UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.D.C. 20549
FORM 10Q10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15 (d)15(d) of the
Securities Exchange Act of 1934
For quarterly period ended JANUARYJULY 31, 2004 or
[ ] Transition report pursuant to Section 13 or 15 (d)15(d) of the
Securities Exchange Act of 1934
Commission file number 1-8551
Hovnanian Enterprises, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-1851059
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
l0 Highway 35, P.O. Box 500, Red Bank, N. J.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 registrantregistrant: (l) has filed all
reports required to be filed by SectionsSection l3 or l5(d) of the Securities
Exchange Act of l934 during the preceding l2 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes ([ X )]
No ( )[ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes ([ X )] No ( )[ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 23,193,985 shares of46,390,719
Class A Common StockShares and 7,348,344
shares of14,685,529 Class B Common StockShares were outstanding
as of March 2,September 7, 2004.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q10-Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Financial Statements:
Condensed Consolidated Balance Sheets at Januaryas of July 31,
2004 (unaudited) and October 31, 2003 43
Condensed Consolidated Statements of Income for the
three and nine months ended JanuaryJuly 31, 2004 and
2003 (unaudited) 65
Condensed Consolidated StatementsStatement of Stockholders'
Equity for the threenine months ended JanuaryJuly 31, 2004
(unaudited) 76
Condensed Consolidated Statements of Cash Flows for
the threenine months ended JanuaryJuly 31, 2004
and 2003 (unaudited) 87
Notes to Condensed Consolidated Financial
Statements (unaudited) 98
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 1620
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 2936
Item 4. Controls and Procedures 3037
PART II. Other Information
30Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 38
Item 6. Exhibits and Reports on Form 8-K.39
Signatures 3140
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
January
July 31, October 31,
ASSETS 2004 2003
----------- -----------
(unaudited)
(unaudited)
Homebuilding:
Cash and cash equivalents.......................equivalents..................... $ 110,9686,667 $ 121,913
----------- -----------
Inventories - At the lower of cost or fair
value:
Sold and unsold homes and lots under
development.................................. 1,450,561development............................... 1,785,771 1,184,907
----------- -----------
Land and land options held for future
development or sale......................... 292,532sale....................... 357,092 270,502
----------- -----------
Consolidated Inventory Not Owned:
Specific performance options............... 29,969options.............. 23,076 56,082
Variable interest entities.................. 211,514entities................ 198,634 100,327
Other options............................... 38,723options............................. 32,811 48,226
----------- -----------
Total Consolidated Inventory Not Owned..... 280,206Owned... 254,521 204,635
----------- -----------
Total Inventories........................... 2,023,299Inventories......................... 2,397,384 1,660,044
----------- -----------
Receivables, deposits, and notes................ 54,898notes ............. 49,614 42,506
----------- -----------
Property, plant, and equipment - net............ 28,438net.......... 37,647 26,263
----------- -----------
Prepaid expenses and other assets............... 127,365assets............. 146,174 106,525
----------- -----------
Goodwill and indefinite life intangibles........ 82,658intangibles...... 32,658 82,658
----------- -----------
Definite life intangibles....................... 85,353intangibles..................... 122,062 56,978
----------- -----------
Total Homebuilding.......................... 2,512,979Homebuilding........................ 2,792,206 2,096,887
----------- -----------
Financial Services:
Cash and cash equivalents....................... 10,420equivalents..................... 12,317 6,308
Mortgage loans held for sale.................... 121,973sale.................. 150,782 224,052
Other assets.................................... 3,379assets.................................. 3,047 3,945
----------- -----------
Total Financial Services.................... 135,772Services.................. 166,146 234,305
----------- -----------
Income Taxes Receivable - Including deferred
tax benefits........................................benefits.................................. 21,903 1,179
----------- -----------
Total Assets...................................... $2,648,751Assets.................................... $2,980,255 $2,332,371
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
January
July 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003
----------- -----------
(unaudited)
(unaudited)
Homebuilding:
Nonrecourse land mortgages........................mortgages....................... $ 47,74123,066 $ 43,795
Accounts payable and other liabilities............ 215,772liabilities........... 290,686 230,696
Customers' deposits............................... 67,317deposits.............................. 92,383 58,376
Liabilities from inventory not owned.............. 59,941owned............. 49,824 94,780
----------- -----------
Total Homebuilding............................ 390,771Homebuilding........................... 455,959 427,647
----------- -----------
Financial Services:
Accounts payable and other liabilities............ 4,313liabilities........... 5,583 5,917
Mortgage warehouse line of credit................. 106,990credit................ 144,853 166,711
----------- -----------
Total Financial Services...................... 111,303Services..................... 150,436 172,628
----------- -----------
Notes Payable:
Term loan........................................ 115,000Revolving and term credit agreements............. 215,000 115,000
Senior notes...................................... 602,304notes..................................... 602,589 387,166
Senior subordinated notes.........................notes........................ 300,000 300,000
Accrued interest.................................. 20,314interest................................. 14,546 15,675
----------- -----------
Total Notes Payable........................... 1,037,618Payable.......................... 1,132,135 817,841
----------- -----------
Income Taxes Payable - Net of deferred tax benefits. 9,826
----------- -----------
Total Liabilities............................. 1,549,518Liabilities............................ 1,738,530 1,418,116
----------- -----------
Minority interest from inventory not owned.......... 194,528owned......... 179,255 90,252
----------- -----------
Minority interest from consolidated joint ventures.. 5,781ventures. 8,731 4,291
----------- -----------
Stockholders' Equity:
Preferred Stock,$.01 par value-authorized 100,000
shares; none issuedissued.............................
Common Stock,Class A,$.01 par value-authorized
200,000,000 shares; issued 28,297,57656,768,461 shares at
JanuaryJuly 31, 2004 and 28,016,49756,036,116 shares at October 31,
2003 (including 5,145,60010,395,656 shares at JanuaryJuly 31, 2004
and 5,390,21810,780,436 shares at October 31, 2003 held
in Treasury)............. 283 280.................................... 567 560
Common Stock,Class B,$.01 par value (convertible to
Class A at time of sale)-authorized authorized 30,000,000
shares; issued 7,695,47715,379,780 shares at JanuaryJuly 31, 2004
and 7,768,50815,537,016 shares at October 31, 2003(including 345,8742003 (including
691,748 shares at JanuaryJuly 31, 2004 and October 31,
2003 held in Treasury)....................................... 77 78.............. 154 155
Paid in Capital................................... 182,699 163,712184,260 163,355
Retained Earnings................................. 762,893920,103 705,182
Deferred Compensation............................. (1,295)
Treasury Stock - at cost.......................... (47,028)(50,050) (49,540)
----------- -----------
Total Stockholders' Equity.................... 898,9241,053,739 819,712
----------- -----------
Total Liabilities and Stockholders' Equity.......... $2,648,751$2,980,255 $2,332,371
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(unaudited)(Unaudited)
Three Months Ended JanuaryNine Months Ended
July 31, ----------------------July 31,
------------------- -----------------------
2004 2003 ----------2004 2003
--------- --------- ----------- ----------
Revenues:
Homebuilding:
Sale of homes......................$ 757,273 $ 607,5011,044,610 $830,734 $2,702,826 $2,104,788
Land sales and other revenues...... 3,169 9,639
----------5,395 4,441 12,959 16,445
--------- --------- ----------- ----------
Total Homebuilding............... 760,442 617,1401,050,005 835,175 2,715,785 2,121,233
Financial Services................... 14,773 10,495
----------13,683 13,642 41,926 35,036
--------- --------- ----------- ----------
Total Revenues................... 775,215 627,635
----------1,063,688 848,817 2,757,711 2,156,269
--------- --------- ----------- ----------
Expenses:
Homebuilding:
Cost of sales...................... 563,935 463,178778,216 621,897 2,016,257 1,582,294
Selling, general and administrative 71,793 54,30182,905 66,136 235,210 180,035
Inventory impairment loss.......... 58 158
----------1,438 149 2,230 1,633
--------- --------- ----------- ----------
Total Homebuilding............... 635,786 517,637862,559 688,182 2,253,697 1,763,962
Financial Services................... 8,027 5,8218,637 7,635 25,334 19,629
Corporate General and Administrative. 14,524 14,58413,011 16,978 42,229 45,026
Interest............................. 16,943 13,67917,725 17,204 53,764 44,308
Expenses Related To Extinguishment
Of Debt............................ 8,663 1,619 9,597 1,619
Other Operations..................... 2,432 4,2783,361 4,232 9,107 10,888
Intangible Amortization.............. 4,808 500
----------9,716 3,159 19,115 5,465
--------- --------- ----------- ----------
Total Expenses................... 682,520 556,499
----------923,672 739,009 2,412,843 1,890,897
--------- --------- ----------- ----------
Income Before Income Taxes............. 92,695 71,136
----------140,016 109,808 344,868 265,372
--------- --------- ----------- ----------
State and Federal Income Taxes:
State................................ 6,240 3,1007,761 5,439 20,417 11,874
Federal.............................. 28,744 23,275
----------45,517 35,567 109,530 87,367
--------- --------- ----------- ----------
Total Taxes........................ 34,984 26,375
----------53,278 41,006 129,947 99,241
--------- --------- ----------- ----------
Net Income............................. $ 57,71186,738 $ 44,761
==========68,802 $ 214,921 $ 166,131
========= ========= =========== ==========
Per Share Data:
Basic:
Income per common share.............. $ 1.851.40 $ 1.431.12 $ 3.47 $ 2.68
Weighted average number of common
shares outstanding................. 31,215 31,37162,001 61,260 61,887 62,088
Assuming dilution:
Income per common share.............. $ 1.741.33 $ 1.351.06 $ 3.30 $ 2.53
Weighted average number of common
shares outstanding................. 33,235 33,080outstanding................ 65,115 65,086 65,158 65,612
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF STOCKHOLDERS' EQUITY
(Dollars In Thousands)
Class
A Common Stock Class 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, 2003. 22,626,279 $280 7,422,634 $78 $163,71245,255,680 $560 14,845,268 $155 $163,355 $705,182 $ $(49,540) $819,712
Acquisitions............ 244,618 2 17,485$ 819,712
Acquisitions.............. 489,236 17,487 2,512 19,999
Sale of common stock under
employee stock option
plan............ 89,250 940 940plan.................... 309,166 3 1,620 1,623
Stock bonus plan......... 91,472 27,326 562 562plan.......... 211,291 2 54,652 1 503 506
Conversion of Class B to
Class A Common Stock.... 100,357 1 (100,357) (1)211,888 2 (211,888) (2)
Deferred compensation..... 1,295 (1,295) -
Treasury stock purchase... (104,456) (3,022) (3,022)
Net Income................ 57,711 57,711214,921 214,921
----------- ------ ----------- ------ ------- -------- -------- -------- ----------------- ----------
Balance, JanuaryJuly 31, 2004
23,151,976 $283 7,349,603 $77 $182,699 $762,893 $(47,028) $898,924
(unaudited)............... 46,372,805 $567 14,688,032 $154 $184,260 $920,103 $ (1,295) $(50,050) $1,053,739
=========== ====== =========== ====== ======= ======== ======== ======== ================= ==========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
ThreeThousands - unaudited)
Nine Months Ended
JanuaryJuly 31,
---------------------------------------------
2004 2003
---------- --------------------- -----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 57,711214,921 $ 44,761166,131
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation.................................... 1,494 1,5694,606 4,946
Intangible amortization......................... 4,808 50019,115 5,465
Loss (gain) on sale and retirement of property
and assets.................................... 4 9(238) 44
Expenses related to extinguishment of debt...... 9,597 1,619
Deferred income taxes........................... (3,920) (2,362)(14,426) (6,123)
Impairment losses............................... 58 1582,230 1,633
Decrease (increase) in assets:
Mortgage notes receivable..................... 102,171 41,87873,548 (59,049)
Receivables, prepaids and other assets........ (38,078) (26,955)(27,232) (14,444)
Inventories................................... (260,030) (69,723)
Increase (decrease)(658,351) (338,374)
(Decrease) increase in liabilities:
State and Federal income taxes................ 15,105 (3,787)(5,817) 403
Tax effect from exercise of stock options..... (180) (19)(481) (6,774)
Customers' deposits........................... 3,941 1,69229,215 21,352
Interest and other accrued liabilities........ (17,692) (12,041)12,602 15,108
Post development completion costs............. (2,009) 2,748(2,929) 1,952
Accounts payable.............................. 8,840 (15,324)
---------- ----------32,575 (11,373)
----------- -----------
Net cash (used in) operating activities................................ (127,777) (36,896)
---------- ----------activities..... (311,065) (217,484)
----------- -----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets....... 245 35721 482
Purchase of property, equipment and other fixed
assets and acquisitions of homebuilding
companies......................................... (44,271) (92,028)
Investment in and advances to(56,634) (141,796)
Net returns of capital from unconsolidated
affiliates........................................ 4,370 3,296
---------- ----------(23,818) 1,150
----------- -----------
Net cash (used in) investing activities..... (39,656) (88,697)
---------- ----------(79,731) (140,164)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 370,009 166,4852,674,035 1,090,427
Proceeds from senior debt........................... 215,000365,000
Proceeds from senior subordinated debt.............. 150,000
Principal payments on mortgages and notes........... (425,909) (215,088)(2,599,739) (1,022,006)
Principal payments on senior debt................... (156,844) (11,369)
Purchase of treasury stock.......................... (3,022) (7,261)
Proceeds from sale of stock and employee stock plans 1,500 (38)
---------- ----------plan. 2,129 7,506
----------- -----------
Net cash provided (used in) by financing activities................................ 160,600 (48,641)
---------- ----------activities.... 281,559 207,297
----------- -----------
Net (Decrease) In Cash................................ (6,833) (174,234)Cash........... ....................... (109,237) (150,351)
Cash and Cash Equivalents Balance, Beginning
Of Period........................................... 128,221 269,990
---------- --------------------- -----------
Cash and Cash EquivalentEquivalents Balance, End Of Period.......Period...... $ 121,38818,984 $ 95,756
========== ==========119,639
=========== ===========
Supplemental Disclosures of Cash Flow
Cash paid during the periodyear for:
Interest......................................... 17,679 7,310
========== ==========$ 68,247 $ 41,198
=========== ===========
Income taxes..................................... 23,798 32,544
========== ==========$ 150,016 $ 104,962
=========== ===========
Supplemental disclosures of noncash operating
activities:
Consolidated Inventory Not Owned:
Specific performance options..................... $ 28,86721,798 $ 66,42064,743
Variable interest entities....................... 191,588181,265 81,537
Other options................................... 33,964 64,183
---------- ----------
$254,419 $130,603
========== ==========options.................................... 26,010 50,486
----------- -----------
Total Inventory Not Owned.......................... $ 229,073 $ 196,766
=========== ===========
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 Formform 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, 2003 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 Option Plan - Stock OptionsStock-Based Compensation Plans - SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123") establishes a fair value-based
method of accounting for stock-
basedstock-based compensation plans, including stock
options.options and non-vested stock. Registrants may elect to continue accounting
for stock optionstock-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 new fair
value approach had been adopted. We intend to continue accounting for our
stock option planstock-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 optionstock-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 optionsstock-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 JanuaryNine Months Ended
------------------ -------------------
July July July July
31, 2004 31, 2003 ---------- ----------31, 2004 31, 2003
--------- --------- --------- --------
Net income to common shareholders;
as reported........................ reported.....................$ 57,71186,738 $ 44,76168,802 $ 214,921 $166,131
Deduct: total stock-based employee
compensation expense determined
underusing Black Scholes fair value
based method for all awards......................... 821 460awards.... 1,244 539 3,175 1,515
Pro forma net income................. income..............$ 56,89085,494 $ 44,301
========== ==========68,263 $ 211,746 $164,616
========= ========= ========= ========
Pro forma basic earnings per share...share$ 1.38 $ 1.821.11 $ 1.41
========== ==========3.42 $ 2.65
========= ========= ========= ========
Basic earnings per share as
reported..reported...................... $ 1.851.40 $ 1.43
========== ==========1.12 $ 3.47 $ 2.68
========= ========= ========= ========
Pro forma diluted earnings per
share..share....................... $ 1.711.31 $ 1.34
========== ==========1.05 $ 3.25 $ 2.51
========= ========= ========= ========
Diluted earnings per share as
reportedReported...................... $ 1.741.33 $ 1.35
========== ==========1.06 $ 3.30 $ 2.53
========= ========= ========= ========
Pro forma information regarding net income and earnings per share is
to be calculated as if we had accounted for our stock
optionsstock-based compensation under
the fair value method of SFAS No. 123. The fair value for those options is
established at the date of grant using a Black-Scholes option pricing model
with the following weighted-
averageweighted-average assumptions for July 31, 2004 and 2003:
risk- freerisk-free interest rate of 4.2% and 4.3%, respectively; dividend yield of
zero; volatility factor of the expected market price of our common stock of
0.43 and 0.43, respectively;for both periods; and a weighted-average expected life of the option
of 5.05.2 and 5.1 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.
On March 5, 2004 our Board of Directors authorized a 2 for 1
stock split on all shares of Hovnanian Enterprises, Inc. common
stock effective March 19, 2004. The following proforma data for
the three months ended January 31, 2004 and 2003 has been
prepared to reflect such stock split.
Three Months Ended January 31,
2004 2003
---------- ----------
Per Share Data:
Basic:
Income per common share........ $ 0.92 $ 0.71
Weighted average number of
common shares outstanding.... 62,430 62,742
Assuming dilution:
Income per common share........ $ 0.87 $ 0.68
Weighted average number of
common shares outstanding.... 66,470 66,160
3. Interest costs incurred, expensed and capitalized were:
Three Months Ended JanuaryNine Months Ended
July 31, ------------------------------July 31,
------------------ -----------------
2004 2003 ---------- -----------2004 2003
-------- ------- ------- --------
(Dollars in Thousands)
Interest Capitalized at
Beginning of Period....... Period........$ 24,833 $ 22,15932,585 $25,480 $24,833 $22,159
Plus Interest Incurred(1)(2) 21,587 15,120. 21,426 17,807 65,217 48,232
Less Interest Expensed(2)... 16,943 13,679
---------- ----------.... 17,725 17,204 53,764 44,308
-------- ------- ------- --------
Interest Capitalized at
End of Period(2)..........Period (2)......... $ 29,477 $ 23,600
========== ==========36,286 $26,083 $36,286 $26,083
======== ======= ======= ========
(1) Data does not include interest incurred by our mortgage and finance
subsidiaries.
(2) RepresentsIncludes interest on borrowings for construction, land and land
and
development costs which are charged to interest expense when
homes are delivered or when land is not under active development.
4. Accumulated depreciation at JanuaryJuly 31, 2004 and October 31, 2003
amounted to $28.7$30.8 million and $27.5 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 related carrying amounts. In addition, from time to
time, we will write off certain residential land options including
approval, engineering and engineeringcapitalized interest costs for land management
decided not to purchase. We wrote off such costs amounting to
$0.1in the amount of $1.4
million and $0.2$0.1 million during the three months ended JanuaryJuly 31, 2004 and
2003, respectively, and $2.2 million and $1.6 million during the nine
months ended July 31, 2004 and 2003, respectively. Residential inventory
impairment losses and option write offswrite-offs are reported in the Condensed
Consolidated Statements of Income as "Homebuilding-
Inventory"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 as part of cost of sales.homebuyer. In
addition, we accrue warranty costs under our $150,000 per occurrence
general liability insurance deductible as part of selling, general and
administrative costs. Warranty accruals are based upon historical
experience. ChargesAdditions and charges incurred in the warranty accrual and
general liability accrual for the three and nine months ended JanuaryJuly 31, 2004
and 2003 are as follows:
Three Months Ended JanuaryNine Months Ended
July 31, ------------------------------July 31,
------------------ ------------------
2004 2003 -------------- --------------2004 2003
-------- -------- -------- --------
(Dollars in Thousands)
Balance, beginning of period......$ 39,532 $ 22,392period..... $47,186 $28,890 $39,532 $22,392
Company acquisitions.............. 5 1,821
Additions......................... 8,174 5,623acquisitions............. 2,170
Additions........................ 10,869 5,142 27,476 15,372
Charges incurred.................. (4,216) (4,332)
-------------- --------------incurred................. (4,697) (1,912) (13,650) (7,814)
-------- -------- -------- --------
Balance, end of period........... $ 43,495 $ 25,504
============== ==============period.......... $53,358 $32,120 $53,358 $32,120
======== ======== ======== ========
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
us.our financial position or results of operations.
8. As of JanuaryJuly 31, 2004 and October 31, 2003, respectively, we are
obligated under various performance letters of credit amounting to $126.4$162.6
million and $130.3 million.
9. We have anOur amended and restated unsecured Revolving Credit Agreement
("Agreement") with a group of banks that provides a revolving credit line of
$590$900 million through July 2006.2008. 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 and at various rates of either the prime rate plus 0.275% or a spread over LIBOR
plus 1.75%.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
equalranging from 0.20% to 0.350%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, areis a guarantor under
the revolving credit agreement.Agreement. As of JanuaryJuly 31, 2004 and October 31, 2003, there was nothe outstanding
balancebalances under the Agreement.
We have aAgreement were $215.0 million and zero, respectively.
Our amended secured mortgage loan warehouse agreement with a group of
banks, which is a short-term borrowing, that provides up to $200$250 million through
July 2004.2005. Interest is payable monthly at the Federal FundsEurodollar Rate plus 1.375%1.25%.
The loan is repaid when the underlying mortgage loans are sold to permanent
investors by the Company.us. As of JanuaryJuly 31, 2004 and October 31, 2003 borrowings under
the agreement were $107$144.9 million and $166.7 million, respectively.
10. On November 3, 2003, we issued $215 million 6 1/2% Senior Notes
due 2014. The net proceeds of the issuance were used for general corporate
purposes.
On March 18, 2004, we issued $150 million 6 3/8% Senior Notes due
2014. The net proceeds of the issuance were used to redeem all of our $150
million outstanding 9 1/8% Senior Notes due 2009, which occurred on May 3,
2004 and for general corporate purposes. Also on March 18, 2004, we paid
off our $115 million Term Loan with available cash. The redemption of the
Senior Notes and the payoff of the Term Loan resulted in expenses due to
the early extinguishment of debt of $8.7 million and $0.9 million,
respectively, before taxes, which have been reported as "Expenses Related
to Extinguishment of Debt" on our Condensed Consolidated Statement of
Income.
At JanuaryJuly 31, 2004, our long term debt consisted of: $140.3 million 10
1/2% Senior Notes due 2007, $150 million 9 1/8%
Senior Notes due 2009, $100 million 8% Senior Notes due 2012, $215
million 6 1/2% Senior Notes due 2014,and $150 million 6 3/8% Senior Notes
due 2014, (Senior Notes aggregate $602.3$602.6 million, net of discount),; $150
million 8 7/8% Senior Subordinated Notes due 2012, and $150 million 7 3/4%
Senior Subordinated Notes due 2013,2013.
Under the terms of the indentures governing our debt securities, we
have the right to make redemptions and a $165 million Term Loan due
2007 which bears interest at either the prime rate plus 1.25% or
LIBOR plus 2.5%. As of January 31, 2004 borrowings under the
Term Loan were $115 million.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 2,020,0003.1 million and 1,755,0003.8 million for the three months ended JanuaryJuly
31, 2004 and 2003, respectively, and approximately 3.3 million and 3.5
million for the nine months ended July 31, 2004 and 2003, 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 from financing its activities
without additional subordinated financial support from other parties or
(ii) equity holders either (a) lack direct or indirect ability to make
decisions about the entity, (b) are not obligated to absorb expected losses
of the entity or (c) do not have the right to receive expected residual
returns of the entity if they occur. If an entity is deemed to be a VIE,
pursuant to FIN 46, an enterprise that absorbs a majority of the expected
losses of the VIE is considered the primary beneficiary and must
consolidate the VIE. FIN 46 iswas effective immediately for VIE's created
after January 31, 2003. Pursuant to FASB revision to FIN 46, ("FSP 46-
6"FIN 46R"),
a public entity needissued 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 the end of the first interim or
annual period ending after March 15,our quarter ended April 30, 2004
if the VIE wasfor VIE's created before February 1, 2003, and the public entity has not issued
financial statements reporting that VIE in2003. In accordance with FIN 46. We46R, we
have elected to defer the application offully implemented FIN 46 to our
interests in potential variable interest entities created prior
to February 1, 2003 pursuant to FSP 46-6.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-
refundablenon-refundable deposit, a VIE
is created under condition (ii) (b) and (c) of the previous paragraph. We
have beenare 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 will compute expected losses and residual returns
based on the probability of future cash flows as outlined in FIN 46. If we
are deemed to be the primary beneficiary of the VIE we will consolidate it on
our balance sheet. The fair value of the VIE's inventory will beis 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 itsit's total assets consolidated on the balance sheet. In
certain cases we will have to place inventory on our balance sheet the VIE
has optioned to other developers. In addition, if the VIE has creditors,
it's debt will be placed on theour balance sheet even though the creditors
have no recourse against our Company. Based on these observations we
believe consolidating VIE's based on land and lot option deposits does not
reflect the economic realities or risks of owning and developing land.
At JanuaryJuly 31, 2004 all VIE's we consolidated VIE's created from
February 1, 2003were required to January 31, 2004 asconsolidate 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 fifteenthirty-one VIE's
totaling $19.9$25.8 million. Our option deposits represent our maximum exposure
to loss. The fair value of the property owned by the VIE's was $211.5 million of which $6.2 million was not
optioned to our Company.$198.6
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 $194.5$179.3 million, was reported on the balance sheet as
"Minority interest from inventory not owned". Creditors of these VIE's
have no recourse against our Company.
We will continue to secure land and lots using options. Not all our
deposits are with VIE's. Including the deposits with the fifteenthirty-one VIE's
above, at JanuaryJuly 31, 2004, we have total cash and letters of credit deposits
amounting to approximately $177.4$218.1 million to purchase land lots with a
total purchase price of $2.3$3.1 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.
In addition to the land and lot options noted above, during the third
quarter of 2004 we entered into two separate joint venture agreements, the
form of which resulted in those entities being considered variable interest
entities. However, in both cases, based on the expected losses and
residual returns, we are not the primary beneficiary of the VIE, and
therefore do not consolidate these entities. Our investment at risk in
these two entities at July 31, 2004 totaled $8.5 million, and is included
in prepaid expenses and other assets on the Condensed Consolidated Balance
Sheet.
13. Recent Accounting Pronouncements - In December 2003,March 2004, the
FinancialSecurities and Exchange Commission staff issued Staff Accounting Standards BoardBulletin
105 ("FASB"SAB 105"). Existing accounting guidance requires an entity to record
on its balance sheet the fair value of any issued and outstanding mortgage
loan commitments. SAB 105 requires that the fair value measurement include
only differences between the guaranteed interest rate in the loan
commitment and a revisionmarket interest rate, excluding any future cash flows
related to FIN 46.(i) expected fees to be received when the loan commitment
becomes a loan, (ii) gains from selling the loan, or (iii) the servicing
value created from the loan. The revision defers the effective date of
implementing FIN 46guidance in SAB 105 must be applied to
mortgage loan commitments that are accounted for variable interests credited prior to
January 2003as derivatives and provides certain additional exceptions. While
we are
still assessing the revised timing requirements of fully
implementing FIN 46, we now expect to apply the consolidation
provisions to allentered into after March 31, 2004. The adoption of the Company's VIE's no later than April 30,
2004, unless further deferrals are issued.guidance in SAB 105
did not have a material adverse effect on our financial position or results
of operations.
14. On November 6, 2003 we acquired a Florida homebuilder in Tampa,
Florida for cash
and 244,618489,236 shares of our Class A Common Stock
were issued.Stock. This acquisition was
accounted for as a purchase, with the results of operations of this entity
included in our condensed consolidated financial statements as of the date
of acquisition. In connection with the acquisition, we have definite life
intangible assets equal to the excess purchase price over the fair value of
the net assets estimated to be $33 million. It is our policy to obtain
appraisals of acquisition intangibles. We are awaiting the appraisal from
this acquisition. Until the appraisal is received, we estimated the
intangible value for amortization calculations. We expect to have our
final appraisal by our year ended October 31, 2004. We expect to amortize
the definite life intangibles over their estimated lives.
15. Intangible Assets - The intangible assets recorded on our
balance sheet are goodwill, tradenames, architectural designs, distribution
processes, and contractual agreements, with both definite and indefinite
lives resulting from acquisitions. We no longer amortize goodwill or
indefinite life intangibles, but instead assess them periodically for
impairment. We are amortizing the definite life intangibles over their
expected useful life, ranging from three to seven years.
In May 2004, we made a decision to change our fiscal 2002 California
acquisition brand name to K. Hovnanian Homes. As a result, we reclassified
$50 million from goodwill and indefinite life intangibles to definite life
intangibles on our July 31, 2004 Condensed Consolidated Balance Sheet.
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 JanuaryJuly 31, 2004 had issued and
outstanding approximately $300 million Senior Subordinated Notes, $602.3$602.6
million face value Senior Notes, a Term Loan with an outstanding balance of $115and $215 million anddrawn on a Revolving
Credit Agreement with no outstanding
balance.Agreement. The Senior Subordinated Notes, Senior Notes and the
Revolving Credit Agreement and Term Loan are fully and unconditionally guaranteed by the
Parent.
In addition to the Parent, each of the wholly-ownedwholly owned subsidiaries of
the Parent other than the Subsidiary Issuer (collectively, the "Guarantor
Subsidiaries"), with the exception of various subsidiaries formerly engaged
in the issuance of collateralized mortgage obligations, a mortgage lending
subsidiary, a subsidiary engaged in homebuilding activity in Poland, our
Title Insurance subsidiaries, and joint ventures (collectively(collectively; the "Non-guarantor"Non-
guarantor Subsidiaries"), have guaranteed fully and unconditionally, on a
joint and several basis, the obligation to pay principal and interest under
the Senior Notes, Senior Subordinated Notes, the Term Loan and the Revolving Credit
Agreement.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries we have included the accompanying consolidated 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 condensed financial information presents
the results of operations, financial position, and cash flows of (i) the
Parent, (ii) the Subsidiary Issuer, (iii) the Guarantor Subsidiaries, of the Parent, (iv)
the Non-guarantor Subsidiaries, of the Parent, and (v) the eliminations to arrive at the
information for Hovnanian Enterprises, Inc. on a consolidated basis.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING CONDENSED BALANCE SHEET
JANUARYJULY 31, 2004
(Thousands of Dollars)(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
ASSETS
Homebuilding.......................Homebuilding.....................$ (246)70 $ 137,210 $2,346,17029,085 $2,701,232 $ 29,84561,819 $ $2,512,979$2,792,206
Financial Services................. 106 135,666 135,772(29) 166,175 166,146
Income Taxes (Payable) Receivable 2,196 (1,240) (441) (515)Receivable. 13,304 33 8,626 (60) 21,903
Investments in and amounts due to
and from consolidated
subsidiaries..................... 896,974 934,921 (1,180,927) (15,490) (635,478)
--------subsidiaries....................1,040,365 1,160,904 (1,377,404) (27,962) (795,903)
---------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................Assets.....................$898,924 $1,070,891 $1,164,9081,053,739 $1,190,022 $1,332,425 $ 149,506 $(635,478) $2,648,751
========199,972 $ (795,903)$2,980,255
========== ========== ========== ============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding.......................Homebuilding......................$ $ 129 $ 389,097454,344 $ 1,6741,486 $ $ 390,771455,959
Financial Services................. 111,303 111,303150,436 150,436
Notes Payable...................... 1,036,262 (2,652) 4,008 1,037,6181,131,332 (3,464) 4,267 1,132,135
Income Taxes Payable (Receivable).
(16) 9,842 9,826
Minority Interest.................. 194,528 5,781 200,309179,255 8,731 187,986
Stockholders' Equity............... 898,924 34,645 574,093 26,740 (635,478) 898,924
-------- -----------Equity..............1,053,739 58,561 702,290 35,052 (795,903) 1,053,739
---------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................Equity.........................$898,924 $1,070,891 $1,164,9081,053,739 $1,190,022 $1,332,425 $ 149,506 $(635,478) $2,648,751
========199,972 $ (795,903)$2,980,255
========== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2003
(Thousands of Dollars)(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ (279) $ 151,050 $1,910,484 $ 35,632 $ $2,096,887
Financial Services................. (252) 234,557 234,305
Income Taxes (Payable)Receivable... 18,713 (1,241) (15,656) (637) 1,179
Investments in and amounts due to
and from consolidated
subsidiaries..................... 801,278 690,971 (851,398) (56,837) (584,014)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$819,712 $ 840,780 $1,043,178 $ 212,715 $ (584,014)$2,332,371
======== =========== =================== ========== ============ ========== ==========
Liabilities
Homebuilding.......................$ $ $ 425,847 $ 1,800 $ $ 427,647
Financial Services................. (35) 172,663 172,628
Notes Payable...................... 816,960 (2,984) 3,865 817,841
Income Taxes Payable (Receivables).
Minority Interest.................. 90,252 4,291 94,543
Stockholders' Equity............... 819,712 23,820 530,098 30,096 (584,014) 819,712
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$819,712 $ 840,780 $1,043,178 $ 212,715 $ (584,014)$2,332,371
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARYJULY 31, 2004
(Thousands(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 21 $1,045,028 $ 4,956 $ $1,050,005
Financial Services............... 1,499 12,184 13,683
Intercompany Charges............. 25,315 31,898 (57,213)
Equity In Pretax Income of
Dollars)Consolidated Subsidiaries......140,016 (140,016)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 140,016 25,336 1,078,425 17,140 (197,229) 1,063,688
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 8,431 938,265 3,925 (35,586) 915,035
Financial Services............... 788 8,422 (573) 8,637
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 8,431 939,053 12,347 (36,159) 923,672
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes. 140,016 16,905 139,372 4,793 (161,070) 140,016
State and Federal Income Taxes..... 53,278 7,112 53,133 403 (60,648) 53,278
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss).................$ 86,738 $ 9,793 $ 86,239 $ 4,390 $ (100,422)$ 86,738
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2003
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 109(45) $ 752,316835,191 $ 8,1004 $ (83)25 $ 760,442835,175
Financial Services .............. 952 13,821 14,773Services............... 2,033 11,609 13,642
Intercompany Charges............. 16,284 31,116 (47,400)(61,982) 51,085 10,897
Equity In Pretax Income of
Consolidated Subsidiaries...... 92,695 (92,695)Subsidiaries......109,808 (109,808)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................. 92,695 16,393 784,384 21,921 (140,178) 775,215Revenues................$109,808 $ (62,027)$ 888,309 $ 11,613 $ (98,886)$ 848,817
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... (225) 703,765 6,665 (35,712) 674,493(84,286) 820,362 142 (4,844) 731,374
Financial Services............... 490 8,643 (1,106) 8,027772 7,254 (391) 7,635
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. (225) 704,255 15,308 (36,818) 682,520(84,286) 821,134 7,396 (5,235) 739,009
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 92,695 16,618 80,129 6,613 (103,360) 92,695Taxes..109,808 22,259 67,175 4,217 (93,651) 109,808
State and Federal Income Taxes..... 34,984 5,816 30,276 2,624 (38,716) 34,98441,006 8,420 25,121 1,812 (35,353) 41,006
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$57,71168,802 $ 10,80213,839 $ 49,85342,054 $ 3,9892,405 $ (64,644) (58,298)$ 57,71168,802
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREENINE MONTHS ENDED JANUARYJULY 31, 2004
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 207 $2,694,491 $ 21,170 $ (83)$2,715,785
Financial Services............... 3,615 38,311 41,926
Intercompany Charges............. 60,123 95,338 (155,461)
Equity In Pretax Income of
Consolidated Subsidiaries......344,868 (344,868)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 344,868 60,330 2,793,444 59,481 (500,412) 2,757,711
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 8,859 2,469,764 16,898 (108,012) 2,387,509
Financial Services............... 1,853 25,953 (2,472) 25,334
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 8,859 2,471,617 42,851 (110,484) 2,412,843
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes..344,868 51,471 321,827 16,630 (389,928) 344,868
State and Federal Income Taxes.....129,947 17,971 122,666 5,081 (145,718) 129,947
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss).................$214,921 $ 33,500 $ 199,161 $ 11,549 $ (244,210)$ 214,921
======== ========== ========== ============ =========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 2003
(Thousands of Dollars)(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 472593 $2,120,611 $ 613,67914 $ 2,994 $ (5) $ 617,14015 $2,121,233
Financial Services .............. 1,610 8,885 10,495Services................ 5,496 29,540 35,036
Intercompany Charges............. 43,538 3,376 (46,914)23,389 62,544 (85,933)
Equity In Pretax Income of
Consolidated Subsidiaries...... 71,136 (71,136)
-------265,372 (265,372)
-------- ---------- ---------- ------------ ---------- ----------
Total Revenues................. 71,136 44,010 618,665 11,879 (118,055) 627,635
-------Revenues................ $265,372 $ 23,982 $2,188,651 $ 29,554 $ (351,290)$2,156,269
-------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 44,010 547,661 3,239 (44,232) 550,6781,723 1,961,389 361 (92,205) 1,871,268
Financial Services............... 542 5,780 (501) 5,821
-------1,907 18,971 (1,249) 19,629
-------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 44,010 548,203 9,019 (44,733) 556,499
-------1,723 1,963,296 19,332 (93,454) 1,890,897
-------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 71,136 70,462 2,860 (73,322) 71,136265,372 22,259 225,355 10,222 (257,836) 265,372
State and Federal Income Taxes..... 26,375 (205) 26,195 1,150 (27,140) 26,375
-------99,241 7,791 84,552 4,261 (96,604) 99,241
-------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$44,761166,131 $ 20514,468 $ 44,267140,803 $ 1,7105,961 $ (46,182) (161,232)$ 44,761
=======166,131
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
THREENINE MONTHS ENDED JANUARYJULY 31, 2004
(Thousands(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income........................$ 214,921 $ 33,500 $ 199,161 $ 11,549 $ (244,210)$ 214,921
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 45,581 (7,558) (855,724) 47,505 244,210 (525,986)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 260,502 25,942 (656,563) 59,054 (311,065)
Net Cash (Used In)
Investing Activities............... (20,909) (58,547) (275) (79,731)
Net Cash Provided By (Used In)
Financing Activities............... (506) 315,000 (10,903) (22,032) 281,559
Intercompany Investing and Financing
Activities - Net...................(239,087) (469,933) 737,895 (28,875)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... (128,991) 11,882 7,872 (109,237)
Balance, Beginning of Dollars)Period......... 15 135,846 (14,372) 6,732 128,221
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period.....................$ 15 $ 6,855 $ (2,490)$ 14,604 $ $ 18,984
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2003
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 57,711166,131 $ 10,80214,468 $ 49,853140,803 $ 3,9895,961 $ (64,644) (161,232)$ 57,711166,131
Adjustments to reconcile net income
to net cash provided by
(used in)(Used In) Provided
By operating activities... 54,458 2,120 (407,690) 100,980 64,644 (185,488)activities.......... (2,534) 12,717 (510,053) (44,977) 161,232 (383,615)
-------- --------- ---------- ------------ ---------- ----------
Net Cash (Used In) Provided By
(Used In)
Operating Activities........... 112,169 12,922 (357,837) 104,969 (127,777)163,597 27,185 (369,250) (39,016) (217,484)
Net Cash (Used In)
Investing Activities............... (18,985) (20,571) (100) (39,656)(7,588) (132,321) (255) (140,164)
Net Cash (Used In) Provided By(Used In)By
Financing Activities............... 2,512 215,000 2,895 (59,807) 160,600(7,261) 138,631 24,990 50,937 207,297
Intercompany Investing and Financing
Activities - Net..................... (95,696) (243,950) 380,994 (41,348)Net...................(148,743) (309,555) 468,463 (10,165)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... (16,028) 5,481 3,714 (6,833)Cash and
Cash Equivalents................... 5 (143,739) (8,118) 1,501 (150,351)
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
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 44,761 $ 205 $ 44,267 $ 1,710 $ (46,182) $ 44,761
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 1,216 7,789 (185,915) 49,071 46,182 (81,657)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 45,977 7,994 (141,648) 50,781 (36,896)
Net Cash Provided by (Used In)
Investing Activities............... (48) 85 (88,732) (2) (88,697)
Net Cash Provided By(Used In)
Financing Activities............... (11,755) (36,886) (48,641)
Intercompany Investing and Financing
Activities - Net................... (45,933) (172,285) 231,457 (13,239)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... (4) (164,206) (10,678) 654 (174,234)
Balance Beginning of Period.......... 10 218,844 43,689 7,447 269,990
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 615 $ 54,63875,105 $ 33,01135,571 $ 8,1018,948 $ $ 95,756119,639
======== ========= ========== ============ ========== ==========
17. Subsequent Events - We have entered into an agreement to
sell $150 million aggregate principal amount of 6 3/8% Senior
Notes due 2014. The offering is expected to close on March 18,
2004.
On March 5, 2004, the shareholders of Hovnanian Enterprises,
Inc. approved an amendment to its amended Certificate of
Incorporation, which provides that the total number of authorized
shares of all classes of stock which Hovnanian Enterprises, Inc.
shall have the authority to issue is 230,100,000, of which
200,000,000 shares shall be class A Common Stock having a par
value of $0.01 per share, 30,000,000 shares shall be Class B
Common Stock having a par value of $0.01 per share, and 100,000
shares shall be Preferred Stock having a par value of $0.01 per
share.
On March 5, 2004 our Board of Directors authorized a 2-for-1
stock split on all shares of Hovnanian Enterprises, Inc. common
stock. The stock split will entitle all shareholders of record
at the close of business on March 19, 2004 to receive one
additional share of Class A Common Stock for every share of Class
A Common Stock held on that date and one additional share of
Class B Common Stock for every share of Class B Common Stock held
on that date. The additional shares of Class A Common Stock and
Class B Common Stock will be distributed to shareholders in the
form of a stock dividend on March 26, 2004.
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, indefinite or definite life
intangibles.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 areis recorded when title is conveyed to the buyer, adequate cash
payment has been received and there is no continued involvement.
Income Recognition from Mortgage Loans - Profits and losses relating
to the sale of mortgage loans are recognized when legal control passes to
the buyer and the sales price is collected.
Inventories - For inventories of communities under
development, a loss is recorded when events and circumstances
indicate impairment and the undiscounted future cash flows
generated are less than the related carrying amounts. The
impairment loss is based on discounted future cash flows
generated from expected revenue, less cost to complete including
interest, and selling costs. Inventories and long-lived assets held for sale are
recorded at the lower of cost or fair value less selling costs. Fair value
is defined 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 - Our deductible is $150,000 per
occurrence for worker's compensation and general liability insurance.
Reserves have been established based upon actuarial analysis of estimated
losses incurred during 2004 and 2003.
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") "Consolidated"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 07-10"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 - The intangible assets recorded on our balance
sheet are goodwill, tradenames, architectural designs, distribution
processes, and contractual agreements with both definite and indefinite
lives resulting from company acquisitions. We no longer amortize goodwill
or indefinite life intangibles, but instead assess them periodically for
impairment. We are amortizing the definite life intangibles over their
expected useful life, ranging from three to seven years.
In May 2004, we made a decision to change our fiscal 2002 California
acquisition brand name to K. Hovnanian Homes. As a result, we reclassified
$50 million from goodwill and indefinite life intangibles to definite life
intangibles on our July 31, 2004 Condensed Consolidated Balance Sheet.
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 andthat 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 consolidated balance sheets.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, and Ohio), our Southeast Region (Washington D. C., 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 threenine months ended JanuaryJuly 31, 2004 were for
operating expenses, increases in housing inventories, construction, income
taxes, interest, the paydownpayoff of our revolving credit facility,Term Loan, the redemption of Senior
Notes due 2009, and the acquisition of a Florida homebuilder. We provided
for our cash requirements from housing and land sales, the revolving credit
facility, the issuance of $215$365 million of Senior 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.
At January 31, 2004, there was no cash balance outstanding
under our $590 million revolving credit facility and we had
approximately $100 million of cash. At January 31, 2004 we had
issued $126.4 million of letters of credit which reduces cash
available under our revolving credit facility.
On July 3, 2001, our Board of Directors authorized a stock repurchase
program to purchase up to 24 million shares of Class A Common Stock. As of
JanuaryJuly 31, 2004, 903,9381.9 million shares of Class A Common Stock have been
purchased under this program of which zero
were repurchased during the three months ended January 31, 2004.program. In addition in 2003, we retired at no cost
0.81.6 million shares that were held by sellers of two previous acquisition.
On March 5, 2004 our Board of Directors authorized a seller2-for-1 stock split in
the form of a previous acquisition.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 $590$900 million
through July 2006.2008. 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 and at
various rates of either the prime rate plus 0.275% or a spread over LIBOR plus 1.75%.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 July 31,
2004, there was $215 million drawn under this Agreement and we had
approximately $6.7 million of homebuilding cash. At July 31, 2004 we had
issued $162.6 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 20062008 or negotiate a replacement facility, but there
can be no assurance of such extension or replacement facility. We
currently are in compliance and intend to maintain compliance with the
covenants under the Agreement. Each of our significant subsidiaries,
except for our financial services subsidiaries and joint ventures, is a
guarantor under the revolving credit agreement.
As of January 31, 2004, there were no borrowings under the
Agreement.
At JanuaryJuly 31, 2004 we had $605.3 million of outstanding senior debt
($602.3602.6 million, net of discount), comprised of $140.3 million 10 1/2%
Senior Notes due 2007, $150 million 9 1/8%
Senior Notes due 2009, $100 million 8% Senior Notes due 2012, and $215 million
6 1/2% Senior Notes due 2014, and $150 million 6 3/8% Senior Notes due
2014. At JanuaryJuly 31, 2004, we had outstanding $300 million of senior
subordinated debt comprised of $150 million 8 7/8% Senior Subordinated
Notes due 2012, and $150 million 7 3/4% Senior Subordinated Notes due 2013.
Each of our significantwholly 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, a mortgage lending subsidiary, a subsidiary engaged in
homebuilding activity in Poland, our financial servicesTitle Insurance subsidiaries, and
joint ventures, is a guarantor underof the Senior Notes and Senior Subordinated
Notes.
On January 22, 2002May 3, 2004 we executed a $165redeemed our 9 1/8% Senior Notes due 2009, and we
recorded $8.7 million five-year
Term Loan. Theof expenses associated with the extinguishment of
this debt. On March 18, 2004, we paid off our $115 million Term Loan, matures in January 2007, and
bears
interest at eitherwe recorded $0.9 million of expenses associated with the prime rate plus 1.25% or LIBOR plus 2.5%.
Eachextinguishment of
our significant subsidiaries, except for our financial
services subsidiaries and joint ventures, is a guarantor under
the Term Loan. At January 31, 2004 borrowings underdebt. In both cases, these expenses have been reported as "Expenses
Related to Extinguishment of Debt" on the Term
Loan were $115 million.Condensed Consolidated Statements
of Income.
Our mortgage banking subsidiary's warehousingwarehouse agreement was amended and restated on
July 31, 2003.August 3, 2004. Pursuant to the agreement, we may borrow up to $200$250
million. The agreement expires in July 20042005 and interest is payable
monthly at the Federal
FundsEurodollar Rate plus 1.375%1.25%. We believe that we will be able
either to extend this agreement beyond July 20042005 or negotiate a replacement
facility, but there can be no assurance of such extension or replacement
facility. As of JanuaryJuly 31, 2004, the aggregate principal amount of all
borrowings under this agreement was $107$144.9 million.
Total inventory increased $287.7$687.5 million during the threenine months ended
JanuaryJuly 31, 2004. This increase excluded the change in Consolidated Inventory Not Ownedconsolidated inventory
not owned of $75.6$49.9 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 98.98, and EITF 97-10,
and Variable Interest Entities in accordance with FIN 46. See "Notes to
Condensed Consolidated Financial StatementsStatements" - Note 12 for additional
explanationinformation on FIN 46. Excluding the impact from our Florida acquisition
in November 2003 of $34.5$42.7 million, total inventory in our Northeast Region
increased $88.2$118.6 million, the Southeast Region increased $47.7$83.6 million, the
Southwest Region increased $19.8$58.5 million, and our West Region increased
$97.5$384.1 million. The increase in inventory was primarily the result of
future planned organic growth in all
of our existing markets. Substantially all
homes under construction or completed and included in inventory at JanuaryJuly 31,
2004 are expected to be closed during the next twelve months. Most
inventory completed or under development is financed through our line of
credit, term loan, and senior and 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 JanuaryJuly 31, 2004 and October 31,
2003 numbers exclude real estate owned and options in locations in whichwhere we
have ceased development.
Active Proposed Grand
Active Communities'Communities Developable Total
Communities Homes Homes Grand TotalHomes
----------- ----------- ----------- -----------
January--------- ------------ ---------
July 31, 2004:
Northeast Region.. 35 8,164 17,055 25,21933 8,004 17,739 25,743
Southeast Region.. 119 11,893 13,676 25,569112 11,968 18,291 30,259
Southwest Region.. 91 8,731 4,435 13,16689 9,975 5,606 15,581
West Region....... 43 8,012 7,768 15,78051 7,676 12,638 20,314
----------- ----------- ---------- -----------
288 36,800 42,934 79,734--------- ------------ ---------
285 37,623 54,274 91,897
=========== =========== ========== ==================== ============ =========
Owned.......... 18,860 5,257 24,11721,336 5,510 26,846
Optioned....... 17,940 37,677 55,617
----------- ---------- -----------16,287 48,764 65,051
--------- ------------ ---------
Total........ 36,800 42,934 79,734
=========== ========== ===========37,623 54,274 91,897
========= ============ =========
Active Proposed Grand
Active Communities'Communities Developable Total
Communities Homes Homes Grand TotalHomes
----------- ----------- ----------- -------------------- ------------ ----------
October 31, 2003:
Northeast Region.. 32 8,536 15,744 24,280
Southeast Region.. 107 10,163 12,345 22,508
Southwest Region.. 81 7,127 6,813 13,940
West Region....... 37 7,359 6,211 13,570
----------- ----------- ---------- -----------
257 33,185 41,113 74,298
=========== =========== ========== ===========
Owned.......... 16,111 5,359 21,470
Optioned....... 17,074 35,754 52,828
----------- ---------- -----------
Total........ 33,185 44,11341,113 74,298
=========== ========== ===========
Homes in active communities under contract at JanuaryJuly 31, 2004 and
October 31, 2003 were 5,7647,235 and 5,020, 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:
JanuaryJuly 31, October 31,
2004 2003
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 176103 54 230157 130 44 174
Southeast Region.... 238 46 284166 40 206 207 32 239
Southwest Region.... 599 99 698738 86 824 557 94 651
West Region......... 177 111 288315 140 455 185 105 290
------ ------ ----- ------ ------ -----
Total 1,190 310 1,5001,322 320 1,642 1,079 275 1,354
====== ====== ===== ====== ====== =====
Receivables, deposits, and notes increased $12.4$7.1 million to $54.9$49.6
million at JanuaryJuly 31, 2004. The increase was primarily due to the timing of
cash received from homes that closed on JanuaryJuly 31, 2004. Receivables from
home sales amounted to $18.4$12.4 million and $4.1 million at January 31,2004July 31, 2004 and
October 31, 2003, respectively.
Prepaid expenses and other assets increased $20.8 million to
$127.4 million at Januaryare as follows:
July 31, 2004. The increase was primarilyOctober 31, Dollar
2004 2003 Change
---------- ----------- ---------
Prepaid insurance.................... $ 2,931 $ - $ 2,931
Prepaid project costs................ 46,530 34,171 12,359
Investment in joint ventures......... 47,050 23,232 23,818
Senior residential rental properties. 8,912 9,118 (206)
Other prepaids....................... 17,969 16,209 1,760
Other assets......................... 22,782 23,795 (1,013)
----------- ----------- ---------
$ 146,174 $ 106,525 $ 39,649
=========== =========== =========
Prepaid insurance increased due to increases in prepaid insurance and prepaid project costs
amounting to $11.7 million and $6.4 million, respectively. We
paya payment of a full year of
insurance costs everyduring the first quarter and
amortize thoseof every year. These costs are
amortized monthly on a straight-linestraight line basis. At
January 31, 2004, we have $11.5 million of prepaid insurance
costs.Prepaid project costs
increased due to increased 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. At JanuaryInvestments
in Joint Ventures increased as we entered into three new land development
joint ventures and one new homebuilding joint venture during the nine
months ended July 31, 2004, with a total investment of $27.9 million at
July 31, 2004. As of July 31, 2004 we have $40.6 million of prepaid project costs. Prepaid
expenses and other assets also include our investmentinvestments in joint
ventures. We have entered into a fewthree
homebuilding joint ventures with
independent third parties to develop and sell land or to developseven land and build and sell homes. At January 31,2004 we have
invested $18.9 million inland 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, senior rental residential assets,
and miscellaneous prepaids and assets which amountedassets.
At July 31, 2004, we had $32.7 million of goodwill. This amount
resulted from company acquisitions prior to $56.4
million.
Intangiblesfiscal 2003. In May 2004, we
made a decision to change our fiscal 2002 California acquisition brand name
to K. Hovnanian Homes. This resulted in a reclassification of $50 million
from goodwill and indefinite life intangibles to definite life intangibles
on our July 31, 2004 Condensed Consolidated Balance Sheet.
Definite life intangibles increased $28.4$65.1 million to $168$122.1 million
at JanuaryJuly 31, 2004. This increase was the result of our November 6, 2003
Florida acquisition and is net of amortization expense.
$82.7expense as well as the
reclassification of $50 million are categorizedrelated to the California acquisition brand
name as goodwill and indefinite life
intangibles. This amount resulted from company acquisitions
prior to fiscal 2003. $85.4 million are categorized as definite
life intangibles resulting from acquisitions made in fiscal 2003
and 2004.noted above. To the extent the acquisition price was greater than
the book value of tangible assets which were stepped up to fair values,
purchase price premiums arewere classified as intangibles. Professionals are
hired to appraise all acquired intangibles. Such appraisals resulted in
all fiscal 2003 acquisition premiums to be categorized as definite life
intangibles. The intangibles from our fiscal 2004 acquisition are
estimated, as we await the final appraisal. See the "Critical Accounting
Policies" section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional explanation of
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.
Income taxes receivable increased $20.7 million to $21.9 million at
July 31, 2004. This increase was primarily the result of the payment of
$28.4 million of federal and state taxes accrued at October 31, 2003 and
netted against deferred taxes receivable offset by unpaid income tax
accruals recorded for the nine months ended July 31, 2004. 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 offset against future taxable
income.
Accounts payable and other liabilities decreased $14.9
million to $215.8 million.are as follows:
July 31, October 31, Dollar
2004 2003 Change
--------- ----------- --------
Accounts payable.......................$102,717 $ 68,935 $ 33,782
Reserves............................... 60,232 46,699 13,533
Accrued expenses....................... 28,188 27,064 1,124
Accrued compensation................... 59,007 72,495 (13,488)
Property secured by a mortgage......... 16,671 - 16,671
Other liabilities...................... 23,871 15,503 8,368
--------- ----------- --------
$290,686 $ 230,696 $ 59,990
========= =========== ========
The decreaseincrease in accounts payable and other liabilities was primarily
due to the resultconsolidation of fiscal 2003 accrued compensation payments made amounting to
$30.4 million offseta property in our Northeast Region that was
secured by a mortgage which was replaced by a letter of credit, increases
in accounts payable due to our November 2003 Florida acquisition as well as
the opening of new communities in our existing markets, increases in
reserves for our General Liability and Workman's Compensation policies and
an increase in other liabilities due to an advance related to a structured
option. These increases were offset by a decrease in accrued expenses and reserves amountingcompensation
due to $10.3 million, $3 million and
$2.2 million, respectively,the payout of our fiscal year 2003 bonuses during the threefirst nine
months ended January
31,of 2004. Accounts payable andThe remainder of other liabilities consist
primarily of accounts payable, accrued expenses, accrued
compensationinclude payroll
withholdings, deferred income, and reserves, which amounted to $79.2 million, $51.7
million, $36 million, and $48.9 million, respectively, at January
31, 2004. The majority of the reserves consist of a warranty
accrual for home repair costs exceeding $1,000, and for community
amenities and land development infrastructure repair. We accrue
for warranty costs at the time each home is closed and title and
possession have been transferred to the homebuyer as part of cost
of sales. In addition, we accrue for warranty costs undernonrecourse mortgage associated with
our $150,000 per occurrence general liability insurance deductibles
as part of selling, general, and administration. Warranty
accruals are based upon historical experience. At January 31,
2004 and October 31, 2003, the warranty and general liability
accruals amounted to $43.5 million and $39.5 million,
respectively.Corporate Office.
Financial Services - Mortgage loans held for sale consist of
residential mortgages receivable of which $121.9$150.8 million and $223.9 million
at JanuaryJuly 31, 2004 and October 31, 2003, respectively, are being temporarily
warehoused and awaiting sale in the secondary mortgage market. The balance
of mortgage loans held for sale are being held as an investment. We may
incur risk with respect to mortgages that are delinquent, but only to the
extent the losses are not covered by mortgage insurance or resale value of
the house. Historically, we have incurred minimal credit losses.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JANUARYJULY 31, 2004
COMPARED TO THE THREE AND NINE MONTHS ENDED JANUARYJULY 31, 2003
Total Revenues:
Compared to the same prior period, revenues increased as follows:
Three Months Ended
------------------------------------------
January JanuaryJuly 31, July 31, Dollar Percentage
31, 2004 31, 2003 Change Change
--------- --------- -------- ----------------------------------------------------
(Dollars inIn Thousands)
Homebuilding:
Sale of homes........ $757,273 $607,501 $149,772 24.7%$1,044,610 $ 830,734 $213,876 25.7%
Land sales and other
revenues............... 3,169 9,639 (6,470) (67.1%revenues........... 5,395 4,441 954 21.5%
Financial Services..... 13,683 13,642 41 0.3%
---------- ---------- -------- --------
Total Revenues... $1,063,688 $ 848,817 $214,871 25.3%
========== ========== ======== ========
Nine Months Ended
------------------------------------------
July 31, July 31, Dollar Percentage
2004 2003 Change Change
------------------------------------------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $2,702,826 $2,104,788 $598,038 28.4%
Land sales and other
revenues........... 12,959 16,445 (3,486) (21.2%)
Financial services........ 14,773 10,495 4,278 40.8%Services..... 41,926 35,036 6,890 19.7%
----------- ---------- -------- --------
-------- ---------
Total Revenues......$775,215 $627,635 $147,580 23.5%Revenues... $2,757,711 $2,156,269 $601,442 27.9%
=========== ========== ======== ======== ======== =========
Homebuilding:
Compared to the same prior period, housing revenues increased $149.8$213.9
million or 24.7%25.7% during the three months ended JanuaryJuly 31, 2004 and increased
$598.0 million or 28.4% during the nine months ended July 31, 2004.
Housing revenues are recorded at the time when title is conveyed to the buyer, adequate
cash payment has been received, and there is no continued involvement.
Information on homes delivered by market area is set forth below:
Three Months Ended JanuaryNine Months Ended
July 31, -------------------July 31,
--------------------- ----------------------
2004 2003 --------- --------2004 2003
---------- ---------- ---------- ----------
(Dollars in Thousands)
Northeast Region:(1)
Housing Revenues..... $191,908 $136,763
Homes Delivered...... 640 431Dollars............ $ 261,470 $ 210,039 $ 661,998 $ 494,957
Homes.............. 792 647 2,101 1,540
Southeast Region:(2)
Housing Revenues..... $191,062 $158,120
Homes Delivered...... 787 623 (1)
Dollars............ $ 272,395 $ 165,583 $ 716,942 $ 479,865
Homes.............. 1,004 689 2,778 1,933
Southwest Region:(3)
Housing Revenues..... $127,814 (1)
Dollars............ $ 72,662
Homes Delivered...... 724 359181,491 $ 129,907 $ 463,869 $ 309,336
Homes.............. 1,045 640 2,653 1,519
West Region:
Housing Revenues..... $246,489 $238,695
Homes Delivered...... 750 863Dollars............ $ 329,254 $ 325,205 $ 860,017 $ 819,369
Homes.............. 897 1,090 2,460 2,846
Other:
Housing Revenues.....Dollars............ $ --- $ -- $ -- $ 1,261
Homes Delivered...... -Homes.............. -- -- -- 9
Consolidated Total:
Housing Revenues..... $757,273 $607,501
Homes Delivered...... 2,901 2,285Dollars............ $ 1,044,610 $ 830,734 $2,702,826 $2,104,788
Homes.............. 3,738 3,066 9,992 7,847
Unconsolidated Joint
Ventures:
Dollars............ $ 11,611 $ 1,901 $ 22,921 $ 6,074
Homes.............. 27 9 56 30
Totals:
Housing Revenues.....Revenues... $ 2,8261,056,221 $ 1,996832,635 $2,725,747 $2,110,862
Homes Delivered...... 10 10
Total:
Housing Revenues..... $760,099 $609,497
Homes Delivered...... 2,911 2,295Delivered.... 3,765 3,075 10,048 7,877
(1) January 31, 2004 includesThe three and nine month periods include deliveries from our
Texas, Ohio, acquisitionArizona, and Florida acquisitions which closed
on April 1, 2003.
(2) January 31, 2004 includes deliveries from our Florida
acquisition which closed November 1, 2003.
(3) January 31, 2004 includes a full quarter of deliveries from
one of our Texas acquisition which closedin January 2003, April 2003, August 2003, and deliveries from our Arizona acquisition which closed on
August 13, 2003.
The increase in housing revenues was primarily due to our
acquisitions and home price increases in our Northeast Region,
Southeast Region and West Region.November 2003,
respectively.
An important indicator of our future results are recently signed
contracts and our 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
ThreeNine Months Ended Contract Backlog
JanuaryJuly 31, as of JanuaryJuly 31,
----------------------- ---------------------------------------------- ------------------------
2004 2003 2004 2003
--------- --------- --------- --------------------- ----------- ----------- -----------
(Dollars in Thousands)
Northeast Region: (1)
Dollars............ $203,484 $115,447 $ 611,901778,303 $ 410,793582,015 $ 768,066 $ 613,884
Homes.............. 631 368 2,190 1,3342,405 1,896 2,522 2,266
Southeast Region: (1)
Dollars............ $241,067 $149,037 $ 650,934886,696 $ 322,578637,177 $ 772,073 $ 497,907
Homes.............. 867 586 2,303 1,1843,132 2,400 2,558 1,707
Southwest Region: (1)
Dollars............ $121,177 $ 68,927503,157 $ 153,397338,197 206,540 $ 89,888127,636
Homes.............. 723 353 988 4332,871 1,722 1,207 642
West Region:
Dollars............ $299,020 $233,616$1,339,917 $ 326,848882,976 $ 270,835777,598 $ 359,821
Homes.............. 912 832 955 9243,600 2,994 1,933 1,103
Other:
Dollars............ $ -- $ 313 $ -- $ --
Homes.............. -- 2 -- --
Consolidated Total:
Dollars............ $864,748 $567,340 $1,743,080 $1,094,094$3,508,073 $2,440,678 $2,524,277 $1,599,248
Homes.............. 3,133 2,141 6,436 3,87512,008 9,014 8,220 5,718
Unconsolidated Joint
Ventures:
Dollars............ $ 50,991179,174 $ 1,4896,409 $ 64,043172,130 $ 4,1344,975
Homes.............. 92 7 118 20301 30 281 23
Totals:
Dollars............ $915,739 $568,829 $1,807,123 $1,098,228
Homes.............. 3,225 2,148 6,554 3,895
In the month of February$3,687,247 $2,447,087 $2,696,407 $1,604,223
Homes............... 12,309 9,044 8,501 5,741
(1) Included in sales contracts and contract backlog are sales contracts
and backlog from our Texas, Ohio, Arizona, and Florida acquisitions which
closed in January 2003, April 2003, August 2003, and November 2003,
respectively.
During August 2004, we signed an additional 1,6091,290 net contracts
amounting to $452.7$417.4 million in consolidated communities and 6444 net
contracts amounting to $32.9$24.5 million in unconsolidated joint ventures. The February 2004ventures
compared to 1,085 net contracts along with our
contract backlog at January 31, 2004amounting to $280.9 million in consolidated
communities and deliveries for5 net contracts amounting to $1.1 million in unconsolidated
joint ventures in the three
months ended January 31, 2004 amount to approximately 75.5% of
our projected deliveries for fiscal 2004.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 JanuaryNine Months Ended
July 31, July 31,
------------------- ----------------------
2004 2003 2004 2003
--------- -------- ------------------- ----------
(Dollars in Thousands)
Sale of Homes................ $757,273 $607,501$1,044,610 $830,734 $2,702,826 $2,104,788
Cost of Sales................ 562,900 457,526778,121 618,650 2,014,799 1,572,306
--------- -------- ------------------ ----------
Housing Gross Margin......... $194,373 $149,975$ 266,489 $212,084 $ 688,027 $ 532,482
========= ======== ================== ==========
Gross Margin Percentage...... 25.7% 24.7%25.5% 25.5% 25.5% 25.3%
Cost of Sales expenses as a percentage of home sales revenues are
presented below:
Three Months Ended JanuaryNine Months Ended
July 31, July 31,
------------------- -------- --------
2004 2003 2004 2003
-------- -------- -------- --------
Sale of Homes................ 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of Sales:
Housing, land &
development costs.... 66.2 67.8%66.7% 67.1% 66.6% 67.2%
Commissions............ 2.22.2% 2.0% 2.2% 2.1%
Financing concessions.. 1.01.0% 0.9% 1.0% 0.9%
Overheads.............. 4.94.6% 4.5% 4.7% 4.5%
-------- -------- -------- --------
Total Cost of Sales.......... 74.3% 75.3%74.5% 74.5% 74.5% 74.7%
-------- -------- -------- --------
Gross Margin................. 25.7% 24.7%25.5% 25.5% 25.5% 25.3%
======== ======== ======== ========
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.
We
achieved higherExcluding our Florida and Arizona acquisitions, our gross margins
duringincreased to 26.1% for both the three and nine months ended JanuaryJuly 31, 2004,
when compared to the same periodperiods last year. The
consolidated gross margin increased 1.0% for the three months
ended January 31, 2004. The margin increase wasThese increases are primarily
due primarily to increases in average sales prices our mix of communities, and the effects from some of the processingprocess
improvements that we have been implementing.
Selling,implementing in our existing operations.
The lower margin from our Florida acquisition is primarily due to the step
up of inventory to reflect fair value at the time of purchase. Although we
achieve targeted returns from our Arizona acquisition through higher
inventory turnover our margins are lower than our average consolidated
margins. Another factor that has begun to hinder our gross margins is the
increase in material costs such as lumber and concrete. Despite the effect
of our acquisitions and price increases of materials, we have been able to
maintain our gross margin percentage. Based on our backlog of homes
expected to close during our fiscal 2004 fourth quarter, there is the
potential for upside in our homebuilding gross margin for the full fiscal
year ended October 31, 2004.
Homebuilding selling, general, and administrative expenses as a
percentage of homebuilding revenues, increasedremained relatively flat comparing the
three and nine months ended July 31, 2004 to 9.4%the same periods in the prior
year. Homebuilding selling, general, and administrative expenses as a
percentage of homebuilding revenues was 7.9% for both the three months
ended JanuaryJuly 31, 2004 from 8.8%and 2003, and 8.7% and 8.5% for the prior
year's three months.nine months ended
July 31, 2004 and 2003, respectively. Such expenses increased $17.5$16.8
million and $55.2 million during the three and nine months ended JanuaryJuly 31,
2004, respectively, compared to the same period last year. The increased percentagedollar
increase was primarily due to our acquisitions and increased selling,
general and administrative costs due toassociated with the increase in the number
of active selling communities and
anticipated business expansion in all of our Northeast Region and West
Region.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 JanuaryNine Months Ended
July 31, July 31,
------------------ -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Land and Lot Sales................ $ 1,139 $8,452230 $ 3,314 $ 1,815 $13,064
Cost of Sales..................... 1,035 5,65295 3,247 1,458 9,988
-------- -------- -------- --------
Land and Lot Sales Gross Margin... $ 104 2,800135 67 357 3,076
Interest Expense.................. 10 344- 153 21 508
-------- -------- -------- --------
Land and Lot Sales Profit (Loss)
Before Tax...................... $ 94 $2,456135 $ (86) $ 336 $ 2,568
======== ======== ======== ========
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: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 and nine months ended JanuaryJuly 31,
2004, financial services provided a $6.7$5.0 million and $16.6 million profit
before income taxes, respectively, compared to a profit of $4.7$6.0 million and
$15.4 million, respectively, for the same periods in 2003. This increaseThe decrease in
pretax profit for the three months ended July 31,2004 as well as the
decrease in pretax margin percentage in both the three and nine months
ended July 31, 2004 is primarily due to reduced costs,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 mortgage loan amounts, andcompetition for purchase mortgages as the
addition of a mortgage
operations from our acquisitions.market for refinancing mortgages has significantly declined.
Corporate General and Administrative:Administrative
Corporate general and administrative expenses includerepresents 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 1.9%1.2%
for the three months ended JanuaryJuly 31, 2004 from 2.3%2.0% for the
corresponding prior year's
three months and decreased to 1.5% for the nine months ended July 31, 2004
from 2.1% for the prior year's nine months. The percentage decrease
isCorporate general and
administrative expenses decreased $4.0 million and $2.8 million during the
three and nine months ended July 31, 2004, respectively, compared to the
same periods last year. Decreases in corporate general and administrative
expenses are primarily attributed to reduced bonus expenses as the
increasepercentage of expected 2004 full year profit earned in housing revenues.
Interest:the nine months
ended July 31, 2004 is less than the percentage of 2003 full year profit
earned in the nine months ended July 31,2003. Bonuses are accrued during
the year based on profit earned to date. In addition, in 2004, we had
reduced depreciation expense as certain assets are now fully depreciated
and reduced consulting services as certain non-recurring projects were
completed last year. These reductions were partially offset by additional
salary expense due to increased headcount as our company continues to grow.
Interest
Interest expense includes housing and land and lot interest.
Interest expense is broken down as follows:
Three Months Ended JanuaryNine Months Ended
July 31, July 31,
------------------ -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Sale of Homes.............. $ 16,933 $13,33517,725 $ 17,051 $ 53,743 $ 43,800
Land and Lot Sales......... 10 344- 153 21 508
-------- -------- -------- --------
Total...................... $ 16,943 $13,67917,725 $ 17,204 $ 53,764 $ 44,308
======== ======== ======== ========
Housing interest as a percentage of sale of homes revenues decreased
0.4% for the three months ended JanuaryJuly 31, 2004 to 1.7% from 2.1% for the
same period last year and 2003 was 2.2%.decreased 0.1% for the nine months ended July 31,
2004 to 2.0% from 2.1% for the same period last year. Housing interest as
a percentage of sale of homes remained flatdecreased due to our effortsaverage debt as a
percentage of average inventory decreasing, as well as due to maintain leverage at a 50% netreduction
in our borrowing costs from redeeming our $150 million 9 1/8% Senior Notes
and replacing that debt to
capital level and interest rates remaining relatively flat overby drawing on the last year.lower rate revolving credit
facility.
Other Operations: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, amortization of
the consultant agreements and the right of first refusal agreement from our
California acquisition in fiscal 2002, 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 $6.6 million and $13.7 million for the three and nine months
ended July 31,2004, respectively, when compared to the same period last
year. This increase was the result of our November 2003 Florida
acquisition and a full nine months of amortization expense from our Texas
and Ohio acquisitions that closed in January 2003 and April 2003,
respectively, as well as the amortization expense associated with the
California acquisition brand name, which is being phased out as discussed
above under "Capital Resources and Liquidity."
Recent Accounting Pronouncements:Pronouncements
In December 2003, the Financial Accounting Standards Board ("FASB")
issued a revision to theRevised Interpretation No. 46, "Consolidation of Variable Interest
Entities" ("FIN 46"46R"). FIN 46R requires the primary beneficiary of a
variable interest entity to consolidate that entity. The revision defersprimary
beneficiary of a variable interest entity is the effective dateparty that absorbs a
majority of implementingthe variable interest entity's expected losses, receives a
majority of the entity's expected residual returns, or both, as a result of
ownership, contractual, or other financial interests in the entity.
Expected losses are the expected negative variability in the fair value of
an entity's net assets exclusive of its variable interests, and expected
residual returns are the expected positive variability in the fair value of
an entity's net assets, exclusive of variable interests. We have fully
implemented FIN 46 as of April 30, 2004.
In March 2004, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin 105 ("SAB 105"). Existing accounting guidance
requires an entity to record on its balance sheet the fair value of any
issued and outstanding mortgage loan commitments. SAB 105 requires that
the fair value measurement include only differences between the guaranteed
interest rate in the loan commitment and a market interest rate, excluding
any future cash flows related to (i) expected fees to be received when the
loan commitment becomes a loan, (ii) gains from selling the loan, or (iii)
the servicing value created from the loan. The guidance in SAB 105 must be
applied to mortgage loan commitments that are accounted for variable interests created prior to January 2003as derivatives
and provides
certain additional exceptions. While we are still assessing the
revised timing requirements of fully implementing FIN 46, we now
expect to apply the consolidation provisions to allentered into after March 31, 2004. The adoption of the Company's VIE's no later than April 30, 2004, unless further
deferrals are issued.guidance in
SAB 105 did not have a material adverse effect on our financial position or
results of operations.
Total Taxes:Taxes
Total taxes as a percentage of income before taxes amounted
to approximately 37.7% and 37.1%increased 0.3% for
the threenine months ended JanuaryJuly 31, 2004 and 2003, respectively.to 37.7% from 37.4% for the same period
last year. The increased effective
rateincrease is due primarily to an increaseadditional state tax reserves recorded
in 2004 in state income
taxes and the reduced effect permanent book to tax differences
have on the rate as profits increase.nine months ended July 31, 2004.
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
Inflation has a long-term effect on us because increasing costs of
land, materials, and labor result in increasing sale prices of our homes.
In general, these price increases have been commensurate with the general
rate of inflation in our housing markets and have not had a significant
adverse effect on the sale of our homes. A significant risk faced by the
housing industry generally is that rising house costs, including land and
interest costs, will substantially outpace increases in the income of
potential purchasers. In recent years, in the price ranges in which our
homes sell, we have not found this risk to be a significant problem.
Inflation has a lesser short-term effect on us because we generally
negotiate fixed price contracts with 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 56% of
our homebuilding cost of sales.
Mergers and Acquisitions:Acquisitions
On November 6, 2003, we acquired a Florida homebuilder for cash and
244,618489,236 shares of our Class A Common Stock were issued.(shares reflect stock dividend).
On November 1, 2002 and December 31, 2002 we acquired two Texas
homebuilding companiescompanies. On April 9, 2003, we acquired a build-on-your-own
lot homebuilder in Ohio and on August 8, 2003 we acquired a homebuilder in
Arizona. All fiscal 2003 acquisitions were paid for in cash.
Safe Harbor Statement
All statements in this Form 10-Q that are not historical facts should
be considered as "Forward-Looking Statements" within the meaning of the
Private Securities Litigation Act of 1995. Such statements involve known
and unknown risks, uncertainties and other factors that may cause actual
results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. 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 California,
New Jersey, Texas, North Carolina, Virginia, and Maryland
markets;
. 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, 2003.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk facing us is interest rate risk onof
our long termlong-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 JanuaryJuly 31, 2004,
our long term debt obligations, principal cash flows by scheduled
maturity, weighted average interest rates and estimated fair market
value ("FMV").
As of JanuaryJuly 31, 2004
----------------------------------------------------------------------------------------
Expected Maturity Rate
----------------------Date
FMV @
2004 2005 2006 2007 2008 2009 Thereafter Total 1/7/31/04
------- ------- ------ ------ ------ ------ ------------- -------- -------- ---------- -------- ---------
(Dollars in Thousands)--------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate...... $47,816Rate.... $ 23,141 $ 81 $ 88 $140,346 $ 104 $150,112 $615,115 $953,662 $1,016,726$ 112 $ 765,115 $928,987 $951,478
Average
interest rate.......... 6.45%rate 5.97% 8.38% 8.38% 10.50% 8.38% 9.12% 7.63% 8.23% --8.38% 7.38% 7.82%
Variable rate... -- -- -- $115,000 -- -- -- $115,000 $ 115,000Rate. $215,000 $215,000 $215,000
Average
interest
rate.......... -- -- --Interest rate (2) -- -- -- -- --
(1) Does not include bonds collateralized by mortgages receivable.
(2) LIBOR plus 2.5%
(1) Does not include bonds collateralized by mortgages receivable.
(2) Various rates of either the prime rate or a spread over LIBOR ranging
from 1.1% to 2.0% per annum, depending on our consolidated Leverage
Ratio, as defined in our revolving credit agreement.
In addition, we have reassessed the market risk for our variable rate
debt, which is based upon the prime rate or a spread over LIBOR, and we
believe that a one percent increase in the prime rate or LIBOR rate would
have an approximate $0.5 million increase in interest expense for the three
and nine months ended July 31, 2004, assuming $215 million of variable rate
debt outstanding from May 1,2004 to July 31, 2004.
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 JanuaryJuly 31, 2004. 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 JanuaryJuly 31, 2004
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
This table provides information with respect to purchases of shares
of our Class A common stock made by or on behalf of Hovnanian Enterprises
during the fiscal third quarter of 2004.
Issuer Purchases of Equity Securities (1)
Total Number
Of Shares Maximum Number of
Purchased as Shares That May
Part of Publicly Yet Be Purchased
Total Number of Average Price Announced Plans Under The Plans
Period Shares Purchased Paid Per Share or Programs or Programs
- ---------------- ---------------- -------------- ---------------- -----------------
May 1, 2004
Through
May 31, 2004 4,510 35.24 4,510 2,187,614
- -------------------------------------------------------------------------------------
June 1, 2004
Through
June 30, 2004 - - - 2,187,614
- -------------------------------------------------------------------------------------
July 1, 2004
Through
July 31, 2004 97,844 29.94 97,844 2,089,770
- -------------------------------------------------------------------------------------
Total 102,354 30.17 102,354
================ ============== ================
(1) In July 2001, our Board of Directors authorized a stock repurchase
program to purchase up to 4 million shares of Class A Common Stock. 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 our
dividend.
No shares of our Class B common stock were purchased by or on behalf of
Hovnanian Enterprises during the fiscal third quarter of 2004.
Item 6. Exhibits and Reports on Form 8-K.
(a)
Exhibit 3(a) Certificate of Incorporation of
the Registrant. (1)
Exhibit 3(b) Certificate of Amendment of
Certificate of Incorporation of the
Registrant. (2)
Exhibit 3(c) Certificate of Amendment of
Certificate of Incorporation of the Registrant
(filed herewith).Registrant. (3)
Exhibit 3(d) Restated Bylaws of the Registrant. (3)(4)
Exhibit 4(a) Indenture10(a) Third Amendment to First Restated
Revolving Credit Agreement dated as of NovemberAugust 3, 2003,
relating to 6 1/2% Senior Notes,2004,
among, K. Hovnanian Enterprises,Mortgage, Inc., and K. Hovnanian
Enterprises, Inc.
and
WachoviaAmerican Mortgage, LLC., Guaranty Bank, Bank of America
NA, J P Morgan Chase Bank, Comerica Bank, National Association, as Trustee,
as
supplemented by the First Supplemental IndentureCity
Bank of Kentucky, U S Bank N A, Colonial Bank NA, and
Washington Mutual Bank FA (Warehouse Agreement)
Exhibit 10(b) Fourth Amended and Restated Credit
Agreement dated as of November 3, 2003June 18, 2004, among, K. Hovnanian
Enterprises,Inc., Hovnanian Enterprises, Inc., the other
Guarantors
named therein andPNC
Bank NA, Bank of America NA, Wachovia Bank NA, Bank
One NA, Key Bank, National Association, as
Trustee, including formand The
Royal Bank of 6 1/2% Senior Notes due
January 15, 2014.(4)Scotland.
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
pursuant to 18 U.S.C.Officer.
Exhibit 32(b) Section 1350 as adopted
pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002.
Exhibit 32(b) Certification of Chief
Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002.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 Exhibit4.2 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.
(4) Incorporated by reference to Exhibits to Current
Report on Form 8-K filed on November 7, 2003
Item 6(b). The following reports have been filed during
quarter ended January 31, 2004:
(i) On November 7, 2003, the Company filed a report on Form 8-
K, Items 5 and 7, relating to issuance and sale in an
underwritten public offering of $215,000,000 in aggregate
principal amount of 6 1/2% Senior Notes due 2014 of K. Hovnanian
Enterprises, Inc., guaranteed by the Company and certain of the
Company's subsidiaries.
(ii) On November 3, 2003, the Company filed a report on Form
8-K, Items 5 and 7, relating to the issuance and sale in an
underwritten public offering of $215,000,000 in aggregate
principal amount of 6 1/2% Senior Notes due 2014 of K. Hovnanian
Enterprises, Inc., guaranteed by the Company and certain of the
Company's subsidiaries.
The following reports have been furnished during the quarter
ended January 31, 2004:
(i) On December 8, 2003, the Company furnished a report on
Form 8-K, Items 7 and 12, relating the Company's press release
dated December 8, 2003 relating to its preliminary financial
results for the fourth quarter ended October 31, 2003.
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 16,September 13, 2004 /S/J. LARRY SORSBY
J. Larry Sorsby,
Executive Vice President and
Chief Financial Officer
DATE: March 16,September 13, 2004 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
CERTIFICATIONS
Exhibit 31(a)
I, Ara K. Hovnanian, President & Chief Executive Officer of
Hovnanian Enterprises, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Hovnanian Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 16, 2004
/S/ARA K. HOVNANIAN
Ara K. Hovnanian
President and Chief Executive Officer
CERTIFICATIONS
Exhibit 31(b)
I, J. Larry Sorsby, Executive Vice President & Chief Financial
Officer of Hovnanian Enterprises, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Hovnanian Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 16, 2004
/S/J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President and Chief Financial Officer
Exhibit 32(a)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Hovnanian Enterprises,
Inc. (the "Company") on Form 10-Q for the period ended January
31, 2004 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Ara K. Hovnanian, President
and Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Date: March 16, 2004
/s/ARA K. HOVNANIAN
Ara K. Hovnanian
President and Chief Executive Officer
Exhibit 32(b)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Hovnanian Enterprises,
Inc. (the "Company") on Form 10-Q for the period ended January
31, 2004 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, J. Larry Sorsby, Executive
Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Date: March 16, 2004
/S/J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President and Chief Financial Officer