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, 2002
( )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.
Indicate by check mark whether the regisrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes ( X ) No ( )
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of
such common equity as of April 30, 2002 was $450,643,000.
As of the close of business on January 6, 2003, there were outstanding
23,228,281 shares of the Registrant's Class A Common Stock and 7,439,742
shares of its Class B Common Stock.
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 7, 2003 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......... 17
7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 19
7A Quantitative and Qualitative Disclosures About
Market Risk................................ 38
8 Financial Statements and Supplementary
Data....................................... 39
9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................. 39
PART III
10 Directors and Executive Officers of the
Registrant................................. 40
Executive Officers of the Registrant......... 40
11 Executive Compensation....................... 42
12 Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters........................ 42
13 Certain Relationships and Related
Transactions............................... 43
14 Controls and Procedures...................... 43
PART IV
15 Exhibits, Financial Statement Schedules and
Reports on Form 8-K....................... 44
Signatures................................... 46
Certifications............................... 47
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, South Carolina, Metro
D.C. (northern Maryland and Virginia), California, Texas, and the Mid
South (Tennessee, Alabama, and Mississippi). During the year ended
October 31, 2002, we liquidated substantially all of our operations in
the Mid-South. 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 base
prices ranging from $42,000 to $933,000 with an average sales price in
fiscal 2002 of $279,000. We are currently offering homes for sale in 196
communities. Since the incorporation of our predecessor company in 1959,
we have delivered in excess of 134,000 homes, including 9,514 homes in
fiscal 2002. In addition, we provide financial services (mortgage loans
and title insurance) to our homebuilding customers.
We employed approximately 2,370 full-time associates as of October
31, 2002. 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."
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.
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 frequently 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 computerized monitoring
systems. 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 markets and by executing
national purchasing contracts with select vendors. 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, 2002, 6.4% of our customers paid in cash and over 71% of our non-cash
customers obtained mortgages originated by one of our wholly-owned
mortgage banking subsidiaries or our mortgage joint venture in
California. 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 single family detached homes and/or a number of
residential buildings containing from two to twenty-four individual homes
per building, 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 the
housing 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 take down schedules
rather than with an obligation to take down 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, 2002 (exclusive of upgrades and options) range from $42,000 to
$900,000 in our Northeast Region, from $119,000 to $700,000 in Metro
D.C., from $97,000 to $405,000 in North Carolina, from $132,000 to
$580,000 in Texas, and from $120,000 to $933,000 in California. Closings
generally occur and are typically reflected in revenues from two to nine
months after sales contracts are signed.
Information on homes delivered by market area is set forth below:
Year Ended
----------------------------------
October October October
31, 2002 31, 2001 31, 2000
---------- -------- --------
(Housing Revenue in Thousands)
Northeast Region:
Housing Revenues........$ 660,250 $ 570,647 $ 561,422
Homes Delivered......... 2,144 1,860 1,939
Average Price...........$ 307,952 $ 306,799 $ 289,542
North Carolina(2):
Housing Revenues........$ 264,055 $ 255,390 $ 126,596
Homes Delivered......... 1,421 1,449 653
Average Price...........$ 185,823 $ 176,253 $ 193,868
Metro D.C.(2):
Housing Revenues........$ 396,273 $ 310,815 $ 66,137
Homes Delivered......... 1,385 1,294 263
Average Price...........$ 286,118 $ 240,197 $ 251,471
California(1):
Housing Revenues........$ 852,373 $ 280,582 $ 143,729
Homes Delivered......... 3,220 760 480
Average Price...........$ 264,712 $ 369,187 $ 299,435
Texas:
Housing Revenues........$ 240,181 $ 215,045 $ 186,294
Homes Delivered......... 1,033 1,003 914
Average Price...........$ 232,508 $ 214,402 $ 203,823
Mid-South(2):
Housing Revenues........$ 48,510 $ 44,372 --
Homes Delivered......... 305 290 --
Average Price...........$ 159,049 $ 153,007 --
Other:
Housing Revenues........$ 453 $ 16,866 $ 21,288
Homes Delivered......... 6 135 118
Average Price...........$ 75,500 $ 124,933 $ 180,407
Combined Total:
Housing Revenues........$2,462,095 $1,693,717 $1,105,466
Homes Delivered........ 9,514 6,791 4,367
Average Price...........$ 258,787 $ 249,406 $ 253,141
(1) October 31, 2002 includes Forecast deliveries beginning on
January 10, 2002.
(2) October 31, 2001 includes Washington Homes deliveries beginning
on January 24, 2001.
The value of our net sales contracts increased 50.2% to $2,432,000
for the year ended October 31, 2002 from $1,619,000 for the year ended
October 31, 2001. This increase was the net result of a 39.8% increase
in the number of homes contracted to 9,394 in 2002 from 6,722 in 2001.
By market, on a dollar basis, the Northeast Region increased 13.4%, Metro
D. C. increased 33.1%, Texas increased 8.0%, and California increased
253.9%. The increases in California and Metro D. C. were due to the
acquisition of the Forecast Group, L.P. on January 10, 2002 and a full
year of operations in Metro D. C. from the merger with Washington Homes
on January 23, 2001. The increases in the Northeast Region, and Texas
were due to increased sales and increased sales prices. These increases
were slightly offset by a 6.5% decrease in sales in North Carolina due to
continued slow market conditions.
The following table summarizes our active communities under
development as of October 31, 2002. The contracted not delivered and
remaining home sites available in our active communities under
development are included in the 53,988 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. 28 9,442 3,743 1,371 4,328
North Carolina... 64 9,062 3,876 466 4,720
Metro D.C........ 27 5,607 2,425 755 2,427
California....... 42 9,952 3,978 955 5,019
Texas............ 35 4,459 1,893 277 2,289
Mid-South........ -- 274 245 7 22
------- -------- --------- --------- ----------
Total 196 38,796 16,160 3,831 18,805
======= ======== ========= ========= ==========
(1) Includes 636 lots under option and excludes 26 lots under our build
on your own lot program.
(2) Of the total home sites available, 959 were under construction or
completed (including 205 models and sales offices), 10,912 were
under option, and 128 were financed through purchase money
mortgages.
The following table summarizes our total started or completed
unsold homes as of October 31, 2002:
Unsold
Homes Models Total
------ ------ -----
Northeast Region.................. 73 46 119
North Carolina.................... 191 32 223
Metro D.C......................... 34 31 65
California........................ 193 65 258
Texas............................. 261 31 292
Mid-South......................... 2 -- 2
------ ------ -----
Total 754 205 959
====== ====== =====
BACKLOG
At October 31, 2002 and October 31, 2001, we had a backlog of
signed contracts for 3,857 homes and 3,033 homes, respectively, with
sales values aggregating $1,076,728,000 and $773,074,000, respectively.
Substantially all of our backlog at October 31, 2002 is expected to be
completed and closed within the next twelve months. At November 30, 2002
and 2001, our backlog of signed contracts was 4,051 homes and 3,025
homes, respectively, with sales values aggregating $1,130,807,000 and
$770,930,000, 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, 2002, 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 53,988 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....... 82 14,941 $658,085 $103,447
Owned.............. 7 759 28,281
--------- ----------- -----------
Total........... 89 15,700 131,728
--------- ----------- -----------
North Carolina:
Under Option....... 13 2,283 $ 77,719 812
--------- ----------- -----------
Metro D.C.:
Under Option....... 47 6,002 $426,421 14,566
Owned.............. 7 1,392 23,446
-------- ----------- -----------
Total........... 54 7,394 38,012
-------- ----------- -----------
California:
Under Option....... 30 4,354 $175,117 15,076
Owned.............. 1 103 6,288
-------- ----------- -----------
Total........... 31 4,457 21,364
-------- ----------- -----------
Texas:
Under Option....... 15 1,518 $ 59,004 12,454
-------- ----------- -----------
Totals:
Under Option....... 187 29,098 146,355
Owned.............. 15 2,254 58,015
--------- ----------- -----------
Combined Total....... 202 31,352 $204,370
========= =========== ===========
(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, 2002, option fees and
deposits aggregating approximately $69,534,000 and accrued
$13,832,000 for specific performance options.. As of October 31,
2002, we spent an additional $62,989,000 in non-refundable
predevelopment costs on such properties.
(2) The book value of $204,370,000 is identified on the balance sheet as
"Inventories - land, land options, held for future development or
sale," and does not include inventory in Poland and Florida
amounting to $4,463,000 and inventory amounting to $29,168,000 for
communities partially under construction.
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, where possible, we plan to option developed or
partially developed lots. With a limited supply of developed lots in
California, we are also 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, Texas, and California. During the
year ended October 31, 2002, approximately 6.4% of our homebuyers paid in
cash and 71% of our non-cash homebuyers obtained mortgages originated by
one of our wholly-owned mortgage banking subsidiaries or our mortgage
joint venture in 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.
COMPETITION
Our residential business is highly competitive. We are among the
top ten homebuilders in the United States in both homebuilding revenues
and home deliveries. 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.
New Jersey 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.
New Jersey 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 adopted some policies and regulations to
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, 49,550 square feet in the
Metro D. C. area, 50,956 square feet in various North Carolina locations,
3,688 square feet in various Mid South locations, 13,505 square feet in
West Palm Beach, Florida, 48,618 square feet in California, and 23,055
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. Recently the general liability insurance market
for homebuilding companies and their suppliers and subcontractors has
become very difficult. The availability of general liability insurance
has been limited due to a decreased number of insurance companies willing
to write for the industry. In addition, those few insurers willing to
write liability insurance have significantly increased the premium costs.
The Company has been able to obtain general liability insurance but at
higher premium costs with higher deductibles. The Company has been
advised that a significant number of its subcontractors and suppliers
have also had difficulty obtaining insurance that also provides coverage
to the Company. While no assurance can be given, the Company believes
that it will be able to continue to obtain coverage but at higher total
costs.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended October 31, 2002 no
matters 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 504 shareholders of record at January 6, 2003. There is
no established public trading market for our Class B Common Stock, which
was held by 380 shareholders of record at January 6, 2003. 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, 2002, 2001, and 2000:
Class A Common Stock
------------------------------------------------
Oct. 31, 2002 Oct. 31, 2001 Oct. 31, 2000
-------------- -------------- --------------
Quarter High Low High Low High Low
- ------- ------ ------ ------ ------ ------ ------
First........ $22.40 $10.00 $ 9.99 $ 7.19 $ 6.88 $ 5.25
Second....... $32.40 $19.07 $18.75 $ 8.75 $ 6.62 $ 5.44
Third........ $38.75 $24.31 $19.34 $13.00 $ 6.38 $ 5.44
Fourth....... $40.56 $24.70 $15.00 $ 9.71 $ 7.94 $ 5.88
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, 2002, 47,619 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 $115,183,000 of retained
earnings was free of such restrictions at October 31, 2002. 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 this Form 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, 2002 31, 2001 31, 2000 31, 1999 31, 1998
- ----------------------------- ---------- ---------- -------- --------- --------
(In Thousands Except Per Share Data)
Revenues.....................$2,551,106 $1,741,990 $1,135,559 $946,414 $937,729
Expenses..................... 2,324,481 1,635,636 1,083,741 895,797 896,437
---------- ---------- --------- --------- ---------
Income before income
taxes and extraordinary loss 226,625 106,354 51,818 50,617 41,292
State and Federal income taxes. 88,347 42,668 18,655 19,674 15,141
Extraordinary loss........... (582) (868) (748)
---------- ---------- --------- --------- ---------
Net income................... $ 137,696 $ 63,686 $ 33,163 $ 30,075 $ 25,403
========== ========== ========= ======== =========
Per Share Data:
Basic:
Income before
extraordinary loss....... $ 4.55 $ 2.38 $ 1.51 $ 1.45 $ 1.20
Extraordinary loss......... (.02) (.04) (0.03)
---------- ---------- --------- --------- --------
Net income................. $ 4.53 $ 2.38 $ 1.51 $ 1.41 $ 1.17
========== ========== ========= ========= ========
Weighted average number of
common shares outstanding.. 30,405 26,810 21,933 21,404 21,781
Assuming Dilution:
Income before
extraordinary loss....... $ 4.30 $ 2.29 $ 1.50 $ 1.43 $ 1.19
Extraordinary loss......... (.02) (.04) (0.03)
---------- ---------- --------- --------- --------
Net income................. $ 4.28 $ 2.29 $ 1.50 $ 1.39 $ 1.16
========== ========== ========= ========= ========
Weighted average number of
common shares outstanding.. 32,155 27,792 22,043 21,612 22,016
Summary Consolidated October October October October October
Balance Sheet Data 31, 2002 31, 2001 31, 2000 31, 1999 31, 1998
- ----------------------------- ---------- ---------- --------- -------- --------
Total assets.................$1,678,128 $1,064,258 $ 873,541 $712,861 $589,102
Mortgages and notes payable..$ 215,365 $ 111,795 $ 78,206 $110,228 $150,282
Senior notes, participating
senior subordinated
debentures and subordinated
notes......................$ 546,390 $ 396,544 $ 396,430 $250,000 $145,449
Stockholders' equity.........$ 562,549 $ 375,646 $ 263,359 $236,426 $201,392
Note: See Item 7 "Results of Operations" for impact of our 1999, 2001, and 2002
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,
--------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- ----------
Ratio of earnings to
fixed charges............ 4.7 3.1 2.2 3.0 2.5
Ratio of earnings to
combined fixed charges
and preferred stock
dividends................. 4.7 3.1 2.2 3.0 2.5
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Management believes that the following critical accounting policies
affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements:
Business Combinations - When we make an acquisition of another
company, we use the purchase method of accounting in accordance with the
Statement of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations". Under SFAS No. 141 (for acquisitions subsequent to June
30, 2001) and APB 16 (for acquisitions prior to June 30, 2001) we record
as our cost the estimated fair value of 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 from the date of acquisition.
Income Recognition from Home and Land Sales - Income from home
sales is recorded when each home is closed, title is conveyed to the
buyer, adequate cash payment has been received and there is no continued
involvement.
Income Recognition from Mortgage Loans - Profits and losses
relating to the sale of mortgage loans are recognized when legal control
pass to the buyer and the sales price is collected.
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 the Statement of
Financial Accounting Standards (SFAS)No. 144 "Accounting for the
Impairment of or Disposal of Long-Lived Assets" 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. SFAS No.
144 provides accounting guidance for financial accounting and reporting
for impairment or disposal of long-lived assets. 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.
Self Insurance Reserves - We are self insured for our worker's
compensation and general liability insurance. Reserves have been
established based upon actuarial analysis of estimated future losses.
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.
Land Options - Costs are 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.
Options that include specific performance terms, which have been
triggered, are recorded on the balance sheet as inventory and other
liabilities.
Intangible Assets - The intangible assets recorded on our balance
sheet are goodwill and a tradename which is an indefinite life intangible
asset resulting from company acquisitions. In accordance with the
Financial Accounting Standards No. 142 ("SFAS No. 142") " Goodwill and
Other Intangible Assets", we no longer amortize goodwill or indefinite
life intangibles, but instead assess them periodically for impairment.
We performed such assessments utilizing a fair value approach as of
October 31, 2002, and determined that no impairment of intangibles
existed.
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 and is recorded in accounts payable and other
liabilities in the accompanying consolidated balance sheets.
CAPITAL RESOURCES AND LIQUIDITY
Our cash uses during the twelve months ended October 31, 2002 were
for operating expenses, seasonal increases in housing inventories,
construction, income taxes, interest, the repurchase of common stock, the
redemption of subordinated indebtedness, the acquisition of the
California operations of the Forecast Group, L.P. ("Forecast"), and the
acquisition of a land portfolio from another homebuilding company. We
provided for our cash requirements from housing and land sales, the
revolving credit facility, the issuance of a term loan, the issuance of
$150,000,000 senior subordinated notes, the issuance of $100,000,000
senior notes, financial service revenues, and other revenues. We believe
that these sources of cash are sufficient to finance our working capital
requirements, acquisitions, and other needs.
At October 31, 2002 we had approximately $250.0 million of excess
cash. Management anticipates using the excess cash to grow existing
operations and fund future acquisitions.
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 receivables,
prepaid and other assets, interest and other accrued liabilities,
accounts payable, inventory levels, mortgage loans and liabilities, and
non-cash charges relating to depreciation, the writeoff of SAP costs, and
impairment losses. In 2001 and 2000, a portion of the difference was
also due to goodwill amortization. When we are expanding our operations,
which was the case in fiscal 2002 and 2001, inventory levels increase
causing cash flow from operating activities to decrease. Liabilities
also increase as inventory levels increase. The difference between net
income and net operating cash flow is our increased efforts to accelerate
the cash collection process from closing agents and increases in tax and
other liabilities due to a significant increase in business. 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
decrease. Conversely, as such loans decrease, cash flow from operations
increase. Depreciation and impairment losses always increase cash flow
from operating activities since they are non-cash charges to operations.
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, 2002, 606,319 shares have been purchased under
this program, of which 147,619 were repurchased during the twelve months
ended October 31, 2002.
Our homebuilding bank borrowings are made pursuant to an unsecured
revolving credit agreement (the "Agreement") that provides a revolving
credit line and letter of credit line of up to $440,000,000 through July
2005. 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 2005 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, 2002, there were no borrowings under the Agreement.
On March 26, 2002, we issued $100,000,000 8% Senior Notes due 2012
and $150,000,000 8 7/8% Senior Subordinated Notes due 2012. On April 29,
2002, we used a portion of the proceeds to redeem our 9 3/4% Subordinated
Notes due 2005 which had a balance of approximately $99,747,000. The
early retirement of these notes resulted in an extraordinary loss of
$582,000 net of an income tax benefit of $313,000. Other senior
indebtedness issued by us and outstanding as of October 31, 2002 was
$150,000,000 10 1/2% Senior Notes due 2007 and $150,000,000 9 1/8% Senior
Notes due 2009.
On January 22, 2002 we issued a $165,000,000 Term Loan to a group
of banks which is due January 22, 2007. Interest is payable monthly at
either the prime rate plus 1.25% or LIBOR plus 2.5%. The proceeds from
the issuance of the Term Loan were primarily used to partially fund the
acquisition of the California operations of Forecast. As of October 31,
2002 borrowings under the Term Loan were $115,000,000.
Our mortgage banking subsidiary borrows up to $150,000,000 under a
bank warehousing arrangement that expires in June 2003. Interest is
payable monthly at the Federal Funds Rate plus 1.375%. We believe that
we will be able either to extend this agreement beyond June 2003 or
negotiate a replacement facility, but there can be no assurance of such
extension or replacement facility. As of October 31, 2002 borrowings
under the agreement were $85,498,000.
Total inventory increased $341,468,000 during the twelve months
ended October 31, 2002. The increase in inventory was primarily due to
the acquisition of The Forecast Group, LP ("Forecast") and the purchase
of a land portfolio from a builder in our Northeast Region. In addition,
inventory levels increased slightly in most of our housing markets except
in the Mid-South where we have liquidated our operations and in North
Carolina where the market has slowed down. Substantially all homes under
construction or completed and included in inventory at October 31, 2002
are expected to be closed during the next twelve months. Most inventory
completed or under development is financed through our line of credit,
senior and subordinated indebtedness, and cash flows generated from
operations.
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, 2002:
Northeast Region............ 21,399 1,371 20,028
North Carolina.............. 7,469 466 7,003
Metro D. C.................. 10,576 755 9,821
California.................. 10,431 955 9,476
Texas....................... 4,084 277 3,807
Mid South................... 29 7 22
-------- ---------- ---------
Total.................. 53,988 3,831 50,157
======== ========== =========
Owned....................... 13,362 3,195 10,167
Optioned.................... 40,626 636 39,990
-------- ---------- ---------
Total.................. 53,988 3,831 50,157
======== ========== =========
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
======== ========== =========
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 and substantially completed communities:
October 31, October 31,
2002 2001
-------------------------- -------------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ------ ------ ------ ------
Northeast Region. 73 33 106 69 48 117
North Carolina... 191 18 209 205 41 246
Metro D.C..... 34 25 59 27 27 54
California.... 193 61 254 60 11 71
Texas......... 261 8 269 215 15 230
Mid South..... 2 -- 2 54 22 76
Other......... -- -- -- 7 -- 7
------ ------ ------ ------ ------ ------
Total 754 145 899 637 164 801
====== ====== ====== ====== ====== ======
Financial Services - mortgage loans held for sale consist of
residential mortgages receivable of which $91,339,000 and $105,174,000 at
October 31, 2002 and October 31, 2001, respectively, are being
temporarily warehoused and awaiting sale in the secondary mortgage
market. The balance of mortgage loans held for sale are being held as an
investment. We may incur risk with respect to mortgages that are
delinquent, but only to the extent the losses are not covered by mortgage
insurance or resale value of the house. Historically, we have incurred
minimal credit losses.
RESULTS OF OPERATIONS
Our operations consist primarily of residential housing development
and sales in our Northeast Region (New Jersey, southern New York state,
and eastern Pennsylvania), North Carolina, Metro D. C. (northern Virginia
and Maryland), California, Texas, and the Mid-South (Tennessee, Alabama,
and Mississippi). During the year ended October 31, 2002, we
substantially liquidated our operations in the Mid-South. In addition,
we provide financial services to our homebuilding customers.
Total Revenues
Compared to the same prior period, revenues increased (decreased)
as follows:
Year Ended
-------------------------------
October October October
31, 2002 31, 2001 31, 2000
--------- --------- ---------
(Dollars in Thousands)
Homebuilding:
Sale of homes...................$ 768,378 $ 588,251 $ 196,913
Land sales and other revenues... 31,396 6,076 (6,334)
Financial services................ 9,342 12,104 (1,434)
--------- --------- ---------
Total change.................$ 809,116 $ 606,431 $ 189,145
========= ========= =========
Percent change................. 46.4% 53.4% 20.0%
========= ========= =========
Homebuilding
Compared to the same prior period, housing revenues increased
$768.4 million or 45.4% for the year ended October 31, 2002, increased
$588.3 million or 53.2% for the year ended October 31, 2001, and
increased $196.9 million or 21.7% for the year ended October 31, 2000.
Housing revenues are recorded at the time each home is delivered and
title and possession have been transferred to the buyer.
Information on homes delivered by market area is set forth below:
Year Ended
-----------------------------------
October October October
31, 2002 31, 2001 31, 2000
----------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Housing Revenues............$ 660,250 $ 570,647 $ 561,422
Homes Delivered............. 2,144 1,860 1,939
North Carolina(2):
Housing Revenues............$ 264,055 $ 255,390 $ 126,596
Homes Delivered............. 1,421 1,449 653
Metro D.C.(2):
Housing Revenues............$ 396,273 $ 310,815 $ 66,137
Homes Delivered............. 1,385 1,294 263
California(1):
Housing Revenues............$ 852,373 $ 280,582 $ 143,729
Homes Delivered............. 3,220 760 480
Texas:
Housing Revenues............$ 240,181 $ 215,045 $ 186,294
Homes Delivered............. 1,033 1,003 914
Mid South(2):
Housing Revenues............$ 48,510 $ 44,372 --
Homes Delivered............. 305 290 --
Other:
Housing Revenues............$ 453 $ 16,866 $ 21,288
Homes Delivered............. 6 135 118
Totals:
Housing Revenues............$ 2,462,095 $1,693,717 $1,105,466
Homes Delivered............. 9,514 6,791 4,367
(1) October 31, 2002 includes deliveries from the Forecast
Acquisition beginning on January 10, 2002.
(2) October 31, 2001 includes deliveries from the Washington Homes,
Inc. merger beginning on January 24, 2001.
The following pro forma information for the years ended October 31,
2002 and 2001 have been prepared as if the merger with Washington Homes,
Inc. on January 23, 2001 and the acquisition of Forecast on January 10,
2002 had occurred on November 1, 2000. Total pro forma housing revenues
were $2,526,000 and $2,242,000 and total homes delivered were 9,789 and
9,306 as of October 31, 2002 and 2001, respectively.
The increase in housing revenues was primarily due to the
acquisition of Forecast and a full year of operations from Washington
Homes, Inc. In addition, these increases were due to increased
deliveries in the Northeast Region resulting from a land portfolio
acquisition in late March 2002, and increased average sales prices in all
our markets except California. California's average sales price is down
due to the Forecast Group product being mostly lower priced, first time
buyer homes.
Unaudited quarterly housing revenues and net sales contracts using
base sales prices by market area for the years ending October 31, 2002,
2001, and 2000 are set forth below:
Quarter Ended
------------------------------------------
October July April January
31, 2002 31, 2002 30, 2002 31, 2002
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region........ $ 205,079 $ 177,153 $ 145,249 $ 132,769
North Carolina.......... 70,153 72,437 64,784 56,681
Metro D.C............... 137,518 110,030 78,333 70,392
California(1)........... 316,412 242,631 178,688 114,642
Texas................... 67,403 65,432 52,820 54,526
Mid South............... 8,717 13,646 12,512 13,635
Other................... -- -- -- 453
--------- --------- --------- ---------
Total............... $ 805,282 $ 681,329 $ 532,386 $ 443,098
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region........ $ 154,623 $ 148,390 $ 165,148 $ 109,689
North Carolina.......... 49,938 55,660 89,394 53,794
Metro D. C.............. 88,864 98,828 164,098 78,993
California(1)........... 283,607 288,885 261,002 84,122
Texas................... 55,893 54,437 73,145 43,827
Mid South............... 3,206 6,443 9,053 11,025
Other................... -- -- -- 340
--------- --------- --------- ---------
Total............... $ 636,131 $ 652,643 $ 761,840 $ 381,790
========= ========= ========= =========
(1) Quarter ended January 31, 2002 includes housing revenues and sales
contracts from Forecast Homes beginning on January 10, 2002.
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(2)....... 77,248 85,887 60,457 31,798
Metro D.C.(2)........... 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(2)............ 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(2)....... 55,041 59,873 109,483 41,651
Metro D. C.(2).......... 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(2)............ 11,801 12,394 20,299 3,806
Other................... 287 279 442 857
--------- --------- --------- ---------
Total............... $335,747 $399,306 $577,837 $306,480
========= ========= ========= =========
(2) Quarter ended January 31, 2001 includes housing revenues and sales
contracts from Washington Homes beginning on January 24, 2001.
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 $217,243
========= ========= ========= =========
Our contract backlog using base sales prices by market area is set
forth below:
October October October
31, 2002 31, 2001 31, 2000
--------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Total Contract Backlog........$ 416,264 $322,100 $311,539
Number of Homes............... 1,397 1,160 1,149
North Carolina:
Total Contract Backlog........$ 88,291 $103,616 $ 40,635
Number of Homes............... 466 534 215
Metro D.C.:
Total Contract Backlog........$ 243,391 $208,888 $ 52,339
Number of Homes............... 755 779 215
California:
Total Contract Backlog........$ 267,305 $ 53,338 $ 58,089
Number of Homes............... 955 172 151
Texas:
Total Contract Backlog........$ 60,532 $ 64,961 $ 61,703
Number of Homes............... 277 263 282
Mid South:
Total Contract Backlog........$ 945 $ 19,734 --
Number of Homes............... 7 122 --
Other:
Total Contract Backlog........$ -- $ 437 $ 14,241
Number of Homes............... -- 3 84
Totals:
Total Contract Backlog........$1,076,728 $773,074 $538,546
Number of Homes............... 3,857 3,033 2,096
The following pro forma information at October 31, 2001 has been
prepared as if the acquisition of Forecast Homes on January 10, 2002 had
occurred on October 31, 2001. Total pro forma contract backlog was
$863,193 and total homes in backlog were 3,445 as of October 31, 2001.
We have written down or written off certain inventories totaling
$8.2, $4.4, and $1.8 million during the years ended October 31, 2002,
2001, and 2000, respectively, to their estimated fair value. See "Notes
to Consolidated Financial Statements - Note 11" for additional
explanation. These write-downs 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 certain
options to purchase land.
During the years ended October 31, 2002, 2001, and 2000, we wrote
off residential land options including approval and engineering costs
amounting to $4.0, $1.9, and $1.8 million, respectively, which are
included in the total write-offs mentioned above. 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, California, and Poland.
The write-down of residential inventory during the year ended
October 31, 2002 was attributed to Poland and the Mid-South. The write-
down in Poland was based upon changes in market conditions. In the Mid-
South, land was written down based on a purchase offer. We have made a
decision to discontinue selling homes in these two markets 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
$4.2 million impairment loss.
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 write-down in the
Northeast Region was attributed to two communities that were part of a
large land acquisition, which resulted in a loss. The write-downs 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.
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, 2002 31, 2001 31, 2000
----------- --------- ---------
(Dollars In Thousands)
Sale of homes.............. $2,462,095 $1,693,717 $1,105,466
Cost of sales.............. 1,919,941 1,344,708 876,492
----------- --------- ---------
Housing gross margin....... $ 542,154 $ 349,009 $ 228,974
=========== ========= =========
Gross margin percentage.... 22.0% 20.6% 20.7%
=========== ========= =========
Cost of sales expenses as a percentage of home sales revenues are
presented below:
Year Ended
---------------------------------
October October October
31, 2002 31, 2001 31, 2000
--------- --------- ---------
Sale of homes.............. 100.0% 100.0% 100.0%
--------- --------- ---------
Cost of sales:
Housing, land and
development costs....... 70.6 71.5 71.1
Commissions.............. 2.2 2.3 2.2
Financing concessions.... 1.0 1.0 0.9
Overheads................ 4.2 4.6 5.1
--------- --------- ---------
Total cost of sales........ 78.0 79.4 79.3
--------- --------- ---------
Gross margin percentage.... 22.0% 20.6% 20.7%
========= ========= =========
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. We achieved higher gross margins
during the year ended October 31, 2002 compared to the same period last
year. The consolidated gross margin percentage increased 1.4% from the
previous year primarily due to higher sales prices and increased national
contract rebates, which slightly lowered our housing costs. Gross
margins for the year ended October 31, 2002 increased in our Metro D. C.
market, California market, (excluding Forecast communities), and in our
highest margin market, the Northeast region. 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 percentage primarily resulting
from increased sales prices for the years ended October 31, 2002, 2001,
and 2000. The dollar increases in gross margin for each of the three
years ended October 31, 2002, 2001, and 2000 were attributed to increased
sales, primarily resulting from the acquisition of Forecast Homes in 2002
and the merger with Washington Homes in 2001.
Selling, general, and administrative expenses as a percentage of
homebuilding revenues decreased to 7.8% for the year ended October 31,
2002 and decreased to 8.2% for the year ended October 31, 2001 from 9.4%
for the year ended October 31, 2000. Such expenses increased to $194.9
million for the year ended October 31, 2002 and increased to $140.1
million for the year ended October 31, 2001 from $104.8 million for the
previous year. The percentage decline for the years ended October 31,
2002 and 2001 was due to increased deliveries. The increased spending
year over year was primarily due to the acquisition of the Forecast Group
in fiscal year 2002 and Washington Homes in fiscal year 2001.
Land Sales and Other Revenues
Land sales and other revenues consist primarily of land and lot
sales. A breakout of land and lot sales is set forth below:
Year Ended
----------------------------
October October October
31, 2002 31, 2001 31, 2000
-------- -------- --------
(In Thousands)
Land and lot sales................... $42,312 $11,356 $ 6,549
Cost of sales........................ 35,897 10,646 3,971
-------- -------- --------
Land and lot sales gross margin...... $ 6,415 $ 710 $ 2,578
======== ======== ========
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 years ended October 31, 2002 and
October 31, 2001, financial services provided a $18.2 and $10.0 million
pretax profit, respectively. During the year ended October 31, 2000,
financial services resulted in a $0.5 million loss before income taxes.
The increases in 2002 and 2001 were primarily due to a change in
management, reduced costs, increased mortgage loan amounts, and the
addition of mortgage operations from the merger with Washington Homes for
a full year and the acquisition of Forecast Homes. In addition to our
wholly-owned mortgage subsidiaries, customers obtained mortgages from our
mortgage joint venture in our Texas division in 2001 and 2000,
respectively, and our Forecast division in 2002. In the market areas
served by our wholly-owned mortgage banking subsidiaries, approximately
71%, 57%, and 54% of our non-cash homebuyers obtained mortgages
originated by these subsidiaries during the years ended October 31, 2002,
2001, and 2000, respectively. 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 include 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, construction services, and administration of insurance, quality,
and safety. As a percentage of total revenues, such expenses were 2.0%,
2.5%, and 2.9% for the years ended October 31, 2002, 2001, and 2000,
respectively. The percentage decrease during the years ended October 31,
2002 and 2001 was due to increased housing revenues. Our long term
improvement initiatives included total quality, process redesign, which
included the implementation of a software system (net of capitalized
expenses), and training. Such initiatives resulted in additional
expenses for the years ended October 31, 2002, 2001, and 2000 which were
not capitalized amounting to $4.1 million, $7.2 million, and $6.9
million, respectively. During the year ended October 31, 2002 we wrote
off $12.4 million of unamortized, capitalized costs associated with these
initiatives. See Asset Write-off Section of Management's Discussion.
Interest
Interest expense includes housing, and land and lot interest.
Interest expense is broken down as follows:
Year Ended
-------------------------------
October October October
31, 2002 31, 2001 31, 2000
--------- --------- ---------
(In Thousands)
Sale of homes.................. $ 59,276 $ 51,046 $ 34,541
Land and lot sales............. 1,095 400 415
--------- --------- ---------
Total.......................... $ 60,371 $ 51,446 $ 34,956
========= ========= =========
Housing interest as a percentage of sale of home revenues amounted
to 2.4%, 3.0%, and 3.1% for the years ended October 31, 2002, 2001, and
2000, respectively. The decreases are primarily the result of increased
equity and quicker inventory turnover. Inventory turnover is up as a
result of the acquisition of Forecast Homes and the merger with
Washington Homes where a larger portion of their purchases are finished
lots requiring shorter holding periods until homes are delivered.
Other Operations
Other operations consist primarily of miscellaneous residential
housing operations expenses, senior residential property operations,
amortization of senior and senior subordinated note issuance expenses,
earnout payments from homebuilding company acquisitions, amortization of
the Forecast consultant's agreement and the right of first refusal
agreement, expenses related to exiting our Mid-South market, minority
interest relating to joint ventures, corporate owned life insurance loan
interest, and contributions. For the year ended October 31, 2002, other
operations increased primarily due to the amortization of the Forecast
consulting and right of first refusal agreements (starting in 2002),
increased amortization of senior and subordinated note issuance expenses,
and an increase in minority interest due to a new joint venture in our
Northeast Region.
Restructuring Charges
Restructuring charges are estimated expenses associated with
the merger of our operations with those of Washington Homes, Inc. as a
result of the merger on January 23, 2001. Under our merger plan,
administration offices in Maryland, Virginia, and North Carolina were
either closed, relocated, or combined. The merger of administration
offices was completed by July 31, 2001. At January 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. During the year ended October 31, 2001 our estimate for
restructuring charges was increased to a total of $3.2 million. We have
provided for the termination of 65 associates. We accrued approximately
$2.0 million to cover termination and related costs. Associates being
terminated were primarily administrative. In addition, we accrued
approximately $1.2 million to cover closing and/or relocation of various
administrative offices in these three states. At October 31, 2002 all
costs have been charged against this accrual.
Asset Write Off
We wrote off costs during the year ended October 31, 2002
associated with SAP, our enterprise-wide operating software, totaling
$12.4 million pretax included in Restructuring Charges/Asset Write Off in
the accompanying consolidated statements of income or $7.6 million after
taxes equal to $0.24 per fully diluted share. These unamortized costs
are those associated with the development of the SAP system. We were not
successful in implementing SAP, due to the complexities and limitations
in the software program. We have $2.1 million initiative costs
remaining, all of which will be amortized over the remaining life of the
communities using SAP software, which are scheduled to be substantially
complete by the end of 2003. We have recently identified an alternative
software package that will offer us the information system functionality
we need. Our first pilot community is on line and is utilizing this
software package.
Recent Accounting Pronouncements
In December 2001, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position 01-6, "Accounting by Certain Entities (Including
Entities With Trade Receivables) That Lend to or Finance the Activities
of Others", ("SOP 01-6"). SOP 01-6 is effective for annual and interm
financial statements issued for fiscal years beginning after December 31,
2001. Under SOP 01-6, Mortgage companies are explicitly subject to new
accounting rules and reporting and disclosure requirements, including
disclosures about regulatory capital and net worth requirements. SOP 01-
6 also requires the carrying amounts of loans and servicing rights to be
allocated using relative fair values in a manner consistent with SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". We do not anticipate that the adoption
of SOP 01-6 will have a material effect on the financial position or
results of operations of our Company.
In April 2002, the Financial Accounting Standards Board issued
(SFAS) No. 145, "Reporting Gains and Losses from Extinguishment of Debt",
which rescinded SFAS No. 4, No. 44, and No. 64 and amended SFAS No. 13.
The new standard addresses the income statement classification of gains
or losses from the extinguishment of debt and criteria for classification
as extraordinary items. We will adopt SFAS No. 145 effective for our
fiscal year beginning November 1, 2002. Certain amounts in our prior
year financial statements will be reclassified to conform to the new
presentation.
In June 2002, the Financial Accounting Standards Board issued
(SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including certain costs incurred in a restructuring)".
SFAS No. 146 requires recognition of a liability for a cost associated
with an exit or disposal activity when the liability is incurred as
opposed to when the entity commits to an exit plan as prescribed under
EITF No. 94-3. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. We do not anticipate that the adoption
of SFAS 146 will have a material effect on the financial position or
results of operations of our Company.
Total Taxes
Total taxes as a percentage of income before taxes amounted to
approximately 39.0%, 40.1%, and 36.0% for the years ended October 31,
2002, 2001, and 2000, respectively. The decrease in this percentage from
2001 to 2002 is primarily attributed to a decrease in the effective
federal income tax rate. This decreased federal effective rate is due
primarily to a reserve set up in 2001 for potential adjustments.
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 reflected in the balance sheet are
recoverable regardless of future income. (See "Notes to Consolidated
Financial Statements - Note 10" for an additional explanation of taxes.)
Extraordinary Loss
On April 29, 2002, we redeemed our 9 3/4% Subordinated Notes due
2005. The early retirement of these notes resulted in an extraordinary
loss of $582,000 net of income taxes of $313,000.
Inflation
Inflation has a long-term effect on us because increasing costs of
land, materials, and labor result in increasing sale 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 risk faced by the
housing industry generally is that rising house 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 our
homes sell, 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 57% of our homebuilding
cost of sales.
Mergers and Acquisitions
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 were issued. At
the date of merger we loaned Washington Homes, Inc. approximately $57.0
million to pay off their third party debt. On January 10, 2002 we
acquired The Forecast Group, L.P. for a total purchase price of $196.5
million, of which $151.6 million was paid in cash and 2,208,738 shares of
our Class A common stock were issued. At the date of acquisition we also
paid off approximately $88.0 million of Forecast's third party debt.
Safe Harbor Statement
All statements 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, performance or achievements expressed or implied by
the forward looking statements. Such risks, uncertainties and other
factors include, but are not limited to:
. Changes in general and local economic and business conditions
. Weather conditions
. Changes in market conditions
. Changes in home prices and sales activity in the markets where
the Company builds homes
. Government regulation, including regulations concerning
development of land, the homebuilding process, and the
environment
. Fluctuations in interest rates and the availability of mortgage
financing
. Increases in raw materials and labor costs
. The availability and cost of suitable land and improved lots
. Levels of competition
. Availability of financing to the Company
. Terrorist acts and other acts of war
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, 2002.
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, 2002 and 2001, 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, 2001
to October 31, 2002.
As of October 31, 2002 for the
Year Ended October 31,
--------------------------------------
FMV @
2003 2004 2005 2006 2007 Thereafter Total 10/31/02
------ ------ ------ ------ ------ ---------- ------ ----------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate.......$14,177 $ 75 $ 81 $ 88 $ 96 $ 550,349 $564,866 $549,991
Average interest
rate........... 10.31% 8.38% 8.38% 8.38% 8.38% 9.23% 9.25% --
Variable rate.... -- -- -- -- $115,000 -- $115,000 $115,000
Average interest
rate........... -- -- -- -- (2) -- -- --
As of October 31, 2001 for the
Year Ended October 31,
--------------------------------------
FMV @
2002 2003 2004 2005 2006 Thereafter Total 10/31/01
------ ------ ------ ------ ------ ---------- -------- ---------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate.......$ 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% --
(1) Does not include bonds collateralized by mortgages receivable.
(2) Libor plus 2.5%
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, 2002, 2001, and 2000, 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 7, 2003, 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 79 Chairman of the Board and l967
Director of the Company.
Ara K. Hovnanian 45 Chief Executive Officer, President 1979
and Director of the Company.
Paul W. Buchanan 52 Senior Vice President-Corporate l981
Controller.
Geaton A. DeCesaris, Jr. 47 President of Homebuilding Operations
And Chief Operating Officer and
Director of the Company 2001
Kevin C. Hake 43 Vice President, Finance and 2000
Treasurer
Peter S. Reinhart 52 Senior Vice President and General 1978
Counsel
J. Larry Sorsby 47 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 resigned as a Director of the Company on
September 13, 2002, in which he served since March 1982, for the purpose
of reducing the number of non-independent board members.
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 resigned as a Director of the Company on
September 13, 2002, in which he served since December l98l, for the
purpose of reducing the number of non-independent board members.
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 7, 2003, which will involve the election of directors.
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
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 7, 2003, which will involve the election of directors.
The following table provides information as of October 31, 2002
with respect to compensation plans (including individual compensation
arrangements) under which our equity securities are authorized for
issuance.
Equity Compensation Plan Information
Number of Weighted Number of securities
securities average remaining available
to be exercise price for future issuance
issued upon of outstanding under equity
exercise of options, compensation plans
outstanding warrants (excluding securities
options, warrants and rights reflected in
and rights column (a)
Plan Category (in thousands) (in thousands)
- ------------- ------------------- --------------- ----------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders 3,276 9.29 1,230
Equity compensation
plans not approved
by security holders
------------------- --------------- --------------------
Total 3,276 9.29 1,230
------------------- --------------- --------------------
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 7, 2003, which will involve the
election of directors.
The weighted average interest rate on Mr. K. Hovnanian and Mr. A.
Hovnanian related party debt was 1.79%, 3.90%, and 5.87% for the years
ended October 31, 2002, 2001, and 2000, respectively. The largest amount
of debt outstanding held by Mr. K. Hovnanian for the years ending October
31, 2002, 2001, and 2000 was $22,000, $56,000, and $386,000,
respectively. The largest amount of debt outstanding held by Mr. A.
Hovnanian for the years ending October 31, 2002, 2001, and 2000 was
$1,729,000, $3,002,000, and $3,124,000, respectively. The balance
outstanding for both Mr. K. Hovnanian and Mr. Ara Hovnanian at October
31, 2002 was zero. The interest rate on six month Treasury bills at
October 31, 2002, 2001, and 2000 was 1.55%, 2.01%, and 6.08%. During the
years ended October 31, 2002, 2001, and 2000, we received $62,000,
$76,000, and $85,000, respectively, from our affected partnerships.
Item 14 - CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer evaluated
the effectiveness of our disclosure controls and procedures (as defined
in Rule 13A-14(c) under the Securities Exchange Act of 1934, as amended)
within 90 days of the filing date of this report (the "Evaluation Date")
and, based on that evaluation, concluded that, as of the Evaluation Date,
we had sufficient controls and procedures for recording, processing,
summarizing and reporting information that is required to be disclosed in
our reports under the Securities Exchange Act of 1934, as amended, within
the time periods specified in the SEC's rules and forms.
Since the Evaulation Date, there have not been any significant
changes to our internal controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART IV
Item 15 - 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, 2002 and 2001......... F-3
Consolidated Statements of Income for the years ended
October 31, 2002, 2001, and 2000.............................. F-5
Consolidated Statements of Stockholders' Equity for the years
ended October 31, 2002, 2001, and 2000........................ F-6
Consolidated Statements of Cash Flows for the years ended
October 31, 2002, 2001, and 2000.............................. 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.
Exhibits:
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 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(d) 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.(9)
4(e) Indenture dated March 26, 2002, relating to 8% Senior Notes
between the Registrant and First Union National Bank,
including form of 8% Senior Notes and 8.875% Senior
Subordinated Notes due April 1, 2012.(10)
4(f) Indenture dated March 26, 2002, relating to 8.875% Senior
Subordinated Notes between the Registrant and First Union
National Bank, including form of 8.875% Senior Subordinated
Notes due April 1, 2012.(10)
10(a) Amended and Restated Credit Agreement dated June 21, 2002
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, National City Bank of
Pennsylvania, 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 (as amended and restated March 8,
2002).
10(e) 1983 Stock Option Plan (as amended and restated March 8,
2002).
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.(8)
10(j) $165,000,000 Term Loan Credit Agreement.(11)
10(k) $110,000,000 K. Hovnanian Mortgage, Inc. Revolving Credit
Agreement dated June 7, 2002.(7)
10(l) First Amendment to K. Hovnanian Mortgage, Inc. Revolving
Credit Agreement dated July 25, 2002.(7)
12 Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors
99(a) Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes- Oxley Act of 2002.
99(b) Certificatiaon of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes- Oxley Act of 2002.
(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, 2002 of the
Registrant.
(8) Incorporated by reference to Exhibit B of the Proxy Statement
of the Registrant filed on Schedule 14A dated January 26,
2000.
(9) Incorporated by reference to Exhibits to Registration
Statement (No. 333-52836-01) on Form S-4 of the Registrant.
(10) Incorporated by reference to Exhibits to Registration
Statement (No. 333-89976-01) on Form S-4 of the Registrant.
(11) Incorporated by reference to Exhibits to Quarterly Report on
Form 10Q for the quarter ended April 30, 2002 of the Registrant.
Reports on Form 8-K
(i) On September 4, 2002, the Company filed a report on Form 8-K,
Items 7 and 9 relating to certifications made by its
principal executive officer and principal financial officer
in accordance with Securities and Exchange Commission Order
No. 4-460 (June 27, 2002).
(ii) On August 6, 2002, the Company filed a report on Form 8-K,
Items 5 and 7, relating to the Company's press release dated
August 5, 2002 with respect to July 2002 new home orders.
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 1/24/03
Kevork S. Hovnanian and Director
/S/ARA K. HOVNANIAN Chief Executive Officer, 1/24/03
Ara K. Hovnanian President and Director
/S/PAUL W. BUCHANAN Senior Vice President 1/24/03
Paul W. Buchanan Corporate Controller
/S/GEATON A. DECESARIS, JR. President of Homebuilding 1/24/03
Geaton A. DeCesaris, Jr. Operations and Chief Operating
Officer and Director
S/SKEVIN C. HAKE Vice President, Finance 1/24/03
Kevin C. Hake and Treasurer
/S/PETER S. REINHART Senior Vice President and 1/24/03
Peter S. Reinhart General Counsel
/S/J. LARRY SORSBY Executive Vice President, 1/24/03
J. Larry Sorsby Chief Financial Officer
and Director
CEO/CFO Section 302 Certification
Each principal executive officer and principal financial officer of the
issuer (or persons performing similar functions) must sign separate 302
Certification included with each applicable report filed.
I, Ara K. Hovnanian, certify that:
1) I have reviewed this Form 10K of Hovnanian Enterprises, Inc.
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/S/ARA K. HOVNANIAN
Ara K. Hovnanian
Chief Executive Officer
Dated: January 17, 2003
CEO/CFO Section 302 Certification
Each principal executive officer and principal financial officer of the
issuer (or persons performing similar functions) must sign separate 302
Certification included with each applicable report filed.
I, J. Larry Sorsby, certify that:
1) I have reviewed this Form 10K of Hovnanian Enterprises, Inc.
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/S/J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President
And Chief Financial Officer
Dated: January 17, 2003
HOVNANIAN ENTERPRISES, INC.
Index to Consolidated Financial Statements
Page
Financial Statements:
Independent Auditors' Report................................... F-2
Consolidated Balance Sheets as of October 31, 2002 and 2001.... F-3
Consolidated Statements of Income for the Years Ended
October 31, 2002, 2001, and 2000............................... F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended October 31, 2002, 2001, and 2000......................... F-6
Consolidated Statements of Cash Flows for the Years Ended
October 31, 2002, 2001, and 2000............................... 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, 2002 and 2001 and
the related consolidated statements of income, stockholders' equity and
cash flows for each of the three years in the period ended October 31,
2002. 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, 2002 and 2001
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended October 31, 2002 in
conformity with accounting principles generally accepted in the United
States.
As discussed in Note 2 to the consolidated financial statements, in 2002
the Company changed its method of accounting for goodwill.
/S/ERNST AND YOUNG, LLP
Ernst and Young, LLP
New York, New York
December 6, 2002,
except for Note 20, as to which the date is
December 31, 2002
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
October 31, October 31,
ASSETS 2002 2001
------------ ------------
Homebuilding:
Cash and cash equivalents(Note 5)............... $ 262,675 $ 10,173
------------ ------------
Inventories - At the lower of cost or fair
value (Notes 7, 11, and 12):
Sold and unsold homes and lots under
development................................. 843,581 593,149
Land and land options held for future
development or sale......................... 238,001 146,965
------------ ------------
Total Inventories........................... 1,081,582 740,114
------------ ------------
Receivables, deposits, and notes (Note 12)...... 26,276 75,802
------------ ------------
Property, plant, and equipment - net (Note 4)... 19,242 30,756
------------ ------------
Senior residential rental properties - net (Notes 4
and 7)....................................... 9,504 9,890
------------ ------------
Prepaid expenses and other assets (Note 15)..... 86,582 46,178
------------ ------------
Goodwill and intangibles (Note 15).............. 82,275 32,618
------------ ------------
Total Homebuilding.......................... 1,568,136 945,531
------------ ------------
Financial Services:
Cash............................................ 7,315 5,976
Mortgage loans held for sale (Notes 6 and 7).... 91,451 105,567
Other assets.................................... 11,226 6,465
------------ ------------
Total Financial Services.................... 109,992 118,008
------------ ------------
Income Taxes Receivable - Including deferred tax
benefits (Note 10).............................. 719
------------ ------------
Total Assets...................................... $1,678,128 $1,064,258
============ ============
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
October 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
------------ ------------
Homebuilding:
Nonrecourse land mortgages (Note 7)............... $ 11,593 $ 10,086
Accounts payable and other liabilities (Note 16).. 298,213 124,125
Customers' deposits (Note 5)...................... 40,422 39,114
Nonrecourse mortgages secured by operating
properties (Note 7)............................. 3,274 3,404
------------ ------------
Total Homebuilding............................ 353,502 176,729
------------ ------------
Financial Services:
Accounts payable and other liabilities............ 4,857 5,264
Mortgage warehouse line of credit (Notes 6 and 7). 85,498 98,305
------------ ------------
Total Financial Services...................... 90,355 103,569
------------ ------------
Notes Payable:
Term loan (Note 7)................................ 115,000
Senior notes (Note 8)............................. 396,390 296,797
Senior subordinated notes (Note 8)................ 150,000
Subordinated notes (Note 8)....................... 99,747
Accrued interest (Notes 7 and 8).................. 9,555 11,770
------------ ------------
Total Notes Payable........................... 670,945 408,314
------------ ------------
Income Taxes Payable - Net of deferred tax benefits
(Note 10).......................................... 777
------------ ------------
Total Liabilities............................. 1,115,579 688,612
------------ ------------
Commitments and Contingent Liabilities (Notes 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 27,453,994 shares in 2002
and 24,599,379 shares in 2001 (including 4,343,240
shares in 2002 and 4,195,621 shares in 2001 held
in Treasury).................................... 275 246
Common Stock,Class B,$.01 par value
(convertible to Class A at time of sale)
-authorized 13,000,000 shares; issued 7,788,061
shares in 2002 and 7,818,927 shares in 2001
(both years include 345,874 shares held in Treasury) 78 78
Paid in Capital................................... 152,977 100,957
Retained Earnings (Note 8)........................ 447,802 310,106
Deferred Compensation............................. (21) (127)
Treasury Stock - at cost.......................... (38,562) (35,614)
------------ ------------
Total Stockholders' Equity.................... 562,549 375,646
------------ ------------
Total Liabilities and Stockholders' Equity.......... $1,678,128 $1,064,258
============ ============
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, 2002 31, 2001 31, 2000
----------- ----------- -----------
Revenues:
Homebuilding:
Sale of homes...........................$2,462,095 $1,693,717 $1,105,466
Land sales and other revenues (Notes 12
and 14).............................. 48,241 16,845 10,769
----------- ----------- -----------
Total Homebuilding.................... 2,510,336 1,710,562 1,116,235
Financial Services........................ 40,770 31,428 19,324
----------- ----------- -----------
Total Revenues........................ 2,551,106 1,741,990 1,135,559
----------- ----------- -----------
Expenses:
Homebuilding:
Cost of sales........................... 1,955,838 1,355,381 880,463
Selling, general and administrative..... 194,903 140,126 104,771
Inventory impairment loss (Note 11)..... 8,199 4,368 1,791
----------- ----------- -----------
Total Homebuilding.................... 2,158,940 1,499,875 987,025
----------- ----------- -----------
Financial Services........................ 22,543 21,443 19,750
----------- ----------- -----------
Corporate General and Administrative(Note 3) 51,974 44,278 33,309
----------- ----------- -----------
Interest (Notes 7 and 8).................. 60,371 51,446 34,956
----------- ----------- -----------
Other operations (Note 15)................ 18,241 11,583 6,188
----------- ----------- -----------
Restructuring charges/asset writeoff
(Notes 16 and 17)....................... 12,412 3,247
----------- ----------- -----------
Goodwill Amortization..................... 3,764 2,513
----------- ----------- -----------
Total Expenses........................ 2,324,481 1,635,636 1,083,741
----------- ----------- -----------
Income Before Income Taxes and
Extraordinary Loss........................ 226,625 106,354 51,818
----------- ----------- -----------
State and Federal Income Taxes:
State (Note 10)........................... 8,993 4,024 2,495
Federal (Note 10)......................... 79,354 38,644 16,160
----------- ----------- -----------
Total Taxes............................. 88,347 42,668 18,655
----------- ----------- -----------
Extraordinary Loss From Extinguishment of
Debt, Net of Income Taxes (Note 8)........ (582)
----------- ----------- -----------
Net Income..................................$ 137,696 $ 63,686 $ 33,163
=========== =========== ===========
Per Share Data:
Basic:
Income Per Common Share Before
Extraordinary Loss....................$ 4.55 $ 2.38 $ 1.51
Extraordinary Loss...................... (.02)
----------- ----------- -----------
Income..................................$ 4.53 $ 2.38 $ 1.51
=========== =========== ===========
Weighted Average Number of Common Shares
Outstanding............................. 30,405 26,810 21,933
=========== =========== ===========
Assuming Dilution:
Income Per Common Share Before
Extraordinary Loss.................... $ 4.30 $ 2.29 $ 1.50
Extraordinary Loss...................... (.02)
----------- ----------- -----------
Income.................................. $ 4.28 $ 2.29 $ 1.50
=========== =========== ===========
Weighted Average Number of Common Shares
Outstanding............................. 32,155 27,792 22,043
=========== =========== ===========
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, 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
----------- ------ ----------- ------ ------- -------- --------- --------- ---------
Acquisitions................ 2,402,769 24 48,051 48,075
Sale of common stock under
employee stock option
plan...................... 357,165 4 3,577 3,581
Stock bonus plan............ 63,815 1 392 393
Conversion of Class B to
Class A common stock...... 30,866 (30,866)
Deferred compensation....... 106 106
Treasury stock purchases.... (147,619) (2,948) (2,948)
Net Income ................. 137,696 137,696
----------- ------ ----------- ------ ------- -------- --------- --------- ---------
Balance, October 31, 2002... 23,110,754 $ 275 7,442,187 $ 78 $152,977 $447,802 $ (21) $(38,562) $ 562,549
=========== ====== =========== ====== ======= ======== ========= ========= =========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended
----------------------------------
October October October
31, 2002 31, 2001 31, 2000
---------- ---------- ----------
Cash Flows From Operating Activities:
Net Income...................................... $ 137,696 $ 63,686 $ 33,163
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation................................ 6,506 8,164 6,423
Amortization of Goodwill.................... 3,764 2,513
Loss (gain) on sale and retirement of
property and assets....................... 12,328 641 (728)
Extraordinary loss from extinguishment of
Debt net of income taxes.................. 582
Deferred income taxes....................... (18,307) (6,265) 2,551
Impairment losses........................... 8,199 4,368 1,791
Decrease (increase) in assets:
Mortgage notes receivable................. 14,870 (42,573) (27,703)
Receivables, prepaids and other assets.... 38,557 (35,805) (13,256)
Inventories............................... (31,573) 12,540 (89,544)
Increase (decrease) in liabilities:
State and Federal income taxes............ 21,451 7,004 3,244
Tax effect from exercise of stock options. (1,335) (566)
Customers' deposits....................... 1,006 4,543 6,240
Interest and other accrued liabilities.... 29,949 15,466 8,222
Post development completion costs......... 8,545 5,120 (2,555)
Accounts payable.......................... 20,066 (3,018) 8,994
Net cash provided by (used in) ---------- ---------- ----------
operating activities.................. 248,540 37,069 (60,645)
---------- ---------- ----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets... 627 5,325 1,517
Purchase of property, equipment, and other
fixed assets.................................. (6,903) (6,777) (15,607)
Acquisition of homebuilding companies........... (137,582) (37,911) (3,845)
Investment in and advances to unconsolidated
affiliates.................................... (15,828) (372)
---------- ---------- ----------
Net cash (used in) investing activities. (159,686) (39,735) (17,935)
---------- ---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes............... 1,895,429 1,472,789 1,433,150
Proceeds from senior debt....................... 99,152 146,430
Proceeds from senior subordinated debt.......... 150,000
Principal payments on mortgages and notes.......(1,880,873) (1,494,528) (1,470,805)
Principal payments on subordinated debt......... (99,747)
Purchase of treasury stock...................... (2,948) (6,215) (6,461)
Proceeds from sale of stock and employee stock
plan.......................................... 3,974 3,516 154
Net cash provided by (used in) ---------- ---------- ----------
financing activities.................. 164,987 (24,438) 102,468
---------- ---------- ----------
Net Increase (Decrease) In Cash................... 253,841 (27,104) 23,888
Cash and Cash Equivalents Balance, Beginning
Of Year......................................... 16,149 43,253 19,365
---------- ---------- ----------
Cash and Cash Equivalents Balance, End Of Year.....$ 269,990 $ 16,149 $ 43,253
========== ========== ==========
Supplemental Disclosures Of Cash Flow:
Cash paid during the year for:
Interest...................................... $ 62,066 $ 53,100 $ 33,814
========== ========== ==========
Income Taxes.................................. $ 85,203 $ 45,498 $ 12,858
========== ========== ==========
Stock issued for acquisitions/extension of options
granted......................................... $ 48,075 $ 51,427 $ 721
========== ========== ==========
Supplemental disclosures of noncash operating
activities:
Inventory capitalized and accrued for specific
performance................................... $ 97,983
==========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2002, 2001, AND
2000.
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" establishes 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 98% of consolidated revenues in the years
ended October 31, 2002, 2001, and 2000 contributed by the homebuilding
operations. We are a Delaware corporation, currently building and
selling homes in more than 196 new home communities in New Jersey,
Pennsylvania, New York, Virginia, Maryland, North Carolina, 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, accounting, 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States requires 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 the
Statement of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations" which we adopted on June 30, 2001. Under SFAS 141 we
record as our cost the estimated fair value of 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 an acquired
company from the date of acquisition.
Income Recognition From Home and Land Sales - Income from home and
land sales is recorded when each home is closed, title is conveyed to the
buyer, adequate cash payment has been received, and there is no continued
involvement.
Income Recognition from Mortgage Loans - Profits and losses
relating to the sale of mortgage loans are recognized when all
indications of legal control pass to the buyer and the sales price is
collected.
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, receivables, customer deposits and notes, accounts
payable and other liabilities, mortgages and notes receivable, mortgages
and notes payable, our term loan, and the senior and senior 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 the Statement of
Financial Accounting Standards (SFAS)No. 144 "Accounting for the
Impairment of or Disposal of Long-Lived Assets" 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. SFAS No.
144, which the Company adopted on November 1, 2001, provides accounting
guidance for financial accounting and reporting for impairment or
disposal of long-lived assets. 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.
Self Insurance Reserves - We are self insured for our workman's
compensation and general liability insurance. Reserves have been
established based upon actuarial analysis of estimated future losses.
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.
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.
Options that include specific performance terms and such terms have been
triggered are recorded on the balance sheet as inventory and other
liabilities.
Intangible Assets - The intangible assets recorded on our balance
sheet are goodwill and a trademark, which is an indefinite life
intangible asset, resulting from company acquisitions. In accordance
with the Financial Accounting Standards (SFAS) No. 142 "Goodwill and
Other Intangible Assets", which we acopted on November 1, 2001, we no
longer amortize goodwill or indefinite life intangibles, but instead
assess them periodically for impairment. We performed such assessments
utilizing a fair value approach as of October 31, 2002, and determined
that no impairment of goodwill or intangibles existed. On a pro forma
basis adding back goodwill amortization, net income for the years ended
October 31, 2001 and 2000 was $65.9 million and $34.8 million,
respectively.
Deferred Bond Issuance Costs - Costs associated with the issuance
of our Senior and Senior 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 credited 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 and is recorded in accounts payable and other
liabilities in the accompanying consolidated balance sheets.
Advertising Costs - Advertising costs are treated as period costs
and expensed as incurred. During the years ended October 31, 2002, 2001,
and 2000, advertising costs expensed amounted to $23,440,000,
$18,536,000, and $14,418,000, 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, 2002, 606,319 have been purchased under this
program.
Depreciation - Property, plant and equipment are depreciated using
the straight-line method over the estimated useful life of the assets.
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 - Basic earnings per common share is
computed using the weighted average number of shares outstanding.
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.
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. 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. We wrote off the unamortized capitalized costs associated with the
development and implementation of the SAP systems during the year ended
October 31, 2002, totaling $12.4 million pretax included in Restructuring
Charges/Asset Write Off in the accompanying consolidated statements of
income, or $7.6 million after taxes equal to $0.24 per fully diluted
share (See Note 17). For both years ended October 31, 2001 and 2002 we
recorded amortization expense of the SAP system 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 December 2001, the
Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants ("AICPA") issued Statement of Position 01-6,
"Accounting by Certain Entities (Including Entities With Trade
Receivables) That Lend to or Finance the Activities of Others", ("SOP 01-
6"). SOP 01-6 is effective for annual and interm financial statements
issued for fiscal years beginning after December 31, 2001. Under SOP 01-
6, Mortgage companies are explicitly subject to new accounting rules and
reporting and disclosure requirements, including disclosures about
regulatory capital and net worth requirements. SOP 01-6 also required
the carrying amounts of loans and servicing rights to be allocated using
relative fair values in a manner consistent with SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." We have adopted SOP 01-6 effective
November 1, 2002. We do not anticipate that the adoption of SOP 01-6
will have a material effect on the financial position or results of
operations of our Company.
In April 2002, the Financial Accounting Standards Board issued
(SFAS) No. 145, "Reporting Gains and Losses from Extinguishment of Debt",
which rescinded SFAS No. 4, No. 44, and No. 64 and amended SFAS No. 13.
The new standard addresses the income statement classification of gains
or losses from the extinguishment of debt and criteria for classification
as extraordinary items. We will adopt SFAS No. 145 effective for our
fiscal year beginning November 1, 2002. Certain amounts in our prior
year financial statements will be reclassified to conform to the new
presentation.
In June 2002, the Financial Accounting Standards Board issued
(SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including certain costs incurred in a restructuring)".
SFAS No. 146 requires recognition of a liability for a cost associated
with an exit or disposal activity when the liability is incurred as
opposed to when the entity commits to an exit plan as prescribed under
EITF No. 94-3. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. We do not anticipate that the adoption
of SFAS 146 will have a material effect on the financial position or
results of operations of our Company.
Reclassifications - Certain amounts in the 2001 and 2000
consolidated financial statements have been reclassified to conform to
the 2002 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 expense is $4,074,000, $7,200,000, and $6,902,000 for
the years ended October 31, 2002, 2001, and 2000, 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 and are recorded at cost less
accumulated depreciation. Homebuilding accumulated depreciation related
to these assets at October 31, 2002 and October 31, 2001 amounted to
$18,470,000 and $18,367,000, respectively. In addition we have two
senior citizen residential rental communities recorded as senior
residential rental properties on the consolidated balance sheets.
Accumulated depreciation on senior residential rental properties at
October 31, 2002 and October 31, 2001 amounted to $3,054,000 and
$2,688,000, respectively.
5. DEPOSITS
We hold escrow cash amounting to $3,455,000 and $4,420,000 at
October 31, 2002 and October 31, 2001, 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.
The remaining deposits are not restricted from use by us.
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, 2002 and 2001, respectively, $91,339,000 and $105,174,000 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, 2002 or 2001.
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 $2,584,000 in 2003,
$75,000 in 2004, $81,000 in 2005, $88,000 in 2006, $96,000 in 2007, and
$350,000 after 2007. 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 2005.
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, 2002 and 2001, there was no outstanding balance under the
Agreement. See Note 19 for loan guarantee.
On January 22, 2002, we issued a $165,000,000 Term Loan to a group
of banks which is due January 22, 2007. Interest is payable monthly at
either the prime rate plus 1.25% or LIBOR plus 2.5%. The proceeds from
the issuance of the Term Loan were primarily used to partially fund the
acquisition of the California operations of Forecast. (See Note 15). As
of October 31, 2002, borrowings under the Term Loan were $115,000,000.
See Note 19 for loan guarantee.
Interest costs incurred, expensed and capitalized were:
Year Ended
----------------------------
October October October
31, 2002 31, 2001 31, 2000
-------- -------- --------
(Dollars in Thousands)
Interest capitalized at
beginning of year.............. $25,124 $25,694 $21,966
Plus acquired entity interest.... 3,604
Plus interest incurred(1)(2)..... 57,406 47,272 38,878
Less interest expensed(2)........ 60,371 51,446 34,956
Less impairment write-off........ 194
-------- -------- --------
Interest capitalized at
end of year(2).................. $22,159 $25,124 $25,694
======== ======== ========
(1) Data does not include interest incurred by our mortgage and finance
subsidiaries.
(2) Represents 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, 2002 31, 2001 31, 2000
-------- -------- --------
(Dollars In Thousands)
Average monthly outstanding
borrowings................. $10,717 $ 74,543 $128,788
Average interest rate during
period..................... 4.4% 7.1% 10.0%
Average interest rate at end
of period(1)............... 3.6% 4.1% 8.4%
Maximum outstanding at any
month end.................. $36,425 $120,600 $170,800
(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 $150,000,000 through June 7, 2003. Interest is payable monthly at the
Federal Funds Rate plus 1.375% (approximately 3.195% and 3.810% at
October 31, 2002 and 2001, respectively) of the outstanding loan balance.
The loan is repaid when the underlying mortgage loans are sold to
permanent investors by the Company. As of October 31, 2002 borrowings
under the agreement were $85,498,000.
8. SENIOR AND SUBORDINATED NOTES
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 were
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 April 29, 2002 we
used a portion of the proceeds from our March 2002 debt issuance (see
below) to redeem the remainder of these notes which resulted in an
extraordinary loss of $582,000 net of an income tax benefit of $313,000.
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.
On March 26, 2002, we issued $100,000,000 8% Senior Notes due 2012
and $150,000,000 8 7/8% Senior Subordinated Notes due 2012. The 8%
Senior Notes were issued at a discount to yield 8.125% and have been
reflected net of the unamortized discount in the accompanying
consolidated balance sheet. Interest on both notes is paid 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
proceeds were used to redeem the remaining 9 3/4% Subordinated Notes (see
above), repay a portion of our Term Loan Facility (See Note 7), repay the
current outstanding indebtedness under our Revolving Credit Agreement,
and the remainder for general corporate purposes.
The indentures relating to the Senior and Subordinated Notes and
the Revolving Credit Agreement contain a Company guarantee (See Note 19)
and restrictions on the payment of cash dividends. At October 31, 2002,
$115,183,000 of retained earnings were free of such restrictions.
The fair value of both the Senior Notes and Senior 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 Senior
Subordinated Notes is estimated at $398,625,000 and $136,500,000,
respectively, as of October 31, 2002.
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
$6,556,000, $3,675,000, and $2,948,000 for the years ended October 31,
2002, 2001, and 2000, respectively. The year over year increases are the
result of increased number of participants from acquisitions and
increased profit sharing contributions resulting from higher Company
Returns on Equity.
10. INCOME TAXES
Income Taxes payable (receivable) including deferred benefits,
consists of the following:
Year Ended
October October
31, 2002 31, 2001
--------- ---------
(Dollars In Thousands)
State income taxes:
Current.......................... $ 7,092 $ 3,393
Deferred......................... (7,088) (2,262)
Federal income taxes:
Current.......................... 27,541 6,623
Deferred......................... (26,768) (8,473)
--------- ---------
Total.......................... $ 777 $ (719)
========= =========
The provision for income taxes is composed of the following charges
(benefits):
Year Ended
-----------------------------------
October October October
31, 2002 31, 2001 31, 2000
--------- --------- ---------
(Dollars In Thousands)
Current income tax expense:
Federal.......................... $ 97,347 $ 48,478 $ 13,609
State(1)......................... 13,808 6,461 1,574
--------- --------- ---------
111,155 54,939 15,183
--------- --------- ---------
Deferred income tax (benefit)
expense:
Federal.......................... (18,307) (9,834) 2,551
State............................ (4,814) (2,437) 921
--------- --------- ---------
(23,121) (12,271) 3,472
--------- --------- ---------
Total.......................... $ 88,034 $ 42,668 $ 18,655
========= ========= =========
(1) The current state income tax expense is net of the use of state loss
carryforwards amounting to $45,778,000, $26,830,000, and $21,330,000
for the years ended October 31, 2002, 2001, and 2000.
The deferred tax liabilities or assets have been recognized in the
consolidated balance sheets due to temporary differences as follows:
Year Ended
October October
31, 2002 31, 2001
-------- ---------
(Dollars In Thousands)
Deferred tax assets:
Maintenance guarantee reserves....... $ 659 $ 658
Inventory impairment loss............ 1,048 2,206
Uniform capitalization of overhead... 14,157 6,726
Post development completion costs.... 8,006 5,319
Acquisition goodwill................. 2,995
State net operating loss
carryforwards...................... 27,684 27,846
Other................................ 9,999 7,067
-------- ---------
Total.............................. 64,548 49,822
Valuation allowance(2)............... (27,684) (27,846)
-------- ---------
Total deferred tax assets.......... 36,864 21,976
-------- ---------
Deferred tax liabilities:
Deferred interest.................... 31
Installment sales.................... 72 76
Accelerated depreciation............. 2,936 2,113
Acquisition goodwill................. 3,124
Software development expenses........ 5,897
-------- ---------
Total deferred tax liabilities..... 3,008 11,241
-------- ---------
Net deferred tax assets................ $33,856 $10,735
======== =========
(2) The net change in the valuation allowance of $(162,000) results from
a decrease in the separate company state net operating losses that
may not be fully utilized.
The effective tax rates varied from the expected rate. The sources
of these differences were as follows:
Year Ended
------------------------------
October October October
31, 2002 31, 2001 31, 2000
-------- -------- --------
Computed "expected" tax rate...... 35.0% 35.0% 35.0 %
State income taxes, net of Federal
income tax benefit.............. 2.6 3.2 3.1
Permanent timing differences...... 1.4 1.6 1.0
Low income housing tax credit..... (0.6) (1.3) (2.6)
Other............................. 0.6 1.6 (0.5)
-------- -------- --------
Effective tax rate................ 39.0% 40.1% 36.0 %
======== ======== ========
We have state net operating loss carryforwards for financial
reporting and tax purposes of $370,257,000 due to expire between the
years October 31, 2003 and October 31, 2017.
11. REDUCTION OF INVENTORY TO FAIR VALUE
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.
As of October 31, 2002, inventory with a carrying amount of
$9,400,000 was writen down by $4,163,000 to its fair market. As of
October 31, 2001, inventory with a carrying amount of $1,391,000 was
written down by $424,000 to its fair value. The writedowns during the
year ended October 31, 2002 were attributed to two properties in Poland
and one community in the Mid-South. The writedowns were attributed to
market conditions coupled with our plan to exit both Poland and the Mid-
South. 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 total aggregate impairment losses, which are presented in the
consolidated statements of income and deducted from inventory held for
future development or sale were $4,163,000, $2,512,000, and $0 for the
years ended October 31, 2002, 2001, and 2000, 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, 2002, 2001, and 2000 write-offs amounted to $4,036,000,
$1,856,000 and $1,791,000, respectively. During the years ended October
31, 2002, 2001, and 2000 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, California,
and Poland.
12. TRANSACTIONS WITH RELATED PARTIES
Our Board of Directors had 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, 2002 and 2001 included in
receivables, deposits and notes are related party receivables from
officers and directors amounting to zero and $1,119,000, respectively.
Interest income from these loans for the years ended October 31, 2002,
2001, and 2000 amounted to $18,000, $84,000, and $167,000, 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, 2002, 2001, and 2000 we
received $62,000, $76,000, and $85,000, respectively, in fees for such
management services. At October 31, 2002, 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 owned by a family relative of our
Chairman of the Board and our Chief Executive Officer. As of October 31,
2002 and 2001, land aggregating $10,293,000 and $2,384,000, respectively,
has been purchased. The Company remains obligated under a land purchase
agreement to purchase an additional $16.6 million of land from this
entity over the next two 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 year ended October 31, 2002 each of the four outside directors
of the Company were granted options to purchase 7,500 shares. During the
year ended October 31, 2000 each of the three outside directors of the
Company were granted options to purchase 5,000 shares. All shares
granted to the outside directors were issued 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, 2002 Price 31, 2001 Price 31, 2000 Price
--------- -------- --------- -------- --------- --------
Options outstanding at
beginning of period. 2,280,657 $ 7.52 1,980,500 $7.55 1,656,000 $8.02
Granted............ 545,500 $15.12 1,058,785 $5.81 444,500 $6.10
Exercised.......... 357,165 $ 6.28 519,673 $4.29
Forfeited.......... 30,000 $ 7.72 238,955 $7.67 120,000 $8.60
--------- --------- ---------
Options outstanding at
end of period....... 2,438,992 $ 9.40 2,280,657 $7.44 1,980,500 $9.44
========= ========= =========
Options exercisable at
end of period....... 1,089,513 1,451,718 1,276,708
Price range of options $2.66- $2.66- $5.13-
outstanding......... $34.75 $15.08 $11.50
Weighted-average
remaining contractual
life................ 6.0 yrs. 6.0 yrs. 7.0 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 2002, 2001, and
2000: risk- free interest rate of 4.3%, 4.4%, and 5.9%, respectively;
dividend yield of zero; volatility factor of the expected market price of
our common stock of 0.43 , 0.38, and 0.41, respectively; and a weighted-
average expected life of the option of 5.5, 5.1, and 7.0 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 (dollars in thousands except for
earnings per share information):
Year Ended
-----------------------------------
October October October
31, 2002 31, 2001 31, 2000
---------- ---------- -----------
Pro forma net income................ $ 137,136 $ 63,491 $ 32,322
========== ========== ===========
Pro forma basic earnings per share.. $ 4.51 $ 2.37 $ 1.47
========== ========== ===========
Pro forma diluted earnings per share $ 4.26 $ 2.28 $ 1.47
========== ========== ===========
During the year ended October 31, 1999, we modified our bonus plan
for certain associates. A portion of their bonus is paid by issuing a
deferred right to receive our Class A Common Stock. The number of shares
is 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, 2002 and 2001, we issued 63,815 and
84,962 shares under the plan. During the years ended October 31, 2002
and 2001 7,355 and 41,550 shares were forfeited under this plan,
respectively. For the years ended October 31, 2002, 2001, and 2000,
approximately 242,000, 319,000, and 281,000 deferred rights were awarded
in lieu of $6,291,000, $3,857,000, and $1,923,000 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, 2002 and 2001, respectively, we are obligated
under various performance letters of credit amounting to $99,984,000 and
$51,647,000. (See Note 5).
15. ACQUISITIONS
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.
On January 10, 2002 we acquired the California homebuilding
operations of The Forecast Group, LP ("Forecast") for a total purchase
price of $196.5 million, of which $151.6 million was paid in cash and
2,208,738 shares of Class A Common Stock were issued. We acquired
Forecast to expand our California homebuilding operations. In addition,
we have an option to purchase additional land parcels owned by Forecast
for a price of $49.0 million. As of October 31, 2002, we have purchased
$8.1 million of these land parcels. At the date of the acquisition we
also paid off approximately $88.0 million of Forecast's third party debt.
The total purchase price amounted to $90.4 million over Forecast's book
value, of which $22.8 million was added to inventory to reflect fair
value, $18.5 million was paid for two option agreements, a two year
consultant's agreement, and a three year right of first refusal
agreement, and the balance recorded as a tradename, which is an
indefinite life intangible asset.
A Forecast condensed balance sheet (including the effects of
purchase accounting adjustments) as of the acquisition date is as follows
(dollars in thousands):
January 10,
2002
-----------
Cash and cash equivalents........ $ 10,209
Inventories...................... 220,110
Tradename intangible............. 49,107
Prepaids and other assets........ 20,676
-----------
Total Assets $ 300,102
===========
Accounts payable and other
liabilities.................... $ 35,028
Revolving credit agreement....... 219,574
Stockholders' equity............. 45,500
-----------
Total Liabilities and
Stockholders' Equity...... $ 300,102
===========
The merger with Washington Homes, Inc. and acquisition of Forecast
were accounted for as purchases with the results of operations of these
entities included in our consolidated financial statements as of the date
of the merger and acquisition. The purchase price was allocated based on
estimated fair value of the assets and liabilities at the date of the
merger and acquisition. An intangible asset equal to the excess purchase
price over the fair value of the net assets of $12.8 million and $49.8
million for Washington Homes and Forecast, respectively, were recorded as
goodwill and a tradename, which is an indefinite life intangible asset on
the consolidated balance sheet. The Washington Homes amount was being
amortized on a straight line basis over a period of ten years during
fiscal 2001. On November 1, 2001 we adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets". Indefinite life intangible assets are not amortized. As a
result of adopting SFAS No. 142, we no longer amortize goodwill or
indefinite life intangibles, but instead assess them periodically for
impairment. We performed a fair value analysis as of October 31, 2002
and determined that no impairment of goodwill or intangibles existed.
The following unaudited pro forma financial data for the years
ended October 31, 2002 and 2001 has been prepared as if the merger with
Washington Homes, Inc. on January 23, 2001 and the acquisition of
Forecast on January 10, 2002 had occurred on November 1, 2000. Unaudited
pro forma financial data is presented for information purposes only and
may not be indicative of the actual amounts had the events occurred on
the dates listed above, nor does it purport to represent future periods.
Year Ended October 31,
------------------------------
2002 2001
------------- -------------
(In Thousands Except Per Share)
Revenues........................... $2,615,455 $2,308,130
Expenses........................... 2,383,466 2,145,759
Income Taxes....................... 90,445 64,387
Extraordinary Loss................. (582)
------------- -------------
Net Income......................... $ 140,962 $ 97,984
============= =============
Diluted Net Income Per
Common Share..................... $ 4.33 $ 3.12
============= =============
16. RESTRUCTURING CHARGES
Restructuring charges are estimated expenses associated with the
merger of our operations with those of Washington Homes, Inc. as a result
of the merger on January 23, 2001. Under our merger plan, administration
offices in Maryland, Virginia, and North Carolina were either closed,
relocated, or combined. The merger of administration offices was
completed by July 31, 2001. At January 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. During
the year ended October 31, 2001 our estimate for restructuring charges
was increased to a total of $3.2 million. We have provided for the
termination of 65 associates. We accrued approximately $2.0 million to
cover termination and related costs. Associates being terminated were
primarily administrative. In addition, we accrued approximately $1.2
million to cover closing and/or relocation of various administrative
offices in these three states. At October 31, 2002 all costs have been
charged against this accrual.
17. ASSET WRITE OFF
We wrote off costs during the year ended October 31, 2002
associated with SAP, our enterprise-wide operating software, totaling
$12.4 million pretax included in Restructuring Charges/Asset Write Off in
the accompanying consolidated statements of income or $7.6 million after
taxes equal to $0.24 per fully diluted share. These unamortized costs
are those associated with the development of the SAP system. We were not
successful in implementing SAP, due to the complexities and limitations
in the software program. We have $2.1 million initiative costs
remaining, all of which will be amortized over the remaining life of the
communities using SAP software, which are scheduled to be substantially
complete by the end of 2003.
18. UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION
Summarized quarterly financial information for the years ended
October 31, 2002 and 2001 is as follows:
Three Months Ended
---------------------------------------
October July April January
31, 2002 31, 2002 30, 2002 31, 2002
-------- -------- -------- ---------
(In Thousands Except Per Share Data)
Revenues..................... $831,410 $704,636 $560,998 $454,062
Expenses..................... $739,011 $642,675 $518,530 $424,265
Income before income taxes and
extraordinary loss......... $ 92,399 $ 61,961 $ 42,468 $ 29,797
State and Federal income tax. $ 37,961 $ 22,774 $ 15,976 $ 11,636
Extraordinary loss from extinguish-
ment of debt, net of income
taxes...................... $ (582)
Net Income................... $ 54,438 $ 39,187 $ 25,910 $ 18,161
Per Share Data:
Basic:
Income per common share before
extraordinary loss....... $ 1.75 $ 1.27 $ 0.86 $ 0.63
Extraordinary loss......... $ (0.02)
Net Income................. $ 1.75 $ 1.27 $ 0.84 $ 0.63
Weighted average number of
common shares outstanding 31,089 30,877 30,670 28,965
Assuming Dilution:
Income per common share before
extraordinary loss....... $ 1.66 $ 1.20 $ 0.82 $ 0.60
Extraordinary loss......... $ (0.02)
Net Income................. $ 1.66 $ 1.20 $ 0.80 $ 0.60
Weighted average number of
common shares outstanding 32,886 32,703 32,402 30,456
Three Months Ended
---------------------------------------
October July April January
31, 2001 31, 2001 30, 2001 31, 2001
-------- -------- -------- --------
(In Thousands Except Per Share Data)
Revenues....................... $537,212 $509,250 $402,340 $293,188
Expenses....................... $500,270 $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
19. 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, October 2, 2000,
and March 26, 2002 and Senior Subordinated Notes on March 26, 2002.
The Subsidiary Issuer acts as a finance and management entity that
as of October 31, 2002 had issued and outstanding approximately
$150,000,000 senior subordinated notes, $400,000,000 face value senior
notes, a term loan with an outstanding balance of $115,000,000, and a
revolving credit agreement with an outstanding balance of zero. The
senior subordinated notes, senior notes, the revolving credit agreement,
and the term loan 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 in 2001 and 2002 joint ventures
(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, subordinated notes,
revolving credit agreement and term loan 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, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ 1,501 $ 261,107 $1,269,514 $ 36,014 $ $1,568,136
Financial Services................. 111 109,881 109,992
Investments in and amounts due to
and from consolidated
subsidiaries..................... 584,103 432,130 (628,246) (34,316) (353,671)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$585,604 $ 693,237 $ 641,379 $ 111,579 $ (353,671)$1,678,128
======== ========== ========== ============ ========== ==========
Liabilities
Homebuilding.......................$ $ 35,736 $ 314,171 $ 3,595 $ $ 353,502
Financial Services................. 90,355 90,355
Notes Payable...................... 661,390 2,345 7,210 670,945
Income Taxes Payable (Receivables). 23,055 (3,147) (18,184) (947) 777
Stockholders' Equity............... 562,549 (742) 343,047 11,366 (353,671) 562,549
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$585,604 $ 693,237 $ 641,379 $ 111,579 $ (353,671)$1,678,128
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ 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
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)$1,064,258
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF INCOME
TWELVE MONTHS ENDED OCTOBER 31, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding...................$ $ 1,059 $2,523,632 $ 14,093 $ (28,448) $2,510,336
Financial Services.............. 7,153 33,617 40,770
Intercompany Charges............ 139,502 21,183 (160,685)
Equity In Pretax Income of
Consolidated Subsidiaries.....226,625 (226,625)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues............... 226,625 140,561 2,551,968 47,710 (415,758) 2,551,106
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding.................... 140,561 2,312,199 18,165 (168,987) 2,301,938
Financial Services.............. 2,397 20,324 (178) 22,543
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................ 140,561 2,314,596 38,489 (169,165) 2,324,481
------- ---------- ---------- ------------ ---------- ----------
Income(Loss) Before Income Taxes 226,625 237,372 9,221 (246,593) 226,625
State and Federal Income Taxes.... 88,347 (195) 89,530 5,797 (95,132) 88,347
Extraordinary Loss From
Extinguishment of Debt, Net of
Income Taxes.................. (582) (582) 582 (582)
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)............... $137,696 $ (387)$ 147,842 $ 3,424 $ (150,879) $ 137,696
======= ========== ========== ============ ========== ==========
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 $1,701,421 $ 46,190 $ (37,480) $1,710,562
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 1,742,292 67,227 (270,682) 1,741,990
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding.................... 96,799 1,637,265 8,935 (128,806) 1,614,193
Financial Services.............. 5,748 15,821 (126) 21,443
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................ 96,799 1,643,013 24,756 (128,932) 1,635,636
------- ---------- ---------- ------------ ---------- ----------
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 CASH FLOWS
TWELVE MONTHS ENDED OCTOBER 31, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income........................$137,696 $ (387) $ 147,841 $ 3,425 $ (150,879) $137,696
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities.. 122,389 23,716 (217,049) 30,909 150,879 110,844
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities.......... 260,085 23,329 (69,208) 34,334 248,540
Net Cash Provided By (Used In)
Investing Activities............ (48,775) (6,875) (104,202) 166 (159,686)
Net Cash Provided By (Used In)
Financing Activities............ (2,948) 264,846 (83,298) (13,613) 164,987
Intercompany Investing and Financing
Activities - Net................(208,362) (56,616) 284,781 (19,803)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease)........... 224,684 28,073 1,084 253,841
In Cash and Cash Equivalents Balance,
Beginning of Period............. 10 (5,840) 15,616 6,363 16,149
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period................... $ 10 $ 218,844 $ 43,689 $ 7,447 $ -- $269,990
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED OCTOBER 31, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income........................$ 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) 13,393 264 (39,735)
Net Cash Provided By (Used In)
Financing Activities............ (6,215) 114 (59,549) 41,212 (24,438)
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
======== ========= ========== ============ ========== ==========
20. Subsequent Event (Unaudited)
During the first quarter we purchased two Houston based
homebuilders for approximately $100.0 million.