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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For quarterly period ended JANUARY 31, 2003 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
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.)
l0 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)
Same
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant (l) has filed all
reports required to be filed by Sections l3 or l5(d) of the Securities
Exchange Act of l934 during the preceding l2 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. Yes (
X ) No ( )
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes ( X ) No (
)
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 23,805,110
Class A Common Shares and 7,436,034 Class B Common Shares were
outstanding as of February 28, 2003.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Financial Statements:
Consolidated Balance Sheets at January 31,
2003 (unaudited) and October 31, 2002 4
Consolidated Statements of Income for the three
months ended January 31, 2003 and 2002
(unaudited) 6
Consolidated Statements of Stockholders' Equity
for the three months ended January 31, 2003
(unaudited) 7
Consolidated Statements of Cash Flows for
the three months ended January 31, 2003
and 2002 (unaudited) 8
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 29
Item 4. Controls and Procedures 30
PART II. Other Information 30
Item 6. Exhibits and Reports on Form 8-K.
(a)
Exhibit 3(a) Certificate of Incorporation of
the Registrant. (1)
Exhibit 3(b) Certificate of Amendment of
Incorporation of the Registrant. (2)
Exhibit 3(c) Bylaws of the Registrant. (2)
Exhibit 10(a) Amended and Restated Credit
Agreement dated February 20, 2003.
Exhibit 10(b) Restated $142 million K. Hovnanian
Mortgage, Inc. Revolving Credit Agreement
dated March 7, 2003.
Exhibit 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.
Exhibit 99(b) Certification 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, 1994 of the Registrant.
Item 6(b). No reports on Form 8-K have been filed during
the quarter for which this report is filed.
Signatures 31
Certifications 32
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
January 31, October 31,
ASSETS 2003 2002
----------- -----------
(unaudited)
Homebuilding:
Cash and cash equivalents....................... $ 87,830 $ 262,675
----------- -----------
Inventories - At the lower of cost or fair
value:
Sold and unsold homes and lots under
development.................................. 1,005,325 843,581
Land and land options held for future
development or sale......................... 270,998 238,001
----------- -----------
Total Inventories........................... 1,276,323 1,081,582
----------- -----------
Receivables, deposits, and notes................ 43,041 26,276
----------- -----------
Property, plant, and equipment - net............ 18,753 19,242
----------- -----------
Senior Residential rental properties - net...... 9,408 9,504
----------- -----------
Prepaid expenses and other assets............... 90,180 86,582
----------- -----------
Goodwill and indefinite life intangibles........ 82,275 82,275
----------- ------------
Definite life intangibles....................... 26,777
----------- -----------
Total Homebuilding.......................... 1,634,587 1,568,136
----------- -----------
Financial Services:
Cash and cash equivalents....................... 7,926 7,315
Mortgage loans held for sale.................... 50,157 91,451
Other assets.................................... 4,418 11,226
----------- -----------
Total Financial Services.................... 62,501 109,992
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits........................................ 5,391
----------- -----------
Total Assets...................................... $1,702,479 $1,678,128
=========== ===========
See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Per Share Data)
January 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
----------- -----------
(unaudited)
Homebuilding:
Nonrecourse land mortgages........................ $ 8,039 $ 11,593
Accounts payable and other liabilities............ 310,651 298,213
Customers' deposits............................... 42,425 40,422
Nonrecourse mortgages secured by operating
properties...................................... 3,239 3,274
----------- -----------
Total Homebuilding............................ 364,354 353,502
----------- -----------
Financial Services:
Accounts payable and other liabilities............ 4,370 4,857
Mortgage warehouse line of credit................. 49,029 85,498
----------- -----------
Total Financial Services...................... 53,399 90,355
----------- -----------
Notes Payable:
Term loan........................................ 115,000 115,000
Senior notes...................................... 396,514 396,390
Senior subordinated notes......................... 150,000 150,000
Accrued interest.................................. 15,924 9,555
----------- -----------
Total Notes Payable........................... 677,438 670,945
----------- -----------
Income Taxes Payable - Net of deferred tax benefits. 777
----------- -----------
Total Liabilities............................. 1,095,191 1,115,579
----------- -----------
Stockholders' Equity:
Preferred Stock,$.01 par value-authorized 100,000
shares; none issued
Common Stock,Class A,$.01 par value-authorized
87,000,000 shares; issued 27,537,468 shares
at January 31, 2003 and 27,453,994 shares at
October 31, 2002 (including 4,343,240 shares
at January 31, 2003 and October 31, 2002 held
in Treasury).................................... 275 275
Common Stock,Class B,$.01 par value (convertible
to Class A at time of sale)-authorized
13,000,000 shares; issued 7,784,372 shares at
January 31, 2003 and 7,788,061 shares at
October 31, 2002 (including 345,874 shares at
January 31, 2003 and October 31, 2002 held in
Treasury)....................................... 78 78
Paid in Capital................................... 152,939 152,977
Retained Earnings................................. 492,563 447,802
Deferred Compensation............................. (5) (21)
Treasury Stock - at cost.......................... (38,562) (38,562)
----------- -----------
Total Stockholders' Equity.................... 607,288 562,549
----------- -----------
Total Liabilities and Stockholders' Equity.......... $1,702,479 $1,678,128
=========== ===========
See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(unaudited)
Three Months Ended
January 31,
-------------------
2003 2002
--------- ---------
Revenues:
Homebuilding:
Sale of homes...................... $607,501 $443,098
Land sales and other revenues...... 9,639 1,977
--------- ---------
Total Homebuilding............... 617,140 445,075
Financial Services................... 10,495 8,987
--------- ---------
Total Revenues................... 627,635 454,062
--------- ---------
Expenses:
Homebuilding:
Cost of sales...................... 463,178 351,483
Selling, general and administrative 54,301 37,649
Inventory impairment loss.......... 158 905
--------- ---------
Total Homebuilding............... 517,637 390,037
Financial Services................... 5,821 5,359
Corporate General and Administration. 14,584 10,876
Interest............................. 13,679 13,702
Other Operations..................... 4,778 4,291
--------- ---------
Total Expenses................... 556,499 424,265
--------- ---------
Income Before Income Taxes............. 71,136 29,797
--------- ---------
State and Federal Income Taxes:
State................................ 3,100 1,873
Federal.............................. 23,275 9,763
--------- ---------
Total Taxes........................ 26,375 11,636
--------- ---------
Net Income............................. $ 44,761 $ 18,161
========= =========
Per Share Data:
Basic:
Income per common share.............. $ 1.43 $ 0.63
Weighted average number of common
shares outstanding................. 31,371 28,965
Assuming dilution:
Income per common share.............. $ 1.35 $ 0.60
Weighted average number of common
shares and common share equivalents
outstanding........................ 33,080 30,456
See notes to consolidated financial statements (unaudited).
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, 2002. 23,110,754 $275 7,442,187 $78 $152,977 $447,802 $ (21) $(38,562) $562,549
Sale of common stock
under employee stock
option plan............ 16,117 143 143
Stock bonus plan......... 63,668 (181) (181)
Conversion of Class B to
Class A Common Stock.... 3,689 (3,689)
Deferred compensation..... 16 16
Net Income................ 44,761 44,761
----------- ------ ----------- ------ -------- -------- -------- -------- --------
Balance, January 31, 2003 23,194,228 $275 7,438,498 $78 $152,939 $492,563 $ (5) $(38,562) $607,288
(unaudited) =========== ====== =========== ====== ======== ======== ======== ======== ========
See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
Three Months Ended
January 31,
---------------------
2003 2002
---------- ----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 44,761 $ 18,161
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation.................................... 1,569 1,658
Loss (gain) on sale and retirement of property
and assets.................................... 9 (3)
Deferred income taxes........................... (2,362) (71)
Impairment losses............................... 158 905
Decrease (increase) in assets:
Mortgage notes receivable..................... 41,878 26,334
Receivables, prepaids and other assets........ (26,455) 3,637
Inventories................................... (69,723) 19,489
Increase (decrease) in liabilities:
State and Federal income taxes................ (3,787) 2,307
Tax effect from exercise of stock options..... (19)
Customers' deposits........................... 1,692 3,594
Interest and other accrued liabilities........ (12,165) (15,288)
Post development completion costs............. 2,748 (832)
Accounts payable.............................. (15,324) 5,488
---------- ----------
Net cash (used in) provided by operating
activities................................ (37,020) 65,379
---------- ----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets....... 35 136
Purchase of property, equipment and other
fixed assets...................................... (755) (1,353)
Acquisition of homebuilding companies............... (91,273) (120,462)
Investment in and advances to unconsolidated
affiliates........................................ 3,296 (1,948)
---------- ----------
Net cash (used in) investing activities..... (88,697) (123,627)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 166,609 706,120
Principal payments on mortgages and notes........... (215,088) (622,315)
Purchase of treasury stock.......................... (1,089)
Proceeds from sale of stock and employee stock plans (38) 1,272
---------- ----------
Net cash (used in) provided by financing
activities................................ (48,517) 83,988
---------- ----------
Net (Decrease) Increase In Cash and Cash Equivalents.. (174,234) 25,740
Cash and Cash Equivalents Balance, Beginning
Of Period........................................... 269,990 16,149
---------- ----------
Cash and Cash Equivalent Balance, End Of Period....... $ 95,756 $ 41,889
========== ==========
Supplemental Disclosures of Cash Flow
Cash paid during the year for:
Interest......................................... 7,310 14,346
========== ==========
Income taxes..................................... 32,544 5,151
========== ==========
Supplemental disclosures of noncash operating
activities:
Inventory capitalized and accrued for specific
performance...................................... 130,307
==========
See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information
and with the instructions to form 10-Q and Article 10 of Regulation S-X.
In the opinion of management, all adjustments for interim periods
presented have been made, which include only normal recurring accruals
and deferrals necessary for a fair presentation of consolidated financial
position, results of operations, and changes in cash flows. 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. Results for the interim periods are
not necessarily indicative of the results which might be expected for a
full year. The balance sheet at October 31, 2002 has been derived from
the audited financial statements at that date but does not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
2. Interest costs incurred, expensed and capitalized were:
Three Months Ended
January 31,
-------------------
2003 2002
-------- --------
(Dollars in Thousands)
Interest Capitalized at
Beginning of Period......... $ 22,159 $ 25,124
Plus Interest Incurred(1)(2).. 15,120 11,477
Less Interest Expensed(2)..... 13,679 13,702
-------- --------
Interest Capitalized at
End of Period(2)............ $ 23,600 $ 22,899
======== ========
(1) Data does not include interest incurred by our mortgage and finance
subsidiaries.
(2) Represents interest for construction, and land and development
costs which are charged to interest expense when homes are delivered
or when land is not under active development.
3. Homebuilding accumulated depreciation at January 31, 2003 and
October 31, 2002 amounted to $19.7 million and $18.5 million,
respectively. Senior residential rental property accumulated
depreciation at January 31, 2003 and October 31, 2002 amounted to $3.2
million and $3.1 million, respectively.
4. In accordance with Financial Accounting Standards No. 144
("SFAS 144") "Accounting for the Impairment of or Disposal of Long Lived
Assets", 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.
In addition, from time to time, we will write off certain residential
land options including approval, engineering and capitalized interest
costs for land management decided not to purchase. We wrote off such
costs in the amount of $0.2 million during the three months ended January
31, 2003. We also wrote off such costs in the amount of $0.9 million
during the three months ended January 31, 2002, primarily due to the exit
of our Mid-South operations. Residential inventory impairment losses and
option write offs are reported in the Consolidated Statements of Income
as "Homebuilding-Inventory Impairment Loss."
5. 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. As of January 31, 2003 and October 31, 2002,
respectively, we are obligated under various performance letters of
credit amounting to $107.6 million and $100.0 million.
6. We have an unsecured Revolving Credit Agreement ("Agreement")
with a group of banks which was amended on February 20, 2003. Pursuant
to the amendment, our credit line increased to $505.0 million and we have
the ability to seek additional lenders to increase the total facility
amount to $590.0 million. The agreement bears an expiration date of July
2005 and interest is payable monthly and at various rates of either the
prime rate plus 0.40% or LIBOR plus 1.85%. In addition, we pay a fee
equal to 0.375% per annum on the weighted average unused portion of the
line. As of January 31, 2003 and October 31, 2002, there was no
outstanding balance under the Agreement.
Our mortgage warehouse line of credit was modified on March 7,
2003. Pursuant to the agreement, our credit line matures in July 2003
and we have the option to borrow up to $142.0 million. Interest is
payable monthly at the Federal Funds Rate plus 1.375%. As of January 31,
2003 and October 31, 2002 borrowings were $49.0 million and $85.5
million, respectively.
7. At January 31, 2003, our long term debt consisted of $150
million 10 1/2% Senior Notes due 2007, $150 million 9 1/8% Senior Notes
due 2009, $100 million 8% Senior Notes due 2012, $150 million 8 7/8%
Senior Subordinated Notes due 2012, and a $165 million Term Loan due 2007
which bears interest at either the prime rate plus 1.25% or LIBOR plus
2.5%. As of January 31, 2003 borrowings under the Term Loan were $115
million.
8. Per Share Calculations - Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings Per Share" requires the presentation
of basic earnings per share and diluted earnings per share. Basic
earnings per share is computed using the weighted average number of
shares outstanding. Diluted earnings per common share is computed using
the basic weighted average number of shares outstanding adjusted for the
incremental shares attributed to outstanding options to purchase common
stock.
9. Recent Accounting Pronouncements - 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 adopted SFAS No. 145 on November 1, 2002 and 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. However, SFAS No. 146 could impact
the amount or timing of liabilities to be recognized in the event that we
engage in exit or disposal activities in the future.
In November 2002, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a
company issues a guarantee, the company must recognize an initial
liability for the fair value, or market value, of the obligations it
assumes under the guarantee and must disclose that information in its
interim and annual financial statements. The provisions related to
recognizing a liability at inception of the guarantee for the fair value
of the guarantor's obligations does not apply to product warranties. The
initial recognition and initial measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31,
2002. The adoption of the initial recognition and initial measurement
provisions of FIN 45 did not have a material effect on our financial
position or results of operations. Our disclosure of guarantees is
included in Note 12 to the financial statements.
In December 2002, the Financial Accounting Standards Board issued
(SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure", which amends (SFAS) No. 123. The new standard provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
It also requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the affect of the method used on reported
results. We have not elected to change to the fair value based method of
accounting for stock-based employee compensation. We will adopt the
disclosure provisions of SFAS No. 148 in our second fiscal quarter ending
April 30, 2003.
In January 2003, the Financial Accounting Standards Board issued
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities,
an interpretation of ARB No. 51 ("FIN 46"). A Variable Interest Entity
("VIE") is a entity with insufficient equity investment or in which the
equity investors lack some of the characteristics of a controlling
financial interest. Pursuant to FIN 46, an enterprise that absorbs a
majority of the expected losses of the VIE must consolidate the VIE. FIN
46 is effective immediately for VIE's created after January 31, 2003.
For VIE's created before January 31, 2003, FIN 46 must be applied at the
beginning of the first interim or annual reporting period beginning after
June 15, 2003 (our quarter ending October 31, 2003). FIN 46 may apply to
certain option contracts to acquire land. We are in the process of
evaluating the applicability of FIN 46 to such option contracts and
cannot currently estimate the potential impact of FIN 46 to our
consolidated balance sheet.
10. On November 1, 2002 and December 31, 2002 we acquired
Parkside Homes and Brighton Homes, two Houston homebuilding companies for
an approximate aggregate purchase price of $100 million. These
acquisitions were accounted for as a purchase, with the results of
operations of these entities included in our consolidated financial
statements as of the date of acquisition. The purchase price will be
allocated based on estimated fair value at the date of acquisition. As a
result, estimated definite life intangible assets of $26.8 million were
recorded on the consolidated balance sheet. We expect to amortize the
definite life intangibles over a 2 to 5 year period. We are in the
process of completing an appraisal of the intangible assets and do not
expect to record any goodwill. Therefore, the purchase price allocation
is preliminary and subject to change. (See Note 11).
11. Intangible Assets - As reported on the balance sheet we have
goodwill and indefinite life intangibles amounting to $82.3 million and
definite life intangibles amounting to $26.8 million. Our intangible
assets consist of goodwill, tradenames, architectural designs, and
contractual agreements. During the three months ended January 31, 2003
we added the $26.8 million (See Note 10) of definite life intangibles due
to the Houston 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 are amortizing the
definite life intangibles over their expected useful life. The
amortization expense of $0.5 million is reported in other operations on
our Consolidated Statement of Income for the three months ended January
31, 2003.
12. 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"), acts as a finance and management entity that as of
January 31, 2003 had issued and outstanding approximately $150 million
senior subordinated notes, $400 million face value senior notes, a term
loan with an outstanding balance of $115 million, and a revolving credit
agreement with an outstanding balance of zero. The senior subordinated
notes, senior notes, the revolving credit agreement, and term loan are
fully and unconditionally guaranteed by the Parent.
Each of the wholly owned subsidiaries of the Parent other than the
Subsidiary Issuer (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 engaged in homebuilding activity in Poland, our title
subsidiaries, and 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, senior subordinated notes, the term loan and the revolving
credit agreement of the Subsidiary Issuer.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries we have included the accompanying consolidated
condensed financial statements. Management does not believe that
separate financial statements of the Guarantor Subsidiaries are material
to investors. Therefore, separate financial statements and other
disclosures concerning the Guarantor Subsidiaries are not presented.
The following consolidating condensed financial information present
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 the Parent on a
consolidated basis.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED BALANCE SHEET
JANUARY 31, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
ASSETS
Homebuilding.......................$ 14 $ 100,961 $1,512,194 $ 21,418 $ $1,634,587
Financial Services................. 111 62,390 62,501
Income Taxes Receivables (Payables) (31,152) 6,687 30,332 (476) 5,391
Investments in and amounts due to
and from consolidated
subsidiaries..................... 638,426 604,415 (817,792) (21,077) (403,972)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$607,288 $ 712,063 $ 724,845 $ 62,255 $(403,972) $1,702,479
======== ========== ========== ============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding.......................$ $ 24,110 $ 340,181 $ 63 $ $ 364,354
Financial Services................. 53,399 53,399
Notes Payable...................... 677,386 52 677,438
Stockholders' Equity............... 607,288 10,567 384,612 8,793 (403,972) 607,288
-------- ----------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$607,288 $ 712,063 $ 724,845 $ 62,255 $(403,972) $1,702,479
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ 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)$1,678,128
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 472 $ 613,679 $ 2,994 $ (5) $ 617,140
Financial Services .............. 1,610 8,885 10,495
Intercompany Charges............. 43,538 3,376 (46,914)
Equity In Pretax Income of
Consolidated Subsidiaries...... 71,136 (71,136)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................. 71,136 44,010 618,665 11,879 (118,055) 627,635
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 44,010 547,661 3,239 (44,232) 550,678
Financial Services............... 542 5,780 (501) 5,821
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 44,010 548,203 9,019 (44,733) 556,499
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 71,136 70,462 2,860 (73,322) 71,136
State and Federal Income Taxes..... 26,375 (205) 26,195 1,150 (27,140) 26,375
------- ---------- ---------- ------------ ---------- ----------
Net Income.........................$44,761 $ 205 $ 44,267 $ 1,710 $ (46,182) $ 44,761
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 145 $ 444,446 $ 5,533 $ (5,049) $ 445,075
Financial Services .............. 1,362 7,625 8,987
Intercompany Charges............. 30,259 2,483 (32,742)
Equity In Pretax Income of
Consolidated Subsidiaries...... 29,797 (29,797)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................. 29,797 30,404 448,291 13,158 (67,588) 454,062
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 30,404 423,744 575 (35,817) 418,906
Financial Services............... 558 5,246 (445) 5,359
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 30,404 424,302 5,821 (36,262) 424,265
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 29,797 23,989 7,337 (31,326) 29,797
State and Federal Income Taxes..... 11,636 27 9,349 2,795 (12,171) 11,636
------- ---------- ---------- ------------ ---------- ----------
Net Income.........................$18,161 $ (27) $ 14,640 $ 4,542 $ (19,155) $ 18,161
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 44,761 $ 205 $ 44,267 $ 1,710 $ (46,182) $ 44,761
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 1,216 7,665 (185,915) 49,071 46,182 (81,781)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 45,977 7,870 (141,648) 50,781 (37,020)
Net Cash Provided by (Used In)
Investing Activities............... (48) 85 (88,732) (2) (88,697)
Net Cash Provided By(Used In)
Financing Activities............... 124 (11,755) (36,886) (48,517)
Intercompany Investing and Financing
Activities - Net................... (45,933) (172,285) 231,457 (13,239)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash and
Cash Equivalents................... (4) (164,206) (10,678) 654 (174,234)
Cash and Cash Equivalents Balance,
Beginning of Period................ 10 218,844 43,689 7,447 269,990
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 6 $ 54,638 $ 33,011 $ 8,101 $ $ 95,756
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JANUARY 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.........................$ 18,161 $ (27) $ 14,640 $ 4,542 $ (19,155) $ 18,161
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 92,738 9,132 (100,389) 26,582 19,155 47,218
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 110,899 9,105 (85,749) 31,124 65,379
Net Cash Provided by (Used In)
Investing Activities............... (43,340) (1,033) (79,180) (74) (123,627)
Net Cash Provided By(Used In)
Financing Activities............... (1,089) 200,698 (85,643) (29,978) 83,988
Intercompany Investing and Financing
Activities - Net..................... (66,470) (188,816) 258,293 (3,007)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash and
Cash Equivalents................... 19,954 7,721 (1,935) 25,740
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 $ 14,114 $ 23,337 $ 4,428 $ $ 41,889
======== ========= ========== ============ ========== ==========
ITEM 2. 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, indefinite or
definite life intangibles. 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 and
land sales are recorded when 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
passes 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 discounted future cash
flows generated from 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. 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.
Insurance Deductible Reserves - Our deductible is $150,000 per
occurrence 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 consist of goodwill, tradenames, architectural designs and
contractual agreements with both definite and indefinite lives 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 are amortizing
the definite life intangibles over their expected useful life.
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 consolidated balance sheets.
CAPITAL RESOURCES AND LIQUIDITY
Our cash uses during the three months ended January 31, 2003 were
for operating expenses, increases in housing inventories, construction,
income taxes, interest, and the acquisition of two Houston, Texas
homebuilders. We provided for our cash requirements from housing and
land sales, the revolving credit facility, financial service revenues,
and other revenues. We believe that these sources of cash are sufficient
to finance our working capital requirements and other needs.
At January 31, 2003 we had approximately $80.0 million of excess
cash. Management anticipates using the excess cash to grow existing
operations and fund future acquisitions.
On December 31, 2000, our stock repurchase program to purchase up
to 4.0 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 2.0 million shares of Class A Common
Stock. As of January 31, 2003, 606,319 shares of Class A Common Stock
have been purchased under this program, of which zero were repurchased
during the three months ended January 31, 2003.
Our homebuilding bank borrowings are made pursuant to an amended
and restated revolving credit agreement (the "Agreement") that provides a
revolving credit line and letter of credit line of up to $590 million
through July 2005. Interest is payable monthly and at various rates of
either the prime rate plus 0.40% 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. Each of our
significant subsidiaries is a guarantor under the revolving credit
agreement. As of January 31, 2003, there were no borrowings under the
Agreement.
At January 31, 2003 we had $400 million of outstanding senior debt
($396.5 million, net of discount), comprised of $150 million 10 1/2% Senior
Notes due 2007, $150 million 9 1/8% Senior Notes due 2009, and $100
million 8% Senior Notes due 2012. At January 31, 2003, we had
outstanding senior subordinated debt comprised of $150 million 8 7/8%
Senior Subordinated Notes due 2012. Each of our significant subsidiaries
is a guarantor under the Senior Notes and Senior Subordinated Notes.
On January 22, 2002 we entered into a $165 million five-year Term
Loan with a group of banks. The Term Loan matures in January 2007, and
bears interest at either the prime rate plus 1.25% or LIBOR plus 2.5%.
Each of our significant subsidiaries is a guarantor under the Term Loan.
At January 31, 2003 borrowings under the Term Loan were $115 million.
Our mortgage banking subsidiary's warehousing agreement was
modified on March 7, 2003. Pursuant to the modification, we may borrow
up to $142 million. The agreement bears an expiration date of July 2003
and 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
July 2003 or negotiate a replacement facility, but there can be no
assurance of such extension or replacement facility. As of January 31,
2003, the aggregate principal amount of all such borrowings was $49.0
million.
Total inventory increased $194.7 million during the three months
ended January 31, 2003. Approximately $75.0 million of the increase in
inventory was due to the acquisition of two homebuilding companies in
Houston, Texas. In addition, inventory levels increased in most of our
other housing markets. This was the result of seasonality factors and
planned future organic growth in our existing markets. Substantially all
homes under construction or completed and included in inventory at
January 31, 2003 are expected to be closed during the next twelve months.
Most inventory completed or under development is financed through our
line of credit, term loan, and senior and subordinated indebtedness.
We usually option property for development prior to acquisition.
By optioning property, we are only subject to the loss of a small option
fee and predevelopment costs if we choose not to exercise the option. As
a result, our commitment for major land acquisitions is reduced.
The following table summarizes housing lots included in our residential
real estate. The January 31, 2003 numbers exclude lots owned and options
in locations in which we have ceased development.
Active Proposed
Active Selling Developable Grand Total
Communities Lots Lots Lots
----------- ------- ----------- -----------
January 31, 2003:
Northeast Region.. 23 5,484 15,246 20,730
North Carolina.... 68 4,893 2,333 7,226
Metro D.C......... 31 3,508 7,776 11,284
California........ 39 5,621 5,031 10,652
Texas............. 72 5,139 2,901 8,040
----------- ------- ---------- -----------
233 24,645 33,287 57,932
=========== ======= ========== ===========
Owned.......... 11,971 3,661 15,632
Optioned....... 12,674 29,626 42,300
------- ---------- -----------
Total........ 24,645 33,287 57,932
======= ========== ===========
Active Proposed
Active Selling Developable Grand Total
Communities Lots Lots Lots
----------- ------- ----------- -----------
October 31, 2002:
Northeast Region.. 28 5,699 15,700 21,399
North Carolina.... 64 5,186 2,283 7,469
Metro D.C......... 27 3,182 7,394 10,576
California........ 42 5,974 4,457 10,431
Texas............. 35 2,566 1,518 4,084
Other............. -- 29 -- 29
----------- ------- ---------- -----------
196 22,636 31,352 53,988
=========== ======= ========== ===========
Owned.......... 11,088 2,274 13,362
Optioned....... 11,548 29,078 40,626
------- ---------- -----------
Total........ 22,636 31,352 53,988
======= ========== ===========
The following table summarizes our started or completed unsold
homes and models:
January 31, October 31,
2003 2002
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 84 49 133 73 46 119
North Carolina...... 180 18 198 191 32 223
Metro D.C........... 38 19 57 34 31 65
California.......... 171 73 244 193 65 258
Texas............... 570 69 639 261 31 292
Other............... -- -- -- 2 -- 2
------ ------ ----- ------ ------ -----
Total 1,043 228 1,271 754 205 959
====== ====== ===== ====== ====== =====
Financial Services - Mortgage loans held for sale consist of
residential mortgages receivable of which $50.0 million and $91.3 million
at January 31, 2003 and October 31, 2002, 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 FOR THE THREE MONTHS ENDED JANUARY 31, 2003
COMPARED TO THE THREE MONTHS ENDED JANUARY 31, 2002
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, and Texas. In addition, we provide financial
services to our homebuilding customers.
Total Revenues:
Compared to the same prior period, revenues increased as follows:
Three Months Ended
------------------------------------------
January January Dollar Percentage
31, 2003 31, 2002 Change Change
-------- -------- -------- ----------
(Dollars in Thousands)
Homebuilding:
Sale of homes............... $607,501 $443,098 $164,403 37.1%
Land sales and other
revenues................... 9,639 1,977 7,662 387.6%
Financial services............ 10,495 8,987 1,508 16.8%
-------- -------- -------- ---------
Total Revenues........... $627,635 $454,062 $173,573 38.2%
======== ======== ======== =========
Homebuilding:
Revenues from the sale of homes increased $164.4 million or 37.1%
during the three months ended January 31, 2003, compared to the same
period last year. Revenues from sales of homes 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:
Three Months Ended
January 31,
-------------------
2003 2002
--------- --------
(Dollars in Thousands)
Northeast Region:
Housing Revenues..... $136,763 $132,769
Homes Delivered...... 431 421
North Carolina:
Housing Revenues..... $ 54,469 $ 56,681
Homes Delivered...... 299 298
Metro D.C.:
Housing Revenues..... $103,651 $ 70,392
Homes Delivered...... 324 263
California:(2)
Housing Revenues..... $238,695 $114,642
Homes Delivered...... 863 440
Texas: (1)
Housing Revenues..... $ 72,662 $ 54,526
Homes Delivered...... 359 237
Other:
Housing Revenues..... $ 1,261 $ 14,088
Homes Delivered...... 9 91
Totals:
Housing Revenues..... $607,501 $443,098
Homes Delivered...... 2,285 1,750
(1) January 31, 2003 includes Parkside Homes and Brighton Homes
deliveries beginning on November 1, 2002 and January 1,
2003, respectively.
(2) January 31, 2002 includes Forecast deliveries beginning on
January 10, 2002.
The increase in housing revenues was primarily due to the
acquisition of Parkside Homes and Brighton Homes in Houston, and a full
quarter of deliveries from Forecast. In addition, these increases were
the result of organic growth in Metro D. C. and California (excluding
Forecast) and increased average sales prices in most of our markets.
Important indicators of the future results are recently signed
contracts and home contract backlog for future deliveries. Our sales
contracts and homes in contract backlog (using base sales prices) by
market area are set forth below:
Sales Contracts for the
Three Months Ended Contract Backlog
January 31, as of January 31,
----------------------- --------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Dollars............. $115,447 $109,689 $ 410,793 $317,189
Homes............... 368 393 1,334 1,132
North Carolina:
Dollars............. $ 54,679 $ 53,794 $ 88,496 $100,708
Homes............... 300 286 467 522
Metro D.C.:
Dollars............. $ 94,358 $ 78,993 $ 234,082 $217,487
Homes............... 286 263 717 779
California: (2)
Dollars............. $233,616 $ 84,122 $ 270,835 $144,061
Homes............... 832 301 924 568
Texas: (1)(3)
Dollars............. $ 68,927 $ 43,827 $ 89,888 $ 56,471
Homes............... 353 193 433 219
Other:
Dollars............. $ 313 $ 11,365 $ -- $ 17,120
Homes............... 2 74 -- 108
Totals:
Dollars............. $567,340 $381,790 $1,094,094 $853,036
Homes............... 2,141 1,510 3,875 3,328
(1) January 31, 2003 includes Parkside Homes and Brighton Homes
sales contracts signed from November 1, 2002 and January 1,
2003, respectively.
(2) January 31, 2002 includes Forecast sales contracts signed
from January 10, 2002 and Forecast's entire contract backlog.
(3) Contract backlog includes 162 homes with a value of $31.1 million
from the acquisition of Parkside Homes and Brighton Homes
during the quarter ended January 31, 2003.
During February 2003 we signed an additional 1,061 contracts compared to
931 in the same month last year. The February 2003 contracts along with
our contract backlog at January 31, 2003 and deliveries for the three
months ended January 31, 2003 amount to approximately 64% of our planned
deliveries for fiscal 2003.
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:
Three Months Ended
January 31,
-------------------
2003 2002
-------- --------
(Dollars in Thousands)
Sale of Homes................ $607,501 $443,098
Cost of Sales................ 457,526 351,201
-------- --------
Housing Gross Margin......... $149,975 $ 91,897
======== ========
Gross Margin Percentage...... 24.7% 20.7%
Cost of Sales expenses as a percentage of home sales revenues are
presented below:
Three Months Ended
January 31,
-------------------
2003 2002
-------- --------
Sale of Homes................ 100.0% 100.0%
-------- --------
Cost of Sales:
Housing, land &
development costs.... 67.8% 71.2%
Commissions............ 2.1% 2.2%
Financing concessions.. 0.9% 1.1%
Overheads.............. 4.5% 4.8%
-------- --------
Total Cost of Sales.......... 75.3% 79.3%
-------- --------
Gross Margin................. 24.7% 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 communities and of home types delivered, consolidated quarterly
gross margin will fluctuate up or down and may not be representative of
the consolidated gross margin for the year. We achieved higher gross
margins during the three months ended January 31, 2003 compared to the
same period last year. The consolidated gross margin increased 4.0% for
the three months ended January 31, 2003. Ignoring the effect of the two
Houston acquisitions, we achieved higher gross margins on a market-by-
market basis during the three months ended January 31, 2003 compared to
the same period last year. These increased margins are the result of
higher sales prices and increased national contract rebates, which
slightly lowered our housing costs.
Selling, general, and administrative expenses as a percentage of
total homebuilding revenues, increased to 8.8% for the three months ended
January 31, 2003 from 8.5% for the prior year's three months. Such
expenses increased $16.7 million during the three months ended January
31, 2003 compared to the same period last year. The percentage increase
was partially due to a full quarter of selling, general and
administrative costs from Forecast and partially due to our Coastal
California and Northeast Region operations gearing up to open a number of
communities later this year. The dollar increase in selling, general and
administrative was due to a full quarter of expenses from Forecast and
the addition of Parkside Homes and Brighton Homes.
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:
Three Months Ended
January 31,
------------------
2003 2002
-------- --------
Land and Lot Sales................ $8,452 $ 421
Cost of Sales..................... 5,652 282
-------- --------
Land and Lot Sales Gross Margin... 2,800 139
Interest Expense.................. 344 65
-------- --------
Land and Lot Sales Profit
Before Tax...................... $2,456 $ 74
======== ========
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.
Financial Services:
Financial services consist primarily of originating mortgages from
our homebuyers, selling such mortgages in the secondary market, and title
insurance activities. For the three months ended January 31, 2003
financial services provided a $4.7 million profit before taxes compared
to a profit of $3.6 million in 2002. This increase is primarily due to
reduced costs, increased mortgage loan amounts, and the addition of a
mortgage joint venture from the acquisition of Forecast for a full
quarter.
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 decreased to
2.3% for the three months ended January 31, 2003 from 2.4% for the
corresponding prior year three months. Corporate general and
administrative expenses increased $3.7 million during the three months
ended January 31, 2003 compared to the same period last year. The
percentage decline is primarily attributed to the increase in housing
operations. Increases in corporate general and administrative dollar
expenses are primarily attributed to higher employee incentives due to a
higher return on equity.
Interest:
Interest expense includes housing, and land and lot interest.
Interest expense is broken down as follows:
Three Months Ended
January 31,
------------------
2003 2002
-------- --------
Sale of Homes.............. $13,335 $13,637
Land and Lot Sales......... 344 65
-------- --------
Total...................... $13,679 $13,702
======== ========
Housing interest as a percentage of sale of homes revenues
decreased to 2.2% for the three months ended January 31, 2003 compared to
3.1% for the three months ended January 31, 2002. This percentage
decline is primarily attributed to the increase in home revenues and a
decrease in debt leverage of our company.
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, amortization of a definite life intangible for our Houston
acquisitions, minority interest relating to joint ventures, and corporate
owned life insurance loan interest.
Recent Accounting Pronouncements:
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 adopted SFAS No. 145 on November 1, 2002 and
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. However, SFAS No. 146 could impact
the amount or timing of liabilities to be recognized in the event that we
engage in exit or disposal activities in the future.
In November 2002, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a
company issues a guarantee, the company must recognize an initial
liability for the fair value, or market value, of the obligations it
assumes under the guarantee and must disclose that information in its
interim and annual financial statements. The provisions related to
recognizing a liability at inception of the guarantee for the fair value
of the guarantor's obligations does not apply to product warranties. The
initial recognition and initial measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31,
2002. The adoption of the initial recognition and initial measurement
provisions of FIN 45 did not have a material effect on our financial
position or results of operations. Our disclosure of guarantees is
included in Note 12 to the financial statements.
In December 2002, the Financial Accounting Standards Board issued
(SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure", which amends (SFAS) No. 123. The new standard provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
It also requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the affect of the method used on reported
results. We have not elected to change to the fair value based method of
accounting for stock-based employee compensation. We will adopt the
disclosure provisions of SFAS No. 148 in our second fiscal quarter ending
April 30, 2003.
In January 2003, the Financial Accounting Standards Board issued
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities,
an interpretation of ARB No. 51 ("FIN 46"). A Variable Interest Entity
("VIE") is a entity with insufficient equity investment or in which the
equity investors lack some of the characteristics of a controlling
financial interest. Pursuant to FIN 46, an enterprise that absorbs a
majority of the expected losses of a VIE must consolidate the VIE. FIN
46 is effective immediately for VIE's created after January 31, 2003.
For VIE's created before January 31, 2003, FIN 46 must be applied at the
beginning of the first interim or annual reporting period beginning after
June 15, 2003 (our quarter ending October 31, 2003). FIN 46 may apply to
certain option contracts to acquire land. We are in the process of
evaluating the applicability of FIN 46 to such option contracts and
cannot currently estimate the potential impact of FIN 46 to our
consolidated balance sheet.
Total Taxes:
Total taxes as a percentage of income before taxes amounted to
approximately 37.1% and 39.1% for the three months ended January 31, 2003
and 2002, respectively. The decreased effective rate is due primarily to
a reduction in 2003 in state income taxes. Deferred federal and state
income tax assets primarily represent the deferred tax benefits arising
from temporary differences between book and tax income which will be
recognized in future years as an offset against future taxable income.
If for some reason the combination of future years income (or loss)
combined with the reversal of the timing differences results in a loss,
such losses can be carried back to prior years to recover the deferred
tax assets. As a result, management is confident such deferred tax
assets are recoverable regardless of future income.
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 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. On November 1, 2002 and December 31, 2002
we acquired two Houston homebuilding companies for an approximate
aggregate purchase price of $100.0 million.
Safe Harbor Statement
All statements in this Form 10-Q 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 of the Company to be
materially different from any future 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 our Form 10-K for the
year ended October 31, 2002.
Item 3. 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 table sets forth as of January 31, 2003, our long term debt
obligations, principal cash flows by scheduled maturity, weighted average
interest rates and estimated fair market value ("FMV").
As of January 31, 2003 for the
Three Months Ended January 31,
--------------------------------------
FMV @
2004 2005 2006 2007 2008 Thereafter Total 1/31/03
------- ------ ------ ------ ------ ---------- -------- -------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate...... $ 8,114 $ 81 $ 88 $150,096 $ 104 $ 400,298 $558,781 $581,028
Average interest
rate.......... 4.96% 8.38% 8.38% 10.50% 8.38% 8.75% 9.16% --
Variable rate... -- -- -- -- $115,000 -- $115,000 $115,000
Average interest
rate.......... -- -- -- -- (2) -- -- --
(1) Does not include bonds collateralized by mortgages receivable.
(2) LIBOR plus 2.5%
Item 4. CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer evaluated
the effectiveness of our disclosure controls and procedures (as defined
in Rules 13a-14(c) and 15d-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 or in other factors that could
significantly affect these controls subsequent to the Evaluation Date,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a)
Exhibit 3(a) Certificate of Incorporation of
the Registrant. (1)
Exhibit 3(b) Certificate of Amendment of
Incorporation of the Registrant. (2)
Exhibit 3(c) Bylaws of the Registrant. (2)
Exhibit 10(a) Amended and Restated Credit
Agreement dated February 20, 2003.
Exhibit 10(b) Restated $142 million K. Hovnanian
Mortgage, Inc. Revolving Credit Agreement
dated March 7, 2003.
Exhibit 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.
Exhibit 99(b) Certification 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, 1994 of the Registrant.
Item 6(b). No reports on Form 8-K have been filed during
the quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
DATE: March 17, 2003 /S/J. LARRY SORSBY
J. Larry Sorsby,
Executive Vice President and
Chief Financial Officer
DATE: March 17, 2003 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Mr. Ara K. Hovnanian, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Hovnanian
Enterprises, Inc.
2) Based on my knowledge, this quarterly 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 quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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
quarterly 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 quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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 quarterly 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.
By,
/S/ARA K. HOVNANIAN
Ara K. Hovnanian
Chief Executive Officer
Date: March 12, 2003
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Mr. J. Larry Sorsby, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Hovnanian
Enterprises, Inc.
2) Based on my knowledge, this quarterly 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 quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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
quarterly 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 quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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 quarterly 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.
By,
/S/J. LARRY SORSBY
J. Larry Sorsby
Chief Financial Officer
Date: March 12, 2003