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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10Q
(Mark One)
[ X ] Quarterly report under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For quarterly period ended APRIL 30, 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 Section 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. 22,509,277
Class A Common Shares and 7,434,844 Class B Common Shares were outstanding
as of May 30, 2003.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Financial Statements:
Consolidated Balance Sheets at April 30,
2003 (unaudited) and October 31, 2002 5
Consolidated Statements of Income for the three
and six months ended April 30, 2003 and 2002
(unaudited) 6
Consolidated Statements of Stockholders' Equity
for the six months ended April 30, 2003
(unaudited) 7
Consolidated Statements of Cash Flows for
the six months ended April 30, 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 20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 35
Item 4. Controls and Procedures 36
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security
Holders 36
Item 6. Exhibits and Reports on Form 8-K. 37
(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. (3)
Exhibit 10(b) Restated $142 million K. Hovnanian
Mortgage, Inc. Revolving Credit Agreement
dated March 7, 2003. (3)
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.
(3) Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q for the quarter
Ended January 31, 2003 of the Registrant.
(b) No reports on Form 8-K have been filed during
The quarter for which this report is filed.
Signatures 38
Certifications 39
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
April 30, October 31,
ASSETS 2003 2002
----------- -----------
(unaudited)
Homebuilding:
Cash and cash equivalents....................... $ 18,565 $ 262,675
----------- -----------
Inventories - At the lower of cost or fair
value:
Sold and unsold homes and lots under
development................................. 1,013,294 803,829
Land and land options held for future
development or sale......................... 240,268 171,081
Consolidated Inventory Not Owned:
Specific performance options................ 59,523 67,183
Variable interest entities.................. 40,923
Other options............................... 61,110 39,489
----------- -----------
Total Inventories........................... 1,415,118 1,081,582
----------- -----------
Receivables, deposits, and notes ............... 37,577 26,276
----------- -----------
Property, plant, and equipment - net............ 26,191 19,242
----------- -----------
Senior residential rental properties - net...... 9,311 9,504
----------- -----------
Prepaid expenses and other assets............... 83,340 86,582
----------- -----------
Goodwill and indefinite life intangibles........ 82,275 82,275
----------- -----------
Definite life intangibles....................... 63,503
----------- -----------
Total Homebuilding.......................... 1,735,880 1,568,136
----------- -----------
Financial Services:
Cash and cash equivalents....................... 4,961 7,315
Mortgage loans held for sale.................... 82,916 91,451
Other assets.................................... 3,708 11,226
----------- -----------
Total Financial Services.................... 91,585 109,992
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits........................................ 34,800
----------- -----------
Total Assets...................................... $1,862,265 $1,678,128
=========== ===========
See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Per Share Data)
April 30, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
----------- -----------
(unaudited)
Homebuilding:
Nonrecourse land mortgages........................ $ 29,506 $ 11,593
Accounts payable and other liabilities............ 189,391 198,290
Customers' deposits............................... 52,868 40,422
Nonrecourse mortgages secured by operating
properties...................................... 3,210 3,274
Liabilities from inventory not owned.............. 108,471 97,983
----------- -----------
Total Homebuilding............................ 383,446 351,562
----------- ----------
Financial Services:
Accounts payable and other liabilities............ 4,835 4,857
Mortgage warehouse line of credit................. 78,823 85,498
----------- -----------
Total Financial Services...................... 83,658 90,355
----------- -----------
Notes Payable:
Revolving and term credit agreements.............. 144,800 115,000
Senior notes...................................... 396,647 396,390
Senior subordinated notes......................... 150,000 150,000
Accrued interest.................................. 10,127 9,555
----------- -----------
Total Notes Payable........................... 701,574 670,945
----------- -----------
Income Taxes Payable - Net of deferred tax benefits. 777
----------- -----------
Total Liabilities............................. 1,168,678 1,113,639
----------- -----------
Minority interest................................... 37,799 1,940
----------- -----------
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 27,797,055 shares at
April 30, 2003 and 27,453,994 shares at October 31,
2002 (including 5,342,599 shares at April 30, 2003
and 4,343,240 shares at October 31, 2002 held
in Treasury).................................... 278 275
Common Stock,Class B,$.01 par value (convertible to
Class A at time of sale) authorized 13,000,000
shares; issued 7,781,018 shares at April 30, 2003
and 7,788,061 shares at October 31, 2002 (including
345,874 shares at April 30, 2003 and October 31,
2002 held in Treasury).............. 78 78
Paid in Capital................................... 156,124 152,977
Retained Earnings................................. 545,131 447,802
Deferred Compensation............................. (21)
Treasury Stock - at cost.......................... (45,823) (38,562)
----------- -----------
Total Stockholders' Equity.................... 655,788 562,549
----------- -----------
Total Liabilities and Stockholders' Equity.......... $1,862,265 $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 Six Months Ended
April 30, April 30,
------------------- -----------------------
2003 2002 2003 2002
--------- --------- ----------- ----------
Revenues:
Homebuilding:
Sale of homes...................... $666,553 $532,386 $1,274,054 $ 975,484
Land sales and other revenues...... 2,365 19,936 12,004 21,913
--------- --------- ----------- ----------
Total Homebuilding............... 668,918 552,322 1,286,058 997,397
Financial Services................... 10,899 8,676 21,394 17,663
--------- --------- ----------- ----------
Total Revenues................... 679,817 560,998 1,307,452 1,015,060
--------- --------- ----------- ----------
Expenses:
Homebuilding:
Cost of sales...................... 497,219 436,526 960,397 788,009
Selling, general and administrative 59,598 47,646 113,899 85,295
Inventory impairment loss.......... 1,326 1,424 1,484 2,329
--------- --------- ----------- ----------
Total Homebuilding............... 558,143 485,596 1,075,780 875,633
Financial Services................... 6,173 5,103 11,994 10,462
Corporate General and Administration. 13,464 10,629 28,048 21,505
Interest............................. 13,425 12,802 27,104 26,504
Other Operations..................... 4,184 5,295 8,962 9,586
--------- --------- ----------- ----------
Total Expenses................... 595,389 519,425 1,151,888 943,690
--------- --------- ----------- ----------
Income Before Income Taxes............. 84,428 41,573 155,564 71,370
--------- --------- ----------- ----------
State and Federal Income Taxes:
State................................ 3,335 1,534 6,435 3,407
Federal.............................. 28,525 14,129 51,800 23,892
--------- --------- ----------- ----------
Total Taxes........................ 31,860 15,663 58,235 27,299
--------- --------- ----------- ---------
Net Income............................. $ 52,568 $ 25,910 $ 97,329 $ 44,071
========= ========= =========== ==========
Per Share Data:
Basic:
Income per common share.............. $ 1.69 $ 0.84 $ 3.11 $ 1.48
Weighted average number of common
shares outstanding................. 31,143 30,736 31,256 29,836
Assuming dilution:
Income per common share.............. $ 1.60 $ 0.80 $ 2.95 $ 1.40
Weighted average number of common
shares outstanding................ 32,761 32,570 32,944 31,511
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 23,110,802 $275 7,442,187 $78 $152,977 $447,802 $ (21) $(38,562) $ 562,549
Shares returned in
connection with prior
year acquisition ....... (749,359)
Sale of common stock under
employee stock option
plan.................... 249,361 2 3,067 3,069
Stock bonus plan.......... 86,609 1 80 81
Conversion of Class B to
Class A Common Stock.... 7,043 (7,043)
Deferred compensation..... 21 21
Treasury stock purchase... (250,000) (7,261) (7,261)
Net Income................ 97,329 97,329
----------- ------ ----------- ------ ------- -------- -------- -------- ---------
Balance, April 30, 2003
(unaudited)............... 22,454,456 $278 7,435,144 $78 $156,124 $545,131 $ -- $(45,823) $ 655,788
=========== ====== =========== ====== ======= ======== ======== ======== =========
See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands - unaudited)
Six Months Ended
April 30,
---------------------
2003 2002
---------- ----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 97,329 $ 44,071
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation.................................... 3,225 3,342
Amortization of indefinite life intangibles..... 2,296
(Gain) on sale and retirement of property
and assets.................................... (28) (7)
Deferred income taxes........................... (2,727) (745)
Impairment losses............................... 1,484 2,329
Decrease (increase) in assets:
Mortgage notes receivable..................... 9,516 47,023
Receivables, prepaids and other assets........ (3,190) 14,188
Inventories................................... (214,148) (69,318)
(Decrease) increase in liabilities:
State and Federal income taxes................ (30,020) (3,761)
Tax effect from exercise of stock options..... (2,830) (152)
Customers' deposits........................... 12,551 1,684
Interest and other accrued liabilities........ (8,485) (7,265)
Post development completion costs............. 2,676 (811)
Accounts payable.............................. (19,547) 4,455
---------- ----------
Net cash (used in) provided by operating
activities................................ (151,898) 35,033
---------- ----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets....... 180 335
Purchase of property, equipment and other fixed
assets and acquisitions of homebuilding
companies......................................... (138,836) (142,186)
Distributions from (investment in and advances to)
unconsolidated affiliates......................... 7,431 (1,095)
---------- ----------
Net cash (used in) investing activities.......(131,225) (142,946)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 583,835 1,045,306
Proceeds from senior debt........................... 99,152
Proceeds from senior subordinated debt.............. 150,000
Principal payments on mortgages and notes........... (543,062)(1,066,455)
Principal payments on subordinated debt............. (99,747)
Purchase of treasury stock.......................... (7,261) (1,089)
Proceeds from sale of stock and employee stock plan. 3,147 2,256
---------- ----------
Net cash provided by financing activities.... 36,659 129,423
---------- ----------
Net (Decrease) Increase In Cash and Cash Equivalents.. (246,464) 21,510
Cash and Cash Equivalents Balance, Beginning
Of Period........................................... 269,990 16,149
---------- ----------
Cash and Cash Equivalents Balance, End Of Period...... $ 23,526 $ 37,659
========== ==========
Supplemental Disclosures of Cash Flow
Cash paid during the year for:
Interest......................................... $ 26,436 $ 27,148
========== ==========
Income taxes..................................... $ 90,981 $ 31,805
========== ==========
Supplemental disclosures of noncash operating
activities:
Consolidated Inventory Not Owned:
Specific performance options..................... $ 51,155 $ 58,494
Variable interest entities....................... 35,811
Other options.................................... 57,316 39,489
---------- ----------
Total Inventory Not Owned.......................... $ 144,282 $ 97,983
========== ==========
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. Stock Option Plan - We adopted Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25") and
related Interpretations in Accounting for our employee stock options.
Under APB No. 25, no compensation expense is recognized because the
exercise price of our Company's employee stock options equals the market
price of the underlying stock on the date of the grant.
Pro forma information regarding net income and earnings per share is
to be calculated as if we had accounted for our stock options under the
fair value method of Financial Accounting Standards (SFAS) No. 123
"Accounting for Stock-Based Compensation". The fair value for those
options is established at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 2003 and
2002 respectively: risk-free interest rate of 4.3% and 4.3%, respectively;
dividend yield of zero; volatility factor of the expected market price of
our common stock of 0.43 and 0.43, respectively; and a weighted-average
expected life of the option of 5.1 and 5.5 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 our traded options,
and changes in the subjective input assumptions can materially affect the
fair value estimate, management believes the existing models do not
necessarily provide a reliable measure of the fair value of its employee
stock options.
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):
Six Months Ended
----------------------
April April
30, 2003 30, 2002
---------- ----------
Net income to common shareholders;
as reported............................ 97,329 44,071
Deduct: total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of minority interest............... 976 280
Pro forma net income.....................$ 96,353 $ 43,791
========== ==========
Pro forma basic earnings per share.......$ 3.08 $ 1.47
========== ==========
Basic earnings per share as reported.....$ 3.11 $ 1.48
========== ==========
Pro forma diluted earnings per share.....$ 2.92 $ 1.39
========== ==========
Diluted earnings per share as reported...$ 2.95 $ 1.40
========== ==========
3. Interest costs incurred, expensed and capitalized were:
Three Months Ended Six Months Ended
April 30, April 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(Dollars in Thousands)
Interest Capitalized at
Beginning of Period......... $23,600 $22,899 $22,159 $ 25,124
Plus Interest Incurred(1)(2).. 15,305 14,779 30,425 26,256
Less Interest Expensed(2)..... 13,425 12,802 27,104 26,504
-------- -------- -------- --------
Interest Capitalized at
End of Period (2)......... $25,480 $24,876 $ 25,480 $ 24,876
======== ======== ======== ========
(1) Data does not include interest incurred by our mortgage and finance
subsidiaries.
(2) Represents interest on borrowings for construction, land and
development costs which are charged to interest expense when
homes are delivered or when land is not under active development.
4. Homebuilding accumulated depreciation at April 30, 2003 and
October 31, 2002 amounted to $20.5 million and $18.5 million, respectively.
Senior residential rental property accumulated depreciation at April 30,
2003 and October 31, 2002 amounted to $3.3 million and $3.1 million,
respectively.
5. 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 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 $1.3
million and $0.2 million primarily in the Northeast Region during the three
months ended April 30, 2003 and January 31, 2003, respectively. During the
three months ended April 30, 2002 we wrote off such costs in the amount of
$1.4 million primarily in Poland and $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."
6. We are involved in litigation arising in the ordinary course of
business, none of which is expected to have a material adverse effect on
us. As of April 30, 2003 and October 31, 2002, we are obligated under
various performance letters of credit amounting to $125.9 million and
$100.0 million, respectively.
7. We have an unsecured Revolving Credit Agreement ("Agreement")
with a group of banks which was amended February 20, 2003. Pursuant to the
amendment, our credit line increased to $513.0 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 0.275% or LIBOR plus 1.75%. In addition, we pay a fee equal to 0.350%
per annum on the weighted average unused portion of the line. As of April
30, 2003 and October 31, 2002, borrowings were $29.8 million and zero,
respectively.
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 April 30, 2003 and October 31,
2002 borrowings were $78.8 million and $85.5 million, respectively. As is
customary with mortgage warehouse lines, the maturity of the facility is
set at 364 days and is renewable annually at the discretion of the lenders.
We have requested such extention through July 2004 and expect to receive a
commitment for such an extension from our lenders prior to June 30, but
there can be no assurance of such extension
8. At April 30, 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 April 30, 2003 borrowings under the Term Loan were $115 million.
On May 9, 2003, we issued $150 million 7 3/4% Senior Subordinated
Notes due 2013. The net proceeds of the issuance will be used to repay the
current outstanding indebtedness under our Revolving Credit Facility and
the remainder for general corporate purposes.
9. 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.
10. 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. We reclassified $0.9 million extraordinary
loss from extinguishment of debt to other operations and ($0.3) million to
State and Federal Income Taxes on our Consolidated Statements of Income 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 adopted SFAS No. 146 January 1, 2003. The initial adoption
of SFAS No. 146 did not have an 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 13 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 adopted the disclosure provisions of
SFAS No. 148 in our second fiscal quarter ending April 30, 2003. Our
disclosure of accounting for stock-based compensation is included in Note 2
to the financial statements.
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 created when (i) the equity investment at risk is not sufficient
to permit the entity from financing its activities without additional
subordinated financial support from other parties or (ii) equity holders
either (a) lack direct or indirect ability to make decisions about the
entity, (b) are not obligated to absorb expected losses of the entity or
(c) do not have the right to receive expected residual returns of the
entity if they occur. If an entity is deemed to be a VIE, pursuant to FIN
46, an enterprise that absorbs a majority of the expected losses of the VIE
is considered the primary beneficiary and 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.
Based on the provisions of FIN 46, we have concluded that whenever we
option land or lots from an entity and pay a non-refundable deposit, a VIE
is created under condition (ii) (b) of the previous paragraph. We have
been deemed to have provided subordinated financial support, which refers
to variable interests that will absorb some or all of an entity's expected
theoretical losses if they occur. For each VIE created we will compute
expected losses and residual returns based on the probability of future
cash flows as outlined in FIN 46. If we are deemed to be the primary
beneficiary of the VIE we will consolidate it on our balance sheet. The
fair value of the VIE's inventory will be reported as "Consolidated
Inventory Not Owned - Variable Interest Entities".
Management believes FIN 46 was not clearly thought out for
application in the homebuilding industry for land and lot options. Under
FIN 46, we can have an option and put down a small deposit as a percentage
of the purchase price and still have to consolidate the entity. Our
exposure to loss as a result of our involvement with the VIE is only the
deposit, not it's total assets consolidated on the balance sheet. In
certain cases we will have to place inventory on our balance sheet the VIE
has optioned to other developers. In addition, if the VIE has creditors,
it's debt will be placed on our balance sheet even though the creditors
have no recourse against our Company. Based on these observations we
believe consolidating VIE's based on land and lot option deposits does not
reflect the economic realities or risks of owning and developing land.
At April 30, 2003 we consolidated three VIE's created from February
1, 2003 to April 30, 2003 as a result of our option to purchase land or
lots from the selling entities. We paid cash or issued letters of credit
deposits to these three VIE's totaling $6.7 million. Our option deposits
represent our maximum exposure to loss. The fair value of the property
owned by the VIE's was $40.9 million of which $6.2 million was not optioned
to our Company. Since we could not get the selling entities to provide us
with any financial information, the fair value of the optioned property
less our cash deposits, which totaled $35.8 million, was reported on the
balance sheet as Minority Interest. Creditors, if any, of these VIE's have
no recourse against our Company.
We will continue to secure land and lots using options. Including
the deposits with the three VIE's above, at April 30, 2003 we have total
cash and letters of credit deposits amounting to approximately $175.7
million to purchase land and lots with a total purchase price of $2.2
billion. Not all our deposits are with VIE's. The maximum exposure to loss
is limited to the deposits although some deposits are refundable at our
request or refundable if certain conditions are not met. We are in the
process of evaluating all option purchase agreements in effect as of
January 31, 2003. Options with VIE's where we are the primary beneficiary
will be consolidated by our fiscal year end October 31, 2003.
11. 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. On April 9, 2003 we
acquired Summit Homes, a build-on-your-own-lot homebuilder based in Canton,
Ohio. All three of 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
$63.5 million were recorded on the consolidated balance sheet. We expect
to amortize the definite life intangibles over their estimated lives. We
are in the process of completing appraisals 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 12).
12. 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 $63.5 million. Our intangible
assets consist of goodwill, tradenames, architectural designs, and
contractual agreements. 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 $1.8 million and $2.3 million is reported in other operations on our
Consolidated Statement of Income for the three and six months ended April
30, 2003, respectively.
13. 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 April 30, 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 $29.8 million. The senior subordinated notes,
senior notes, the revolving credit agreement, and term loan are fully and
unconditionally guaranteed by the Parent.
In addition to 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 consolidating
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, (iv)
the Non-guarantor Subsidiaries, 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
APRIL 30, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
ASSETS
Homebuilding.......................$ 30 $ 13,564 $1,705,146 $ 17,140 $ $1,735,880
Financial Services................. 110 91,475 91,585
Income Taxes Receivables(Payables). 5,898 9,926 19,301 (325) 34,800
Investments in and amounts due to
and from consolidated
subsidiaries..................... 649,860 720,707 (913,460) (12,304) (444,803)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$655,788 $ 744,197 $ 811,097 $ 95,986 $ (444,803)$1,862,265
======== ========== ========== ============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding.......................$ $ 32,194 $ 351,188 $ 64 $ $ 383,446
Financial Services................. 83,658 83,658
Notes Payable...................... 701,436 138 701,574
Minority Interest.................. 35,811 1,988 37,799
Stockholders' Equity............... 655,788 10,567 423,960 10,276 (444,803) 655,788
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$655,788 $ 744,197 $ 811,097 $ 95,986 $ (444,803)$1,862,265
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ 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 (630,186) (32,376) (353,671)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$585,604 $ 693,237 $ 639,439 $ 113,519 $ (353,671)$1,678,128
======== ========== ========== ============ ========== ==========
Liabilities
Homebuilding.......................$ $ 35,736 $ 312,231 $ 3,595 $ $ 351,562
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
Minority Interest.................. 1,940 1,940
Stockholders' Equity............... 562,549 (742) 343,047 11,366 (353,671) 562,549
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$585,604 $ 693,237 $ 639,439 $ 113,519 $ (353,671)$1,678,128
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 166 $ 668,756 $ 1 $ (5)$ 668,918
Financial Services............... 1,853 9,046 10,899
Intercompany Charges............. 41,833 8,083 (49,916)
Equity In Pretax Income of
Consolidated Subsidiaries...... 84,428 (84,428)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 84,428 41,999 678,692 9,047 (134,349) 679,817
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 41,999 590,202 144 (43,129) 589,216
Financial Services............... 593 5,937 (357) 6,173
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 41,999 590,795 6,081 (43,486) 595,389
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 84,428 87,897 2,966 (90,863) 84,428
State and Federal Income Taxes..... 31,860 (424) 33,236 1,299 (34,111) 31,860
------- ---------- ---------- ------------ ---------- ----------
Net Income ........................$52,568 $ 424 $ 54,661 $ 1,667 $ (56,752)$ 52,568
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 125 $ 551,454 $ 7,135 $ (6,392) $ 552,322
Financial Services............... 1,324 7,352 8,676
Intercompany Charges............. 34,147 4,180 (38,327)
Equity In Pretax Income of
Consolidated Subsidiaries...... 41,573 (41,573)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 41,573 34,272 556,958 14,487 (86,292) 560,998
------- ---------- ---------- ------------ -------- ----------
Expenses:
Homebuilding..................... 34,272 520,297 1,084 (41,331) 514,322
Financial Services............... 527 4,925 (349) 5,103
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 34,272 520,824 6,009 (41,680) 519,425
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 41,573 36,134 8,478 (44,612) 41,573
State and Federal Income Taxes..... 15,663 (181) 13,662 3,355 (16,836) 15,663
------- ---------- ---------- ------------ ---------- ----------
Net Income ........................$25,910 $ 181 $ 22,472 $ 5,123 $ (27,776) $ 25,910
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 638 $1,285,420 $ 10 $ (10)$1,286,058
Financial Services............... 3,463 17,931 21,394
Intercompany Charges............. 85,371 11,459 (96,830)
Equity In Pretax Income of
Consolidated Subsidiaries......155,564 (155,564)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 155,564 86,009 1,300,342 17,941 (252,404) 1,307,452
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 86,009 1,141,027 219 (87,361) 1,139,894
Financial Services............... 1,135 11,717 (858) 11,994
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 86,009 1,142,162 11,936 (88,219) 1,151,888
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes.........155,564 158,180 6,005 (164,185) 155,564
State and Federal Income Taxes..... 58,235 (629) 59,431 2,449 (61,251) 58,235
------- ---------- ---------- ------------ ---------- ----------
Net Income ........................$97,329 $ 629 $ 98,749 $ 3,556 $ (102,934)$ 97,329
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.................... $ $ 270 $ 995,900 $ 12,668 $ (11,441)$ 997,397
Financial Services............... 2,686 14,977 17,663
Intercompany Charges............. 64,406 6,663 (71,069)
Equity In Pretax Income of
Consolidated Subsidiaries...... 71,370 (71,370)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 71,370 64,676 1,005,249 27,645 (153,880) 1,015,060
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 64,676 944,041 1,659 (77,148) 933,228
Financial Services............... 1,085 10,171 (794) 10,462
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 64,676 945,126 11,830 (77,942) 943,690
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 71,370 60,123 15,815 (75,938) 71,370
State and Federal Income Taxes..... 27,299 (154) 23,011 6,150 (29,007) 27,299
------- ---------- ---------- ------------ ---------- ----------
Net Income.........................$44,071 $ 154 $ 37,112 $ 9,665 $ (46,931)$ 44,071
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 97,329 629 98,749 3,556 (102,934) 97,329
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... (29,463) 3,420 (347,348) 21,230 102,934 (249,227)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 67,866 4,049 (248,599) 24,786 - (151,898)
Net Cash Provided By (Used In)
Investing Activities............... (3,233) 2,866 (130,704) (154) (131,225)
Net Cash Provided By (Used In)
Financing Activities............... (7,261) 30,057 20,937 (7,074) 36,659
Intercompany Investing and Financing
Activities - Net................... (57,367) (288,577) 365,968 (20,024) -
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash
and Cash Equivalents............... 5 (251,605) 7,602 (2,466) - (246,464)
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......................$ 15 (32,761) 51,291 4,981 - 23,526
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 44,071 $ (428) $ 38,007 $ 9,665 $ (47,244) $ 44,071
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 87,095 52,923 (236,818) 40,518 47,244 (9,038)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 131,166 52,495 (198,811) 50,183 35,033
Net Cash Provided By (Used In)
Investing Activities............... (44,323) (1,445) (97,332) 154 (142,946)
Net Cash Provided By (Used In)
Financing Activities............... (1,089) 264,608 (88,267) (45,829) 129,423
Intercompany Investing and Financing
Activities - Net................... (85,754) (295,948) 389,016 (7,314)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash
and Cash Equivalents............... 19,710 4,606 (2,806) 21,510
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 $ 13,870 $ 20,222 $ 3,557 $ $ 37,659
======== ========= ========== ============ ========== ==========
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. In
accordance with FIN 46, SFAS 49, SFAS 98, and EITF 97-10 we record specific
performance options, options with variable interest entities and other
options under Consolidated Inventory Not Owned with the offset to
Liabilities from inventory not owned and Minority interest on our
Consolidated Balance Sheets.
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 six months ended April 30, 2003 were for
operating expenses, increases in housing inventories, construction, income
taxes, interest, the repurchase of common stock, and the acquisition of
three 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.
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
April 30,2003, 856,319 have been purchased under this program of which
250,000 were repurchased during the six months ended April 30, 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. As of April 30, 2003 our lenders have committed $513.0
million. Interest is payable monthly and at various rates of either the
prime rate plus 0.275% or Libor plus 1.75%. 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 April 30, 2003, borrowings under the Agreement were $29.8
million.
At April 30, 2003 we had $400 million of outstanding senior debt
($396.6 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 April 30, 2003, we had outstanding senior
subordinated debt comprised of $150 million 8 7/8% Senior Subordinated
Notes due 2012. On May 9, 2003, we issued $150 million 7 3/4% Senior
Subordinated Notes due 2013. Each of our significant subsidiaries is a
guarantor under the Senior Notes and Senior Subordinated Notes.
On January 22, 2002 we issued a $165 million five-year Term
Loan. 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 April 30, 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 April 30, 2003, the aggregate
principal amount of all such borrowings was $78.8 million.
Total inventory increased $278.7 million during the six months ended
April 30, 2003. This increase excluded the change in Consolidated
Inventory Not Owned of $54.9 million consisting of specific performance
options and other options that were added to our balance sheet in
accordance with SFAS 49, SFAS 98, and EITF 97-10 and Variable Interest
entities in accordance with FIN 46. The $278.7 million increase in
inventory was due to increases in inventory levels in all of our housing
markets as well as our acquisitions. Excluding the impact of acquisitions,
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 April 30, 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 total
residential real estate. The April 30, 2003 numbers excluded lots owned
and options in locations where we have ceased development.
Active Proposed Grand
Active Selling Developable Total
Communities Lots Lots Lots
----------- --------- ------------ ------------
April 30, 2003:
Northeast Region.. 27 6,979 13,740 20,719
North Carolina.... 69 6,858 739 7,597
Metro D.C......... 33 4,035 9,320 13,355
California........ 40 5,624 5,253 10,877
Texas............. 75 5,589 3,234 8,823
----------- --------- ------------ ------------
244 29,085 32,286 61,371
=========== ========= ============ ============
Owned.......... 12,359 3,273 15,632
Optioned....... 16,726 29,013 45,739
--------- ------------ ------------
Total........ 29,085 32,286 61,371
========= ============ ============
Active Proposed Grand
Active Selling Developable 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:
April 30, October 31,
2003 2002
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ------ ------ ------ -----
Northeast Region.... 59 51 110 73 46 119
North Carolina...... 150 18 168 191 32 223
Metro D. C.......... 21 21 42 34 31 65
California.......... 217 82 299 193 65 258
Texas.............. 539 65 604 261 31 292
Other............... 2 -- 2
------ ------ ------ ------ ------ -----
Total 986 237 1,223 754 205 959
====== ====== ====== ====== ====== =====
Financial Services - Mortgage loans held for sale consist of
residential mortgages receivable of which $82.8 million and $91.3 million
at April 30, 2003 and October 31, 2002, respectively, are being temporarily
warehoused and awaiting sale in the secondary mortgage market. The balance
of such mortgages is being held as an investment by us. 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 AND SIX MONTHS ENDED APRIL 30, 2003
COMPARED TO THE THREE AND SIX MONTHS ENDED APRIL 30, 2002
Our operations consist primarily of residential housing development
and sales in our Northeast Region (New Jersey, southern New York State,
eastern Pennsylvania, and Ohio), North Carolina, Metro D. C. (northern
Virginia, eastern West 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 (decreased)
as follows:
Three Months Ended
------------------------------------------
April 30, April 30, Dollar Percentage
2003 2002 Change Change
------------------------------------------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $ 666,553 $ 532,386 $ 134,167 25.2%
Land sales and other
revenues........... 2,365 19,936 (17,571) (88.1%)
Financial Services... 10,899 8,676 2,223 25.6%
---------- ---------- -------- --------
Total Revenues... $ 679,817 $ 560,998 $ 118,819 21.2%
========== ========== ======== ========
Six Months Ended
------------------------------------------
April 30, April 30, Dollar Percentage
2003 2002 Change Change
------------------------------------------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $1,274,054 $ 975,484 $298,570 30.6%
Land sales and other
revenues........... 12,004 21,913 (9,909) (45.2%)
Financial Services... 21,394 17,663 3,731 21.2%
---------- --------- -------- --------
Total Revenues... $1,307,452 $1,015,060 $292,392 28.8%
========== ========= ======== ========
Homebuilding:
Revenues from the sale of homes increased $134.2 million or 25.2%
during the three months ended April 30, 2003, and increased $298.6 million
or 30.6% during the six months ended April 30, 2003, compared to the same
period last year. Revenues from the 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 Six Months Ended
April 30, April 30,
------------------- ------------------
2003 2002 2003 2002
--------- -------- -------- --------
(Dollars in Thousands)
Northeast Region: (1)
Housing Revenues..... $148,155 $145,249 $ 284,918 $278,018
Homes Delivered...... 462 478 893 899
North Carolina:
Housing Revenues..... $ 54,070 $ 64,784 $ 108,539 $121,465
Homes Delivered...... 301 353 600 651
Metro D.C.:
Housing Revenues..... $102,092 $ 78,333 $ 205,743 $148,725
Homes Delivered...... 320 295 644 558
California:(2)
Housing Revenues..... $255,469 $178,688 $ 494,164 $293,330
Homes Delivered...... 893 728 1,756 1,168
Texas: (1)
Housing Revenues..... $106,767 $ 52,820 $ 179,429 $107,346
Homes Delivered...... 520 223 879 460
Other:
Housing Revenues..... $ -- $ 12,512 $ 1,261 $ 26,600
Homes Delivered...... -- 81 9 172
Totals:
Housing Revenues..... $666,553 $532,386 $1,274,054 $975,484
Homes Delivered...... 2,496 2,158 4,781 3,908
(1) April 30, 2003 includes Parkside Homes (Texas), Brighton Homes
(Texas) and Summit Homes (Ohio) deliveries beginning on
November 1, 2002, January 1, 2003, and April 1, 2003,
respectively.
(2) April 30, 2002 includes Forecast Homes (California)
deliveries beginning on January 10, 2002.
The increase in housing revenues was primarily due to the acquisition
of Parkside Homes and Brighton Homes in Houston, Texas for the second
quarter 2003 and the acquisition of Parkside Homes and Brighton Homes and a
full six months of deliveries from Forecast Homes in California for the six
months ended April 30, 2003. In addition, these increases were the result
of organic growth in Metro D. C. and California (excluding Forecast) and
increased average sales prices in most of our markets.
Important indicators of the future results are recently signed
contracts and home contract backlog for future deliveries. Our sales
contracts and homes in contract (using base sales prices) by market area
are set forth below:
Sales Contracts for the
Six Months Ended Contract Backlog
April 30, as of April 30,
------------------------- ------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(Dollars in Thousands)
Northeast Region:(2)(4)
Dollars.............$ 320,391 $ 274,837 $ 538,742 $ 452,910
Homes............... 1,007 944 2,024 1,614
North Carolina:
Dollars.............$ 142,379 $ 143,188 $ 122,091 $ 125,292
Homes............... 775 778 641 661
Metro D. C.:(4)
Dollars.............$ 254,981 $ 243,091 $ 301,523 $ 303,252
Homes............... 760 781 890 1,002
California:(3)
Dollars.............$ 546,086 $ 345,124 $ 336,741 $ 231,803
Homes............... 1,901 1,273 1,100 812
Texas:(1)(4)
Dollars.............$ 212,905 $ 116,972 $ 128,786 $ 78,334
Homes............... 1,085 521 645 324
Other:
Dollars.............$ 313 $ 20,418 $ -- $ 13,660
Homes............... 2 135 -- 88
Totals:
Dollars.............$1,477,055 $1,143,630 $1,427,883 $1,205,251
Homes............... 5,530 4,432 5,300 4,501
(1) April 30, 2003 includes Parkside Homes and Brighton Homes sales
contracts signed from November 1, 2002 and January 1, 2003,
respectively.
(2) April 30, 2003 includes Summit Homes contracts signed from
April 1, 2003.
(3) April 30, 2002 includes Forecast sales contracts signed from
January 10, 2002.
(4) We acquired contract backlog during the six months ended
April 30, 2003 of 694 homes valued at $93.8 million.
During May 2003 we signed an additional 1,215 contracts compared to 764 in
the same month last year.
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 Six Months Ended
April 30, April 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- --------- --------
(Dollars in Thousands)
Sale of Homes................ $666,553 $532,386 $1,274,054 $975,484
Cost of Sales................ 496,130 422,256 953,656 773,457
-------- -------- -------- --------
Housing Gross Margin......... $170,423 $110,130 $ 320,398 $202,027
======== ======== ======== ========
Gross Margin Percentage...... 25.6% 20.7% 25.1% 20.7%
Cost of Sales expenses as a percentage of home sales revenues are
presented below:
Three Months Ended Six Months Ended
April 30, April 30,
------------------- -------- --------
2003 2002 2003 2002
-------- -------- -------- --------
Sale of Homes................ 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of Sales:
Housing, land &
development costs.... 66.7% 71.2% 67.2% 71.2%
Commissions............ 2.1% 2.2% 2.1% 2.3%
Financing concessions.. 1.0% 1.0% 1.0% 1.0%
Overheads.............. 4.6% 4.9% 4.6% 4.8%
-------- -------- -------- --------
Total Cost of Sales.......... 74.4% 79.3% 74.9% 79.3%
-------- -------- -------- --------
Gross Margin................. 25.6% 20.7% 25.1% 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 and six months ended April 30, 2003 compared to the same
period last year. The consolidated gross margin increased 4.9% and 4.4%
for the three and six months ended April 30, 2003, respectively. Ignoring
the effect of our acquisitions, we achieved higher gross margins on a
market-by-market basis during the three and six months ended April 30,
2003. 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 8.9% for the three and six months
ended April 30, 2003 from 8.6% for the prior year's three and six months
ended April 30, 2002. Such expenses increased during the three and six
months ended April 30, 2003 by $12.0 million and $28.6 million,
respectively, compared to the same periods last year. The percentage
increase for the three months ended April 30, 2003 was due to a full
quarter of selling, general and administrative costs from our Houston
acquisitions and an increase in administrative costs in North Carolina and
the Northeast Region associated with opening additional communities. The
percentage increase for the six months ended April 30, 2003 was due to
selling, general, and administrative costs from our Houston acquisitions, a
full six months of costs from Forecast Homes and increased administrataive
costs in North Carolina and the Northeast Region associated with opening
additional communities and the implementation of a new compensation program
for their sales associates. The dollar increase in selling, general, and
administrative is primarily due to a full six months 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 Six Months Ended
April 30, April 30,
------------------ -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Land and Lot Sales................ $ 1,298 $18,118 $ 9,750 $18,539
Cost of Sales..................... 1,089 14,270 6,741 14,552
-------- -------- -------- --------
Land and Lot Sales Gross Margin... 209 3,848 3,009 3,987
Interest Expense.................. 11 584 355 648
-------- -------- -------- --------
Land and Lot Sales Profit
Before Tax...................... $ 198 $ 3,264 $ 2,654 $ 3,339
======== ======== ======== ========
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 and six months ended April 30, 2003
financial services provided a $4.7 million and $9.4 million profit before
income taxes compared to a profit of $3.6 million and $7.2 million for the
same periods in 2002. These increases are 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 six months.
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 increased to 2.0%
for the three months ended April 30, 2003 from 1.9% for the prior year's
three months but remained flat for the six months ended April 30, 2003.
Corporate general and administrative expenses increased $2.8 million and
$6.5 million during the three and six months ended April 30, 2003 compared
to the same periods last year. Increases in corporate general and
administrative dollar expenses are primarily attributed to higher employee
incentives due to higher return on equity.
Interest
Interest expense includes housing and land and lot interest.
Interest expense is broken down as follows:
Three Months Ended Six Months Ended
April 30, April 30,
------------------ -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Sale of Homes.............. $ 13,414 $ 12,218 26,749 $ 25,856
Land and Lot Sales......... 11 584 355 648
-------- -------- -------- --------
Total...................... $ 13,425 $ 12,802 $ 27,104 $ 26,504
======== ======== ======== ========
Housing interest as a percentage of sale of homes revenues decreased
to 2.0% and 2.1% for the three and six months ended April 30, 2003,
respectively, compared to 2.3% and 2.7% for the three and six months ended
April 30, 2002, respectively. These percentage declines are primarily
attributed to a decrease in debt leverage of our Company, and lower
interest rates on our debt.
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 intangibles for our
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. We
reclassified $0.9 million extraordinary loss from extinguishment of debt to
other operations and ($0.3) million to state and Federal Income Taxes on
our Consolidated Statements of Income 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 adopted SFAS No. 146 January 1, 2003. The initial adoption
of SFAS No. 146 did not have an 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 13 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 adopted the disclosure provisions of
SFAS No. 148 in our second fiscal quarter ending April 30, 2003. Our
disclosure of accounting for stock-based compensation is included in Note 2
to the financial statements.
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 created when (i) the equity investment at risk is not sufficient
to permit the entity from financing its activities without additional
subordinated financial support from other parties or (ii) equity holders
either (a) lack direct or indirect ability to make decisions about the
entity, (b) are not obligated to absorb expected losses of the entity or
(c) do not have the right to receive expected residual returns of the
entity if they occur. If an entity is deemed to be a VIE, pursuant to FIN
46, an enterprise that absorbs a majority of the expected losses of the VIE
is considered the primary beneficiary and 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.
Based on the provisions of FIN 46, we have concluded that whenever we
option land or lots from an entity and pay a non-refundable deposit, a VIE
is created under condition (ii) (b) of the previous paragraph. We have
been deemed to have provided subordinated financial support, which refers
to variable interests that will absorb some or all of an entity's expected
theoretical losses if they occur. For each VIE created we will compute
expected losses and residual returns based on the probability of future
cash flows as outlined in FIN 46. If we are deemed to be the primary
beneficiary of the VIE we will consolidate it on our balance sheet. The
fair value of the VIE's inventory will be reported as "Consolidated
Inventory Not Owned - Variable Interest Entities".
Management believes FIN 46 was not clearly thought out for
application in the homebuilding industry for land and lot options. Under
FIN 46, we can have an option and put down a small deposit as a percentage
of the purchase price and still have to consolidate the entity. Our
exposure to loss as a result of our involvement with the VIE is only the
deposit, not it's total assets consolidated on the balance sheet. In
certain cases we will have to place inventory on our balance sheet the VIE
has optioned to other developers. In addition, if the VIE has creditors,
it's debt will be placed on our balance sheet even though the creditors
have no recourse against our Company. Based on these observations we
believe consolidating VIE's based on land and lot option deposits does not
reflect the economic realities or risks of owning and developing land.
At April 30, 2003 we consolidated three VIE's created from February
1, 2003 to April 30, 2003 as a result of our option to purchase land or
lots from the selling entities. We paid cash or issued letters of credit
deposits to these three VIE's totaling $6.7 million. Our option deposits
represent our maximum exposure to loss. The fair value of the property
owned by the VIE's was $40.9 million of which $6.2 million was not optioned
to our Company. Since we could not get the selling entities to provide us
with any financial information, the fair value of the optioned property
less our cash deposits, which totaled $35.8 million, was reported on the
balance sheet as Minority interest. Creditors of these VIE's have no
recourse against our company.
We will continue to secure land and lots using options. Including
the deposits with the three VIE's above, at April 30, 2003 we have total
cash and letters of credit deposits amounting to approximately $175.7
million to purchase land and lots with a total purchase price of $2.2
billion. Not all our deposits are with VIE's. The maximum exposure to loss
is limited to the deposits although some deposits are refundable at our
request or refundable if certain conditions are not met. We are in the
process of evaluating all option purchase agreements in effect as of
January 31, 2003. Options with VIE's where we are the primary beneficiary
will be consolidated by our fiscal year end October 31, 2003.
Total Taxes
Total taxes as a percentage of income before taxes amounted to
approximately 37.4% and 38.3% for the six months ended April 30, 2003 and
2002, respectively. The decrease in this percentage from 2002 to 2003 is
primarily attributed to a reduction 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. During the second quarter ended April 30, 2003 we
exercised the right to retire at no cost 750,000 Class A Common Stock
shares that were held by the selling principal of Forecast Homes, under the
terms of the acquisition. On November 1, 2002 and December 31, 2002 we
acquired two Houston homebuilding companies for an approximate aggregate
purchase price of $100.0 million. On April 9, 2003 we acquired a build-on-
your-own lot homebuilder in Ohio.
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 DISCLOUSRES 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 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 April 30, 2003, our
long term debt obligations, principal cash flows by scheduled maturity,
weighted average interest rates and estimated fair market value ("FMV").
Six Months Ended April 30,
----------------------------------------------
Expected Maturity Rate
FMV @
2003 2004 2005 2006 2007 2008 Thereafter Total 4/30/03
------- ------- ------ ------ -------- -------- ---------- -------- --------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate...... $29,575 $ 75 $ 81 $ 88 $150,096 $ 104 $ 400,217 $580,236 $629,216
Average interest
rate.......... 6.69% 8.38% 8.38% 8.38% 10.50% 8.38% 8.75% 9.00% --
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 4. Submission of Matters to a Vote of Security Holders
We held our annual stockholders meeting on March 7, 2003 at 10:30
a.m. at the offices of Simpson Thacher & Bartlett LLP, 425 Lexington
Avenue, New York, New York. The following matters were voted at the
meeting:
. Election of all Directors to hold office until the next Annual
Meeting of Stockholders. There wre no broker non-votes. The elected
Directors were:
Class A Class B
Votes For Votes Withheld Votes For Votes Withheld
---------- -------------- ---------- --------------
Kevork S. Hovnanian 12,501,054 2,642,043 70,425,570 1,337,750
Ara K. Hovnanian 12,508,464 2,634,633 70,424,070 1,339,250
Geaton A. DeCesaris,Jr. 12,576,244 2,566,853 70,424,570 1,338,750
Arthur M. Greenbaum 14,555,941 587,156 70,436,070 1,327,250
Edward A. Kangas 14,559,611 583,486 70,436,070 1,327,250
Desmond P. McDonald 14,543,968 599,129 70,436,070 1,327,250
John J. Robbins 14,559,581 583,516 70,436,070 1,327,250
J. Larry Sorsby 12,561,544 2,581,553 70,424,570 1,338,750
Stephen D. Weinroth 14,558,381 584,716 70,436,070 1,327,250
. Ratification of selection of Ernst & Young, LLP as certified
independent accountants for fiscal year ending October 31, 2003. There
were no broker non-votes.
Class A Class B
------------ ------------
.. Votes For 14,608,940 71,151,350
.. Votes Against 521,691 10,750
.. Abstain 12,466 1,220
.. Approval of the Company's amended Senior Executive Short-Term
Incentive Plan.
Class A Class B
------------ ------------
.. Votes For 9,204,288 70,200,940
.. Votes Against 2,740,902 1,402,350
.. Abstain 79,745 3,940
.. Broker Non-Votes 3,118,162 156,090
.. Approval of the Company's amended 1999 Stock Incentive Plan.
Class A Class B
------------ ------------
.. Votes For 9,008,337 70,204,040
.. Votes Against 2,941,789 1,396,550
.. Abstain 75,029 3,940
.. Broker Non-Votes 3,117,942 158,790
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. (3)
Exhibit 10(b) Restated $142 million K. Hovnanian
Mortgage, Inc. Revolving Credit Agreement
dated March 7, 2003. (3)
Exhibit 99(a) Certification of Chief Executive
Officer, defined in the Exchange Act Rules
13a-14(a) and 15d-14(a)as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 99(b) Certification of Chief Financial
Officer, defined in the Exchange Act Rules
13a-14(a) and 15d-14(a)as Adopted Pursuant to
Section 302 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.
(3) Incorporated by reference to Exhibits to Quarterly
Report on Form 10-Q for the quarter ended January 31,
2003 of the Registrant.
(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: June 12, 2003 /S/J. LARRY SORSBY
J. Larry Sorsby,
Executive Vice President and
Chief Financial Officer
DATE: June 12, 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 we 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 function):
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 or not 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: June 9, 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 we 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 function):
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 or not 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: June 9, 2003