We are able to release other escrow cash by pledging letters of credit
and surety bonds. Escrow cash accounts are substantially invested
in short-term certificates of deposit, time deposits, or money
market accounts.
6. MORTGAGE LOANS HELD FOR SALE
Our wholly-owned mortgage banking subsidiary originates
mortgage loans, primarily from the sale of our homes. Such mortgage
loans are sold in the secondary mortgage market with servicing
released. At October 31, 2001 and 2000, respectively, $105,174,000
and $61,549,000 of such mortgages were pledged against our mortgage
warehouse line (see Note 7). We may incur risk with respect to
mortgages that are delinquent, but only to the extent the losses are
not covered by mortgage insurance or resale value of the home.
Historically, we have incurred minimal credit losses. The mortgage
loans held for sale are carried at the lower of cost or market
value, determined on an aggregate basis. There was no valuation
adjustment at October 31, 2001 or 2000.
7. MORTGAGES AND NOTES PAYABLE
Substantially all of the nonrecourse land mortgages are
short-term borrowings. Nonrecourse mortgages secured by operating
properties are installment obligations having annual principal
maturities in the following years ending October 31, of approximately
$138,000 in 2002, $2,577,000 in 2003, $75,000 in 2004, $81,000 in
2005, $88,000 in 2006 and $445,000 after 2006. The interest
rates on these obligations range from 6.0% to 10.0%.
We have an unsecured Revolving Credit Agreement
("Agreement") with a group of banks which provides up to
$440,000,000 through July 2004. Interest is payable monthly
and at various rates of either the prime rate plus .40% or
LIBOR plus 1.85%. In addition, we pay a fee equal to .375% per
annum on the weighted average unused portion of the line. As
of October 31, 2001 and 2000, there was no outstanding
balance under the Agreement.
Interest costs incurred, expensed and capitalized were:
Year Ended
----------------------------
October October October
31, 2001 31, 2000 31, 1999
-------- -------- --------
(Dollars in Thousands)
Interest capitalized at
beginning of year.............. $25,694 $21,966 $25,545
Plus acquired entity interest.... 3,604 3,397
Plus interest incurred(1)(2)..... 47,272 38,878 24,594
Less interest expensed(2)........ 51,446 34,956 30,343
Less impairment write-off........ 194
Less sale of assets.............. 1,227
-------- -------- --------
Interest capitalized at
end of year(2).................. $25,124 $25,694 $21,966
======== ======== ========
(1) Data does not include interest incurred by our mortgage and
finance subsidiaries.
(2) Represents acquisition interest for construction, land and
development costs which is charged to interest expense when
homes are delivered or when land is not under active
development.
Average interest rates and average balances outstanding for
short-term debt are as follows:
October October October
31, 2001 31, 2000 31, 1999
-------- -------- --------
(Dollars In Thousands)
Average monthly outstanding
borrowings................. $ 74,543 $128,788 $ 55,495
Average interest rate during
period..................... 7.1% 10.0% 9.2%
Average interest rate at end
of period(1)............... 4.1% 8.4% 7.2%
Maximum outstanding at any
month end.................. $120,600 $170,800 $117,085
(1) Average interest rate at the end of the period excludes any charges
on unused loan balances.
In addition, we have a secured mortgage loan warehouse agreement
with a group of banks, which is a short-term borrowing, that provides
up to $110,000,000 through July 26, 2002. Interest is payable monthly
at the Federal Funds Rate plus 1.125% (approximately 3.81% at October 31,
2001) plus fees equal to .625% of the outstanding loan balance. The
loan is repaid when the underlying mortgage loans are sold to permanent
investors by the Company.
8. SENIOR AND SUBORDINATED NOTES
On April 29, 1992, we issued $100,000,000 principal amount of
11 1/4% Subordinated Notes due April 15, 2002. Prior to 1999, we
redeemed $44,551,000 principal amount. The funds were provided by
the revolving credit agreement. In June 1999, we redeemed the
remaining $45,449,000 principal amount at an average price of
101.875% of par. The funds for this redemption were provided
by the issuance of Senior Notes and resulted in an extraordinary
loss of $868,000 net of an income tax benefit of $468,000.
On June 7, 1993, we issued $100,000,000 principal amount of
9 3/4% Subordinated Notes due June 1, 2005. In April 2001, we
retired $253,000 of these notes. Interest is payable semi-annually.
The notes are redeemable in whole or in part at our option, initially
at 104.875% of their principal amount on or after June 1, 1999 and
reducing to 100% of their principal amount on or after June 1, 2002.
On May 4, 1999, we issued $150,000,000 principal amount of
9 1/8% Senior Notes due May 1, 2009. Interest is payable
semi-annually. The notes are redeemable in whole or in part at our
option, initially at 104.563% of their principal amount on or after
May 1, 2004 and reducing to 100% of their principal amount on or
after May 1, 2007.
On October 2, 2000, we issued $150,000,000 principal amount
of 10 1/2% Senior Notes due October 1, 2007. The 10 1/2% Senior
Notes were issued at a discount to yield 11% and have been reflected
net of the unamortized discount in the accompanying consolidated
balance sheet. Interest is payable semi-annually. The notes are
redeemable in whole or in part at our option at 100% of their
principal amount upon payment of a make-whole price.
The indentures relating to the Senior and Subordinated Notes
and the Revolving Credit Agreement contain restrictions on the
payment of cash dividends. At October 31, 2001, $66,013,000 of
retained earnings were free of such restrictions.
The fair value of both the Senior Notes and Subordinated Notes
is estimated based on the quoted market prices for the same or similar
issues or on the current rates offered to us for debt of the same
remaining maturities. The fair value of the Senior Notes and
Subordinated Notes is estimated at $297,750,000 and $96,256,000,
respectively, as of October 31, 2001.
9. RETIREMENT PLAN
In December 1982, we established a defined contribution
savings and investment retirement plan. Under such plan there are
no prior service costs. All associates are eligible to participate
in the retirement plan and employer contributions are based on a
percentage of associate contributions. Plan costs charged to
operations amount to $3,675,000, $2,948,000, and $2,760,000
for the years ended October 31, 2001, 2000, and 1999,
respectively.
10. INCOME TAXES
Income Taxes payable (receivable) including deferred
benefits, consists of the following:
October October
31, 2001 31, 2000
--------- ---------
(In Thousands)
State income taxes:
Current.......................... $ 3,393 $ 1,552
Deferred......................... (2,262) 163
Federal income taxes:
Current.......................... 6,623 5,519
Deferred......................... (8,473) (3,162)
--------- ---------
Total.......................... $ (719) $ 4,072
========= =========
The provision for income taxes is composed of the following
charges (benefits):
Year Ended
-----------------------------------
October October October
31, 2001 31, 2000 31, 1999
--------- --------- ---------
(In Thousands)
Current income tax expense:
Federal(1).................... $ 48,478 $ 13,609 $ 13,253
State(2)...................... 6,461 1,574 4,954
--------- --------- ---------
54,939 15,183 18,207
--------- --------- ---------
Deferred income tax expense:
Federal....................... (9,834) 2,551 860
State......................... (2,437) 921 139
--------- --------- ---------
(12,271) 3,472 999
--------- --------- ---------
Total....................... $ 42,668 $ 18,655 $ 19,206
========= ========= =========
(1) The current federal income tax expense includes a tax benefit
of $468,000 and in the year ended October 31, 1999 relating
to the loss on the redemption of Subordinated Notes that
was reported as an extraordinary item in the "Statements
of Income."
(2) The current state income tax expense is net of the use of
state loss carryforwards amounting to $26,830,000,
$21,330,000, and $5,860,000, for the years ended October 31,
2001, 2000, and 1999.
The deferred tax liabilities or assets have been recognized
in the consolidated balance sheets due to temporary differences as
follows:
October October
31, 2001 31, 2000
-------- ---------
(In Thousands)
Deferred tax assets:
Maintenance guarantee reserves....... 658 740
Inventory impairment loss............ 2,206 1,785
Uniform capitalization of overhead... 6,726 6,008
Post development completion costs.... 5,319 3,194
State net operating loss
carryforwards...................... 27,846 30,916
Other................................ 7,067 2,970
-------- ---------
Total.............................. 49,822 45,613
Valuation allowance(3)............... (27,846) (30,916)
-------- ---------
Total deferred tax assets.......... 21,976 14,697
-------- ---------
Deferred tax liabilities:
Deferred interest.................... 31 31
Installment sales.................... 76 96
Accelerated depreciation............. 2,113 3,965
Acquisition goodwill................. 3,124 2,279
Software development expenses........ 5,897 5,327
-------- ---------
Total deferred tax liabilities..... 11,241 11,698
-------- ---------
Net deferred tax assets(4)............. $10,735 $ 2,999
======== =========
(3) The net change in the valuation allowance of $(3,070,000) results
from a decrease in the separate company state net operating
losses that may not be fully utilized.
(4) In connection with the merger with Washington Homes, Inc. we
recorded a deferred tax liability of $4,534,000.
The effective tax rates varied from the expected rate. The
sources of these differences were as follows:
Year Ended
------------------------------
October October October
31, 2001 31, 2000 31, 1999
-------- -------- --------
Computed "expected" tax rate...... 35.0% 35.0 % 35.0 %
State income taxes, net of Federal
income tax benefit.............. 3.2 3.1 6.5
Permanent timing differences...... 1.6 1.0 .2
Low income housing tax credit..... (1.3) (2.6) (2.8)
Other............................. 1.6 (1.5) .1
-------- -------- --------
Effective tax rate................ 40.1 36.0 % 39.0 %
======== ======== ========
We have state net operating loss carryforwards for financial
reporting and tax purposes of $358,000,000 due to expire between the
years October 31, 2002 and October 31, 2016.
11. REDUCTION OF INVENTORY TO FAIR VALUE
In accordance with "Financial Accounting Standards (SFAS) No. 121
"Accounting for the Impairment of Long Lived Assets and for Long
Lived Assets to Be Disposed Of", we record impairment losses on
inventories related to communities under development when events
and circumstances indicate that they may be impaired and the
undiscounted cash flows estimated to be generated by those assets
are less than their related carrying amounts. During the year
ended October 31, 2001, inventory with a carrying amount of
$12,084,000 was written down by $2,088,000 to its fair value.
This was based on our evaluation of the expected revenue, cost
to complete including interest and selling cost. The writedown
during the year ended October 31, 2001 was attributed to two
communities in the Northeast Region that were part of a
large land acquisition, which resulted in a loss.
Also in accordance with SFAS 121, we record impairment losses
on inventories and long-lived assets held for sale when the related
carrying amount exceeds the fair value less the selling cost. As
of October 31, 2001, inventory with a carrying amount of $1,391,000
was written down by $424,000 to its fair value. No inventory was
written down during the year ended October 31, 2000. As of
October 31, 1999, inventory with a carrying amount of
$4,539,000 was written down by $1,801,000 to its fair value.
The writedowns during the year ended October 31, 2001 were attributed
to two land parcels in Florida and one community in North Carolina.
The writedowns in Florida and North Carolina were based upon changes
in market conditions. The writedowns during the year ended
October 31, 1999 were attributed to one land parcel in
Florida and two residential communities in North Carolina. The
Florida land parcel was written down based on purchase offers.
The communities in North Carolina were written down based on our
decision to discontinue selling homes and offer the remaining
lots for sale.
The total aggregate impairment losses, which are presented in the
consolidated statements of income, in inventory held for future
development or sale were $2,512,000, zero, and $1,801,000 for the
years ended October 31, 2001, 2000, and 1999, respectively.
On the statement of income the line entitled "Homebuilding -
Inventory impairment loss" also includes write-offs of options
including approval, engineering, and capitalized interest costs.
During the years ended October 31, 2001, 2000, and 1999 write-offs
amounted to $1,856,000, $1,791,000 and $290,000, respectively.
During the years ended October 31, 2001, 2000, and 1999 we did
not exercise options in various locations because the communities
pro forma profitability did not produce adequate returns on
investment commensurate with the risk. Those communities were
located in New Jersey, New York, Metro D. C., North Carolina,
and California.
12. TRANSACTIONS WITH RELATED PARTIES
Our Board of Directors has adopted a general policy providing
that it will not make loans to our officers or directors or their
relatives at an interest rate less than the interest rate at the
date of the loan on six month U.S. Treasury Bills, that the
aggregate of such loans will not exceed $3,000,000 at any one
time, and that such loans will be made only with the approval of
the members of our Board of Directors who have no interest in the
transaction. At October 31, 2001 and 2000 included in receivables,
deposits and notes are related party receivables from officers and
directors amounted to $1,119,000 and $3,127,000, respectively.
Due to an oversight the loan balances exceeded $3,000,000 at
October 31, 2000. On November 9, 2000 a $250,000 payment was
received which reduced the loans to within authorized limits.
Interest income from these loans for October 31, 2001, 2000, and
1999 amounted to $84,000, $167,000, and $108,000, respectively.
We provide property management services to various limited
partnerships including one partnership in which Mr. A. Hovnanian,
our Chief Executive Officer, President and a Director, is a general
partner, and members of his family and certain officers and
directors are limited partners. During the years ended October 31,
2001, 2000, and 1999 we received $76,000, $85,000, and $80,000,
respectively, in fees for such management services. At October 31,
2000 and 1999, no amounts were due us by these partnerships.
During the year ended October 31, 2001 we entered into an
agreement to purchase land from an entity that is a family relative
of our Chairman of the Board and our Chief Executive Officer.
As of October 31, 2001, land aggregating $2,384,000 has been
purchased. The Company remains obligated under a land purchase
agreement to purchase an additional $26.9 million of land from this
entity over the next three years. Neither the Company nor the
Chairman of the Board and Chief Executive Officer has a financial
interest in the relative's company from whom the land was purchased.
13. STOCK PLANS
We have a stock option plan for certain officers and key
employees. Options are granted by a Committee appointed by the
Board of Directors. The exercise price of all stock options must
be at least equal to the fair market value of the underlying shares
on the date of the grant. Options granted prior to May 14, 1998
vest in three equal installments on the first, second and third
anniversaries of the date of the grant. Options granted on or after
May 14, 1998 vest in four equal installments on the third, fourth,
fifth and sixth anniversaries of the date of the grant. Certain
Washington Homes associates were granted and held options to
purchase Washington Homes stock prior to the January 23, 2001
merger. These options vest in three installments: 25% on the
first and second anniversary, and 50% on the third anniversary
of the date of the grant. In connection with the merger (See Note
15) the options were exchanged for options to purchase the
Company's Class A Common Stock. In 2000 we extended the life of
options that expired on May 4, 2000 five years which resulted in
additional compensation expense of $346,000 net of taxes. All
options expire ten years after the date of the grant. In
addition, during the years ended October 31, 2000 and 1999 each
of the three outside directors of the Company were granted options
to purchase 10,000 shares at the same price and terms as those
granted to officers and key employees. Stock option transactions
are summarized as follows:
Weighted Weighted Weighted
Average Average Average
Fair Fair Fair
Value (1) Value (1) Value (1)
And And And
October Exercise October Exercise October Exercise
31, 2001 Price 31, 2000 Price 31, 1999 Price
--------- -------- --------- -------- --------- --------
Options outstanding at
beginning of period. 1,980,500 $7.55 1,656,000 $8.02 1,415,000 $8.13
Granted............ 1,048,785 $5.81 444,500 $6.10 251,000 $7.87
Exercised.......... 519,673 $4.29 10,000 $5.81
Forfeited.......... 238,955 $7.67 120,000 $8.60
--------- --------- ---------
Options outstanding at
end of period....... 2,270,657 $7.44 1,980,500 $9.44 1,656,000 $8.29
========= ========= =========
Options exercisable at
end of period....... 1,451,718 1,276,708 1,106,666
Price range of options $2.66- $5.13- $5.13-
outstanding......... $15.08 $11.50 $11.50
Weighted-average
remaining contractual
life................ 6.0 yrs. 7.0 yrs. 5.0 yrs.
(1) Fair value of options at grant date approximate exercise price.
Pro forma information regarding net income and earnings per
share is required under the fair value method of Financial Accounting
Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation" and
is to be calculated as if we had accounted for our stock options under
the fair value method of SFAS 123. The fair value for these options
is established at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for
2001, 2000, and 1999: risk- free interest rate of 4.4%, 5.9%, and
6.4%, respectively; dividend yield of zero; volatility factor of the
expected market price of our common stock of 0.38, 0.41, and 0.46,
respectively; and a weighted-average expected life of the option of
5.1, 7.0, and 7.7 years, respectively.
The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because our employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee
stock options and are not likely to be representative of the effects
on reported net income for future years, if applicable.
For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options'
vesting period. Our pro forma information follows (in thousands
except for earnings per share information):
Year Ended
---------------------------------
October October October
31, 2001 31, 2000 31, 1999
---------- ---------- ---------
Pro forma net income.................$ 63,491 $ 32,322 $ 29,851
========== ========== =========
Pro forma basic earnings per share...$ 2.37 $ 1.47 $ 1.39
========== ========== =========
Pro forma diluted earnings per share.$ 2.28 $ 1.47 $ 1.38
========== ========== =========
During the year ended October 31, 1999, we modified our bonus
plan for certain associates. A portion of their bonus will be paid
by issuing a deferred right to receive our Class A Common Stock. The
number of shares will be calculated by dividing the portion of the
bonus subject to the deferred right award by our stock price on the
date the bonus is earned. 25% of the deferred right award will vest
and shares will be issued one year after the year end and then 25% a
year for the next three years. During the years ended October 31,
2001 and 2000, we issued 84,962 and 25,000 shares under the plan.
During the years ended October 31, 2001 and 2000 41,550 and 26,000
shares were forfeited under this plan, respectively. For the years
ended October 31, 2001, 2000, and 1999, approximately 319,000,
281,000, and 200,000 deferred rights were awarded in lieu of
$3,857,000, $1,923,000, and $1,534,000 of bonus payments,
respectively.
14. COMMITMENTS AND CONTINGENT LIABILITIES
We are involved from time to time in litigation arising in
the ordinary course of business, none of which is expected to
have a material adverse effect on us. We were involved in an action
resulting from the non-performance by a land owner (the "Defendant")
to sell real property to us. In 1999, we entered into a Settlement
Agreement and Mutual Release ("SAMR") relating to this action.
Pursuant to the terms of the SAMR, the Defendant stipulated to a
judgement in our favor in the amount of $3,535,349. In 2000 the
judgement was upheld in bankruptcy proceedings. As a result of
the bankruptcy proceeding and evaluation of the collateral
underlying our claim, we recorded a net gain on settlement of
$1.8 million which is included in land sales and other revenues
in the consolidated statements of income at October 31, 2000.
As of October 31, 2001 and 2000, respectively, we are
obligated under various performance letters of credit amounting
to $10,223,000 and $4,284,000. (See Note 5)
15. ACQUISITIONS
On August 7, 1999 we acquired The Matzel and Mumford Organization,
Inc. ("M & M"), a New Jersey homebuilder and its related entities.
On October 1, 1999 we acquired the Goodman Family of Builders, L.P.
("Goodman"), a Texas homebuilder and its related entities. The
combined purchase price for both acquisitions was approximately
$24,400,000 in cash and 1,845,359 shares of our Class A Common
Stock at a weighted average share price of $7.18, of which
483,302 shares were held in escrow (and thus not reported as
issued and outstanding) for pre-acquisition contingencies. As of
October 31, 2001, 241,651 of those shares held in escrow were
released. At the dates of the acquisition we loaned the acquired
entities approximately $85,000,000 to pay off their third party
debt. In addition, both the M & M and Goodman acquisitions
provide for other payments to be made generally dependent upon
the achievement of certain future operating and return objectives.
Both acquisitions were accounted for as a purchase with the
results of operations of the acquired entities included in our
consolidated financial statements as of the dates of acquisitions.
The purchase prices were allocated based on estimated fair values
at the dates of the acquisitions. An intangible asset equal to
the excess purchase prices over the fair values of net assets
acquired of $19,998,000 has been recorded in prepaid expenses and
other assets on the consolidated balance sheet; this amount is
being amortized on a straight-line basis over a period of ten
years.
On January 23, 2001 we merged with Washington Homes, Inc.
for a total purchase price of $87.4 million, of which $38.5 million
was paid in cash and 6,352,900 shares of our Class A Common Stock
valued at $44.9 million were issued and options were issued to
Washington Homes, Inc. employees with an intrinsic value of
$3.4 million were converted to 738,785 of our options. At
the date of acquisition we loaned Washington Homes, Inc.
approximately $57,000,000 to pay off their third party debt.
The merger with Washington Homes, Inc. was accounted for as a
purchase with the results of operations of the merged entity
included in our consolidated financial statements as of the date
of the merger. The purchase price was allocated based on
estimated fair value at the date of the merger. An intangible
asset equal to the excess purchase price over the fair value of
the net assets of $16,689,000 is recorded in prepaid expenses
and other assets on the consolidated balance sheet. This amount
is being amortized on a straight line basis over a period
of ten years.
The following unaudited pro forma financial data presents a
summary of our consolidated results of operations as if the
merger with Washington Homes, Inc. on January 23, 2001 had
occurred on November 1, 1999. Unaudited pro forma financial
data is presented for information purposes only and may not be
indicative of the actual amounts of the Company had the events
occurred on the dates listed above, nor does it purport to
represent future periods.
Year Ended October 31,
------------------------------
2001 2000
------------- -------------
(In Thousands Except Per Share)
Revenues........................... $1,811,701 $1,617,161
Expenses........................... 1,704,844 1,544,083
Income Taxes....................... 42,126 27,556
------------- -------------
Net Income......................... $ 64,731 $ 45,522
============= =============
Diluted Net Income Per
Common Share..................... $ 2.22 $ 1.59
============= =============
These pro forma results have been prepared for comparative
purposes only and include certain adjustments including additional
amortization expense as a result of goodwill, additional
compensation and increased interest expense on acquisition debt.
This pro forma does not purport to be indicative of the results of
operations which actually would have resulted had the combination
been in effect on November 1, 1999 or of future results of
operations of the consolidated entities.
16. Restructuring Charges
Restructuring charges are estimated expenses associated with the
merger of our operations with those of Washington Homes, Inc. on
January 23, 2001. Under our merger plan, administration offices
in Maryland, Virginia, and North Carolina will be either closed,
relocated, or combined. The merger of administration offices was
completed by July 31, 2001. Expenses were accrued for salaries,
severance and outplacement costs for the involuntary termination
of associates, costs to close and/or relocate existing
administrative offices, and lost rent and leasehold improvements.
We estimated that approximately 58 associates would be terminated.
We have accrued approximately $2.0 million to cover termination
and related costs. Associates being terminated are primarily
administrative. In addition, we accrued approximately $1.2 million
to cover closing and/or relocating various administrative offices
in these three states. At October 31, 2001 $1.5 million has been
charged against termination costs relating to the termination of
55 associates and $0.5 million has been charged against closing
and relocation costs.
17. UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION
Summarized quarterly financial information for the years
ended October 31, 2001 and 2000 is as follows:
Three Months Ended
-----------------------------------------
October July April January
31, 2001 31, 2001 30, 2001 31, 2001(1)
-------- -------- -------- ---------
(In Thousands Except Per Share Data)
Revenues..................... $537,185 $509,250 $402,340 $293,188
Expenses..................... $500,243 $473,965 $379,773 $281,628
Income before income taxes... $ 36,942 $ 35,285 $ 22,567 $ 11,560
State and Federal income tax. $ 15,251 $ 14,273 $ 8,507 $ 4,637
Net Income................... $ 21,691 $ 21,012 $ 14,060 $ 6,923
Per Share Data:
Basic:
Net Income................. $ 0.77 $ 0.74 $ 0.50 $ 0.31
Weighted average number of
common shares outstanding 28,288 28,375 28,176 22,286
Assuming Dilution:
Net Income................. $ 0.74 $ 0.71 $ 0.48 $ 0.30
Weighted average number of
common shares outstanding 29,227 29,623 29,472 22,732
(1) On January 23, 2001, we merged with Washington Homes, Inc.
Three Months Ended
-----------------------------------------
October July April January
31, 2000 31, 2000 30, 2000 31, 2000
-------- -------- -------- ---------
(In Thousands Except Per Share Data)
Revenues..................... $352,483 $284,620 $241,487 $256,969
Expenses..................... $323,151 $272,362 $236,035 $252,193
Income before income taxes... $ 29,332 $ 12,258 $ 5,452 $ 4,776
State and Federal income tax. $ 11,170 $ 4,167 $ 1,994 $ 1,324
Net Income................... $ 18,162 $ 8,091 $ 3,458 $ 3,452
Per Share Data:
Basic:
Net Income................. $ 0.85 $ 0.37 $ 0.16 $ 0.15
Weighted average number of
common shares outstanding 21,463 21,904 22,054 22,327
Assuming Dilution:
Net Income................. $ 0.84 $ 0.37 $ 0.16 $ 0.15
Weighted average number of
common shares outstanding 21,704 21,949 22,111 22,413
18. FINANCIAL INFORMATION OF SUBSIDIARY ISSUER AND SUBSIDIARY
GUARANTORS
Hovnanian Enterprises, Inc., the parent company (the "Parent") is the
issuer of publicly traded common stock. One of its wholly owned
subsidiaries, K. Hovnanian Enterprises, Inc., (the "Subsidiary Issuer")
was the issuer of certain Senior Notes on May 4, 1999 and
October 2, 2000.
The Subsidiary Issuer acts as a finance and management entity thatas of
October 31, 2001 had issued and outstanding approximately $97,747,000
subordinated notes, $300,000,000 senior notes and a revolving credit
agreement with an outstanding balance of zero. The subordinated notes,
senior notes and the revolving credit agreement are fully and
unconditionally guaranteed by the Parent.
Each of the wholly owned subsidiaries of the Parent
(collectively the "Guarantor Subsidiaries"), with the exception of
various subsidiaries formerly engaged in the issuance of
collateralized mortgage obligations, a mortgage lending subsidiary,
a subsidiary holding and licensing the "K. Hovnanian" trade name,
a subsidiary engaged in homebuilding activity in Poland, our Title
subsidiaries, and a joint venture (collectively the "Non-guarantor
Subsidiaries"), have guaranteed fully and unconditionally, on a
joint and several basis, the obligation to pay principal and
interest under the senior notes and revolving credit agreement
of the Subsidiary Issuer.
In lieu of providing separate audited financial statements
for the Guarantor Subsidiaries we have included the accompanying
consolidated condensed financial statements. Management does not
believe that separate financial statements of the Guarantor
Subsidiaries are material to investors. Therefore, separate
financial statements and other disclosures concerning the
Guarantor Subsidiaries are not presented.
The following consolidating condensed financial information
presents the results of operations, financial position and cash
flows of (i) the Parent (ii) the Subsidiary Issuer (iii) the
Guarantor Subsidiaries of the Parent (iv) the Non-guarantor
Subsidiaries of the Parent and (v) the eliminations to arrive at
the information for Hovnanian Enterprises, Inc. on a consolidated
basis.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ 2,022 $ 50,565 $ 882,715 $ 10,229 $ $ 945,531
Financial Services................. 205 117,803 118,008
Income Taxes (Payables)Receivables. (5,067) (3,658) 11,893 (2,449) 719
Investments in and amounts due to
and from consolidated
subsidiaries..................... 378,691 375,514 (668,285) 14,513 (100,433)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$375,646 $ 422,421 $ 226,528 $ 140,096 $ (100,433)$1,064,258
======== ========== ========== ============ ========== ==========
Liabilities
Homebuilding.......................$ $ 14,679 $ 161,759 $ 291 $ $ 176,729
Financial Services................. 103,569 103,569
Notes Payable...................... 408,206 108 408,314
Income Taxes Payable...............
Stockholders' Equity............... 375,646 (464) 64,661 36,236 (100,433) 375,646
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$375,646 $ 422,421 $ 226,528 $ 140,096 $ (100,433)$1,064,258
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ (63) $ 76,648 $ 717,484 $ 8,002 $ $ 802,071
Financial Services......... 994 70,476 71,470
Income Taxes (Payables)Receivables. (4,585) (5,873) 12,567 (2,109)
Investments in and amounts due to
and from consolidated
subsidiaries..................... 268,007 353,115 (473,872) 577 (147,827)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$263,359 $ 423,890 $ 257,173 $ 76,946 $(147,827) $ 873,541
======== ========== ========== ============ ========== ==========
Liabilities
Homebuilding.......................$ $ 11,533 $ 122,807 $ 1,060 $ $ 135,400
Financial Services................. 457 61,114 61,571
Notes Payable...................... 409,041 98 409,139
Income Taxes Payable............... 4,072 4,072
Stockholders' Equity............... 263,359 3,316 129,739 14,772 (147,827) 263,359
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$263,359 $ 423,890 $ 257,173 $ 76,946 $(147,827) $ 873,541
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF INCOME
TWELVE MONTHS ENDED OCTOBER 31, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 431 $1,701,394 $ 46,190 $ (37,480) $1,710,535
Financial Services.............. 10,391 21,037 31,428
Intercompany Charges............ 96,368 30,480 (126,848)
Equity In Pretax Income of
Consolidated Subsidiaries.....106,354 (106,354)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................106,354 96,799 1,742,265 67,227 (270,682) 1,741,963
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding.................... 96,799 1,637,238 8,935 (128,806) 1,614,166
Financial Services.............. 5,748 15,821 (126) 21,443
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................ 96,799 1,642,986 24,756 (128,932) 1,635,609
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes106,354 99,279 42,471 (141,750) 106,354
State and Federal Income Taxes....42,668 109 39,278 16,448 (55,835) 42,668
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)................$63,686 $ (109)$ 60,001 $ 26,023 $ (85,915) $ 63,686
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF INCOME
TWELVE MONTHS ENDED OCTOBER 31, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 391 $1,112,173 $ 21,397 $ (17,726) $1,116,235
Financial Services.............. 6,028 13,296 19,324
Intercompany Charges............ 82,051 34,505 (116,556)
Equity In Pretax Income of
Consolidated Subsidiaries..... 51,818 (51,818)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 51,818 82,442 1,152,706 34,693 (186,100) 1,135,559
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding.................... 66,232 1,094,207 2,831 (99,279) 1,063,991
Financial Services.............. 4,591 15,426 (267) 19,750
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................ 66,232 1,098,798 18,257 (99,546) 1,083,741
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes. 51,818 16,210 53,908 16,436 (86,554) 51,818
State and Federal Income Taxes.... 18,655 6,616 18,438 5,757 (30,811) 18,655
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss).................$33,163 $ 9,594 $ 35,470 $ 10,679 $ (55,743) $ 33,163
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF INCOME
TWELVE MONTHS ENDED OCTOBER 31, 1999
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ (159) $ 1,120 $ 922,333 $ 22,767 $ (20,405) $ 925,656
Financial Services............... 3,561 17,197 20,758
Intercompany Charges............. 91,695 72 (91,767)
Equity In Pretax Income of
Consolidated Subsidiaries...... 50,776 (50,776)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 50,617 92,815 925,966 39,964 (162,948) 946,414
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 90,111 865,736 2,248 (81,997) 876,098
Financial Services............... 2,757 17,370 (428) 19,699
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 90,111 868,493 19,618 (82,425) 895,797
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 50,617 2,704 57,473 20,346 (80,523) 50,617
State and Federal Income Taxes..... 19,674 917 21,453 7,771 (30,141) 19,674
Extraordinary Loss................. (868) (868) 868 (868)
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$30,075 $ 919 $ 36,020 $ 12,575 $ (49,514) $ 30,075
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED OCTOBER 31, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income........................$ 63,686 $ (109)$ 60,001 $ 26,023 $ (85,915) $ 63,686
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities.. 102,908 99,063 (264,122) (50,381) 85,915 (26,617)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities.......... 166,594 98,954 (204,121) (24,358) 37,069
Net Cash Provided By (Used In)
Investing Activities.............. (49,622) (3,770) 13,399 264 (39,729)
Net Cash Provided By (Used In)
Financing Activities.............. (6,215) 114 (59,555) 41,212 (24,444)
Intercompany Investing and Financing
Activities - Net..................(110,684) (118,767) 243,387 (13,936)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease)............. 73 (23,469) (6,890) 3,182 (27,104)
In Cash and Cash Equivalents Balance,
Beginning of Period............... (63) 17,629 22,506 3,181 43,253
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period..................... $ 10 $ (5,840) $ 15,616 $ 6,363 $ 16,149
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED OCTOBER 31, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 33,163 $ 9,594 $ 35,470 $ 10,679 $ (55,743) $ 33,163
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 751 80,742 (196,014) (35,030) 55,743 (93,808)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 33,914 90,336 (160,544) (24,351) (60,645)
Net Cash Provided By (Used In)
Investing Activities............... (231) (13,262) (4,433) (9) (17,935)
Net Cash Provided By (Used In)
Financing Activities............... (6,461) 76,305 6,864 25,760 102,468
Intercompany Investing and Financing
Activities - Net................... (27,331) (130,355) 156,011 1,675
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease).............. (109) 23,024 (2,102) 3,075 23,888
In Cash and Cash Equivalents Balance,
Beginning of Period................ 46 (5,395) 24,608 106 19,365
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ (63) $ 17,629 $ 22,506 $ 3,181 $ 43,253
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED OCTOBER 31, 1999
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 30,075 $ 919 $ 36,020 $ 12,575 $ (49,514) $ 30,075
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 15,774 311 (123,977) 63,782 49,514 5,404
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 45,849 1,230 (87,957) 76,357 35,479
Net Cash Provided By (Used In)
Investing Activities............... (9,478) 1,868 480 (7,130)
Net Cash Provided By (Used In)
Financing Activities............... (6,291) 106,676 (40,326) (84,597) (24,538)
Intercompany Investing and Financing
Activities - Net................... (39,526) (94,163) 128,000 5,689
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease).............. 32 4,265 1,585 (2,071) 3,811
In Cash and Cash Equivalents Balance,
Beginning of Period................ 14 (9,660) 23,023 2,177 15,554
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 46 $ (5,395) $ 24,608 $ 106 $ 19,365
======== ========= ========== ============ ========== ==========
19. Subsequent Event (Unaudited)
On December 19, 2001 we entered into a purchase agreement with
The Forecast Group, L.P. ("TFG"), a California homebuilder, to
acquire certain assets and assume related liabilities for an
estimated purchase price of $176.0 million plus the assumption of
debt net of cash acquired. The transaction closed on January 10,
2002 but the final purchase price is subject to adjustment based
on financial performance through January 31, 2002. Under the
terms of the agreement the partners in TFG received $45.5 million
of Hovnanian restricted Class A Common Stock amounting to
approximately 2,200,000 shares and the balance in cash.