UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For quarterly period ended JANUARY 31, 2005 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, NJ 07701
(Address of Principal Executive Offices) (Zip Code)
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. 46,535,042
shares of Class A Common Stock and 14,683,358 shares of Class B Common Stock
were outstanding as of March 1, 2005.
HOVNANIAN ENTERPRISES, INC.
FORM 10-Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Financial Statements:
Condensed Consolidated Balance Sheets as of January 31,
2005 (unaudited) and October 31, 2004 3
Condensed Consolidated Statements of Income for the
three months ended January 31, 2005 and
2004 (unaudited) 5
Condensed Consolidated Statement of Stockholders'
Equity for the three months ended January 31, 2005
(unaudited) 6
Condensed Consolidated Statements of Cash Flows for
the three months ended January 31, 2005
and 2004 (unaudited) 7
Notes to Condensed Consolidated Financial
Statements (unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 21
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 37
Item 4. Controls and Procedures 38
PART II. Other Information
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 38
Item 6. Exhibits 39
Signatures 41
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
January 31, October 31,
ASSETS 2005 2004
----------- -----------
(unaudited)
Homebuilding:
Cash and cash equivalents..................... $ 80,152 $ 65,013
----------- -----------
Inventories - At the lower of cost or fair
value:
Sold and unsold homes and lots under
development............................... 1,987,502 1,785,706
----------- -----------
Land and land options held for future
development or sale....................... 349,363 436,184
----------- -----------
Consolidated Inventory Not Owned:
Specific performance options.............. 3,162 11,926
Variable interest entities................ 165,848 201,669
Other options............................. 112,211 31,824
----------- -----------
Total Consolidated Inventory Not Owned... 281,221 245,419
----------- -----------
Total Inventories......................... 2,618,086 2,467,309
----------- -----------
Receivables, deposits, and notes ............. 74,439 56,753
----------- -----------
Property, plant, and equipment - net.......... 56,053 44,137
----------- -----------
Prepaid expenses and other assets............. 164,383 134,456
----------- -----------
Goodwill...................................... 32,658 32,658
----------- -----------
Definite life intangibles..................... 115,870 125,492
----------- -----------
Total Homebuilding........................ 3,141,641 2,925,818
----------- -----------
Financial Services:
Cash and cash equivalents..................... 13,127 13,011
Mortgage loans held for sale.................. 156,565 209,193
Other assets.................................. 3,896 8,245
----------- -----------
Total Financial Services.................. 173,588 230,449
----------- -----------
Total Assets.................................... $ 3,315,229 $ 3,156,267
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
January 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004
----------- -----------
(unaudited)
Homebuilding:
Nonrecourse land mortgages....................... $ 24,097 $ 25,687
Accounts payable and other liabilities........... 271,659 329,621
Customers' deposits.............................. 91,638 80,131
Nonrecourse mortgages secured by operating
Properties..................................... 24,802 24,951
Liabilities from inventory not owned............. 139,617 68,160
----------- -----------
Total Homebuilding........................... 551,813 528,550
----------- -----------
Financial Services:
Accounts payable and other liabilities........... 5,309 6,080
Mortgage warehouse line of credit................ 131,247 188,417
----------- -----------
Total Financial Services..................... 136,556 194,497
----------- -----------
Notes Payable:
Revolving credit agreement....................... 115,000
Senior notes..................................... 802,890 602,737
Senior subordinated notes........................ 400,000 300,000
Accrued interest................................. 17,062 15,522
----------- -----------
Total Notes Payable.......................... 1,219,952 1,033,259
----------- -----------
Income Taxes Payable............................... 4,181 48,999
----------- -----------
Total Liabilities............................ 1,912,502 1,805,305
----------- -----------
Minority interest from inventory not owned......... 122,235 155,096
----------- -----------
Minority interest from consolidated joint ventures. 3,422 3,472
----------- -----------
Stockholders' Equity:
Preferred Stock,$.01 par value-authorized 100,000
shares; none issued.............................
Common Stock,Class A,$.01 par value-authorized
200,000,000 shares; issued 57,067,248 shares at
January 31, 2005 and 56,797,313 shares at October 31,
2004 (including 10,395,656 shares at January 31, 2005
and October 31, 2004 held in Treasury).......... 571 568
Common Stock,Class B,$.01 par value (convertible to
Class A at time of sale) authorized 30,000,000
shares; issued 15,375,228 shares at January 31, 2005
and 15,376,972 shares at October 31, 2004 (including
691,748 shares at January 31, 2005 and October 31,
2004 held in Treasury).............. 154 154
Paid in Capital................................... 201,243 199,643
Retained Earnings................................. 1,135,345 1,053,863
Deferred Compensation............................. (10,193) (11,784)
Treasury Stock - at cost.......................... (50,050) (50,050)
----------- -----------
Total Stockholders' Equity.................... 1,277,070 1,192,394
----------- -----------
Total Liabilities and Stockholders' Equity..........$ 3,315,229 $ 3,156,267
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Ended
January 31,
------------------------
2005 2004
----------- -----------
Revenues:
Homebuilding:
Sale of homes...................... $ 1,015,969 $ 757,273
Land sales and other revenues...... 27,984 3,169
----------- -----------
Total Homebuilding............... 1,043,953 760,442
Financial Services................... 14,193 14,773
----------- -----------
Total Revenues................... 1,058,146 775,215
----------- -----------
Expenses:
Homebuilding:
Cost of sales, excluding interest.. 771,256 563,935
Cost of sales interest............. 12,969 11,943
------------ ----------
Total Cost of Sales.............. 784,225 575,878
Selling, general and administrative 98,738 71,793
Inventory impairment loss.......... 498 58
----------- -----------
Total Homebuilding............... 883,461 647,729
Financial Services................... 9,920 8,027
Corporate General and Administrative. 15,878 14,524
Interest............................. 4,953 5,000
Other Operations..................... 1,940 2,432
Intangible Amortization.............. 10,088 4,808
----------- -----------
Total Expenses................... 926,240 682,520
----------- -----------
Income Before Income Taxes............. 131,906 92,695
----------- -----------
State and Federal Income Taxes:
State................................ 5,446 6,240
Federal.............................. 44,978 28,744
----------- -----------
Total Taxes........................ 50,424 34,984
----------- -----------
Net Income............................. $ 81,482 $ 57,711
=========== ===========
Per Share Data:
Basic:
Income per common share.............. $ 1.31 $ .92
Weighted average number of common
shares outstanding................. 62,240 62,430
Assuming dilution:
Income per common share.............. $ 1.25 $ .87
Weighted average number of common
shares outstanding................ 65,419 66,470
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars In Thousands)
(Unaudited)
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, 2004. 46,401,657 $ 568 14,685,224 $ 154 $199,643 $1,053,863 $(11,784) $(50,050)
$1,192,394
Sale of common stock under
employee stock option
plan.................... 74,250 1 3,365 3,366
Stock Bonus issuances..... 193,941 2 (1,491) 289
(1,200)
Restricted Stock granted.. (274)
(274)
Amortization of Restricted
Stock................... 1,302 1,302
Conversion of Class B to
Class A common stock.... 1,744 (1,744)
Net Income................ 81,482 81,482
----------- ------ ----------- ------ -------- ---------- -------- --------- ----------
Balance, January 31, 2005. 46,671,592 $ 571 14,683,480 $ 154 $201,243 $1,135,345 $(10,193) $ (50,050)
$1,277,070
=========== ====== =========== ====== ======== ========== ======== ========= ==========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands - unaudited)
Three Months Ended
January 31,
----------------------
- --
2005 2004
----------- ---------
- --
Cash Flows From Operating Activities:
Net Income.......................................... $ 81,482 $
57,711
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation.................................... 1,620
1,494
Intangible amortization......................... 10,088
4,808
Loss on sale and retirement of property
and assets.................................... 41
4
Deferred income taxes........................... (7,394)
(3,920)
Impairment losses............................... 498
58
Decrease (increase) in assets:
Mortgage notes receivable..................... 52,665
102,171
Receivables, prepaids and other assets........ (37,745)
(38,078)
Inventories................................... (112,248)
(260,030)
(Decrease) increase in liabilities:
State and Federal income taxes................ (34,393)
15,105
Tax effect from exercise of stock options..... (3,031)
(180)
Customers' deposits........................... 11,366
3,941
Interest and other accrued liabilities........ (22,866)
(17,692)
Post development completion costs............. 1,509
(2,009)
Accounts payable.............................. (35,960)
8,840
----------- ---------
- --
Net cash (used in) operating activities..... (94,368)
(127,777)
----------- ---------
- --
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets....... 35
245
Purchase of property, equipment and other fixed
assets and acquisitions of homebuilding
companies......................................... (13,478)
(44,271)
Net returns of capital from unconsolidated
affiliates........................................ (6,156)
4,370
----------- ---------
- --
Net cash (used in) investing activities..... (19,599)
(39,656)
----------- ---------
- --
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 449,005
370,009
Proceeds from senior debt........................... 200,000
215,000
Proceeds from senior subordinated debt.............. 100,000
Principal payments on mortgages and notes........... (622,977)
(425,909)
Proceeds from sale of stock and employee stock plan. 3,194
1,500
----------- ---------
- --
Net cash provided by financing activities.... 129,222
160,600
----------- ---------
- --
Net Increase (Decrease) In Cash.. ....................... 15,255
(6,833)
Cash and Cash Equivalents Balance, Beginning
Of Period........................................... 78,024
128,221
----------- ---------
- --
Cash and Cash Equivalents Balance, End Of Period...... $ 93,279 $
121,388
===========
===========
Supplemental Disclosures of Cash Flow
Cash paid during the year for:
Interest......................................... $ 17,668 $
13,035
===========
===========
Income taxes..................................... $ 92,210 $
23,798
===========
===========
Supplemental disclosures of noncash operating
activities:
Consolidated Inventory Not Owned:
Specific performance options..................... $ 2,941 $
28,867
Variable interest entities....................... 150,793
191,588
Other options.................................... 109,696
34,054
----------- ---------
- --
Total Inventory Not Owned.......................... $ 263,430 $
254,509
===========
===========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 our 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, 2004 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.
In March 2004, our Board of Directors authorized a 2-for-1 stock
split in the form of a 100% stock dividend of Class A and Class B Common
Stock payable to stockholders of record on March 19, 2004. The additional
shares were distributed on March 26, 2004. All share and per share amounts
(except par value) have been retroactively adjusted to reflect the stock
split. There was no net effect on total stockholders' equity as a result
of the stock split.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. Stock-Based Compensation Plans - SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123") established a fair value based
method of accounting for stock-based compensation plans, including stock
options and non-vested stock. Under SFAS 123, registrants may elect to
continue accounting for stock-based compensation plans under APB Opinion
No. 25 "Accounting for Stock Issued to Employees" ("APB 25"), but are
required to provide pro forma net income and earnings per share information
"as if" the fair value approach had been adopted. We continue to account
for our stock-based compensation plans under APB 25. Under APB 25, no
compensation expense is recognized when the exercise price of our employee
stock options equals the market price of the underlying stock on the date
of grant. However, for non-vested stock, compensation expense equal to the
market price of the stock on the grant date is recognized ratably over the
vesting period.
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS 123 to provide
alternative methods of transition for an entity that voluntarily adopts the
fair value recognition method of recording stock-based compensation
expense. SFAS 148 also amends the disclosure provisions of SFAS 123 and
APB Opinion No. 28, "Interim Financial Reporting" to require disclosure in
the summary of significant accounting policies of the effects of an
entity's accounting policy with respect to stock-based compensation on
reported net income and earnings per share in annual and interim financial
statements.
For purposes of pro forma disclosures, the estimated fair value of
the options using Black-Scholes is amortized to expense over the options'
vesting period. Our pro forma information follows (dollars in thousands
except for earnings per share information):
Three Months Ended
------------------------
January January
31, 2005 31, 2004
----------- -----------
Net income to common shareholders;
as reported................... $ 81,482 $ 57,711
Deduct: total stock-based employee
compensation expense determined
using Black-Scholes fair value
based method for all awards... 1,352 821
----------- -----------
Pro forma net income............ $ 80,130 $ 56,890
=========== ===========
Pro forma basic earnings per share $ 1.29 $ 0.91
=========== ===========
Basic earnings per share as
reported...................... $ 1.31 $ 0.92
=========== ===========
Pro forma diluted earnings per
share......................... $ 1.22 $ 0.86
=========== ===========
Diluted earnings per share as
Reported...................... $ 1.25 $ 0.87
=========== ===========
Pro forma information regarding net income and earnings per share is
calculated as if we had accounted for our stock-based compensation under
the fair value method of SFAS 123. The fair value for options is
established at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions for January 31, 2005 and
2004: risk-free interest rate of 4.2% for both periods; dividend yield of
zero; volatility factor of the expected market price of our common stock of
0.43 for both periods; and a weighted average expected life of the option
of 5.2 and 5.0 years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because our employee stock options have
characteristics significantly different from 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.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share
Based Payment" ("SFAS 123R"), which is a revision of SFAS 123 and
supersedes APB 25 and SFAS 148. This statement requires that the cost
resulting from all share-based payment transactions be recognized in an
entity's financial statements. This statement establishes fair value as
the measurement objective in accounting for share-based payment
arrangements and requires all entities to apply a fair value based
measurement method in accounting for share-based payment transactions with
employees except for equity instruments held by employee share ownership
plans.
SFAS 123R applies to all awards granted after the required effective
date (the beginning of the first interim or annual reporting period that
begins after June 15, 2005) and to awards modified, repurchased, or
cancelled after that date. As of the required effective date, all public
entities that used the fair value based method for either recognition or
disclosure under Statement 123 will apply SFAS 123R using a modified
version of prospective application. Under that transition method,
compensation cost is recognized on or after the required effective date for
the portion of outstanding awards for which the requisite service has not
yet been rendered, based on the grant-date fair value of those awards
calculated under Statement 123 for either recognition or pro forma
disclosures. For periods before the required effective date, those
entities may elect to apply a modified version of the retrospective
application under which financial statements for prior periods are adjusted
on a basis consistent with the pro forma disclosures required for those
periods by Statement 123. As a result, beginning in our fiscal fourth
quarter of 2005, we will adopt SFAS 123R and begin reflecting the stock
option expense determined under fair value based methods in our income
statement rather than as pro forma disclosure in the notes to the financial
statements. We expect the impact of the adoption of SFAS 123R to be a
reduction of fourth quarter fiscal 2005 net income of approximately $1.6
million assuming modified prospective application.
3. Interest costs incurred, expensed and capitalized were:
Three Months Ended January 31,
2005 2004
---------- ----------
(Dollars in Thousands)
Interest Capitalized at
Beginning of Period........$ 37,465 $ 24,833
Plus Interest Incurred(1)(2). 21,044 21,587
Less Cost of Sales Interest
Expensed (2).. ........... 12,969 11,943
Less Other Interest Expensed(2) 4,953 5,000
---------- ----------
Interest Capitalized at
End of Period (2)......... $ 40,587 $ 29,477
========== ==========
(1) Data does not include interest incurred by our mortgage and finance
subsidiaries.
(2) Includes interest on borrowings for construction, land and land
development costs which are charged to interest expense when
homes are delivered or when land is not under active development.
4. Accumulated depreciation at January 31, 2005 and October 31, 2004
amounted to $33.0 million and $31.7 million, respectively, for our
homebuilding and senior rental residential assets.
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 $0.5
million and $0.1 million during the three months ended January 31, 2005 and
2004, respectively. Residential inventory impairment losses and option
write-offs are reported in the Condensed Consolidated Statements of Income
as "Homebuilding-Inventory Impairment Loss."
6. We provide a warranty accrual for repair costs over $1,000 to
homes, community amenities, and land development infrastructure. We accrue
for warranty costs as part of cost of sales at the time each home is closed
and title and possession have been transferred to the homebuyer. In
addition, we accrue warranty costs under our $5 million per occurrence
general liability insurance deductible for 2005 (deductible was $150
thousand per occurrence for 2004) as part of selling, general and
administrative costs. Warranty accruals are based upon historical
experience. Additions and charges incurred in the warranty accrual and
general liability accrual for the three months ended January 31, 2005 and
2004 are as follows:
Three Months Ended January 31,
2005 2004
------------ ------------
(Dollars in Thousands)
Balance, beginning of period..... $ 64,922 $ 39,532
Company acquisitions.............
Additions........................ 13,337 8,179
Charges incurred................. (4,143) (4,216)
------------ ------------
Balance, end of period.......... $ 74,116 $ 43,495
============ ============
7. We are involved in litigation arising in the ordinary course of
business, none of which is expected to have a material adverse effect on
our financial position or results of operations.
8. As of January 31, 2005 and October 31, 2004, respectively, we are
obligated under various performance letters of credit amounting to $213.4
million and $180.6 million.
9. Our amended and restated unsecured Revolving Credit Agreement
("Agreement") with a group of banks provides a revolving credit line of
$900 million through July 2008. The facility contains an accordion feature
under which the aggregate commitment can be increased to $1.0 billion
subject to the availability of additional commitments. Interest is payable
monthly at various rates of either the prime rate or a spread over LIBOR
ranging from 1.10% to 2.00% per annum, depending on our Consolidated
Leverage Ratio, as defined in the Agreement. In addition, we pay a fee
ranging from 0.20% to 0.40% per annum, depending on our Consolidated
Leverage Ratio and the weighted average unused portion of the revolving
credit line. Each of our significant subsidiaries, except for our
financial services subsidiaries and joint ventures, is a guarantor under
the Agreement. As of January 31, 2005 and October 31, 2004, the
outstanding balances under the Agreement were zero and $115 million,
respectively.
Our amended secured mortgage loan warehouse agreement with a group of
banks, which is a short-term borrowing, provides up to $250 million through
July 2005. Interest is payable monthly at the Eurodollar Rate plus 1.25%.
The loan is repaid when the underlying mortgage loans are sold to permanent
investors by us. As of January 31, 2005 and October 31, 2004, borrowings
under this agreement were $131.2 million and $188.4 million, respectively.
10. On November 30, 2004, we issued $200 million of 6 1/4% Senior
Notes due 2015 and $100 million of 6% Senior Subordinated Notes due 2010.
The net proceeds of the issuance were used to repay the outstanding balance
on our revolving credit facility as of November 30, 2004 and for general
corporate purposes.
At January 31, 2005, we had $805.3 million of outstanding senior
notes ($802.9 million, net of discount), comprised of $140.3 million 10
1/2% Senior Notes due 2007, $100 million 8% Senior Notes due 2012, $215
million 6 1/2% Senior Notes due 2014, $150 million 6 3/8% Senior Notes due
2014, and $200 million 6 1/4% Senior Notes due 2015. At January 31, 2005,
we had $400 million of outstanding senior subordinated notes, comprised of
$150 million 8 7/8% Senior Subordinated Notes due 2012, $150 million 7 3/4%
Senior Subordinated Notes due 2013, and $100 million 6% Senior Subordinated
Notes due 2010.
Under the terms of the indentures governing our debt securities, we
have the right to make certain redemptions and depending on market
conditions, may do so from time to time.
11. Per Share Calculations - Basic earnings per common share is
computed using the weighted average number of shares outstanding. Diluted
earnings per common share is computed using the weighted average number of
shares outstanding adjusted for the incremental shares attributed to non-
vested stock and outstanding options to purchase common stock, of
approximately 3.2 million and 4.0 million for the three months ended
January 31, 2005 and 2004, respectively.
12. Variable Interest Entities - In January 2003, the Financial
Accounting Standards Board ("FASB") issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). A Variable
Interest Entity ("VIE") is created when (i) the equity investment at risk
is not sufficient to permit the entity to finance 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
was effective immediately for VIEs created after January 31, 2003.
Pursuant to FASB revision to FIN 46 ("FIN 46R"), issued in December 2003,
our Company was not required to apply the provisions of FIN 46 to an
interest held in a variable interest entity or potential variable interest
entity until our quarter ended April 30, 2004 for VIEs created before
February 1, 2003. In accordance with FIN 46R, we have fully implemented
FIN 46 as of April 30, 2004.
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) and (c) of the previous paragraph. We
are 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 with a significant
nonrefundable option fee, we 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 consolidate it on
our balance sheet. The fair value of the VIEs inventory is 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 the VIE has optioned to
other developers on our balance sheet. In addition, if the VIE has
creditors, its 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 VIEs based on land and lot option
deposits does not reflect the economic realities or risks of owning and
developing land.
At January 31, 2005, all VIEs we were required to consolidate were a
result of our options to purchase land or lots from the selling entities.
We paid cash or issued letters of credit deposits to these twenty-three
VIEs totaling $22.8 million. Our option deposits represent our maximum
exposure to loss. The fair value of the property owned by these VIEs was
$165.8 million. Because we could not get the remainder of the selling
entities to provide us with any financial information, the fair value of
the optioned property less our cash deposits and liabilities from inventory
not owned, which totaled $122.2 million, was reported on the balance sheet
as "Minority interest from inventory not owned". Creditors of these VIEs
have no recourse against our Company.
We will continue to control land and lots using options. Not all our
deposits are with VIEs. Including the deposits with the twenty-three VIEs
above, at January 31, 2005, we have total cash and letters of credit
deposits amounting to approximately $198.9 million to purchase land lots
with a total purchase price of $3.6 billion. 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.
13. Investments in Unconsolidated Homebuilding and Land Development
Joint Ventures - We enter into homebuilding and land development joint
ventures from time to time as a means of accessing lot positions, expanding
our market opportunities, establishing strategic alliances, managing our
risk profile and leveraging our capital base. Our homebuilding joint
ventures are generally entered into with third party investors to develop
land and construct homes that are sold directly to third party homebuyers.
Our land development joint ventures include those entered into with
developers and other homebuilders as well as financial investors to develop
finished lots for sale to the joint venture's members or other third
parties. The tables set forth below summarize the combined financial
information related to our unconsolidated homebuilding and land development
joint ventures that are accounted for under the equity method.
January 31, October 31,
2005 2004
----------- -----------
(In Thousands)
Assets:
Cash $ 39,625 $ 30,519
Inventories 204,805 176,360
Other assets 7,022 5,477
----------- -----------
Total assets $251,452 $ 212,356
=========== ===========
Liabilities and Equity:
Accounts payable and accrued
liabilities $ 42,234 $ 39,065
Notes payable 92,970 82,742
Equity 116,248 90,549
----------- -----------
Total liabilities and equity $251,452 $ 212,356
=========== ===========
Our share of equity related to these unconsolidated joint ventures,
included in prepaids and other assets in our Consolidated Balance Sheets,
was approximately $47.0 million and $40.8 million at January 31, 2005 and
October 31, 2004, respectively. Additionally, as of January 31, 2005 and
October 31, 2004, we had advances outstanding of approximately $14.6 and
$12.7 million to these unconsolidated joint ventures, which were included
in the accounts payable and accrued liabilities balances in the table
above.
Three Months Ended January 31,
2005 2004
- ---------- ----------
Revenues $ 13,091 $ 3,812
Cost of sales and expenses (11,071) (4,142)
---------- ----------
Net income (loss) $ 2,020 $ (330)
========== ==========
Income (loss) from unconsolidated joint ventures are included in other
revenue in the accompanying Consolidated Financial Statements and reflects
our proportionate share of the income of these unconsolidated homebuilding
and land development joint ventures. Our ownership interests in the joint
ventures vary but are generally less than or equal to 50 percent. In some
instances, the joint venture entity is considered a variable interest
entity (VIE) under FIN 46 due to the returns being capped to the equity
holders; however, in these instances, we are not the primary beneficiary,
therefore we do not consolidate these entities.
14. Recent Accounting Pronouncements - In December 2004, the FASB
issued SFAS No. 123 (Revised 2004) "Share Based Payment" ("SFAS 123R"),
which is a revision of SFAS 123 and supersedes APB 25 and SFAS 148. This
statement requires that the cost resulting from all share-based payment
transactions be recognized in an entity's financial statements. This
statement establishes fair value as the measurement objective in accounting
for share-based payment arrangements and requires all entities to apply a
fair value based measurement method in accounting for share-based payment
transactions with employees except for equity instruments held by employee
share ownership plans. See Note 2 for a further description of SFAS 123R
and its expected impact on our fourth quarter fiscal 2005 net income.
In December 2004, the FASB issued Staff Position 109-1 ("FSP 109-1"),
Application of FASB Statement No. 109 ("FASB No. 109"), "Accounting for
Income Taxes", to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004. FSP 109-1 clarifies
guidance that applies to the new deduction for qualified domestic
production activities. When fully phased-in, the deduction will be up to
9% of the lesser of "qualified production activities income" or taxable
income. FSP 109-1 clarifies that the deduction should be accounted for as
a special deduction under FASB No. 109 and will reduce tax expense in the
period or periods that the amounts are deductible on the tax return. Any
tax benefits resulting from the new deduction will be effective for our
fiscal year ending October 31, 2006. We are in the process of assessing
the impact, if any, the new deduction will have on our financial
statements.
15. Intangible Assets - Except for goodwill, the intangible assets
recorded on our balance sheet are definite life intangibles, which include
tradenames, architectural designs, distribution processes, and contractual
agreements. We no longer amortize goodwill, but instead assess it
periodically for impairment. We are amortizing the definite life
intangibles over their expected useful life, ranging from three to seven
years.
16. 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 entity that as of January 31, 2005 had issued and
outstanding approximately $400 million of Senior Subordinated Notes, $805.3
million face value of Senior Notes, and zero drawn on a Revolving Credit
Agreement. The Senior Subordinated Notes, Senior Notes and the Revolving
Credit Agreement 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, our mortgage
lending subsidiaries, a subsidiary engaged in homebuilding activity in
Poland, our Title Insurance subsidiaries, and joint ventures (collectively,
the "Non-guarantor Subsidiaries"), have guaranteed fully and
unconditionally, on a joint and several basis, the obligation of the
Subsidiary Issuer to pay principal and interest under the Senior Notes,
Senior Subordinated Notes, and the Revolving Credit Agreement.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries we have included the accompanying condensed
consolidating 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 condensed consolidating financial information presents
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 Hovnanian Enterprises, Inc. on a consolidated basis.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 31, 2005
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin-
Consol-
Parent Issuer iaries Subsidiaries ations
idated
-------- ---------- ---------- ------------ ---------- ------
- ----
ASSETS
Homebuilding.....................$ 54 $ 120,731 $2,940,154 $ 80,702 $
$3,141,641
Financial Services................. 100 173,488
173,588
Investments in and amounts due to
and from consolidated
subsidiaries....................1,316,608 1,186,429 (1,421,091) (56,771)(1,025,175)
---------- ---------- ---------- ------------ ---------- ------
- ----
Total Assets.....................$1,316,662 $1,307,160 $1,519,163 $
197,419$(1,025,175)$3,315,229
========== ========== ========== ============ ==========
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding......................$ $ 2 $ 549,621 $ 2,190 $
551,813
Financial Services................. 289 136,267
136,556
Notes Payable...................... 1,218,570 (23,419) 24,801
1,219,952
Income Taxes Payable (Receivable). 39,592 2,000 (38,147) 736
4,181
Minority Interest.................. 122,235 3,422
125,657
Stockholders' Equity..............1,277,070 86,588 908,584 30,003 (1,025,175)
1,277,070
---------- ---------- ---------- ------------ ---------- ------
- ----
Total Liabilities and Stockholders'
Equity.........................$1,316,662 $1,307,160 $1,519,163 $
197,419$(1,025,175)$3,315,229
========== ========== ========== ============ ==========
==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 2004
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin-
Consol-
Parent Issuer iaries Subsidiaries ations
idated
---------- ----------- ----------- ------------ ---------- ----
- ------
Assets
Homebuilding......................$ (99) $ 51,441 $ 2,804,800 $ 69,676 $
$2,925,818
Financial Services................ 149 230,300
230,449
Investments in and amounts due to
and from consolidated
subsidiaries.................... 1,262,169 1,037,671 (1,319,839) (41,423) (938,578)
---------- ----------- ------------ ------------ ---------- ---
- ------
Total Assets......................$1,262,070 $ 1,089,112 $ 1,485,110 $ 258,553
$(938,578)$3,156,267
========== =========== =========== ============ ==========
==========
Liabilities
Homebuilding......................$ $ 149 $ 526,278 $ 2,123 $
$528,550
Financial Services................. (1) 194,498
194,497
Notes Payable...................... 1,032,259 (28,324) 29,324
1,033,259
Income Taxes Payable (Receivables). 69,676 1,961 (23,579) 941
48,999
Minority Interest.................. 155,096 3,472
158,568
Stockholders' Equity...............1,192,394 54,743 855,640 28,195 (938,578)
1,192,394
---------- ----------- ----------- ------------ ---------- ----
- ------
Total Liabilities and Stockholders'
Equity......................... $1,262,070 $ 1,089,112 $ 1,485,110 $ 258,553 $
(938,578)$3,156,267
========= =========== =========== ============ ==========
==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2005
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin-
Consol-
Parent Issuer iaries Subsidiaries ations
idated
-------- ---------- ---------- ------------ ---------- -------
- ---
Revenues:
Homebuilding....................$ $ 42 $1,043,183 $ 728 $
$1,043,953
Financial Services............... 1,029 13,164
14,193
Intercompany Charges............. 48,397 48,985 (97,382)
Equity In Pretax Income of
Consolidated Subsidiaries...... 131,906 (131,906)
-------- ---------- ---------- ------------ ---------- -------
- ---
Total Revenues................ 131,906 48,439 1,093,197 13,892 (229,288)
1,058,146
-------- ---------- ---------- ------------ ---------- -------
- ---
Expenses:
Homebuilding..................... (545) 938,605 1,171 (22,911)
916,320
Financial Services............... 730 10,075 (885)
9,920
-------- ---------- ---------- ------------ ---------- -------
- ---
Total Expenses................. (545) 939,335 11,246 (23,796)
926,240
-------- ---------- ---------- ------------ ---------- -------
- ---
Income (Loss) Before Income Taxes. 131,906 48,984 153,862 2,646 (205,492)
131,906
State and Federal Income Taxes..... 50,424 17,098 54,923 4,158 (76,179)
50,424
-------- ---------- ---------- ------------ ---------- -------
- ---
Net Income (Loss).................$ 81,482 $ 31,886 $ 98,939 $ (1,512)$ (129,313)$
81,482
======== ========== ========== ============ ==========
==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2004
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin-
Consol-
Parent Issuer iaries Subsidiaries ations
idated
------- ---------- ---------- ------------ ---------- -------
- ---
Revenues:
Homebuilding.....................$ $ 109 $ 752,316 $ 8,100 $ (83) $
760,442
Financial Services .............. 952 13,821
14,773
Intercompany Charges............. 16,284 31,116 (47,400)
Equity In Pretax Income of
Consolidated Subsidiaries...... 92,695 (92,695)
------- ---------- ---------- ------------ ---------- -------
- ---
Total Revenues................. 92,695 16,393 784,384 21,921 (140,178)
775,215
------- ---------- ---------- ------------ ---------- -------
- ---
Expenses:
Homebuilding..................... (225) 703,765 6,665 (35,712)
674,493
Financial Services............... 490 8,643 (1,106)
8,027
------- ---------- ---------- ------------ ---------- -------
- ---
Total Expenses................. (225) 704,255 15,308 (36,818)
682,520
------- ---------- ---------- ------------ ---------- -------
- ---
Income (Loss) Before Income Taxes.. 92,695 16,618 80,129 6,613 (103,360)
92,695
State and Federal Income Taxes..... 34,984 5,816 30,276 2,624 (38,716)
34,984
------- ---------- ---------- ------------ ---------- -------
- ---
Net Income (Loss)..................$57,711 $ 10,802 $ 49,853 $ 3,989 $ (64,644) $
57,711
======= ========== ========== ============ ==========
==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2005
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin-
Consol-
Parent Issuer iaries Subsidiaries ations
idated
-------- --------- ---------- ------------ ---------- -----
- -----
Cash Flows From Operating Activities:
Net Income........................$ 81,482 $ 31,886 $ 98,939 $ (1,512)$ (129,313)$
81,482
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... (25,443) (1,330) (321,900) 43,510 129,313
(175,850)
-------- --------- ---------- ------------ ---------- -----
- -----
Net Cash Provided By (Used In)
Operating Activities........... 56,039 30,556 (222,961) 41,998
(94,368)
Net Cash (Used In)
Investing Activities............... (1,600) (17,964) (35)
(19,599)
Net Cash Provided By (Used In)
Financing Activities............... 185,000 1,427 (57,205)
129,222
Intercompany Investing and Financing
Activities - Net................... (54,439) (148,758) 187,849 15,348
-------- --------- ---------- ------------ ---------- -----
- -----
Net Increase (Decrease) In Cash...... 66,798 (51,649) 106
15,255
Balance, Beginning of Period......... 15 29,369 35,441 13,199
78,024
-------- --------- ---------- ------------ ---------- -----
- -----
Cash and Cash Equivalents Balance,
End of Period.....................$ 15 $ 96,167 $ (16,208)$ 13,305 $ $
93,279
======== ========= ========== ============ ==========
==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2004
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin-
Consol-
Parent Issuer iaries Subsidiaries ations
idated
-------- --------- ---------- ------------ ---------- -----
- -----
Cash Flows From Operating Activities:
Net Income.........................$ 57,711 $ 10,802 $ 49,853 $ 3,989 $ (64,644) $
57,711
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 54,458 2,120 (407,690) 100,980 64,644
(185,488)
-------- --------- ---------- ------------ ---------- -----
- -----
Net Cash Provided By (Used In)
Operating Activities........... 112,169 12,922 (357,837) 104,969
(127,777)
Net Cash (Used In)
Investing Activities............... (18,985) (20,571) (100)
(39,656)
Net Cash Provided By(Used In)
Financing Activities............... 2,512 215,000 2,895 (59,807)
160,600
Intercompany Investing and Financing
Activities - Net..................... (95,696) (243,950) 380,994 (41,348)
-------- --------- ---------- ------------ ---------- -----
- -----
Net Increase (Decrease) In Cash...... (16,028) 5,481 3,714
(6,833)
Balance, Beginning of Period......... 15 135,846 (14,372) 6,732
128,221
-------- --------- ---------- ------------ ---------- -----
- -----
Cash and Cash Equivalents Balance,
End of Period......................$ 15 $ 119,818 $ (8,891)$ 10,446 $ $
121,388
======== ========= ========== ============ ==========
==========
17. Subsequent Events - On March 1, 2005, we acquired for cash the
assets of Cambridge Homes, a privately held Orlando homebuilder and
provider of related financial services, headquartered in Altamonte Springs,
Florida. The acquisition provides us with a complementary presence to our
Tampa operations in the greater Orlando market, which is the 9th largest
housing market in the U.S., based on 2003 new home starts.
The Cambridge Homes acquisition will be accounted for as a purchase,
with the results of its operations included in our consolidated financial
statements as of the date of the acquisition.
On March 2, 2005, we acquired the operations of Town & Country Homes,
a privately held homebuilder and land developer headquartered in Lombard,
Illinois, which occurred concurrently with our entering into a joint
venture agreement with affiliates of Blackstone Real Estate Advisors in New
York to own and develop Town & Country's existing residential communities.
The joint venture will be accounted for under the equity method. Town and
Country Homes operations beyond the existing assets, as of the acquisition
date, are expected to be wholly owned and included in our consolidated
financial statements.
The Town and Country acquisition provides us with a strong initial
position in the greater Chicago market, which is the 6th largest housing
market in the U.S., based on 2003 new home starts. This acquisition also
expands our operations into the Florida markets of West Palm Beach, Boca
Raton and Fort Lauderdale and bolsters our current presence in
Minneapolis/St. Paul, which is the 10th largest housing market in the U.S.,
based on 2003 new home starts. Town & Country designs, markets and sells a
diversified product portfolio in each of its markets, including single
family homes and attached townhomes, as well as mid-rise condominiums in
Florida. Town & Country serves a broad customer base including first-time,
move-up and luxury homebuyers.
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 intangible assets less liabilities
is recorded as goodwill. The reported income of an acquired company
includes the operations of the acquired company from the date of
acquisition.
Income Recognition from Home and Land Sales - Income from home and
land sales is 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 of the mortgage and the sales price is collected.
Inventories - 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 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 charged to cost of sales equally based upon the number of
homes to be constructed in each product type. 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,
less cost to complete including interest, and selling costs.
Insurance Deductible Reserves - For fiscal 2005, our deductible is
$500,000 per occurrence for worker's compensation and $5 million per
occurrence for general liability insurance. Reserves have been established
based upon actuarial analysis of estimated losses incurred during 2005 and
2004.
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. Costs related to properties not under development are charged to
interest expense.
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 Financial Accounting Standards Board ("FASB")
Interpretation No. 46 ("FIN 46") "Consolidation of Variable Interest
Entities", an interpretation of Accounting Research Bulletin No. 51, SFAS
No. 49 "Accounting for Product Financing Arrangements" ("SFAS 49"), SFAS
No. 98 "Accounting for Leases" ("SFAS 98"), and Emerging Issues Task Force
("EITF") No. 97-10 "The Effects of Lessee Involvement in Asset
Construction" ("EITF 97-10"), we record on the Consolidated Balance Sheet
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, Minority interest from inventory not
owned and Minority interest from consolidated joint ventures.
Intangible Assets - Except for goodwill, the intangible assets
recorded on our balance sheet are definite life intangibles, which include
tradenames, architectural designs, distribution processes, and contractual
agreements. We no longer amortize goodwill, but instead assess it
periodically for impairment. We are amortizing the definite life
intangibles over their expected useful life, ranging from three to seven
years.
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. In addition, our warranty accrual includes
estimated costs for construction work that is unforeseen, but estimable
based on past history, at the time of closing. Both of these liabilities
are recorded in accounts payable and other liabilities in the Condensed
Consolidated Balance Sheets.
CAPITAL RESOURCES AND LIQUIDITY
Our operations consist primarily of residential housing development
and sales in our Northeast Region (New Jersey, southern New York state,
Pennsylvania, Ohio, Michigan, Illinois and Minnesota), our Southeast Region
(Washington D. C., Delaware, Maryland, Virginia, West Virginia, North
Carolina, South Carolina, and Florida), our Southwest Region (Texas and
Arizona), and our West Region (California). In addition, we provide
financial services to our homebuilding customers.
Our cash uses during the three months ended January 31, 2005 were for
operating expenses, increases in housing inventories, construction, income
taxes, interest, and the payoff of our revolving credit facility. We
provided for our cash requirements from housing and land sales, the
revolving credit facility, the issuance of $200 million of Senior Notes and
$100 million of Senior Subordinated Notes, 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 July 3, 2001, our Board of Directors authorized a stock repurchase
program to purchase up to 4 million shares of Class A Common Stock. As of
January 31, 2005, 1.9 million shares of Class A Common Stock have been
purchased under this program. In addition in 2003, we retired at no cost
1.5 million shares that were held by a seller of a previous acquisition.
On March 5, 2004, our Board of Directors authorized a 2-for-1 stock split
in the form of a 100% stock dividend. All share information reflects this
stock dividend.
Our homebuilding bank borrowings are made pursuant to an amended and
restated unsecured revolving credit agreement (the "Agreement") that
provides a revolving credit line and letter of credit line of $900 million
through July 2008. The facility contains an accordion feature under which
the aggregate commitment can be increased to $1.0 billion subject to the
availability of additional commitments. Interest is payable monthly at
various rates of either the prime rate or a spread over LIBOR ranging from
1.10% to 2.00% per annum, depending on our Consolidated Leverage Ratio, as
defined in the Agreement. In addition, we pay a fee ranging from 0.20% to
0.40% per annum, depending on our Consolidated Leverage Ratio and the
weighted average unused portion of the revolving credit line. At January
31, 2005, there was zero drawn under this Agreement and we had
approximately $80.2 million of homebuilding cash. At January 31, 2005, we
had issued $213.4 million of letters of credit which reduces cash available
under the Agreement. We believe that we will be able either to extend the
Agreement beyond July 2008 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. We and each of our significant
subsidiaries, except for our title insurance and home mortgage subsidiaries
and joint ventures, is a guarantor under the Agreement.
At January 31, 2005, we had $805.3 million of outstanding senior
notes ($802.9 million, net of discount), comprised of $140.3 million 10
1/2% Senior Notes due 2007, $100 million 8% Senior Notes due 2012, $215
million 6 1/2% Senior Notes due 2014, $150 million 6 3/8% Senior Notes due
2014, and $200 million 6 1/4% Senior Notes due 2015. At January 31, 2005,
we had $400 million of outstanding senior subordinated notes, comprised of
$150 million 8 7/8% Senior Subordinated Notes due 2012, $150 million 7 3/4%
Senior Subordinated Notes due 2013, and $100 million 6% Senior Subordinated
Notes due 2010. We and each of our wholly owned subsidiaries, except for
K. Hovnanian Enterprises, Inc., the issuer of the senior and senior
subordinated notes, and various subsidiaries formerly engaged in the
issuance of collateralized mortgage obligations, our mortgage lending
subsidiaries, a subsidiary engaged in homebuilding activity in Poland, our
Title Insurance subsidiaries, and joint ventures, is a guarantor of the
senior notes and senior subordinated notes.
Our mortgage banking subsidiary's warehouse agreement was amended on
August 3, 2004. Pursuant to the agreement, we may borrow up to $250
million. The agreement expires in July 2005 and interest is payable
monthly at the Eurodollar Rate plus 1.25%. We believe that we will be able
either to extend this agreement beyond July 2005 or negotiate a replacement
facility, but there can be no assurance of such extension or replacement
facility. As of January 31, 2005, the aggregate principal amount of all
borrowings under this agreement was $131.2 million.
Total inventory increased $115.0 million during the three months
ended January 31, 2005. This increase excluded the increase in
consolidated inventory not owned of $35.8 million consisting of specific
performance options, options with variable interest entities, 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. See "Notes to Condensed Consolidated Financial Statements" - Note
12 for additional information on FIN 46. Total inventory in our Northeast
Region increased $24.5 million, the Southeast Region increased $81.9
million, the Southwest Region increased $15.6 million, and our West Region
decreased $8.0 million; however, if you exclude the impact of property that
was owned at October 31, 2004, but is now under option and included in
Inventory not owned - Other Options, our West Region increased $71.6
million. The increase in inventory was primarily the result of future
planned organic growth in our existing markets. Substantially all homes
under construction or completed and included in inventory at January 31,
2005 are expected to be closed during the next twelve months. Most
inventory completed or under development is financed through our line of
credit, and senior and senior subordinated indebtedness.
We usually option property for development prior to acquisition. By
optioning property, we are only subject to the loss of the cost of the
option 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 the number of buildable homes included
in our total residential real estate. The January 31, 2005 and October 31,
2004 numbers exclude real estate owned and options in locations where we
have ceased development.
Active Proposed Grand
Active Communities Developable Total
Communities Homes Homes Homes
----------- --------- ------------ ---------
January 31, 2005:
Northeast Region.. 30 7,054 21,107 28,161
Southeast Region.. 123 12,031 19,176 31,207
Southwest Region.. 86 10,865 11,301 22,166
West Region....... 54 11,118 8,275 19,393
----------- --------- ------------ ---------
293 41,068 59,859 100,927
=========== ========= ============ =========
Owned.......... 22,283 4,219 26,502
Optioned....... 18,785 55,640 74,425
--------- ------------ ---------
Total........ 41,068 59,859 100,927
========= ============ =========
Active Proposed Grand
Active Communities Developable Total
Communities Homes Homes Homes
----------- --------- ------------ ----------
October 31, 2004:
Northeast Region.. 28 7,163 21,160 28,323
Southeast Region.. 113 12,124 19,697 31,821
Southwest Region.. 85 10,859 9,205 20,064
West Region....... 49 11,277 8,455 19,732
----------- ----------- ---------- -----------
275 41,423 58,517 99,940
=========== =========== ========== ===========
Owned.......... 20,713 6,024 26,737
Optioned....... 20,710 52,493 73,203
----------- ---------- -----------
Total........ 41,423 58,517 99,940
=========== ========== ===========
Homes in active communities under contract at January 31, 2005 and
October 31, 2004 were 6,522 and 6,621, respectively. Such amounts do not
include our build on your own lot contracts or contracts from our
unconsolidated joint ventures.
The following table summarizes our started or completed unsold homes
and models:
January 31, October 31,
2005 2004
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 99 38 137 77 39 116
Southeast Region.... 342 35 377 222 35 257
Southwest Region.... 725 67 792 683 78 761
West Region......... 500 165 665 329 160 489
------ ------ ----- ------ ------ -----
Total 1,666 305 1,971 1,311 312 1,623
====== ====== ===== ====== ====== =====
Receivables, deposits, and notes increased $17.7 million to $74.4
million at January 31, 2005. The increase was primarily due to the timing
of cash received from homes that closed at the end of January 2005.
Receivables from home sales amounted to $27.3 million and $17.6 million at
January 31, 2005 and October 31, 2004, respectively.
Prepaid expenses and other assets are as follows:
January 31, October 31, Dollar
2005 2004 Change
---------- ----------- ---------
Prepaid insurance.................... $ 12,320 $ $ 12,320
Prepaid project costs................ 50,729 48,695 2,034
Investment in joint ventures......... 47,047 40,840 6,207
Senior residential rental properties. 8,741 8,830 (89)
Other prepaids....................... 23,319 16,632 6,687
Other assets......................... 22,227 19,459 2,768
----------- ----------- ---------
$ 164,383 $ 134,456 $ 29,927
=========== =========== =========
Prepaid insurance increased due to a payment of a full year of
insurance costs during the first quarter of every year. These costs are
amortized monthly on a straight line basis. Prepaid project costs
increased due to new communities. Prepaid project costs consist of
community specific expenditures that are used over the life of the
community. Such prepaids are expensed as homes are delivered. Investments
in joint ventures increased as we entered into one new homebuilding joint
venture during the three months ended January 31, 2005. As of January 31,
2005, we have investments in four homebuilding joint ventures and seven
land and land development joint ventures. Other than completion
guarantees, no other guarantees associated with unconsolidated joint
ventures have been given. Also included in prepaid expenses and other
assets are debt issuance fees, non-qualified associate benefit plan assets,
and miscellaneous prepaids and assets.
At January 31, 2005, we had $32.7 million of goodwill. This amount
resulted from company acquisitions prior to fiscal 2003.
Definite life intangibles decreased $9.6 million to $115.9 million at
January 31, 2005. The decrease was the result of the intangible
amortization during the first quarter of $10.1 million offset slightly by
increased intangibles generated from contingent payments related to past
acquisitions. For any acquisition, professionals are hired to appraise all
acquired intangibles. See "- Critical Accounting Policies - Intangible
Assets" above for additional information on intangibles. For tax purposes
all our intangibles, except those resulting from an acquisition classified
as a tax free exchange, are being amortized over 15 years.
Accounts payable and other liabilities are as follows:
January 31, October 31, Dollar
2005 2004 Change
--------- ----------- --------
Accounts payable.......................$ 77,971 $ 113,866 $(35,895)
Reserves............................... 81,356 72,289 9,067
Accrued expenses....................... 27,011 28,016 (1,005)
Accrued compensation................... 49,005 78,283 (29,278)
Property secured by a mortgage......... 11,750 11,750
Other liabilities...................... 24,566 25,417 (851)
--------- ----------- --------
$ 271,659 $ 329,621 $(57,962)
========= =========== ========
The decrease in accounts payable was primarily due to decreases in
land development activity in the winter months in the Northeast and lower
deliveries in the first quarter of 2005 compared to the fourth quarter of
2004 throughout our markets, which results in less activity and lower
payables. Reserves increased for our General Liability insurance
deductible, owner controlled insurance program and bonding. These
increases were offset by a decrease in accrued compensation due to the
payout of our fiscal year 2004 bonuses during the first quarter of 2005.
The remainder of Other liabilities include payroll withholdings, deferred
income, and a nonrecourse mortgage associated with our corporate office.
Financial Services - Mortgage loans held for sale consist of
residential mortgages receivable of which $156.6 million and $209.2 million
at January 31, 2005 and October 31, 2004, respectively, are being
temporarily warehoused and awaiting sale in the secondary mortgage market.
We may incur risk with respect to mortgages that are delinquent, but only
to the extent the losses are not covered by mortgage insurance or resale
value of the house. Historically, we have incurred minimal credit losses.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2005 COMPARED
TO THE THREE MONTHS ENDED JANUARY 31, 2004
Total Revenues:
Compared to the same prior period, revenues increased as follows:
Three Months Ended
--------------------------------------------
January 31, January 31, Dollar Percentage
2005 2004 Change Change
------------ ----------- -------- ----------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $ 1,015,969 $ 757,273 $258,696 34%
Land sales and other
revenues........... 27,984 3,169 24,815 783%
Financial Services..... 14,193 14,773 (580) -4%
----------- ---------- -------- --------
Total Revenues... $ 1,058,146 $ 775,215 $282,931 36%
=========== ========== ======== ========
Homebuilding:
Compared to the same prior period, housing revenues increased $258.7
million or 34.2% during the three months ended January 31, 2005. Housing
revenues are recorded when title is conveyed to the buyer, adequate cash
payment has been received, and there is no continued involvement. 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.
Information on homes delivered by market area is set forth below:
Three Months Ended
January 31,
---------------------
2005 2004
---------- ----------
(Dollars in Thousands)
Northeast Region:
Dollars............ $ 238,461 $191,908
Homes.............. 687 640
Southeast Region:
Dollars............ $ 263,834 $191,062
Homes.............. 902 787
Southwest Region:
Dollars............ $ 135,911 $127,814
Homes.............. 715 724
West Region:
Dollars............ $ 377,763 $246,489
Homes.............. 962 750
Consolidated Total:
Dollars............ $1,015,969 $757,273
Homes.............. 3,266 2,901
Unconsolidated Joint
Ventures:
Dollars............ $ 11,585 $ 2,826
Homes.............. 22 10
Totals:
Housing Revenues... $1,027,554 $760,099
Homes Delivered.... 3,288 2,911
An important indicator of our future results are recently signed
contracts and home contract backlog for future deliveries. Our sales
contracts and homes in contract backlog using base sales prices by market
area are set forth below:
Sales Contracts for the
Three Months Ended Contract Backlog
January 31, as of January 31,
------------------------- ------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
(Dollars in Thousands)
Northeast Region (1):
Dollars............ $ 189,605 $ 203,484 $ 720,675 $ 611,901
Homes.............. 522 631 2,091 2,190
Southeast Region:
Dollars............ $ 284,882 $ 241,067 $ 792,979 $ 650,934
Homes.............. 849 867 2,346 2,303
Southwest Region:
Dollars............ $ 165,048 $ 121,177 $ 197,285 $ 153,397
Homes.............. 897 723 1,106 988
West Region:
Dollars............ $ 354,124 $ 299,020 $ 764,697 $ 326,848
Homes.............. 906 912 1,861 955
Consolidated Total:
Dollars............ $ 993,659 $ 864,748 $2,475,635 $1,743,080
Homes.............. 3,174 3,133 7,404 6,436
Unconsolidated Joint
Ventures:
Dollars............ $ 41,347 $ 50,991 $ 239,851 $ 64,043
Homes.............. 66 92 399 118
Totals:
Dollars............ $1,035,006 $ 915,739 $2,715,486 $1,807,123
Homes............... 3,240 3,225 7,803 6,554
(1) During the first quarter of 2005, a community in the Northeast Region
was contributed to a joint venture. As a result, the 56 contracts
in consolidated backlog at October 31, 2004 for that community were
moved to unconsolidated joint ventures backlog.
During February 2005, we signed an additional 1,547 net contracts
amounting to $477.0 million in consolidated communities and 45 net
contracts amounting to $29.1 million in unconsolidated joint ventures
compared to 1,609 net contracts amounting to $452.7 million in consolidated
communities and 64 net contracts amounting to $32.9 million in
unconsolidated joint ventures 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
January 31,
----------------------
2005 2004
---------- ---------
(Dollars in Thousands)
Sale of Homes................$1,015,969 $ 757,273
Cost of Sales, excluding
Interest................... 757,085 562,900
---------- ----------
Housing Gross Margin, before
Interest expense...........$ 258,884 $ 194,373
Cost of Sales Interest....... 12,969 11,943
---------- ----------
Housing Gross Margin,
After interest expense.....$ 245,915 $ 182,430
========== ==========
Gross Margin Percentage,
Before interest expense.... 25.5% 25.7%
Gross Margin Percentage,
After interest expense..... 24.2% 24.1%
Cost of Sales expenses as a percentage of home sales revenues are
presented below:
Three Months Ended
January 31,
-------------------
2005 2004
-------- --------
Sale of Homes................ 100.0% 100.0%
-------- --------
Cost of Sales, excluding
Interest:
Housing, land &
development costs.... 66.1% 66.2%
Commissions............ 2.1% 2.2%
Financing concessions.. 0.9% 1.0%
Overheads.............. 5.4% 4.9%
-------- --------
Total Cost of Sales, before
Interest expense........... 74.5% 74.3%
-------- --------
Gross Margin Percentage,
Before interest expense.... 25.5% 25.7%
Cost of Sales interest....... 1.3% 1.6%
-------- --------
Gross Margin Percentage,
After interest expense...... 24.2% 24.1%
======== ========
We sell a variety of home types in various local communities, each
yielding a different gross margin. As a result, depending on the
geographic mix of deliveries and 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. The consolidated gross margin before interest expense for the first
quarter of 2005 was 20 basis points lower than the first quarter of 2004,
primarily due to the mix of homes sold both in home type and region.
However, our gross margin after interest expense for the first quarter of
2005 is 10 basis points more than the first quarter of 2004, as a result of
our borrowing costs decreasing and the mix of homes sold in the applicable
quarters.
Homebuilding selling, general, and administrative expenses as a
percentage of homebuilding revenues remained relatively flat at 9.5% and
9.4% for the three months ended January 31, 2005 and 2004, respectively.
Such expenses increased $26.9 million for the three months ended January
31, 2005 compared to the same period last year. The dollar increase was in
line with our organic growth as we increase selling, general and
administrative costs associated with the expected increase in the number of
active selling communities in all of our regions.
Land Sales and Other Revenues:
Land sales and other revenues consist primarily of land and lot
sales. A breakout of land and lot sales is set forth below:
Three Months Ended
January 31,
------------------
2005 2004
-------- --------
Land and Lot Sales................ $23,004 $ 1,139
Cost of Sales..................... 14,171 1,035
-------- --------
Land and Lot Sales Gross Margin... 8,833 104
======== ========
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 and selling such mortgages in the secondary market, and
title insurance activities. For the three months ended January 31, 2005,
financial services provided a $4.3 million profit before income taxes,
compared to a profit of $6.7 million for the same period in 2004. The
decrease in pretax profit for the three months ended January 31,2005 is
primarily due to reduced spreads resulting from the steady rise in
homebuyers choosing to use Adjustable Rate Mortgage (ARM) products which
historically are less profitable to originate and lower gross spreads due
to increased competition for purchase mortgages as the market for
refinancing mortgages has significantly declined.
Corporate General and Administrative
Corporate general and administrative expenses represents the
operations at our headquarters in Red Bank, New Jersey. Such expenses
include our executive offices, information services, human resources,
corporate accounting, training, treasury, process redesign, internal audit,
construction services, and administration of insurance, quality, and
safety. As a percentage of total revenues, such expenses decreased to 1.5%
for the three months ended January 31, 2005 from 1.9% for the prior year's
three months. Corporate general and administrative expenses increased $1.4
million during the three months ended January 31, 2005, compared to the
same periods last year. The increase in corporate general and
administrative expenses is primarily attributed to additional salary and
employee expense due to increased headcount as our company continues to
grow.
Interest
Interest expense includes housing, and land and lot interest that is
capitalized while the land and homes are developed and expensed with the
sold land and homes, as well as other interest. See Note 3 to the
"Condensed Consolidated Financial Statements" for detail on interest
incurred, expensed, and capitalized.
Interest related to homes sold as a percentage of home revenues amounted
to 1.3% and 1.6% for the quarters ended January 31, 2005 and 2004,
respectively. This percentage decrease is due to our average debt as a
percentage of average inventory decreasing and lower interest rates.
Other Operations
Other operations consist primarily of miscellaneous residential
housing operations expenses, senior rental residential property operations,
amortization of senior and senior subordinated note issuance expenses,
earnout payments from homebuilding company acquisitions, minority interest
relating to joint ventures, and corporate owned life insurance.
Intangible Amortization
We are amortizing our definite life intangibles over their expected
useful life, ranging from three to seven years. Intangible amortization
increased $5.3 million for the three months ended January 31, 2005, when
compared to the same period last year. This increase was the result of the
amortization expense associated with the fiscal 2002 California acquisition
brand name, which is being phased out.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share
Based Payment" ("SFAS 123R"), which is a revision of SFAS 123 and
supersedes APB 25 and SFAS 148. This statement requires that the cost
resulting from all share-based payment transactions be recognized in an
entity's financial statements. This statement establishes fair value as
the measurement objective in accounting for share-based payment
arrangements and requires all entities to apply a fair value based
measurement method in accounting for share-based payment transactions with
employees except for equity instruments held by employee share ownership
plans. See Note 2 to the "Condensed Consolidated Financial Statements" for
a further description of SFAS 123R and its expected impact on our fourth
quarter fiscal 2005 net income.
In December 2004, the FASB issued Staff Position 109-1 ("FSP 109-1"),
Application of FASB Statement No. 109 ("FASB No. 109"), "Accounting for
Income Taxes", to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004. FSP 109-1 clarifies
guidance that applies to the new deduction for qualified domestic
production activities. When fully phased-in, the deduction will be up to
9% of the lesser of "qualified production activities income" or taxable
income. FSP 109-1 clarifies that the deduction should be accounted for as
a special deduction under FASB No. 109 and will reduce tax expense in the
period or periods that the amounts are deductible on the tax return. Any
tax benefits resulting from the new deduction will be effective for our
fiscal year ending October 31, 2006. We are in the process of assessing
the impact, if any, the new deduction will have on our financial
statements.
Total Taxes
Total taxes as a percentage of income before taxes increased slightly
for the three months ended January 31, 2005 to 38.2% from 37.7% for the
same period last year.
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, 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, because we generally
negotiate fixed price contracts with many, but not all, of 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 three to twelve months.
Construction costs for residential buildings represent approximately 55% of
our homebuilding cost of sales.
Mergers and Acquisitions
On March 1, 2005, we acquired for cash the assets of Cambridge Homes,
a privately held Orlando homebuilder and provider of related financial
services, headquartered in Altamonte Springs, Florida. The acquisition
provides us with a complementary presence to our Tampa operations in the
greater Orlando market, which is the 9th largest housing market in the
U.S., based on 2003 new home starts.
The Cambridge Homes acquisition will be accounted for as a purchase,
with the results of its operations included in our consolidated financial
statements as of the date of the acquisition.
On March 2, 2005, we acquired the operations of Town & Country Homes,
a privately held homebuilder and land developer headquartered in Lombard,
Illinois, which occurred concurrently with our entering into a joint
venture agreement with affiliates of Blackstone Real Estate Advisors in New
York to own and develop Town & Country's existing residential communities.
The joint venture will be accounted for under the equity method. Town and
Country Homes operations beyond the existing assets, as of the acquisition
date, are expected to be wholly owned and included in our consolidated
financial statements.
The Town and Country acquisition provides us with a strong initial
position in the greater Chicago market, which is the 6th largest housing
market in the U.S., based on 2003 new home starts. This acquisition also
expands our operations into the Florida markets of West Palm Beach, Boca
Raton and Fort Lauderdale and bolsters our current presence in
Minneapolis/St. Paul, which is the 10th largest housing market in the U.S.,
based on 2003 new home starts. Town & Country designs, markets and sells a
diversified product portfolio in each of its markets, including single
family homes and attached townhomes, as well as mid-rise condominiums in
Florida. Town & Country serves a broad customer base including first-time,
move-up and luxury homebuyers.
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 Reform 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. Although we believe that our
plans, intentions and expectations reflected in, or suggested by such
forward-looking statements are reasonable, we can give no assurance that
such plans, intentions, or expectations will be achieved. 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;
. Shortages in, and price fluctuations of, raw materials and labor;
. The availability and cost of suitable land and improved lots;
. Levels of competition;
. Availability of financing to the Company;
. Utility shortages and outages or rate fluctuations; and
. Geopolitical risks, terrorist acts and other acts of war.
Certain 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, 2004.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk facing us is interest rate risk on our
long-term debt. In connection with our mortgage operations, mortgage
loans held for sale and the associated mortgage warehouse line of
credit are subject to interest rate risk; however, such obligations
reprice frequently and are short-term in duration. In addition, we
hedge the interest rate risk on mortgage loans by obtaining forward
commitments from private investors. Accordingly, the risk from
mortgage loans is not material. We do not hedge interest rate risk
other than on mortgage loans using financial instruments. We are
also subject to foreign currency risk but this risk is not material.
The following table sets forth as of January 31, 2005, our long term
debt obligations, principal cash flows by scheduled maturity,
weighted average interest rates and estimated fair market value ("FMV").
As of January 31, 2005
--------------------------------------------------
Expected Maturity Date
FMV @
2005 2006 2007 2008 2009 2010 Thereafter Total
1/31/05
------- ------- -------- ------- -------- -------- --------- ---------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate.... $ 24,097 $ 622 $140,915 $ 711 $ 760 $100,814 $986,230 $1,254,149
$1,315,978
Average
interest rate 7.84% 6.65% 10.48% 6.69% 6.17% 6.01% 7.14% 7.44%
Variable Rate.
Average
Interest rate
(1) Does not include bonds collateralized by mortgages receivable.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the
Company's reports under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosures. Any
controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control
objectives. The Company's management, with the participation of the
Company's chief executive officer and chief financial officer, has
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of January 31, 2005. Based upon that
evaluation and subject to the foregoing, the Company's chief executive
officer and chief financial officer concluded that the design and
operation of the Company's disclosure controls and procedures are
effective to accomplish their objectives.
In addition, there was no change in the Company's internal control over
financial reporting that occurred during the quarter ended January 31,
2005 that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. Other Information
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
In July 2001, our Board of Directors authorized a stock repurchase
program to purchase up to 4 million shares of Class A Common Stock. No
shares of our Class A Common Stock or Class B Common Stock were purchased
by or on behalf of Hovnanian Enterprises during the first quarter of 2005.
As of January 31, 2005, we may still purchase 2,089,770 shares of Class A
Common Stock under the stock repurchase program.
Item 6. Exhibits
Exhibit 3(a) Certificate of Incorporation of
the Registrant. (1)
Exhibit 3(b) Certificate of Amendment of
Certificate of Incorporation of the
Registrant. (2)
Exhibit 3(c) Certificate of Amendment of
Certificate of Incorporation of the Registrant. (3)
Exhibit 3(d) Restated Bylaws of the Registrant. (4)
Exhibit 4(a) Indenture dated as of November 30, 2004,
relating to 6 1/4% Senior Notes, among K. Hovnanian
Enterprises, Inc., the Guarantors named therein and Wachovia
Bank, National Association, as Trustee, including form of
6 1/4% Senior Notes due 2015. (6)
Exhibit 4(b) Indenture dated as of November 30, 2004,
relating to 6% Senior Subordinated Notes, among K. Hovnanian
Enterprises, Inc., the Guarantors named therein and Wachovia
Bank, National Association, as Trustee, including form of
6% Senior Notes due 2010. (6)
Exhibit 10(a) Third Amendment to First Restated
Revolving Credit Agreement dated as of August 3, 2004,
among K. Hovnanian Mortgage, Inc., and K. Hovnanian
American Mortgage, LLC., Guaranty Bank, Bank of America NA,
J P Morgan Chase Bank, Comerica Bank, National City
Bank of Kentucky, U S Bank N A, Colonial Bank NA, and
Washington Mutual Bank FA (Warehouse Agreement). (5)
Exhibit 10(b) Fourth Amended and Restated Credit Agreement
dated as of June 18, 2004, among K. Hovnanian Enterprises,
Inc., Hovnanian Enterprises, Inc., PNC Bank NA, Bank of
America NA, Wachovia Bank NA, Bank One NA, Key Bank,
National Association, and The Royal Bank of Scotland. (5)
Exhibit 31(a) Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer.
Exhibit 31(b) Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer.
Exhibit 32(a) Section 1350 Certification of Chief
Executive Officer.
Exhibit 32(b) Section 1350 Certification of Chief
Financial Officer.
(1) Incorporated by reference to Exhibits to
Registration Statement (No. 2-85198) on
Form S-1 of the Registrant.
(2) Incorporated by reference to Exhibit 4.2 to Registration
Statement (No. 333-106761) on Form S-3
of the Registrant.
(3) Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q of the Registrant for
the quarter ended January 31, 2004.
(4) Incorporated by reference to Exhibit 3.2 to
Registration Statement (No. 1-08551) on
Form 8-A of the Registrant.
(5) Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q of the Registrant for
the quarter ended July 31, 2004.
(6) Incorporated by reference to Exhibits to Annual Report on
Form 10-K of the Registrant for the year ended October 31,
2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of l934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
HOVNANIAN ENTERPRISES, INC.
(Registrant)
DATE: March 11, 2005 /S/J. LARRY SORSBY
J. Larry Sorsby,
Executive Vice President and
Chief Financial Officer
DATE: March 11, 2005 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
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