UNITED STATESSECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
10-Q
(Mark10-Q/A (Amendment No. 1) (Mark One)[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
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Securities Exchange Act of 1934 For quarterly period ended JANUARY 31, 2006 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 1-8551
Hovnanian Enterprises, Inc.
(Exact
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 22-1851059 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 110 West Front Street, P.O. Box 500, Red Bank, NJ 07701
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(Address of Principal Executive Offices) (Zip Code) 732-747-7800
(Registrant's
(Registrant's Telephone Number, Including Area Code)
Same (Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
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[ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. (See definition of
“accelerated"accelerated filer and large accelerated filer”filer" in Rule 12b-2 of the Exchange
Act).
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Large Accelerated Filer [ X ] Accelerated Filer [ ] Non-Accelerated Filer { } Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 47,125,97447,043,772
shares of Class A Common Stock and 14,652,55214,672,000 shares of Class B Common Stock
were outstanding as of September 1,March 2, 2006.
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Explanatory Paragraph
This Form 10-Q/A for the quarterly period ended January 31, 2006 is
being filed for the purpose of restating Note 3 in our Notes | |
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HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Share Amounts) | |||
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| July 31, 2006 |
| October 31, 2005 |
ASSETS |
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Homebuilding: |
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Cash and cash equivalents | $ 36,787 |
| $ 201,641 |
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Restricted cash | 9,500 |
| 17,189 |
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Inventories - At the lower of cost or fair value: |
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Sold and unsold homes and lots under development | 3,589,248 |
| 2,459,431 |
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Land and land options held for future |
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development or sale | 501,059 |
| 595,806 |
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Consolidated inventory not owned: |
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Specific performance options | 12,872 |
| 9,289 |
Variable interest entities | 369,705 |
| 242,825 |
Other options | 175,021 |
| 129,269 |
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Total consolidated inventory not owned | 557,598 |
| 381,383 |
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Total Inventories | 4,647,905 |
| 3,436,620 |
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Investments in and advances to unconsolidated |
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joint ventures | 217,153 |
| 187,205 |
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Receivables, deposits, and notes | 103,102 |
| 125,388 |
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Property, plant, and equipment – net | 111,542 |
| 96,891 |
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Prepaid expenses and other assets | 182,964 |
| 131,845 |
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Goodwill | 32,658 |
| 32,658 |
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Definite life intangibles | 200,525 |
| 249,506 |
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Total homebuilding | 5,542,136 |
| 4,478,943 |
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Financial services: |
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Cash and cash equivalents | 11,015 |
| 9,632 |
Restricted cash | 1,285 |
| 1,037 |
Mortgage loans held for sale | 174,747 |
| 211,248 |
Other assets | 8,722 |
| 15,375 |
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Total financial services | 195,769 |
| 237,292 |
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Income taxes receivable – including deferred |
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tax benefits | 150,795 |
| 9,903 |
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Total assets | $ 5,888,700 |
| $ 4,726,138 |
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See notes to Condensed
Consolidated Financial Statements, which includes expanded reportable segment
footnote disclosure related to our homebuilding operations. We have restated
the accompanying Consolidated Financial Statements to revise our segment
disclosures for all periods presented to show six reportable homebuilding
segments. The restatement has no impact on our condensed consolidated
financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Share Amounts) | ||||
| July 31, 2006 |
| October 31, 2005 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | (unaudited) |
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Homebuilding: |
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Nonrecourse land mortgages | $ 33,046 |
| $ 48,673 |
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Accounts payable and other liabilities | 546,668 |
| 510,529 |
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Customers’ deposits | 205,721 |
| 259,930 |
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Nonrecourse mortgages secured by operating |
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properties | 23,852 |
| 24,339 |
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Liabilities from inventory not owned | 283,905 |
| 177,014 |
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Total homebuilding | 1,093,192 |
| 1,020,485 |
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Financial services: |
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Accounts payable and other liabilities | 8,666 |
| 8,461 |
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Mortgage warehouse line of credit | 166,923 |
| 198,856 |
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Total financial services | 175,589 |
| 207,317 |
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Notes payable: |
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Revolving credit agreement | 273,225 |
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Senior notes | 1,649,510 |
| 1,098,739 |
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Senior subordinated notes | 400,000 |
| 400,000 |
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Accrued interest | 30,762 |
| 26,991 |
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Total notes payable | 2,353,497 |
| 1,525,730 |
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Total liabilities | 3,622,278 |
| 2,753,532 |
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Minority interest from inventory not owned | 208,542 |
| 180,170 |
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Minority interest from consolidated joint ventures | 3,563 |
| 1,079 |
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Stockholders’ equity: |
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Preferred stock, $.01 par value-authorized 100,000 |
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shares; issued 5,600 shares at July 31, |
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2006 and at October 31, 2005 with a |
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liquidation preference of $140,000 | 135,299 |
| 135,389 |
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Common stock, Class A, $.01 par value-authorized |
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200,000,000 shares; issued 58,593,879 shares at |
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July 31, 2006 and 57,976,455 shares at |
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October 31, 2005 (including 11,494,720 shares |
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at July 31, 2006 and 10,995,656 shares at |
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October 31, 2005 held in Treasury) | 586 |
| 580 |
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Common stock, Class B, $.01 par value (convertible |
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to Class A at time of sale) authorized |
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30,000,000 shares; issued 15,360,360 shares at |
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July 31, 2006 and 15,370,250 shares at |
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October 31, 2005 (including 691,748 shares at |
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July 31, 2006 and October 31, 2005 held in |
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Treasury) | 154 |
| 154 |
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Paid in capital – common stock | 247,488 |
| 236,001 |
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Retained earnings | 1,779,738 |
| 1,522,952 |
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Deferred compensation |
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| (19,648) |
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Treasury stock - at cost | (108,948) |
| (84,071) |
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Total stockholders’ equity | 2,054,317 |
| 1,791,357 |
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Total liabilities and stockholders’ equity | $ 5,888,700 |
| $ 4,726,138 |
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See notes tobalance sheets as of January 31, 2006 and October 31, 2005, or condensed
consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Per Share Data) (Unaudited) | |||||||
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| Three Months Ended July 31, |
| Nine Months Ended July 31, | ||||
| 2006 |
| 2005 |
| 2006 |
| 2005 |
Revenues: |
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Homebuilding: |
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Sale of homes | $1,499,826 |
| $1,289,373 |
| $4,225,571 |
| $3,495,014 |
Land sales and other revenues | 28,032 |
| 4,820 |
| 113,947 |
| 32,747 |
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Total homebuilding | 1,527,858 |
| 1,294,193 |
| 4,339,518 |
| 3,527,761 |
Financial services | 22,661 |
| 18,533 |
| 63,114 |
| 48,995 |
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Total revenues | 1,550,519 |
| 1,312,726 |
| 4,402,632 |
| 3,576,756 |
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Expenses: |
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Homebuilding: |
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Cost of sales, excluding interest | 1,170,272 |
| 940,202 |
| 3,285,258 |
| 2,588,285 |
Cost of sales interest | 25,601 |
| 22,332 |
| 62,453 |
| 58,563 |
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Total cost of sales | 1,195,873 |
| 962,534 |
| 3,347,711 |
| 2,646,848 |
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Selling, general and administrative | 154,050 |
| 116,388 |
| 441,137 |
| 319,680 |
Inventory impairment and land option deposit write-offs | 12,274 |
| 1,354 |
| 20,978 |
| 3,352 |
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Total homebuilding | 1,362,197 |
| 1,080,276 |
| 3,809,826 |
| 2,969,880 |
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Financial services | 15,127 |
| 12,296 |
| 43,174 |
| 33,683 |
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Corporate general and administrative | 26,744 |
| 18,884 |
| 80,377 |
| 49,678 |
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Other interest | 649 |
| 1,149 |
| 2,169 |
| 1,843 |
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Other operations | 8,355 |
| 7,356 |
| 23,877 |
| 10,575 |
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Intangible amortization | 13,331 |
| 11,781 |
| 38,391 |
| 32,255 |
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Total expenses | 1,426,403 |
| 1,131,742 |
| 3,997,814 |
| 3,097,914 |
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Income (loss) from unconsolidated joint |
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ventures | (3,239) |
| 13,907 |
| 13,833 |
| 22,482 |
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Income before income taxes | 120,877 |
| 194,891 |
| 418,651 |
| 501,324 |
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State and federal income taxes: |
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State | (3,897) |
| 10,535 |
| 7,212 |
| 26,299 |
Federal | 47,727 |
| 68,262 |
| 146,647 |
| 171,313 |
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Total taxes | 43,830 |
| 78,797 |
| 153,859 |
| 197,612 |
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Net income | 77,047 |
| 116,094 |
| 264,792 |
| 303,712 |
Less: preferred stock dividends | 2,668 |
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| 8,006 |
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Net income available to common |
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stockholders | $ 74,379 |
| $ 116,094 |
| $ 256,786 |
| $ 303,712 |
Per share data: |
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Basic: |
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Income per common share | $ 1.18 |
| $ 1.85 |
| $ 4.09 |
| $ 4.87 |
Weighted average number of common |
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shares outstanding | 62,804 |
| 62,754 |
| 62,843 |
| 62,412 |
Assuming dilution: |
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Income per common share | $ 1.15 |
| $ 1.76 |
| $ 3.95 |
| $ 4.63 |
Weighted average number of common |
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shares outstanding | 64,460 |
| 65,796 |
| 64,989 |
| 65,574 |
See notes toof income and related income per common share amounts
for the three months ended January 31, 2006 and 2005 or condensed
consolidated financial statements (unaudited).
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HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (In Thousands Except Share Amounts) (Unaudited) |
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| A Common Stock |
| B Common Stock |
| Preferred Stock |
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| Shares Issued and Outstanding |
| Amount |
| Shares Issued and Outstanding |
| Amount |
| Shares Issued and Outstanding |
| Amount |
| Paid-In Capital - Common Stock |
| Retained Earnings |
| Deferred Comp |
| Treasury Stock |
| Total |
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Balance, October 31, 2005 | 46,980,799 |
| $ 580 |
| 14,678,502 |
| $ 154 |
| 5,600 |
| $ 135,389 |
| $236,001 |
| $1,522,952 |
| $(19,648) |
| $(84,071) |
| $1,791,357 |
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Stock issuances for company acquisitions | 175,936 |
| 1 |
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| 4,188 |
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| 1,750 |
| 5,939 |
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Issuance costs |
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| (90) |
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| (90) |
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Preferred dividend declared ($476.56 per share) |
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| (8,006) |
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| (8,006) |
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Stock options amortization and issuances, net of tax | 215,596 |
| 2 |
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| 14,536 |
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| 14,538 |
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Restricted stock amortization, issuances and forfeitures, net of tax | 391,938 |
| 3 |
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| 12,411 |
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| 12,414 |
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Reclass due to SFAS 123R implementation (See Note 2) |
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| (19,648) |
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| 19,648 |
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Conversion of Class B to Class A common stock | 9,890 |
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| (9,890) |
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Treasury stock purchases | (675,000) |
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| (26,627) |
| (26,627) |
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Net income |
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| 264,792 |
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| 264,792 |
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Balance, July 31, 2006 | 47,099,159 |
| $586 |
| 14,668,612 |
| $154 |
| 5,600 |
| $135,299 |
| $247,488 |
| $1,779,738 |
| $ -- |
| $(108,948) |
| $2,054,317 |
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of cash flows for the three months ended January 31,
2006 and 2005. Conforming and other changes that are responsive to certain
disclosure comments, primarily relating to segment reporting received from
the Division of Corporation Finance of the Securities and Exchange
Commission, have been made to Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 2 and our Controls and
Procedures discussion in Item 4 of this Form 10-Q/A. See notesNote 3 in the Notes
to condensed consolidated financial statementsCondensed Consolidated Financial Statements for further information
relating to the restatement. This Form 10-Q/A has not been updated for
events or information subsequent to the date of filing of the original Form
10-Q, except in connection with the foregoing.
HOVNANIAN ENTERPRISES, INC.
FORM 10-Q/A
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Financial Statements:
Condensed Consolidated Balance Sheets as of January 31,
2006 (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands - Unaudited) | |||
| Nine Months Ended | ||
| July 31, | ||
| 2006 |
| 2005 |
Cash flows from operating activities: |
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Net Income | $ 264,792 |
| $ 303,712 |
Adjustments to reconcile net income to net cash |
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used in operating activities: |
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Depreciation | 10,587 |
| 5,912 |
Intangible amortization | 38,391 |
| 32,255 |
Compensation from stock options and awards | 21,079 |
| 4,293 |
Amortization of bond discounts | 771 |
| 470 |
Excess tax benefits from share-based payment | (4,661) |
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Loss (gain) on sale and retirement of property |
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and assets | 297 |
| (3,479) |
Equity earnings in unconsolidated entities | (13,833) |
| (22,482) |
Distributions from unconsolidated entities | 15,060 |
| 15,241 |
Deferred income taxes | (33,911) |
| (14,287) |
Impairment and land option deposit write-offs | 20,978 |
| 3,352 |
Decrease (increase) in assets: |
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Mortgage notes receivable | 36,503 |
| 27,357 |
Restricted cash, receivables, prepaids and |
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other assets | 7,578 |
| (30,286) |
Inventories | (1,055,065) |
| (434,634) |
(Decrease) increase in liabilities: |
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State and Federal income taxes | (106,981) |
| (82,413) |
Customers’ deposits | (53,962) |
| 25,252 |
Interest and other accrued liabilities | (2,677) |
| 12,554 |
Accounts payable | 16,692 |
| 12,312 |
Net cash used in operating activities | (838,362) |
| (144,871) |
Cash flows from investing activities: |
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Net proceeds from sale of property and assets | 258 |
| 8,040 |
Purchase of property, equipment and other fixed |
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|
assets and acquisitions | (48,026) |
| (131,872) |
Investments in and advances to unconsolidated |
|
|
|
Entities | (36,726) |
| (105,975) |
Distributions from unconsolidated entities | 5,600 |
| 239 |
Net cash used in investing activities | (78,894) |
| (229,568) |
Cash flows from financing activities: |
|
|
|
Proceeds from mortgages and notes | 63,838 |
| 77,417 |
Net proceeds (payments) related to revolving |
|
|
|
credit agreement | 273,225 |
| (71,950) |
Net payments related to mortgage |
|
|
|
warehouse line of credit | (31,933) |
| (21,242) |
Proceeds from senior debt | 550,000 |
| 200,000 |
Proceeds from senior subordinated debt |
|
| 100,000 |
Payments of issuance costs | (90) |
|
|
Proceeds from preferred stock |
|
| 135,720 |
Principal payments on mortgages and notes | (77,156) |
| (62,358) |
Excess tax benefits from share-based payment | 4,661 |
|
|
Preferred dividends paid | (8,006) |
|
|
Purchase of treasury stock | (26,627) |
| (22,095) |
Proceeds from sale of stock and employee stock plan | 5,873 |
| 14,750 |
Net cash provided by financing activities | 753,785 |
| 350,242 |
Net (decrease) in cash | (163,471) |
| (24,197) |
Cash and cash equivalents balance, beginning |
|
|
|
Of period | 211,273 |
| 60,959 |
Cash and cash equivalents balance, end of period | $ 47,802 |
| $ 36,762 |
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Share Amounts) |
| Nine Months Ended | ||
| July 31, | ||
| 2006 |
| 2005 |
|
|
|
|
Supplemental disclosures of cash flow: |
|
|
|
Cash paid during the period for: |
|
|
|
Interest | $ 74,216 |
| $ 66,724 |
Income taxes | $ 262,563 |
| $ 279,686 |
Supplemental disclosures of noncash operating |
|
|
|
activities: |
|
|
|
Consolidated inventory not owned: |
|
|
|
Specific performance options | $ 11,699 |
| $ 5,415 |
Variable interest entities | 336,570 |
| 121,989 |
Other options | 173,456 |
| 118,405 |
Total inventory not owned | $ 521,725 |
| $ 245,809 |
Supplemental disclosure of noncash investing and financing activities:
In 2006, the Company acquired substantially all of the assets of two mechanical contracting businesses by issuing 175,936 Class A common shares with a fair value of $5.9 million on the date of the transaction.
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments for interim periods presented have been made, which include only normal recurring accruals and deferrals necessary for a fair presentation of our consolidated financial position, results of operations, and changes in cash flows. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and these differences could have a significant impact on the financial statements. Results for interim periods are not necessarily indicative of the results which might be expected for a full year. The balance sheet at October 31, 2005 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.
Certain prior year amounts have been reclassified to conform |
The Company is in the process of responding to the
SEC with respect to its segment reporting. Based on this correspondence, the Company believes it will have to file an amended Form 10-K for the fiscalcurrent year ended October 31, 2005, as well as an amended Form 10-Q for each of its fiscal quarters of 2006. These amendments will be filed as soon as the correspondence with the SEC is resolved. These amendments will expand the reporting segment footnote disclosures related to our homebuilding operations. The amendment will have no impact on our Consolidated Balance Sheets, Consolidated Income Statements, Consolidated Cash Flows, or Consolidated Statements of Stockholders Equity for any period presented.
presentation.
2. Effective November 1, 2005, the Company adopted Statement of
Financial Accounting Standards (“SFAS”("SFAS") 123R, “Share-Based Payments”"Share-Based Payments", which
revises SFAS 123, “Accounting"Accounting for Stock-Based Compensation”Compensation". Prior to
fiscal year 2006, the Company accounted for stock awards granted to
employees under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, “Accounting"Accounting for Stock Issued to
Employees”Employees", and related interpretations.Interpretations. As a result, the recognition of
stock-based compensation expense was generally limited to the expense
attributed to nonvested stock awards, as well as the amortization of
certain acquisition-related deferred compensation.
SFAS 123R applies to new awards and to awards modified, repurchased,
or cancelled after the required effective date, as well as to the unvested
portion of awards outstanding as of the required effective date. The
Company uses the Black-Scholes model to value its new stock option grants
under SFAS 123R, applying the “modified"modified prospective method”method" for existing
grants which requires the Company to value stock options prior to its
adoption of SFAS 123R under the fair value method and expense the unvested
portion over the remaining vesting period. The fair value for options is
established at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions for JulyJanuary 31, 2006:
risk-free interest rate of 4.30%4.15%; dividend yield of zero; volatility factor
of the expected market price of our common stock of 0.44;0.43; and a weighted
average expected life of the option of 5.75.0 years. SFAS 123R also requires
the Company to estimate forfeitures in calculating the expense related to
stock-based compensation (estimated at 2% for fiscal 2006 and fiscal 2005,
respectively,) and requires the Company to reflect the benefits of tax
deductions in excess of recognized compensation cost to be reported as both
a financing cash inflow and an operating cash outflow upon adoption.
Compensation cost arising from nonvested stock granted to employees
and from non-employee stock awards is recognized as expense using the
straight-line method over the vesting period. Unearned compensation wasis
included in deferred compensation in stockholders’stockholders' equity beginning in the
first quarter of fiscal 2004. Upon adoptionAs of SFAS 123R, deferredJanuary 31, 2006, there was $17.4
million of total unrecognized compensation is no longer recorded for non vested stock awards, therefore deferred compensation was reclassifiedcost related to paid in capital.
nonvested stock.
For the three months and nine months ended JulyJanuary 31, 2006, the Company’sCompany's total
stock-based compensation expense was $6.0$7.9 million ($3.84.9 million net of
tax) and $21.1 million ($13.3 million net of tax), respectively.. Included in this total stock-based compensation expense was
incremental expense for stock options of $3.0$3.3 million ($1.9 million net of tax) and $10.4 million ($6.62.1 million net of
tax) for the three and nine monthsquarter ended JulyJanuary 31, 2006, respectively.
2006.
The following table illustrates the effect (in thousands, except per
share amounts) on net income and earnings per share for the three and nine months
ended JulyJanuary 31, 2005 as if the Company’sCompany's stock-based compensation had
been determined based on the fair value at the grant dates for awards made
prior to fiscal 2006, under those plans and consistent with SFAS 123R:
| Three Months Ended |
| Nine Months Ended |
| July 31, 2005 |
| July 31, 2005 |
|
|
|
|
Net income as reported | $116,094 |
| $303,712 |
|
|
|
|
Deduct: total stock-based employee |
|
|
|
compensation expense determined |
|
|
|
using Black-Scholes fair value |
|
|
|
based method for all awards | 1,689 |
| 4,531 |
Pro forma net income | $114,405 |
| $299,181 |
Pro forma basic earnings per share | $ 1.82 |
| $ 4.79 |
|
|
|
|
Basic earnings per share as reported | $ 1.85 |
| $ 4.87 |
Pro forma diluted earnings per |
|
|
|
share | $ 1.74 |
| $ 4.56 |
|
|
|
|
Diluted earnings per share as reported | $ 1.76 |
| $ 4.63 |
Three Months Ended
January 31,
------------------
2005
------------------
Net income as reported.......... $ 81,482
Deduct: total stock-based employee
compensation expense determined
using Black-Scholes fair value
based method for all awards... 1,352
--------
Pro forma net income............ $ 80,130
========
Pro forma basic earnings per share $ 1.29
========
Basic earnings per share as
reported...................... $ 1.31
========
Pro forma diluted earnings per
share......................... $ 1.22
========
Diluted earnings per share as
reported...................... $ 1.25
========
Pro forma information regarding net income and earnings per share is
calculated as if we had accounted for our stock-based compensation under
the fair value method of SFAS 123R. The fair value for options is
established at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions for JulyJanuary 31, 2005:
risk-free interest rate of 4.18%,4.19%; dividend yield of zero; volatility factor
of the expected market price of our common stock of 0.44;0.43; and a weighted
average expected life of the option of 4.95.2 years.
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 November 10, 2005, the FASB issued FASB Staff Position No. SFAS
123(R)-3, “Transition"Transition Election Related to Accounting for Tax Effects of
Share-Based Payment Awards”Awards" (FSP 123R-3). The alternative transition method
includes simplified methods to establish the beginning balance of the
additional paid inpaid-in capital pool (APIC pool) related to the tax effects of
employee stock-based compensation, and to determine the subsequent impact
on the APIC pool and Consolidated Statements of Cash Flows of the tax
effects of employee stock-based compensation awards that are outstanding
upon adoption of SFAS 123R. The Company has until November 2006 to make a
one-time election to adopt the transition method described in FSP 123R-3.
The Company is currently evaluating FSP 123R-3; however, if the Company
were to make the one-time election, it is not expected to affect operating
income or net income.
3. Operating and Reporting Segments (as Restated) Subsequent to the issuance of the Company's condensed consolidated financial statements for the quarterly period ended January 31, 2006, the Company expanded its disclosure of reportable segments in accordance with the provisions of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures About Segments of an Enterprise and Related Information". SFAS 131 defines operating segments as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the chief operating decision-maker, or decision-making group, to evaluate performance and make operating decisions. The Company has identified its chief operating decision-maker as the Chief Executive Officer. The Company had historically aggregated its homebuilding operating segments into a single, national reportable segment, but has restated its segment disclosure to include six homebuilding reportable segments, as identified below, for the three months ended January 31, 2006 and 2005. The restatement has no impact on the Company's condensed consolidated balance sheets as of January 31, 2006 and October 31, 2005, condensed consolidated statements of income and related income per common share amounts for the three months ended January 31, 2006 and 2005 or condensed consolidated statements of cash flows for the three months ended January 31, 2006 and 2005. The Company's operating segments are aggregated into reportable segments in accordance with SFAS 131, based primarily upon geographic proximity, similar regulatory environments, land acquisition characteristics and similar methods used to construct and sell homes. The Company's reportable segments consist of: Homebuilding: (1) Northeast (New Jersey, New York, Pennsylvania) (2) Mid-Atlantic (Delaware, Maryland, Virginia, West Virginia, Washington D.C.) (3) Midwest (Illinois, Michigan, Minnesota, Ohio) (4) Southeast (Florida, North Carolina, South Carolina) (5) Southwest (Arizona, Texas) (6) West (California) Financial Services Operations of the Company's Homebuilding segments primarily include the sale and construction of single-family attached and detached homes, attached townhomes and condominiums, mid-rise and high-rise condominiums, urban infill and active adult homes in planned residential developments. Operations of the Company's Financial Services segment include mortgage banking and title services to the homebuilding operations' customers. We do not retain or service mortgages that we originate but rather sell the mortgages and related servicing rights to investors. Evaluation of segment performance is based primarily on operating earnings from continuing operations before provision for income taxes. Operating earnings for the Homebuilding segments consist of revenues generated from the sales of homes and land, equity in earnings from unconsolidated entities and management fees and other income, net, less the cost of homes and land sold, selling, general and administrative expenses and minority interest expense, net. Operating earnings for the Financial Services segment consist of revenues generated from mortgage banking and title services, less the cost of such services and certain selling, general and administrative expenses incurred by the Financial Services segment. Each reportable segment follows the same accounting policies described in Note 10 - "Operating and Reporting Segments (as restated)" to the consolidated financial statements in the Company's 2005 Annual Report on Form 10-K/A. Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented. Financial information relating to the Company's operations was as follows: Three Months Ended January 31, --------------------- (In thousands) 2006 2005 ---------- ---------- Revenues: Northeast $ 206,960 $ 222,436 Mid-Atlantic 198,282 158,486 Midwest 27,522 18,538 Southeast 270,045 105,611 Southwest 183,854 137,237 West 369,865 397,826 ---------- ---------- Total Homebuilding Revenues 1,256,528 1,040,134 ---------- ---------- Financial Services 19,262 14,193 Corporate and Unallocated 2,202 234 ---------- ---------- Total Revenues $1,277,992 $1,054,561 Income Before Income Taxes: Northeast 35,658 33,908 Mid-Atlantic 36,577 16,609 Midwest (5,343) (2,157) Southeast 23,031 5,570 Southwest 13,473 4,103 West 51,354 82,004 ---------- ---------- Homebuilding Income Before Income Taxes 154,750 140,037 ---------- ---------- Financial Services 5,731 4,273 Corporate and Unallocated (25,255) (12,404) ---------- ---------- Income Before income taxes $ 135,226 $ 131,906 ========== ========== January 31, October 31, 2006 2005 ---------- ---------- (In thousands) Assets: Northeast $1,115,422 $1,058,155 Mid-Atlantic 676,958 621,836 Midwest 177,083 156,464 Southeast 727,605 688,880 Southwest 496,943 377,866 West 1,290,059 1,143,747 ---------- ---------- Total Homebuilding Assets 4,484,070 4,046,948 ---------- ---------- Financial Services 168,808 237,292 Corporate and Unallocated 255,901 435,715 ---------- ---------- Total Assets $4,908,779 $4,719,955 ========== ========== 4. Interest costs incurred, expensed and capitalized were:
|
|
| Three Months Ended |
| Nine Months Ended | ||||
|
|
| July 31, |
| July 31, | ||||
|
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
|
|
| (Dollars in Thousands) | ||||||
Interest capitalized at |
|
|
|
|
|
|
|
|
|
beginning of period(1) |
|
| $ 77,048 |
| $ 44,488 |
| $ 48,366 |
| $ 37,465 |
Plus interest incurred(2) |
|
| 41,515 |
| 27,991 |
| 108,569 |
| 71,939 |
Less cost of sales interest |
|
|
|
|
|
|
|
|
|
expensed(3) |
|
| 25,601 |
| 22,332 |
| 62,453 |
| 58,563 |
Less other interest expensed |
|
| 649 |
| 1,149 |
| 2,169 |
| 1,843 |
Interest capitalized at |
|
|
|
|
|
|
|
|
|
end of period |
|
| $ 92,313 |
| $ 48,998 |
| $ 92,313 |
| $ 48,998 |
Three Months Ended January 31, ------------------ 2006 2005 -------- -------- (Dollars in Thousands) Interest Capitalized at Beginning of Period(1)..... $ 48,366 $ 37,465 Plus Interest Incurred(2).... 30,804 21,044 Less Cost of Sales Interest Expensed(3)................ 16,569 17,767 Less Other Interest Expensed. 820 155 -------- -------- Interest Capitalized at End of Period.............. $ 61,781 $ 40,587 ======== ======== (1) Beginning balance for 2006 does not include interest incurred of $2.3 million which is capitalized in property,
|
plant, and equipment. (2) Data does not include interest incurred by our mortgage and finance subsidiaries.
(3) Represents interest on borrowings for construction, land and development costs, which are charged to interest
|
4. expense when homes
are delivered.
5. Accumulated depreciation at JulyJanuary 31, 2006 and October 31, 2005
amounted to $39.7$33.3 million and $30.5 million, respectively, for our
homebuilding assets.
5.
6. In accordance with Financial Accounting Standards No. 144 (“("SFAS
144”144"), “Accounting"Accounting for the Impairment of or Disposal of Long Lived Assets”Assets",
we record impairment losses on inventories related to communities under
development when events and circumstances indicate that they may be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than their carrying amounts. For the three and nine months ended July 31, 2006 and 2005, these amounts were $0.8 million and zero respectively, and $2.4 million and zero, respectively. In addition, from time to
time, we will write off certain residential land options including approval
and engineering costs for land we decided not to purchase at the earlier of the option expiration or the decision to terminate.purchase. We wrote off
such costs in the amount of $11.4$3.1 million and $1.4$0.5 million during the three
months ended July 31, 2006 and 2005, respectively, and $18.6 million and $3.3 million during the nine months ended JulyJanuary 31, 2006 and 2005, respectively. Residential
inventory impairment losses and option write-offs are reported in the
Condensed Consolidated Statements of Income as “Homebuilding-Inventory"Homebuilding-Inventory
impairment and land option deposit write-offs”loss".
6.
7. We provide a warranty accrual for repair costs over $1,000 to
homes, community amenities, and land development infrastructure. We accrue
for warranty costs as part of cost of sales at the time each home is closed
and title and possession have been transferred to the homebuyer. In
addition, we accrue warranty costs under our $20 million per occurrence
general liability insurance deductible for fiscal 2006 (deductible was $5
million per occurrence for homes built in fiscal 2005 and $150,000 per
occurrence for homes built between fiscal 2001 and fiscal 2004) as part of
selling, general and administrative costs. For fiscal 2006, our deductible is $20 million per occurrence with an aggregate $20 million for premise liability claims and an aggregate $20 million for construction defect claims under our general liability insurance. Once our $20 million aggregate deductible is reached for construction defect claims, a $250,000 per occurrence deductible is required on any additional claims.Warranty accruals are based
upon historical experience. Additions and charges incurred in the warranty
accrual and general liability accrual for the three and nine months ended JulyJanuary
31, 2006 and 2005 are as follows:
|
| Three Months Ended |
| Nine Months Ended | ||||
|
| July 31, |
| July 31, | ||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
|
|
|
| (Dollars in Thousands) |
|
| ||
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
| $ 91,159 |
| $ 81,122 |
| $ 86,706 |
| $ 64,922 |
Company acquisitions during period |
|
|
|
|
| 186 |
|
|
Additions |
| 8,105 |
| 15,329 |
| 27,699 |
| 41,246 |
Charges incurred |
| (9,421) |
| (8,841) |
| (24,748) |
| (18,558) |
Balance, end of period |
| $ 89,843 |
| $ 87,610 |
| $ 89,843 |
| $ 87,610 |
|
|
|
|
|
|
|
|
|
Warranty accruals are based upon historical experience. We engage a third party actuary that uses our historical warranty data to estimate our unpaid claims, claim adjustment expenses and incurred but not reported claims reserves for the risks that we are assuming under the general liability and workers compensation programs. The estimates include provisions for inflation, claims handling and legal fees.
Insurance claims paid by our insurance carriers were $4.7 million and $7.9 million for the nine months ended July
Three Months Ended
January 31,
-------- --------
2006 and 2005
respectively, for prior year deliveries.
7.-------- --------
(Dollars in Thousands)
Balance, beginning of period..... $86,706 $64,922
Additions........................ 7,264 13,337
Charges incurred................. (6,339) (4,143)
-------- --------
Balance, end of period.......... $87,631 $74,116
======== ========
8. We are involved in litigation arising in the ordinary course of
business, none of which is expected to have a material adverse effect on
our financial position or results of operations and we are subject to
extensive and complex regulations that affect the development and home
building, sales and customer financing processes, including zoning,
density, building standards and mortgage financing. These regulations
often provide broad discretion to the administering governmental
authorities. This can delay or increase the cost of development or
homebuilding.
We also are subject to a variety of local, state, federal and foreign
laws and regulations concerning protection of health and the environment.
The particular environmental laws which apply to any given community vary
greatly according to the community site, the site’ssite's environmental
conditions and the present and former uses of the site. These
environmental laws may result in delays, may cause us to incur substantial
compliance, remediation, and/or other costs, and can prohibit or severely
restrict development and homebuilding activity in certain environmentally
sensitive regions or areas.
In March 2005, we received two requests for information pursuant to
Section 308 of the Clean Water Act from Region 3 of the Environmental
Protection Agency (the “EPA”"EPA"). These requests sought information
concerning storm water discharge practices in connection with completed,
ongoing and planned homebuilding projects by subsidiaries in the states and
district that comprise EPA Region 3. We also received a notice of
violations for one project in Pennsylvania and requests for sampling plan
implementation in two projects in Pennsylvania. The amount requested by
the EPA to settle the asserted violations at the one project was not
material. We provided the EPA with information in response to its
requests. We have since been advised by the Department of Justice (“DOJ”("DOJ")
that it will be involved in the review of our storm water discharge
practices. We cannot predict the outcome of the review of these practices
or estimate the costs that may be involved in resolving the matter. To the
extent that the EPA or the DOJ asserts violations of regulatory
requirements and requests injunctive relief or penalties, we will defend
and attempt to resolve such asserted violations.
In addition, in November 2005, we received two notices from the California Regional Water Quality Control Board alleging violations of certain storm water discharge rules and assessing an administrative civil liability of $0.2 million and $0.3 million. We do not consider these assessments to be material and are considering our response to the notices.
It can be anticipated that increasingly stringent requirements will
be imposed on developers and homebuilders in the future. Although we
cannot predict the effect of these requirements, they could result in time-consumingtime-
consuming and expensive compliance programs and in substantial
expenditures, which could cause delays and increase our cost of operations.
In addition, the continued effectiveness of permits already granted or
approvals already obtained is dependent upon many factors, some of which
are beyond our control, such as changes in policies, rules and regulations
and their interpretations and application.
Our sales and customer financing processes are subject to the
jurisdiction of the U. S. Department of Housing and Urban Development
(“HUD”("HUD"). In connection with the Real Estate Settlement Procedures Act, HUD
hasrecently inquired about our process of referring business to our affiliated
mortgage company and has separately requested documents related to customer
financing. We have responded to HUD’sHUD's inquiries. In connection with these
inquiries, the Inspector General of HUD has recommended to the Secretary of
HUD that we indemnify HUD for any losses that it may sustain in connection
with nine loans that it alleges were improperly underwritten. We cannot
predict the outcome of HUD’sHUD's inquiry or estimate the costs that may be
involved in resolving the matter. We do not expect the ultimate cost to be
material.
In August 2006, the Company canceled a purchase contract for a property located in Southern California based on the seller’s failure to perform certain obligations, and requested return of its $16.5 million contract deposit. Refund of the deposit is currently in dispute with the seller and the Company anticipates that arbitration proceedings will commence during the fourth quarter of 2006 to resolve the dispute. At this time, the Company can not predict the outcome of this dispute.
8.
9. As of JulyJanuary 31, 2006 and October 31, 2005, respectively, we are
obligated under various performance letters of credit amounting to $457.6$391.0
million and $330.8 million.
9.
10. Our amended and restated unsecured Revolving Credit Agreement
(“Agreement”("Agreement") with a group of lendersbanks provides a revolving credit line of
$1.5$1.2 billion through May 2011.July 2009. The facility contains an accordion feature
under which the aggregate commitment can be increased to $2.0$1.3 billion
subject to the availability of additional commitments. Loans under the Agreement bear interestInterest is payable
monthly at various rates based on a margin ranging from 1.00% to 1.95% per
annum, depending on our Consolidated Leverage Ratio, as defined in the
Agreement, plus, at the Company's option, either (1) a base rate determined
by reference to the higher of (a) PNC Bank, National Association’sAssociation's prime
rate and (b) the federal funds rate plus 1/2% or (2) a margin ranging from 0.65% to 1.50% per annum, depending on our Leverage Ratio, as defined in the Agreement, and our debt ratings plus a LIBOR-based rate for
a one, two, three, or six month interest period as selected by us.the Company.
In addition, we pay a fee ranging from 0.15%0.20% to 0.25%0.30% per annum on the
unused portion of the revolving credit line depending on our Consolidated
Leverage Ratio and our debt ratings and the average percentage unused portion of the revolving
credit line. As of July 31, 2006 and October 31, 2005, the outstanding balance under the Agreement was $273.2 million and zero, respectively.
We and each of our significant subsidiaries, except for K. Hovnanian Enterprises, Inc., the borrower, and
various subsidiaries formerly engaged in the issuance of collateralized
mortgage obligations, a subsidiary formerly engaged in homebuilding
activity in Poland, our financial services subsidiaries, joint ventures,
and certain other subsidiaries, is a guarantor under the Agreement.
As of
January 31, 2006 and October 31, 2005, the outstanding balance under the
Agreement was $226.3 million and zero, respectively.
Our amended secured mortgage loan warehouse agreement with a group of
banks, which is a short-term borrowing facility, providesprovided up to $250
million through May 18, 2007.April 2006. Interest is payable monthly at the LIBOREurodollar
Rate plus 1.0%1.25%. The loan is repaid when we sell the underlying mortgage
loans to permanent investors. We also have a $100 million commercial paper
facility. The facility expires on April 20, 2007in September 2006 and interest of LIBOR
plus .65% is payable monthly at the LIBOR Rate plus 0.65%.monthly. As of JulyJanuary 31, 2006 and October 31, 2005,
borrowings under both agreements were $166.9$137.7 million and $198.9 million,
respectively.
10. On March 7, 2006, we amended our secured mortgage loan
warehouse agreement. Pursuant to the new agreement, we may borrow up to
$250 million. It expires on October 30, 2006 and interest is payable
monthly at the Eurodollar Rate plus 1.0%.
11. On November 30, 2004, we issued $200 million of 6 1/4% Senior
Notes due 2015 and $100 million of 6% Senior Subordinated Notes due 2010.
The net proceeds of the issuance were used to repay the outstanding balance
on our revolving credit facility as of November 30, 2004 and for general
corporate purposes.
On August 8, 2005, we issued $300 million of 6 1/4% Senior Notes due
2016. The notes were issued at a discount to yield 6.46% and have been
reflected net of the unamortized discount in the Condensed Consolidated
Balance Sheets. The notes are redeemable in whole or in part at our option
at 100% of their principal amount plus the payment of a make-whole amount.
The net proceeds of the issuance were used to repay the outstanding balance
under our revolving credit facility as of August 8, 2005, and for general
corporate purposes, including acquisitions.
On
At January 31, 2006, we had $1,105.3 million of outstanding senior
notes ($1,099.0 million, net of discount), comprised of $140.3 million 10
1/2% Senior Notes due 2007, $100 million 8% Senior Notes due 2012, $215
million 6 1/2% Senior Notes due 2014, $150 million 6 3/8% Senior Notes due
2014, $200 million 6 1/4% Senior Notes due 2015, and $300 million 6 1/4%
Senior Notes due 2016. At January 31, 2006, we had $400 million of
outstanding senior subordinated notes, comprised of $150 million 8 7/8%
Senior Subordinated Notes due 2012, $150 million 7 3/4% Senior Subordinated
Notes due 2013, and $100 million 6% Senior Subordinated Notes due 2010.
As a subsequent event, on February 27, 2006, we issued $300 million
of 7 1/2% Senior Notes due 2016. The notes are redeemable in whole or in
part at our option at 100% of their principal amount plus the payment of a
make-whole amount. The net proceeds of the issuance were used to repay a
portion of the outstanding balance under our revolving credit facility as
of February 27, 2006.
On June 12, 2006, we issued $250 million of 8 5/8% Senior Notes due 2017. The notes are redeemable in whole or in part at our option at 100% of their principal amount plus the payment of a make-whole amount. The net proceeds of the issuance were used to repay a portion of the outstanding balance under our revolving credit facility as of June 12, 2006.
At July 31, 2006, we had $1,655.3 million of outstanding senior notes ($1,649.5 million, net of discount), comprised of $140.3 million 10 1/2% Senior Notes due 2007, $100 million 8% Senior Notes due 2012, $215 million 6 1/2% Senior Notes due 2014, $150 million 6 3/8% Senior Notes due 2014, $200 million 6 1/4% Senior Notes due 2015, $300 million 6 1/4% Senior Notes due 2016, $300 million 7 1/2% Senior Notes due 2016, and $250 million 8 5/8% Senior Notes due 2017. At July 31, 2006, we had $400.0 million of outstanding senior subordinated notes, comprised of $150 million 8 7/8% Senior Subordinated Notes due 2012, $150 million 7 3/4% Senior Subordinated Notes due 2013, and $100 million 6% Senior Subordinated Notes due 2010.
Under the terms of the indentures governing our debt securities, we have the right to make certain redemptions and depending on market conditions, may do so from time to time.
11.
12. 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-vestednon-
vested stock and outstanding options to purchase common stock, of
1.7approximately 2.6 million and 3.03.2 million for the three months ended
JulyJanuary 31, 2006 and 2005, respectively, and approximately 2.1 million and 3.2 million for the nine months ended July 31, 2006 and 2005, respectively.
12.
13. On July 12, 2005, we issued 5,600 shares of 7.625% Series A
Preferred Stock, with a liquidation preference of $25,000 per share for net
proceeds of $135 million. Dividends on the Series A Preferred Stock are
not cumulative and are paid at an annual rate of 7.625%. The Series A
Preferred Stock is not convertible into the Company’sCompany's common stock and is
redeemable in whole or in part at our option at the liquidation preference
of the shares beginning on the fifth anniversary of their issuance. The
Series A Preferred Stock is traded as depositary shares, with each
depositary share representing 1/1000th 1000th of a share of Series A Preferred
Stock. The depositary shares are listed on the Nasdaq GlobalNational Market
under the symbol “HOVNP”"HOVNP". The net proceeds from the offering, reflected in
Preferred StockPaid in Capital in the Condensed Consolidated Balance Sheets,Sheet, were used for
the partial repayment of the outstanding balance under our revolving credit
facility as of July 12, 2005. In October 2005,On January 17, 2006, we paid $2.8$2.7 million of
dividends on the Series A Preferred Stock.
In each completed quarter of fiscal 2006, we paid $2.7 million of dividends.
13.14. Variable Interest Entities - In January 2003, the Financial
Accounting Standards Board (“FASB”("FASB") issued Interpretation No. 46,
“Consolidation"Consolidation of Variable Interest Entities” (“Entities" ("FIN 46”46"). A Variable
Interest Entity (“VIE”("VIE") is created when (i) the equity investment at risk
is not sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties or (ii) equity
holders either (a) lack direct or indirect ability to make decisions about
the entity, (b) are not obligated to absorb expected losses of the entity
or (c) do not have the right to receive expected residual returns of the
entity if they occur. If an entity is deemed to be a
VIE pursuant to FIN 46, an enterprise that absorbs a majority of the expected losses of the VIE is considered the primary beneficiary and must consolidate the VIE.
Based on the provisions of FIN 46, we have concluded that whenever we
option land or lots from an entity and pay a non-refundable deposit, a VIE
is created under condition (ii) (b) and (c) of the previous paragraph. We
are deemed to have provided subordinated financial support, which refers to
variable interests that will absorb some or all of an entity’sentity's expected
theoretical losses if they occur. For each VIE created with a significant
nonrefundable option fee, (we currently define significant as greater than $100,000 because we have determined that in the aggregate the VIEs related to deposits of this size or less are not material), we compute expected losses and residual returns
based on the probability of future cash flows as outlined in FIN 46. If we
are deemed to be the primary beneficiary of the VIE we consolidate it on
our balance sheet. The fair value of the VIE’sVIEs inventory is reported as
“Consolidated inventory not owned – variable"Consolidated Inventory Not Owned - Variable interest entities”entities".
Typically, the determining factor in whether or not we are the primary beneficiary is the deposit amount as a percentage of the total purchase price, because it determines the amount of the first risk of loss we take on the contract. The higher this percentage deposit, the more likely we are to be the primary beneficiary. Other important criteria that impact the outcome of the analysis, are the probability of getting the property through the approval process for residential homes, because this impacts the ultimate value of the property, as well as who is the responsible party (seller or buyer) for funding the approval process and development work that will take place prior to the decision to exercise the option.
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 its total assets consolidated on the balance sheet. In certain cases, we will have to place inventory the VIE has optioned to other developers on our balance sheet. In addition, if the VIE has creditors, its debt will be placed on our balance sheet even though the creditors have no recourse against us. Based on these observations we believe consolidating VIEs based on land and lot option deposits does not reflect the economic realities or risks of owning and developing land.
At JulyJanuary 31, 2006, all 3731 VIEs we were required to consolidate were
the result of our options to purchase land or lots from the selling
entities. We paid cash or issued letters of credit deposits to these VIEs
totaling $44.8$27.4 million. Our option deposits represent our maximum exposure
to loss. The fair value of the property owned by these VIEs was $369.7$242.0
million. Since we do not own an equity interest in any of the unaffiliated
variable interest entities that we must consolidate pursuant to FIN 46, we
generally have little or no control or influence over the operations of
these entities or their owners. When our requests for financial
information are denied by the land sellers, certain assumptions about the
assets and liabilities of such entities are required. In most cases, we determine the
fair value of the assets of the consolidated entities have been based on
the remaining contractual purchase price of the land or lots we are
purchasing. In these cases, it is assumed that the entities have no debt
obligations and the only asset recorded is the land or lots we have the
option to buy with a related offset to minority interest for the assumed
third party investment in the variable interest equity. At JulyJanuary 31,
2006, the balance reported in minority interest from inventory not owned
was $208.5$175.0 million. Creditors of these VIEs have no recourse against us.
the
Company.
We will continue to control land and lots using options. Not all of our
deposits are with VIEs. Including the deposits with the 3731 VIEs described above, at
JulyJanuary 31, 2006, we have total cash and letters of credit deposits
amounting to approximately $189.0 million and $264.5$409.5 million to purchase land and lots with a
total purchase price of $5.1$5.0 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.
14.
15. Investments in Unconsolidated Homebuilding and Land Development
Joint Ventures - We enter into homebuilding and land development joint
ventures from time to time as a means of accessing lot positions, expanding
our market opportunities, establishing strategic alliances, managing our
risk profile, leveraging our capital base, and enhancing returns on
capital. Our homebuilding joint ventures are generally entered into with
third party investors to develop land and construct homes that are sold
directly to third party homebuyers. Our land development joint ventures
include those entered into with developers and other homebuilders, andas well
as financial investors, to develop finished lots for sale to the joint
venture’sventure's members or other third parties. As of JulyJanuary 31, 2006, we have
investments in tennine homebuilding joint ventures and nine land development
joint ventures. The tables set forth below summarize the combined
financial information related to our unconsolidated homebuilding and land
development joint ventures that are accounted for under the equity method.
|
|
|
|
|
|
|
|
| July 31, 2006 |
|
|
| Homebuilding |
| Land Development |
| Total |
Assets: |
|
|
|
|
|
Cash and cash equivalents | $ 40,233 |
| $ 5,958 |
| $ 46,191 |
Inventories | 741,354 |
| 205,194 |
| 946,548 |
Other assets | 88,982 |
| 4,968 |
| 93,950 |
Total assets | $ 870,569 |
| $ 216,120 |
| $ 1,086,689 |
|
|
|
|
|
|
Liabilities and equity: |
|
|
|
|
|
Accounts payable and accrued liabilities | $ 148,515 |
| $ 27,804 |
| $ 176,319 |
Notes payable | 355,528 |
| 51,839 |
| 407,367 |
Equity of: |
|
|
|
|
|
Hovnanian Enterprises, Inc. | 88,976 |
| 92,624 |
| 181,600 |
Others | 277,550 |
| 43,853 |
| 321,403 |
Total equity | 366,526 |
| 136,477 |
| 503,003 |
Total liabilities and equity | $ 870,569 |
| $ 216,120 |
| $ 1,086,689 |
Debt to capitalization ratio | 49% |
| 28% |
| 45% |
|
|
|
|
|
|
|
|
| October 31, 2005 |
|
|
| Homebuilding |
| Land Development |
| Total |
Assets: |
|
|
|
|
|
Cash and cash equivalents | $ 46,200 |
| $ 5,012 |
| $ 51,212 |
Inventories | 694,408 |
| 198,267 |
| 892,675 |
Other assets | 166,974 |
| 295 |
| 167,269 |
Total assets | $ 907,582 |
| $ 203,574 |
| $ 1,111,156 |
|
|
|
|
|
|
Liabilities and equity: |
|
|
|
|
|
Accounts payable and accrued liabilities | $ 228,264 |
| $ 21,523 |
| $ 249,787 |
Notes payable | 316,532 |
| 59,131 |
| 375,663 |
Equity of: |
|
|
|
|
|
Hovnanian Enterprises, Inc. | 75,349 |
| 86,593 |
| 161,942 |
Others | 287,437 |
| 36,327 |
| 323,764 |
Total equity | 362,786 |
| 122,920 |
| 485,706 |
Total liabilities and equity | $ 907,582 |
| $ 203,574 |
| $ 1,111,156 |
Debt to capitalization ratio | 47% |
| 32% |
| 44% |
|
|
|
|
|
|
Enterprises, Inc.
Condensed Consolidated Balance SheetsSheet is due to a different inside basis versus
outside basis in certain joint ventures.
| For the Three Months Ended July 31,2006 | ||||
| Homebuilding |
| Land Development |
| Total |
|
|
|
|
|
|
Revenues | $ 192,918 |
| $ 7,447 |
| $ 200,365 |
Cost of sales and expenses (1) | (209,541) |
| (7,259) |
| (216,800) |
Net income (loss) | $ (16,623) |
| $ 188 |
| $ (16,435) |
Our share of net losses | $ (3,397) |
| $ (145) |
| $ (3,542) |
|
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended July 31,2005 | ||||
| Homebuilding |
| Land Development |
| Total |
|
|
|
|
|
|
Revenues | $ 196,340 |
| $ 13,124 |
| $ 209,464 |
Cost of sales and expenses | (171,374) |
| (12,746) |
| (184,120) |
Net income | $ 24,966 |
| $ 378 |
| $ 25,344 |
Our share of net earnings | $ 13,781 |
| $ 125 |
| $ 13,906 |
|
|
|
|
|
|
|
|
|
|
|
|
| For the Nine Months Ended July 31,2006 | ||||
| Homebuilding |
| Land Development |
| Total |
|
|
|
|
|
|
Revenues | $ 657,086 |
| $ 19,878 |
| $ 676,964 |
Cost of sales and expenses (1) | (614,741) |
| (19,501) |
| (634,242) |
Net income | $ 42,345 |
| $ 377 |
| $ 42,722 |
Our share of net earnings (losses) | $ 13,644 |
| $ (19) |
| $ 13,625 |
|
|
|
|
|
|
|
| �� |
|
|
|
| For the Nine Months Ended July 31,2005 | ||||
| Homebuilding |
| Land Development |
| Total |
|
|
|
|
|
|
Revenues | $ 332,005 |
| $ 21,334 |
| $ 353,339 |
Cost of sales and expenses | (288,149) |
| (22,219) |
| (310,368) |
Net income (loss) | $ 43,856 |
| $ (885) |
| $ 42,971 |
Our share of net earnings (losses) | $ 22,733 |
| $ (89) |
| $ 22,644 |
|
|
|
|
|
|
(1) Expenses in the third quarter of 2006 include the $27 million write-off of the Town & Country
|
Income (loss) from unconsolidated joint ventures is reflected as a separate
line in the accompanying Condensed Consolidated Financial Statements and
reflects our proportionate share of the income or loss of these unconsolidated
homebuilding and land development joint ventures. The minor difference between our share of the income or loss from these unconsolidated joint ventures disclosed here compared to the Hovnanian Enterprises, Inc. Condensed Consolidated Income Statements is due to the reclass of the intercompany portion of management fee income from certain joint ventures. Our ownership interests
in the joint ventures vary but are generally less than or equal to 50
percent. In determining whether or not we must consolidate joint ventures,
where we are the manager of the joint venture, we consider the guidance in
EITF 04-5 in assessing whether the other partners have specific rights to
overcome the presumption of control by us asor the manager of the joint
venture.
In most cases, the presumption is overcome because the joint venture agreements require that both partners agree on establishing the operating and capital decisions of the partnership, including budgets, in the ordinary course of business.
Typically, our unconsolidated joint ventures obtain separate project
specific mortgage financing for each venture. Generally, the amount of
such financing is limited to no more than 50% of the joint venture’sventure's total
assets, and such financing is obtained on a non-recourse basis, with
guarantees from us limited only to performance and completion guarantees
and environmental indemnification. In some instances, the joint venture
entity is considered a variable interest entity (VIE) under FIN 46 due to
the returns being limited environmental indemnifications.
15.to the equity holders; however, in these
instances, we are not the primary beneficiary, therefore we do not
consolidate these entities.
16. Recent Accounting Pronouncements –- In May 2005, the FASB issued
SFAS 154, “Accounting"Accounting Changes and Error Corrections”Corrections". This statement,
which replaces APB Opinion No. 20, “Accounting Changes”"Accounting Changes", and SFAS No. 3,
“Reporting"Reporting Accounting Changes in Interim Financial Statements”Statements", changes the
requirements for the accounting for and reporting of a change in accounting
principle. The statement requires retrospective application of changes in
accounting principle to prior periods’periods' financial statements unless it is
impracticable to determine the period-specific effects or the cumulative
effect of the change. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15,
2005. The adoption of SFAS No. 154 is not expected to have a material
impact on our consolidated financial position, results of operations or
cash flows.
In June 2005, the Emerging Issues Task Force (“EITF”("EITF") released Issue
No. 04-5, “Determining"Determining Whether a General Partner, or the General Partners
as a Group, Controls a Limited Partnership or Similar Entity When the
Limited Partners Have Certain Rights” (“Rights" ("EITF 04-5”04-5"). EITF 04-5 creates a
framework for evaluating whether a general partner or a group of general
partners controls a limited partnership and therefore should consolidate
the partnership. EITF 04-5 states that the presumption of general partner
control would be overcome only when the limited partners have certain
specific rights as outlined in EITF 04-5. EITF 04-5 is effective
immediately for all newly formed limited partnerships and for existing
limited partnership agreements that are modified. For general partners in
all other limited partnerships, EITF 04-5 is effective no later than the
beginning of the first reporting period in fiscal years beginning after
December 15, 2005. Implementation of EITF 04-5 is not expected to have a
material impact on our consolidated financial position, results of
operations or cash flows.
In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting to Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for the Company’s first quarter ending January 31, 2007. We are in the process of assessing the impact, if any, this will have on our financial statements.
16.
17. Intangible Assets –- The intangible assets recorded on our
balance sheet are goodwill, which has an indefinite life, and definite life intangibles, including tradenames,
architectural designs, distribution processes, and contractual agreements
with both definite and indefinite lives resulting from our acquisitions.
We no longer amortize goodwill or indefinite life intangibles, but instead
assess itthem periodically for impairment. We are amortizing the definite
life intangibles over their expected useful lives,life, ranging from three to
eightseven years.
17. Acquisitions -
18. On March 1, 2005, we acquired for cash the assets of Cambridge
Homes, a privately held Orlando homebuilder and provider of related
financial services, headquartered in Altamonte Springs, Florida. Cambridge
Homes also provides mortgage financing, as well as title and settlement
services to its homebuyers. In connection with the acquisition, based on an
appraisal of acquisition intangibles, we have definite life intangible
assets equal to the excess of purchase price over the fair value of the net
tangible assets of $22 million. We are amortizing the various definite
life intangibles over their estimated lives.
On March 2, 2005, we acquired the operations of Town & Country Homes,
a privately held homebuilder and land developer headquartered in Lombard,
Illinois, which occurred concurrently with our entering into a joint
venture agreement with affiliates of Blackstone Real Estate Advisors in New
York to own and develop Town & Country's existing residential communities.
The joint venture is being accounted for under the equity method. Town &
Country Homes' operations beyond the existing owned and optioned
communities, as of the acquisition date, are wholly-owned and included in
our consolidated financial statements.
On August 3, 2005, we acquired substantially all of the homebuilding
assets of Oster Homes, a privately held Ohio homebuilder, headquartered in
Lorain, Ohio.
On August 8, 2005, we acquired substantially all of the assets of First Home Builders of Florida, a privately held homebuilder and provider of related financial services headquartered in Cape Coral, Florida.
In connection with the First Home Builders of Florida and Oster Homes
acquisitions, based on an appraisal of acquisition intangibles, we have definite life intangible assets equal to the excess
purchase price over the fair value of net tangible assets of $121 million in the aggregate. We are amortizing the definite life intangibles over their estimated lives.
On April 17, 2006, we acquired for cash the assets of CraftBuilt Homes, a privately held homebuilder headquartered in Bluffton, South Carolina. In connection with the acquisition, we have definite life intangible assets equal to the excess purchase price over the fair value of net tangible assets of $4.5 million in the aggregate. We
are awaiting the appraisal from this acquisition.these acquisitions. Until the appraisal isappraisals
are received, we are estimatingestimated the intangible value for amortization
calculations. We expect to have the final appraisalappraisals by the end of the secondthird quarter
of fiscal 2007.ended July 31, 2006. We expect to amortize the definite life intangibles
over their estimated lives.
On May 1, 2006, we acquired through the issuance of 175,936 shares of Class A common stock substantially all of the assets of two mechanical contracting businesses.
All fiscal 2006 and 2005 acquisitions provide for other payments to be made, generally dependent upon achievement of certain future operating and return objectives.
18.
19. Hovnanian Enterprises, Inc., the parent company (the "Parent"),
is the issuer of publicly traded common stock and preferred stock. One of
its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc. (the
“Subsidiary Issuer”"Subsidiary Issuer"), acts as a finance entity that as of JulyJanuary 31, 2006
had issued and outstanding $400 million of Senior Subordinated Notes,
$1,655.3$1,105.3 million face value of Senior Notes, and $273.2$226.3 million drawn on a
Revolving Credit Agreement. The Senior Subordinated Notes, Senior Notes
and the Revolving Credit Agreement are fully and unconditionally guaranteed
by the Parent.
In addition to the Parent, each of the wholly owned subsidiaries of
the Parent other than the Subsidiary Issuer (collectively, the “Guarantor Subsidiaries”"Guarantor
Subsidiaries"), with the exception of various subsidiaries formerly engaged
in the issuance of collateralized mortgage obligations, our mortgage
lending subsidiaries, a subsidiary formerly engaged in homebuilding
activity in Poland, our title insurance subsidiaries, joint ventures, and
certain other subsidiaries (collectively, the “Non-guarantor Subsidiaries”"Non-guarantor
Subsidiaries"), have guaranteed fully and unconditionally, on a joint and
several basis, the obligationsobligation of the Subsidiary Issuer to pay principal and
interest under the Senior Notes, Senior Subordinated Notes, and the
Revolving Credit Agreement.
In lieu of providing separate audited financial statements for the Guarantor Subsidiaries we have included the accompanying condensed consolidating financial statements. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented.
The following condensed consolidating financial information presents the results of operations, financial position, and cash flows of (i) the Parent, (ii) the Subsidiary Issuer, (iii) the Guarantor Subsidiaries, (iv) the Non-guarantor Subsidiaries, and (v) the eliminations to arrive at the information for Hovnanian Enterprises, Inc. on a consolidated basis.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES | |||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | |||||||||||
CONDENSED CONSOLIDATING BALANCE SHEET | |||||||||||
JULY 31, 2006 | |||||||||||
(Dollars in Thousands) | |||||||||||
| Parent |
| Subsidiary Issuer |
| Guarantor Subsidiaries |
| Non- Guarantor Subsidiaries |
| Eliminations |
| Consolidated |
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
Homebuilding | $ 242 |
| $ 130,042 |
| $5,125,510 |
| $ 286,342 |
| $ |
| $5,542,136 |
Financial services |
|
|
|
| 106 |
| 195,663 |
|
|
| 195,769 |
Income taxes (payable) receivable | 53,149 |
|
|
| 96,671 |
| 975 |
|
|
| 150,795 |
Investments in and amounts due to and from consolidated subsidiaries | 2,000,926 |
| 2,588,249 |
| (2,665,652) |
| (241,476) |
| (1,682,047) |
| - |
Total assets | $2,054,317 |
| $2,718,291 |
| $2,556,635 |
| $ 241,504 |
| $(1,682,047) |
| $5,888,700 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
Homebuilding | $ |
| $ |
| $1,064,700 |
| $ 28,492 |
| $ |
| $1,093,192 |
Financial services |
|
|
|
| 72 |
| 175,517 |
|
|
| 175,589 |
Notes payable |
|
| 2,352,379 |
| 1,118 |
|
|
|
|
| 2,353,497 |
Minority interest |
|
|
|
| 208,542 |
| 3,563 |
|
|
| 212,105 |
Stockholders’ equity | 2,054,317 |
| 365,912 |
| 1,282,203 |
| 33,932 |
| (1,682,047) |
| 2,054,317 |
Total liabilities and stockholders’ equity | $2,054,317 |
| $2,718,291 |
| $2,556,635 |
| $ 241,504 |
| $(1,682,047) |
| $5,888,700 |
|
|
|
|
|
|
|
|
|
|
|
|
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES | |||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | |||||||||||
CONDENSED CONSOLIDATING BALANCE SHEET | |||||||||||
OCTOBER 31, 2005 | |||||||||||
(Dollars in Thousands) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Parent |
| Subsidiary Issuer |
| Guarantor Subsidiaries |
| Non- Guarantor Subsidiaries |
| Eliminations |
| Consolidated |
ASSETS; |
|
|
|
|
|
|
|
|
|
|
|
Homebuilding | $ 1,192 |
| $ 332,180 |
| $3,931,333 |
| $ 214,238 |
|
|
| $4,478,943 |
Financial services |
|
|
|
| 200 |
| 237,092 |
|
|
| 237,292 |
Income taxes (payable) receivable | (22,704) |
|
|
| 32,970 |
| (363) |
|
|
| 9,903 |
Investments in and amounts due to and from consolidated subsidiaries | 1,812,869 |
| 1,413,666 |
| (1,617,271) |
| (189,626) |
| (1,419,638) |
| - |
Total assets | $1,791,357 |
| $1,745,846 |
| $2,347,232 |
| $ 261,341 |
| $(1,419,638) |
| $4,726,138 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
Homebuilding | $ |
| $ 20,431 |
| $ 996,428 |
| $ 3,626 |
| $ |
| $1,020,485 |
Financial services |
|
|
|
| 81 |
| 207,236 |
|
|
| 207,317 |
Notes payable |
|
| 1,504,922 |
| (3,531) |
| 24,339 |
|
|
| 1,525,730 |
Minority interest |
|
|
|
| 180,170 |
| 1,079 |
|
|
| 181,249 |
Stockholders’ equity | 1,791,357 |
| 220,493 |
| 1,174,084 |
| 25,061 |
| (1,419,638) |
| 1,791,357 |
Total liabilities and stockholders’ equity | $1,791,357 |
| $1,745,846 |
| $2,347,232 |
| $ 261,341 |
| $(1,419,638) |
| $4,726,138 |
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES | |||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | |||||||||||
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS | |||||||||||
THREE MONTHS ENDED JULY 31, 2006 | |||||||||||
(Dollars in Thousands) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Parent |
| Subsidiary Issuer |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| Eliminations |
| Consolidated |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Homebuilding | $ |
| $ 119 |
| $1,512,360 |
| $ 15,379 |
| $ |
| $1,527,858 |
Financial services |
|
|
|
| 2,240 |
| 20,421 |
|
|
| 22,661 |
Intercompany charges |
|
| 81,758 |
| 81,317 |
|
|
| (163,075) |
| - |
Equity in pretax income of consolidated subsidiaries | 120,877 |
|
|
|
|
|
|
| (120,877) |
| - |
Total revenues | 120,877 |
| 81,877 |
| 1,595,917 |
| 35,800 |
| (283,952) |
| 1,550,519 |
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
Homebuilding |
|
| 560 |
| 1,444,103 |
| 8,039 |
| (41,426) |
| 1,411,276 |
Financial services |
|
|
|
| 1,263 |
| 13,864 |
|
|
| 15,127 |
Total expenses |
|
| 560 |
| 1,445,366 |
| 21,903 |
| (41,426) |
| 1,426,403 |
Income from unconsolidated joint ventures |
|
|
|
| (3,239) |
|
|
|
|
| (3,239) |
Income (loss) before income taxes | 120,877 |
| 81,317 |
| 147,312 |
| 13,897 |
| (242,526) |
| 120,877 |
State and federal income taxes | 43,830 |
| 31,191 |
| 50,247 |
| 4,971 |
| (86,409) |
| 43,830 |
Net income (loss) | $ 77,047 |
| $ 50,126 |
| $ 97,065 |
| $ 8,926 |
| $ (156,117) |
| $ 77,047 |
|
|
|
|
|
|
|
|
|
|
|
|
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES | |||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | |||||||||||
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS | |||||||||||
THREE MONTHS ENDED JULY 31, 2005 | |||||||||||
(Dollars in Thousands) |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Parent |
| Subsidiary Issuer |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| Eliminations |
| Consolidated |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Homebuilding | $ |
| $ 60 |
| $1,293,968 |
| $ 165 |
| $ |
| $1,294,193 |
Financial services |
|
|
|
| 1,009 |
| 17,524 |
|
|
| 18,533 |
Intercompany charges |
|
| 53,685 |
| 54,559 |
|
|
| (108,244) |
| - |
Equity in pretax income of consolidated subsidiaries | 194,891 |
|
|
|
|
|
|
| (194,891) |
| - |
Total revenues | 194,891 |
| 53,745 |
| 1,349,536 |
| 17,689 |
| (303,135) |
| 1,312,726 |
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
Homebuilding |
|
| (814) |
| 1,136,550 |
| 881 |
| (17,171) |
| 1,119,446 |
Financial services |
|
|
|
| 315 |
| 12,895 |
| (914) |
| 12,296 |
Total expenses |
|
| (814) |
| 1,136,865 |
| 13,776 |
| (18,085) |
| 1,131,742 |
Income from unconsolidated joint ventures |
|
|
|
| 13,907 |
|
|
|
|
| 13,907 |
Income (loss) before income taxes | 194,891 |
| 54,559 |
| 226,578 |
| 3,913 |
| (285,050) |
| 194,891 |
State and federal income taxes | 78,797 |
| 31,571 |
| 129,114 |
| 3,078 |
| (163,763) |
| 78,797 |
Net income (loss) | $ 116,094 |
| $ 22,988 |
| $ 97,464 |
| $ 835 |
| $ (121,287) |
| $ 116,094 |
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES | |||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | |||||||||||
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS | |||||||||||
NINE MONTHS ENDED JULY 31, 2006 | |||||||||||
(Dollars in Thousands) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Parent |
| Subsidiary Issuer |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiries |
| Eliminations |
| Consolidated |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Homebuilding | $ |
| $ 370 |
| $ 4,310,378 |
| $ 28,770 |
| $ |
| $4,339,518 |
Financial services |
|
|
|
| 6,516 |
| 56,598 |
|
|
| 63,114 |
Intercompany charges |
|
| 224,600 |
| 223,705 |
|
|
| (448,305) |
| - |
Equity in pretax income of consolidated subsidiaries | 418,651 |
|
|
|
|
|
|
| (418,651) |
| - |
Total revenues | 418,651 |
| 224,970 |
| 4,540,599 |
| 85,368 |
| (866,956) |
| 4,402,632 |
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
Homebuilding |
|
| 1,265 |
| 4,045,861 |
| 15,180 |
| (107,666) |
| 3,954,640 |
Financial services |
|
|
|
| 3,442 |
| 39,977 |
| (245) |
| 43,174 |
Total expenses |
|
| 1,265 |
| 4,049,303 |
| 55,157 |
| (107,911) |
| 3,997,814 |
Income from unconsolidated joint ventures |
|
|
|
| 13,833 |
|
|
|
|
| 13,833 |
Income (loss) before income taxes | 418,651 |
| 223,705 |
| 505,129 |
| 30,211 |
| (759,045) |
| 418,651 |
State and federal income taxes | 153,859 |
| 79,239 |
| 181,997 |
| 11,762 |
| (272,998) |
| 153,859 |
Net income (loss) | $ 264,792 |
| $ 144,466 |
| $ 323,132 |
| $ 18,449 |
| $ (486,047) |
| $ 264,792 |
|
|
|
|
|
|
|
|
|
|
|
|
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES | |||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | |||||||||||
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS | |||||||||||
NINE MONTHS ENDED JULY 31, 2005 | |||||||||||
(Dollars in Thousands) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Subsidiary |
| Guarantor |
| Non-Guarantor |
|
|
|
|
| Parent |
| Issuer |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Consolidated |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Homebuilding | $ |
| $ 161 |
| $3,526,539 |
| $ 1,061 |
| $ |
| $3,527,761 |
Financial services |
|
|
|
| 3,983 |
| 45,012 |
|
|
| 48,995 |
Intercompany charges |
|
| 154,345 |
| 156,408 |
|
|
| (310,753) |
| - |
Equity in pretax income of consolidated subsidiaries | 501,324 |
|
|
|
|
|
|
| (501,324) |
| - |
Total revenues | 501,324 |
| 154,506 |
| 3,686,930 |
| 46,073 |
| (812,077) |
| 3,576,756 |
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
Homebuilding |
|
| (1,902) |
| 3,133,308 |
| 2,909 |
| (70,084) |
| 3,064,231 |
Financial services |
|
|
|
| 2,087 |
| 34,388 |
| (2,792) |
| 33,683 |
Total expenses |
|
| (1,902) |
| 3,135,395 |
| 37,297 |
| (72,876) |
| 3,097,914 |
Income from unconsolidated joint ventures |
|
|
|
| 22,482 |
|
|
|
|
| 22,482 |
Income (loss) before income taxes | 501,324 |
| 156,408 |
| 574,017 |
| 8,776 |
| (739,201) |
| 501,324 |
State and federal income taxes | 197,612 |
| 54,743 |
| 221,741 |
| 4,384 |
| (280,868) |
| 197,612 |
Net income (loss) | $303,712 |
| $ 101,665 |
| $ 352,276 |
| $ 4,392 |
| $ (458,333) |
| $ 303,712 |
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES | |||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | |||||||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS | |||||||||||
NINE MONTHS ENDED JULY 31, 2006 | |||||||||||
(Dollars in Thousands) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Parent |
| Subsidiary Issuer |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| Eliminations |
| Consolidated |
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Net income | $ 264,792 |
| $ 144,466 |
| $ 323,132 |
| $ 18,449 |
| $ (486,047) |
| $ 264,792 |
Adjustments to reconcile net income to net cash provided by (used in) operating activities | (76,641) |
| (7,698) |
| (1,401,483) |
| (103,379) |
| 486,047 |
| (1,103,154) |
Net cash provided by (used in) investing activities | 188,151 |
| 136,768 |
| (1,078,351) |
| (84,930) |
|
|
| (838,362) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) |
|
|
|
|
|
|
|
|
|
|
|
investing activities |
|
|
|
| (67,692) |
| (11,202) |
|
|
| (78,894) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities | (94) |
| 823,225 |
| (105,042) |
| 35,696 |
|
|
| 753,785 |
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany investing and financing activities – net | (188,057) |
| (1,174,583) |
| 1,310,790 |
| 51,850 |
|
|
| - |
Net increase (decrease) in cash | - |
| (214,590) |
| 59,705 |
| (8,586) |
|
|
| (163,471) |
Cash and cash equivalents balance, beginning of period | 16 |
| 298,596 |
| (97,024) |
| 9,685 |
|
|
| 211,273 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents balance, end of period | $ 16 |
| $ 84,006 |
| $ (37,319) |
| $ 1,099 |
| $ - |
| $ 47,802 |
|
|
|
|
|
|
|
|
|
|
|
|
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES | |||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | |||||||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS | |||||||||||
NINE MONTHS ENDED JULY 31, 2005 | |||||||||||
(Dollars in Thousands) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Parent |
| Subsidiary Issuer |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| Eliminations |
| Consolidated |
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Net income | $ 303,712 |
| $ 101,665 |
| $ 352,276 |
| $ 4,392 |
| $(458,333) |
| $303,712 |
Adjustments to reconcile net income to net cash provided by (used in) operating activities | (70,247) |
| 361,828 |
| (1,090,783) |
| (107,714) |
| 458,333 |
| (448,583) |
Net cash provided by (used in) operating activities | 233,465 |
| 463,493 |
| (738,507) |
| (103,322) |
|
|
| (144,871) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
|
| (229,486) |
| (82) |
|
|
| (229,568) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities | 128,374 |
| 228,049 |
| 18,304 |
| (24,485) |
|
|
| 350,242 |
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany investing and financing activities – net | (361,838) |
| (667,602) |
| 902,645 |
| 126,795 |
|
|
| - |
Net increase (decrease) in cash | 1 |
| 23,940 |
| (47,044) |
| (1,094) |
|
|
| (24,197) |
Cash and cash equivalents balance, beginning of period | 15 |
| 29,369 |
| 20,017 |
| 11,558 |
|
|
| 60,959 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents balance, end of period | $ 16 |
| $ 53,309 |
| $ (27,027) |
| $ 10,464 |
| $ - |
| $ 36,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
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”"Business
Combinations". Under SFAS No. 141, we record as our cost the estimated
fair value of the acquired assets less liabilities assumed. Any difference
between the cost of an acquired company and the sum of the fair values of
tangible and intangible assets less liabilities is recorded as goodwill.
The reported income of an acquired company includes the operations of the
acquired company from the date of acquisition.
Income Recognition from Home and Land Sales – We are primarily engaged in the development, construction, marketing- Income from home and
sale of residential single-family and multi-family homes where the planned construction cycleland sales is less than 12 months. For these homes, in accordance with SFAS No. 66, “Accounting for Sales of Real Estate” (“SFAS 66”), revenue is recognizedrecorded when title is conveyed to the buyer, adequate cash
payment has been received and there is no continued involvement.
Additionally, in certain markets, we sell lots to customers,
transferring title, collecting proceeds, and entering into contracts to
build homes on these lots. In these cases, we do not recognize the revenue
from the lot sale until we deliver the completed home and have no continued
involvement related to that home. The cash received on the lot is recorded
as a component of inventorycustomer deposits until the revenue is recognized.
Income Recognition from High-Rise/Mid-Rise Projects – We are developing several high-rise/mid-rise projects that will take more than 12 months to complete. If these projects qualify, revenues and costs are recognized using the percentage of completion method of accounting in accordance with SFAS 66. Under the percentage of completion method, revenues and costs are to be recognized when construction is beyond the preliminary stage, the buyer is committed to the extent of having a sufficient deposit that the buyer cannot require be refunded except for non-delivery of the home, sufficient units in the project have been sold to ensure that the property will not be converted to rental property, the sales prices are collectible and the aggregate sales proceeds and the total cost of the project can be reasonably estimated. We currently do not have any projects that meet these criteria, therefore the revenues from delivering homes in high-rise/mid-rise projects are recognized when title is conveyed to the buyer, adequate cash payment has been received and there is no continued involvement with respect to that home.
Income Recognition from Mortgage Loans –- Profits and losses relating
to the sale of mortgage loans are recognized when legal control passes to
the buyer of the mortgage and the sales price is collected.
Interest Income Recognition for Mortgage Loans Receivable and Recognition of Related Deferred Fees and Costs - Interest income is recognized as earned for each mortgage loan during the period from the loan closing date to the sale date when legal control passes to the buyer and the sale price is collected. All fees related to the origination of mortgage loans and direct loan origination costs are deferred and recorded as either (a) an adjustment to the related mortgage loans upon the closing of a loan or (b) recognized as a deferred asset or deferred revenue while the loan is in process. These fees and costs include loan origination fees, loan discount, and salaries and wages. Such deferred fees and costs relating to the closed loans are recognized over the life of the loans as an adjustment of yield or taken into operations upon sale of the loan to a permanent investor.
Inventories - Inventories and long-lived assets held for sale are recorded at the lower of cost or fair value less selling costs. Fair value is defined as the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Construction costs are accumulated during the period of construction and charged to cost of sales under specific identification methods. Land, land development, and common facility costs are allocated based on buildable acres to product types within
each community, except for high-rise and mid-rise buildings, then charged to cost of sales equally based upon the number of homes to be constructed in each product type. For high-rise and mid-rise buildings, land, land development and common facility costs are allocated to homes based on the relative sales value of each home. For inventories of communities under development, a loss is recorded when events and circumstances indicate impairment and the undiscounted future cash flows generated are less than the related carrying amounts. The impairment loss is based on discounted future cash flows generated from expected revenue, less cost to complete including interest, and selling costs.
Insurance Deductible Reserves –- For fiscal 2006, our deductible is
$20 million per occurrence with an aggregate $20 million for premise
liability claims and an aggregate $20 million for construction defect
claims under our general liability insurance. Once our $20 million aggregate deductible is reached for construction defect claims, a $250,000 per occurrence deductible is required on any additional claims. Our worker’sworker's compensation
insurance deductible is $1 million per occurrence in fiscal 2006. Reserves
have been established based upon actuarial analysis of estimated losses
forincurred during fiscal 2006 and fiscal 2005.
We engage a third party actuary that uses our historical warranty data to estimate our unpaid claims, claim adjustment expenses and incurred but not reported claims reserves for the risks that we are assuming under the general liability and workers compensation programs. The estimates include provisions for inflation, claims handling and legal fees.
Interest –- In accordance with SFAS 34 “Capitalization"Capitalization of Interest
Cost”Cost", interest incurred is first capitalized to properties under
development during the land development and home construction period and
expensed along with the associated cost of sales as the related inventories
are sold. Interest in excess of interest capitalized or interest incurred
on borrowings directly related to properties not under development is
expensed immediately in “Other Interest”"Other Interest".
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”("FASB")
Interpretation No. 46R (“46 ("FIN 46R”46") “Consolidation"Consolidation of Variable Interest
Entities”Entities", an interpretation of Accounting Research Bulletin No. 51, SFAS
No. 49 “Accounting"Accounting for Product Financing Arrangements” (“Arrangements" ("SFAS 49”49"), SFAS
No. 98 “Accounting"Accounting for Leases” (“Leases" ("SFAS 98”98"), and Emerging Issues Task Force
(“EITF”("EITF") No. 97-10 “The"The Effects of Lessee Involvement in Asset
Construction” (“Construction" ("EITF 97-10”97-10"), we record on the Condensed Consolidated
Balance SheetsSheet specific performance options, options with variable interest
entities, and other options under “Consolidated inventory not owned”"Consolidated Inventory Not Owned" with
the offset to “Liabilities"Liabilities from inventory not owned” and “Minorityowned", "Minority interest
from inventory not owned”owned", and "Minority interest from consolidated joint
ventures".
Unconsolidated Homebuilding and Land Development Joint Ventures -
Investments in unconsolidated homebuilding and land development joint
ventures are accounted for under the equity method of accounting. Under
the equity method, we recognize our proportionate share of earnings and
losses earned by the joint venture upon the delivery of lots or homes to
third parties. Our ownership interestinterests in our unconsolidated joint
ventures varies but is generally less than or equalrange from 20% to 50%. In determining whether or not we must consolidate joint ventures where we are the managing member ofsome instances, the joint venture
entity is considered a variable interest entity (VIE) under FIN 46 due to
the returns being limited to the equity holders; however, in these
instances, we considerare not the guidance in EITF 04-5 in assessing whether the other partners have specific rights to overcome the presumption of control by us as the manager of the joint venture. In most cases, the presumption is overcome because the joint venture agreements require that both partners agree on establishing the operating and capital decisions of the partnership, including budgets, in the ordinary course of business.
primary beneficiary, therefore we do not
consolidate these entities.
Intangible Assets –- The intangible assets recorded on our balance
sheet are goodwill which has indefinite life, and definite life intangibles, including tradenames, architectural
designs, distribution processes, and contractual agreements with both
definite and indefinite lives resulting from our acquisitions. We no
longer amortize goodwill or indefinite life intangibles, but instead assess
itthem periodically for impairment. We are amortizing the definite life
intangibles over their expected useful lives,life, ranging from three to eight
years.
Post Development Completion and Warranty Costs - In those instances
where a development is substantially completed and sold and we have
additional construction work to be incurred, an estimated liability is
provided to cover the cost of such work. In addition, our warranty accrual
includes estimated costs for construction work that is unforeseen, but
estimable based on past history, at the time of closing. Both of these
liabilities are recorded in “Accounts"Accounts payable and other liabilities”liabilities" in the
Condensed Consolidated Balance Sheets.
The Company is in the process of responding to the SEC with respect to its segment reporting. Based on this correspondence, the Company believes it will have to file an amended Form 10-K for the fiscal year ended
October 31, 2005, as well as an amended Form 10-Q for each of its fiscal quarters of 2006. These amendments will be filed as soon as the correspondence with the SEC is resolved. These amendments will be done to expand the reporting segment footnote disclosures related to our homebuilding operations. The amendment will have no impact on our Consolidated Balance Sheets, Consolidated Income Statements, Consolidated Cash Flows, or Consolidated Statements of Stockholders Equity for any period presented.
CAPITAL RESOURCES AND LIQUIDITY
Our operations consist primarily of residential housing development
and sales in ourthe Northeast Region (New Jersey, New York, State, Pennsylvania, Ohio,Pennsylvania), the
Midwest (Illinois, Michigan, Illinois and Minnesota)Minnesota, Ohio), our Southeast Region (Washington D. C., Delaware,the Mid-Atlantic (Delaware,
Maryland, Virginia, West Virginia, Washington D.C.), the Southeast
(Florida, North Carolina, South Carolina, Georgia, and Florida)Carolina), ourthe Southwest Region (Texas and Arizona)(Arizona, Texas),
and ourthe West Region (California). In addition, we provide financial services to
our homebuilding customers.
Our cash uses during the ninethree months ended JulyJanuary 31, 2006 were for
operating expenses, increases in housing inventories, construction, income
taxes, interest, preferred stock dividends the acquisition of CraftBuilt Homes and repayments of our revolving
credit facility. We provided for our cash requirements from housing and
land sales, the revolving credit facility, Senior Notes issued in February and June 2006, financial service revenues, and
other revenues. We believe that these sources of cash are sufficient to
finance our working capital requirements and other needs.
On July 3, 2001, our Board of Directors authorized a stock repurchase
program to purchase up to 4 million shares of Class A Common Stock. As of
JulyJanuary 31, 2006, 3.22.7 million shares of Class A Common Stock have been
purchased under this program.
On July 12, 2005, we issued 5,600 shares of 7.625% Series A Preferred
Stock, with a liquidation preference of $25,000 per share for net proceeds
of $135 million. Dividends on the Series A Preferred Stock are not
cumulative and are paid at an annual rate of 7.625%. The Series A
Preferred Stock is not convertible into the Company’sCompany's common stock and is
redeemable in whole or in part at our option at the liquidation preference
of the shares beginning on the fifth anniversary of their issuance. The
Series A Preferred Stock is traded as depositary shares, with each
depositary share representing 1/1000th 1000th of a share of Series A Preferred
Stock. The depositary shares are listed on the Nasdaq GlobalNational Market
under the symbol “HOVNP”"HOVNP". The net proceeds from the offering, reflected in
Preferred stockPaid in Capital in the Condensed Consolidated Balance Sheets,Sheet, were used for
the partial repayment of the outstanding balance under our revolving credit
facility as of July 12, 2005. In October 2005,On January 17, 2006, we paid $2.8$2.7 million of
dividends on the Series A Preferred Stock.
In each completed quarter of fiscal 2006, we paid $2.7 million of dividends.
Our homebuilding bank borrowings are made pursuant to an amended and
restated unsecured revolving credit agreement ("Agreement"(the "Agreement") effective
May 31, 2006,June 17, 2005, that provides a revolving credit line and letter of credit
line of $1.5$1.2 billion through May 2011.July 2009. The facility contains an accordion
feature under which the aggregate commitment couldcan be increased to $2.0$1.3
billion subject to the availability of additional commitments. Loans under the Agreement bear interestInterest is
payable monthly at various rates based on a margin ranging from 1.00% to
1.95% per annum, depending on our Consolidated Leverage Ratio, as defined
in the Agreement, plus, at the Company's option, either (1) a base rate
determined by reference to the higher of (a) PNC Bank, National
Association’sAssociation's prime rate and (b) the federal funds rate plus 1/2% or (2) a margin ranging from 0.65% to 1.50% per annum, depending on our Leverage Ratio, as defined in the Agreement, and our debt ratings plus a
LIBOR-based rate for a one, two, three or six month interest period as
selected by us.the Company. In addition, we pay a fee ranging from 0.15%0.20% to
0.25%0.30% per annum on the unused portion of the revolving credit line
depending on ourits Leverage Ratio and our debt ratings and the average percentage unused portion
of the revolving credit line. At JulyJanuary 31, 2006, there was $273.2$226.3
million drawn under this Agreement and we had approximately $36.8$44.5 million
of homebuilding cash. At JulyJanuary 31, 2006, we had issued $457.6$391.0 million of
letters of credit which reducedreduces cash available under the Agreement.
We
believe that we will be able either to extend the Agreement beyond May 2011July
2009 or negotiate a replacement facility, but there can be no assurance of
such extension or replacement facility. We currently are in compliance and
intend to maintain compliance with the covenants under the Agreement. We
and each of our significant subsidiaries, except for K. Hovnanian Enterprises, Inc., the borrower, and various subsidiaries
formerly
engaged in the issuance of collateralized mortgage obligations, a subsidiary formerly engaged in homebuilding activity in Poland, our financial services subsidiaries, joint ventures, and certain other subsidiaries, is a guarantor under the Agreement.
At JulyJanuary 31, 2006, we had $1,655.3$1,105.3 million of outstanding senior
notes ($1,649.51,099.0 million, net of discount), comprised of $140.3 million 10
1/2% Senior Notes due 2007, $100 million 8% Senior Notes due 2012, $215
million 6 1/2% Senior Notes due 2014, $150 million 6 3/8% Senior Notes due
2014, $200 million 6 1/4% Senior Notes due 2015, and $300 million 6 1/4%
Senior Notes due 2016, $300 million 7 1/2% Senior Notes due 2016, and $250 million 8 5/8% Senior Notes due 2017.2016. At JulyJanuary 31, 2006, we had $400.0$400 million of
outstanding senior subordinated notes, comprised of $150 million 8 7/8%
Senior Subordinated Notes due 2012, $150 million 7 3/4% Senior Subordinated
Notes due 2013, and $100 million 6% Senior Subordinated Notes due 2010. On
February 27, 2006, we issued $300 million of 7 1/2% Senior Notes due 2016.
We and each of our wholly owned subsidiaries, except for K. Hovnanian
Enterprises, Inc., the issuer of the senior and senior subordinated notes,
and various subsidiaries formerly engaged in the issuance of collateralized
mortgage obligations, our mortgage lending subsidiaries, a subsidiary
formerly engaged in homebuilding activity in Poland, our title insurance
subsidiaries, joint ventures, and certain other subsidiaries is a guarantor
of the senior notes and senior subordinated notes.
Our mortgage banking subsidiary’ssubsidiary's warehouse agreement was amended on
May 19,March 7, 2006. Pursuant to the agreement, we may borrow up to $250
million through May 18, 2007. Interestmillion. The agreement expires in October 2006 and interest is payable
monthly at the LIBOREurodollar Rate plus 1.0%. We also have a $100 million
commercial paper facility. The facility expires on April 20, 2007,in September 2006 and
interest of LIBOR Rate plus 0.65%.65% is payable monthly. As of JulyJanuary 31, 2006,
the aggregate principal amount of all borrowings under these agreements were $166.9this agreement was
$137.7 million.
Total inventory increased $1.0 billion$440.2 million during the ninethree months
ended JulyJanuary 31, 2006. This increase excluded the increase in
consolidated inventory not owned of $176.2$9.5 million consisting of specific
performance options, options with variable interest entities, and other
options that were added to our balance sheet in accordance with SFAS 49,
SFAS 98, and EITF 97-10, and variable interest entities in accordance with
FIN 46R.46. See “Notes"Notes to Condensed Consolidated Financial Statements” –Statements" - Note
1314 for additional information on FIN 46R. Excluding the impact from an acquisition of $31.3 million, the total46. Total inventory in the Southeast RegionNortheast
increased $229.6$88.5 million, the Northeast RegionMid-Atlantic increased $286.0$67.9 million, the
Midwest increased $22.0 million, the Southeast increased $70.1 million, the
Southwest Region increased $117.6$41.0 million, and ourthe West Region increased $370.2$150.7 million.
The increase in inventory was primarily the result of future planned
organic growth in our existing markets as we have increased the number of communities open for sale from 367 at October 31, 2005 to 436 at July 31, 2006.markets. Substantially all homes under
construction or completed and included in inventory at JulyJanuary 31, 2006 are
expected to be closed during the next twelve months. Most inventory
completed or under development is partially financed through our revolving
credit agreement 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.
Inventory impairment losses increased $10.9 million and $17.6 million for the three and nine months ended July 31, 2006, compared to the same period in the prior year. These increases are primarily attributable to walking away from option deposits where the current market conditions yield a lower than acceptable return on investment.
The following table summarizes the number of buildable homes included in our total residential real estate.
|
|
|
|
|
|
|
|
|
|
| Active Communities |
| Active Communities Homes |
| Proposed Developable Homes |
| Grand Total Homes |
|
|
|
|
|
|
|
|
|
July 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast Region |
| 82 |
| 11,340 |
| 21,198 |
| 32,538 |
Southeast Region |
| 179 |
| 22,764 |
| 24,788 |
| 47,552 |
Southwest Region |
| 114 |
| 13,633 |
| 5,506 |
| 19,139 |
West Region |
| 61 |
| 13,144 |
| 6,391 |
| 19,535 |
|
|
|
|
|
|
|
|
|
Consolidated total |
| 436 |
| 60,881 |
| 57,883 |
| 118,764 |
|
|
|
|
|
|
|
|
|
Unconsolidated joint ventures |
|
|
| 6,343 |
| 1,517 |
| 7,860 |
|
|
|
|
|
|
|
|
|
Total including unconsolidated joint ventures |
|
|
| 67,224 |
| 59,400 |
| 126,624 |
|
|
|
|
|
|
|
|
|
Owned |
|
|
| 30,548 |
| 5,952 |
| 36,500 |
Optioned |
|
|
| 26,766 |
| 51,931 |
| 78,697 |
|
|
|
|
|
|
|
|
|
Controlled lots |
|
|
| 57,314 |
| 57,883 |
| 115,197 |
|
|
|
|
|
|
|
|
|
Construction to permanent financing lots |
|
|
| 3,567 |
|
|
| 3,567 |
|
|
|
|
|
|
|
|
|
Lots controlled by unconsolidated joint ventures |
|
|
| 6,343 |
| 1,517 |
| 7,860 |
|
|
|
|
|
|
|
|
|
Total including unconsolidated joint ventures |
|
|
| 67,224 |
| 59,400 |
| 126,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Active Communities |
| Active Communities Homes |
| Proposed Developable Homes |
| Grand Total Homes |
October 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast Region |
| 65 |
| 10,797 |
| 22,928 |
| 33,725 |
Southeast Region |
| 148 |
| 21,713 |
| 26,113 |
| 47,826 |
Southwest Region |
| 102 |
| 12,905 |
| 7,547 |
| 20,452 |
West Region |
| 52 |
| 9,285 |
| 9,718 |
| 19,003 |
|
|
|
|
|
|
|
|
|
Consolidated total |
| 367 |
| 54,700 |
| 66,306 |
| 121,006 |
|
|
|
|
|
|
|
|
|
Unconsolidated joint ventures |
|
|
| 6,655 |
| 3,396 |
| 10,051 |
|
|
|
|
|
|
|
|
|
Total Including unconsolidated joint ventures |
|
|
| 61,355 |
| 69,702 |
| 131,057 |
|
|
|
|
|
|
|
|
|
Owned |
|
|
| 24,731 |
| 5,657 |
| 30,388 |
Optioned |
|
|
| 25,046 |
| 60,649 |
| 85,695 |
|
|
|
|
|
|
|
|
|
Controlled lots |
|
|
| 49,777 |
| 66,306 |
| 116,083 |
|
|
|
|
|
|
|
|
|
Construction to permanent financing lots |
|
|
| 4,923 |
|
|
| 4,923 |
|
|
|
|
|
|
|
|
|
Lots controlled by unconsolidated joint ventures |
|
|
| 6,655 |
| 3,396 |
| 10,051 |
|
|
|
|
|
|
|
|
|
Total including unconsolidated joint ventures |
|
|
| 61,355 |
| 69,702 |
| 131,057 |
|
|
|
|
|
|
|
|
|
The January 31, 2006 and October 31,
2005 numbers exclude real estate owned and options in locations where we
have ceased development.
Active Proposed Grand
Active Communities Developable Total
Communities Homes Homes Homes
----------- --------- ------------ ---------
January 31, 2006:
Northeast........ 41 7,429 18,287 25,716
Mid-Atlantic..... 74 7,434 15,497 22,931
Midwest.......... 26 3,291 3,805 7,096
Southeast........ 79 14,873 12,457 27,330
Southwest......... 99 13,418 8,922 22,340
West.............. 52 9,409 10,464 19,873
----------- --------- ------------ ---------
Consolidated Total 371 55,854 69,432 125,286
===========
Unconsolidated
Joint Ventures.. 6,601 2,431 9,032
--------- ------------ ---------
Total Including
Unconsolidated
Joint Ventures.. 62,455 71,863 134,318
========= ============ =========
Owned.......... 26,248 7,219 33,467
Optioned....... 24,656 62,213 86,869
--------- ------------ ---------
Controlled Lots... 50,904 69,432 120,336
Construction to
Permanent Financing
Lots........... 4,950 - 4,950
Lots Controlled by
Unconsolidated
Joint ventures. 6,601 2,431 9,032
--------- ------------ ---------
Total Including
Unconsolidated
Joint Ventures. 62,455 71,863 134,318
========= ============ =========
Active Proposed Grand
Active Communities Developable Total
Communities Homes Homes Homes
----------- ----------- ------------ ----------
October 31, 2005:
Northeast......... 40 7,179 19,465 26,644
Mid-Atlantic...... 70 7,137 16,445 23,582
Midwest........... 25 3,618 3,463 7,081
Southeast......... 78 14,576 9,668 24,244
Southwest......... 102 12,905 7,547 20,452
West.............. 52 9,285 9,718 19,003
----------- ----------- ----------- -----------
Consolidated Total 367 54,700 66,306 121,006
===========
Unconsolidated
Joint Ventures.. 6,655 3,396 10,051
----------- ----------- -----------
Total Including Unconsolidated
Joint Ventures.. 61,355 69,702 131,057
=========== =========== ===========
Owned.......... 24,731 5,657 30,388
Optioned....... 25,046 60,649 85,695
----------- ----------- -----------
Controlled Lots... 49,777 66,306 116,083
Construction to
Permanent Financing
Lots........... 4,923 - 4,923
Lots Controlled by
Unconsolidated
Joint ventures. 6,655 3,396 10,051
----------- ----------- -----------
Total Including
Unconsolidated
Joint Ventures. 61,355 69,702 131,057
=========== =========== ===========
The following table summarizes our started or completed unsold homes
and models. The increase in total started or completed unsold homes
compared to the prior year is primarily due to the increase in our communitymid-rise and
high-rise buildings for which we count from 367 atall units started when vertical
construction begins and the growth in the number of active selling
communities.
January 31, October 31,
2006 2005
to 436 at July 31, 2006, as well as an increase in our contract cancellation rates and our purchase of a completed high rise building with 130 unsold homes available for sale.
|
|
|
|
|
|
|
|
|
|
|
|
| July 31, 2006 |
| October 31, 2005 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unsold Homes |
| Models |
| Total |
| Unsold Homes |
| Models |
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
Northeast Region | 724 |
| 53 |
| 777 |
| 469 |
| 35 |
| 504 |
Southeast Region | 811 |
| 58 |
| 869 |
| 417 |
| 56 |
| 473 |
Southwest Region | 961 |
| 85 |
| 1,046 |
| 901 |
| 70 |
| 971 |
West Region | 796 |
| 154 |
| 950 |
| 275 |
| 157 |
| 432 |
|
|
|
|
|
|
|
|
|
|
|
|
Total | 3,292 |
| 350 |
| 3,642 |
| 2,062 |
| 318 |
| 2,380 |
|
|
|
|
|
|
|
|
|
|
|
|
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast.... 338 27 365 294 18 312
Mid-Atlantic. 171 22 193 167 19 186
Midwest ..... 208 22 230 175 17 192
Southeast.... 241 42 283 250 37 287
Southwest.... 1,150 92 1,242 901 70 971
West......... 460 133 593 275 157 432
------ ------ ----- ------ ------ -----
Total 2,568 338 2,906 2,062 318 2,380
====== ====== ===== ====== ====== =====
Investments in and advances to unconsolidated joint ventures
increased $29.9$9.0 million during the ninethree months ended JulyJanuary 31, 2006.
This increase is due to income from joint ventures not distributed and
additional investment in joint ventures. As of JulyJanuary 31, 2006, we have
investments in tennine homebuilding joint ventures and nine land development
joint ventures. Other than performance and completion guarantees and
limited environmental indemnifications, no other guarantees associated with
unconsolidated joint ventures have been given.
Receivables, deposits, and notes decreased $22.3$41.1 million to $103.1$84.3
million at JulyJanuary 31, 2006. The decrease was primarily due to a decrease
in miscellaneous receivables for a payment received in the first quarter of
2006 from an unconsolidated joint venture, offset by an increaseventure. It was also due to the
reduction in deposits during the quarter.
|
| Prepaid expenses and other assets are as follows: |
| |||||
|
|
|
|
|
| |||
| July 31, |
| October 31, |
| Dollar | |||
| 2006 |
| 2005 |
| Change | |||
|
|
|
|
|
| |||
Prepaid insurance | $ 12,199 |
|
|
| $ 12,199 | |||
Prepaid project costs | 85,501 |
| $ 61,773 |
| 23,728 | |||
Senior residential rental properties | 8,453 |
| 8,754 |
| (301) | |||
Other prepaids | 44,641 |
| 30,730 |
| 13,911 | |||
Other assets | 32,170 |
| 30,588 |
| 1,582 | |||
|
|
|
|
|
| |||
| $182,964 |
| $131,845 |
| $ 51,119 | |||
receivables from home sales which amounted to $26.8
million and $39.4 million at January 31, 2006 and October 31, 2005,
respectively.
Prepaid expenses and other assets are as follows:
January 31, October 31, Dollar
2006 2005 Change
---------- ----------- ---------
Prepaid insurance.................... $ 14,877 $ - $ 14,877
Prepaid project costs................ 66,548 61,773 4,775
Senior residential rental properties. 8,659 8,754 (95)
Other prepaids....................... 29,166 24,547 4,619
Other assets......................... 33,072 30,588 2,484
----------- ----------- ---------
$ 152,322 $ 125,662 $ 26,660
=========== =========== =========
Prepaid insurance increased due to a payment of a full year of
liability insurance premium costs during the first quarter of every year. These costs are
amortized on a straight line basis. Prepaid project costs and other
prepaids increased due to the growth in the number ofnew 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. The
increase in other prepaidsassets is primarilyattributable to the Executive Deferred
Compensation Plan, due to prepaid bond fees, recorded in connection with the Company’s two new bond issuances in fiscal 2006.
increased profit sharing contributions for Senior
Management.
At JulyJanuary 31, 2006, we had $32.7 million of goodwill. This amount
resulted from Company acquisitions prior to fiscal 2000.
Definite life intangibles decreased $49.0$37.6 million to $200.5$211.9 million
at JulyJanuary 31, 2006. The decrease was the result of amortization during
the ninethree months of $38.4$11.7 million, and an adjustment to the First Home
Builders of Florida acquisition accounting, offset by current year acquisitions and contingent payments related to past acquisitions.accounting. As we finalizedfinalize our valuation
of the assets acquired, from First Home Builders of Florida, we established a deferred tax asset as part of the
purchase price allocation, which reduced the recorded intangibles.intangibles, offset
by our Cambridge Homes acquisition earnout and contingent payments related
to past acquisitions. For any acquisition, professionals are hired to
appraise all acquired intangibles. See “-"- Critical Accounting Policies –-
Intangible Assets”Assets" above for additional information on intangibles. For
tax purposes all our intangibles, except those resulting from an
acquisition classified as a tax free exchange, are being amortized over 15
years.
Income Taxes Receivable – Including Deferred Tax Benefits increased $140.9 million due to estimated tax payments made during
Accounts payable and other liabilities are as follows:
January 31, October 31, Dollar
2006 based on 2005 actual taxes, while pre-tax income is lower in 2006 than in 2005. Also, as noted above, we finalized our valuation of the assets acquired from First Home Builders of Florida and we established a deferred tax asset as part of the purchase price allocation, which reduced the recorded intangibles.
|
|
|
|
|
|
|
|
|
| July 31, |
| October 31, |
| Dollar |
|
| 2006 |
| 2005 |
| Change |
|
|
|
|
|
|
|
Accounts payable |
| $208,859 |
| $191,469 |
| $ 17,390 |
Reserves |
| 100,525 |
| 95,310 |
| 5,215 |
Accrued expenses |
| 56,128 |
| 48,647 |
| 7,481 |
Accrued compensation |
| 67,427 |
| 75,655 |
| (8,228) |
Other liabilities |
| 113,729 |
| 99,448 |
| 14,281 |
|
| $546,668 |
| $510,529 |
| $ 36,139 |
Change
--------- ----------- --------
Accounts payable.......................$ 172,010 $ 191,469 $(19,459)
Reserves............................... 98,258 95,310 2,948
Accrued expenses....................... 41,379 48,647 (7,268)
Accrued compensation................... 64,356 75,655 (11,299)
Other liabilities...................... 106,500 99,448 7,052
--------- ----------- --------
$ 482,503 $ 510,529 $(28,026)
========= =========== ========
The increasedecrease in accounts payable was primarily due to timing of payments and an increasedecreases in
new communitieshomes under construction in the first quarter of 2006 compared to the
fourth quarter of 2005 throughout our markets, which resultedresults in moreless
activity and higherlower payables. Reserves increased for our general liability
insurance deductible, owner controlled insurance program and bonding. As each home closes, we accrue for warranty costs under our general liability insurance. Any claims for warranty costs may not occur until the later years of the ten year warranty period, therefore, as our number of closed homes continues to increase each year, our reserves will increase until charges are incurred or the warranty period expires. The
increasedecrease in accrued expenses is due to timing of property tax payments and
acquisition earnout obligations and a significant increase in the number of homes closed in one of our Southeast markets in the third quarter of 2006, resulting in a higher volume of invoices not yet received for work completed in the last few weeks of the quarter.obligations. The decrease in accrued compensation was
primarily due to the payout of our fiscal year 2005 fourth quarter bonuses during the
first quarter of 2006. Traditionally higher bonuses are earned in the fourth quarter of the fiscal year, as the Company earns its highest profits in the fourth quarter. The increase in other liabilities is mainly due to
an increase inincreased contributions to our deferred income from advances relatedcompensation plan, increased
payroll withholding due to timing of insurance claims, and a lot optionsoption
advance in the Northeast and Southwest Regions.
Southwest.
Financial Services - Mortgage loans held for sale consist of
residential mortgages receivable of which $174.7$152.4 million and $211.2 million
at JulyJanuary 31, 2006 and October 31, 2005, respectively, are being
temporarily warehoused and awaiting sale in the secondary mortgage market.
We may incur risk with respect to mortgages that are delinquent, but only
to the extent the losses are not covered by mortgage insurance or resale
value of the house. Historically, we have incurred minimal credit losses.
The decrease in the receivable from October 31, 2005 is directly related to a decrease in the amount of loans financed at July 31, 2006.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JULYJANUARY 31, 2006 COMPARED
TO THE THREE AND NINE MONTHS ENDED JULYJANUARY 31, 2005
Total revenues:
|
| Three Months Ended | ||||||
| July 31, 2006 |
| July 31, 2005 |
| Dollar Change |
| Percentage Change |
| (Dollars In Thousands) | ||||||
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
Sale of homes | $1,499,826 |
| $1,289,373 |
| $ 210,453 |
| 16.3% |
Land sales and other | 28,032 |
| 4,820 |
| 23,212 |
| 481.6% |
Financial services | 22,661 |
| 18,533 |
| 4,128 |
| 22.3% |
|
|
|
|
|
|
|
|
Total revenues | $1,550,519 |
| $1,312,726 |
| $ 237,793 |
| 18.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended | ||||||
| July 31, 2006 |
| July 31, 2005 |
| Dollar Change |
| Percentage Change |
| (Dollars In Thousands) | ||||||
|
|
|
|
|
|
|
|
Homebuilding: |
|
|
|
|
|
|
|
Sale of homes | $4,225,571 |
| $3,495,014 |
| $ 730,557 |
| 20.9% |
Land sales and other |
|
|
|
|
|
|
|
revenues | 113,947 |
| 32,747 |
| 81,200 |
| 248.0% |
Financial services | 63,114 |
| 48,995 |
| 14,119 |
| 28.8% |
|
|
|
|
|
|
|
|
Total revenues | $4,402,632 |
| $3,576,756 |
| $ 825,876 |
| 23.1% |
|
|
|
|
|
|
|
|
Homebuilding:
Revenues:
Compared to the same prior period, homebuilding revenues increased $233.7as follows:
Three Months Ended
--------------------------------------------
January 31, January 31, Dollar Percentage
2006 2005 Change Change
----------- ----------- -------- ----------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $1,246,197 $1,015,969 $230,228 22.7%
Land sales and other
revenues........... 12,533 24,399 (11,866) (48.6)%
Financial Services..... 19,262 14,193 5,069 35.7%
----------- ----------- -------- ----------
Total Revenues... $1,277,992 $1,054,561 $223,431 21.2%
=========== =========== ======== ==========
Homebuilding:
Compared to the same prior period, housing revenues increased $230.2
million or 18%22.7% during the three months ended JulyJanuary 31, 20062006. Housing
revenues are recorded when title is conveyed to the buyer, adequate cash
payment has been received, and increased $811.8 million or 23% during the nine months ended July 31, 2006.there is no continued involvement. Land
sales are ancillaryincidental to our homebuildingresidential housing operations and are expected
to continue in the future but may significantly fluctuate up or down. For
further details on land sales and other revenues, see paragraph titled
“Land"Land Sales and Other Revenues”Revenues" later in this document.
|
| Three Months Ended July 31, |
| Nine Months Ended July 31, | ||||
|
|
|
|
|
|
|
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| (Dollars in Thousands) | ||||||
Northeast Region (1): |
|
|
|
|
|
|
|
Dollars | $ 286,250 |
| $ 244,973 |
| $ 744,704 |
| $ 750,679 |
Homes | 721 |
| 644 |
| 1,979 |
| 2,056 |
|
|
|
|
|
|
|
|
Southeast Region (2): |
|
|
|
|
|
|
|
Dollars | $ 617,412 |
| $ 405,467 |
| $1,647,282 |
| $1,004,201 |
Homes | 2,030 |
| 1,212 |
| 5,364 |
| 3,232 |
|
|
|
|
|
|
|
|
Southwest Region: |
|
|
|
|
|
|
|
Dollars | $ 220,211 |
| $ 189,766 |
| $ 635,759 |
| $ 489,810 |
Homes | 1,022 |
| 1,021 |
| 2,948 |
| 2,636 |
|
|
|
|
|
|
|
|
West Region: |
|
|
|
|
|
|
|
Dollars | $ 375,953 |
| $ 449,167 |
| $1,197,826 |
| $1,250,324 |
Homes | 850 |
| 1,090 |
| 2,732 |
| 3,057 |
|
|
|
|
|
|
|
|
Consolidated total: |
|
|
|
|
|
|
|
Dollars | $1,499,826 |
| $1,289,373 |
| $4,225,571 |
| $3,495,014 |
Homes | 4,623 |
| 3,967 |
| 13,023 |
| 10,981 |
|
|
|
|
|
|
|
|
Unconsolidated joint |
|
|
|
|
|
|
|
ventures (3): |
|
|
|
|
|
|
|
Dollars | $ 189,287 |
| $ 195,716 |
| $ 648,301 |
| $ 331,033 |
Homes | 498 |
| 571 |
| 1,695 |
| 944 |
|
|
|
|
|
|
|
|
Totals: |
|
|
|
|
|
|
|
Housing revenues | $1,689,113 |
| $1,485,089 |
| $4,873,872 |
| $3,826,047 |
Homes delivered | 5,121 |
| 4,538 |
| 14,718 |
| 11,925 |
|
|
|
|
|
|
|
|
Information on homes delivered by market area is set forth below:
Three Months Ended
January 31,
---------------------
2006 2005
---------- ----------
(Dollars in Thousands)
Northeast:
Dollars............ $ 196,299 $ 219,891
Homes.............. 442 553
Mid-Atlantic:
Dollars............ $ 197,878 $ 158,329
Homes.............. 379 348
Midwest (1):
Dollars............ $ 29,203 $ 18,570
Homes.............. 170 134
Southeast (2):
Dollars............ $ 269,778 $ 105,505
Homes.............. 1,148 554
Southwest:
Dollars............ $ 183,259 $ 135,911
Homes.............. 872 715
West:
Dollars............ $ 369,780 $ 377,763
Homes.............. 834 962
Consolidated Total:
Dollars............ $ 1,246,197 $1,015,969
Homes.............. 3,845 3,266
Unconsolidated Joint
Ventures (3):
Dollars............ $ 214,612 $ 11,585
Homes.............. 585 22
Totals:
Housing Revenues... $ 1,460,809 $1,027,554
Homes Delivered.... 4,430 3,288
(1) Northeast RegionMidwest includes deliveries from our Ohio acquisition of
Oster Homes on August 3, 2005.
(2) Southeast Region includes deliveries from our Florida acquisitions
of Cambridge Homes and First
| |||
| |||
Home Builders of Florida on March 1, 2005 and August 8, 2005, respectively. (3) Unconsolidated Joint Ventures includes deliveries from our joint venture with affiliates of Blackstone
| |||
Real Estate Advisors that acquired Town & Country Homes existing residential communities on March 2, 2005. | |||
An important indicator of our future results are recently signed
contracts and home contract backlog for future deliveries. Our sales
contracts and homes in contract backlog primarily using base sales prices by market
area are set forth below:
|
|
|
|
|
|
|
|
| Net Contracts(1) for the Nine Months Ended July 31, |
| Contract Backlog as of July 31, | ||||
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| (Dollars in Thousands) | ||||||
Northeast Region (2): |
|
|
|
|
|
|
|
Dollars | $ 754,855 |
| $ 729,637 |
| $ 862,227 |
| $ 798,113 |
Homes | 2,064 |
| 1,981 |
| 2,249 |
| 2,181 |
|
|
|
|
|
|
|
|
Southeast Region (3): |
|
|
|
|
|
|
|
Dollars | $1,371,689 |
| $1,308,952 |
| $1,950,945 |
| $1,232,152 |
Homes | 3,673 |
| 3,630 |
| 5,771 |
| 3,305 |
|
|
|
|
|
|
|
|
Southwest Region: |
|
|
|
|
|
|
|
Dollars | $ 635,986 |
| $ 647,975 |
| $ 300,375 |
| $ 333,875 |
Homes | 2,981 |
| 3,320 |
| 1,329 |
| 1,608 |
|
|
|
|
|
|
|
|
West Region: |
|
|
|
|
|
|
|
Dollars | $ 872,358 |
| $1,272,462 |
| $ 490,893 |
| $ 840,758 |
Homes | 1,943 |
| 3,076 |
| 964 |
| 1,936 |
|
|
|
|
|
|
|
|
Consolidated total: |
|
|
|
|
|
|
|
Dollars | $3,634,888 |
| $3,959,026 |
| $3,604,440 |
| $3,204,898 |
Homes | 10,661 |
| 12,007 |
| 10,313 |
| 9,030 |
|
|
|
|
|
|
|
|
Unconsolidated joint ventures (4): |
|
|
|
|
|
|
|
Dollars | $ 323,557 |
| $ 671,277 |
| $ 706,057 |
| $ 993,259 |
Homes | 903 |
| 1,426 |
| 1,548 |
| 2,301 |
|
|
|
|
|
|
|
|
Totals: |
|
|
|
|
|
|
|
Dollars | $3,958,445 |
| $4,630,303 |
| $4,310,497 |
| $4,198,157 |
Homes | 11,564 |
| 13,433 |
| 11,861 |
| 11,331 |
|
|
|
|
|
|
|
|
Net Contracts(1) for the Three Months Ended Contract Backlog January 31, as of January 31, ------------------------- ------------------------ 2006 2005 2006 2005 ----------- ----------- ----------- ----------- (Dollars in Thousands) Northeast: Dollars............$ 195,021 $ 181,373 $ 710,217 $ 672,997 Homes.............. 460 451 1,601 1,657 Mid-Atlantic: Dollars............$ 187,374 $ 178,516 $ 702,516 $ 540,187 Homes.............. 352 351 1,354 1,135 Midwest (1): Dollars............$ 29,380 $ 8,232 $ 93,281 $ 47,678 Homes.............. 148 71 559 434 Southeast (3): Dollars............$ 314,027 $ 106,366 $1,539,586 $ 252,791 Homes.............. 1,015 498 5,864 1,211 Southwest: Dollars............ $ 170,704 $ 165,048 $ 276,116 $ 197,285 Homes.............. 801 897 1,225 1,106 West: Dollars............ $ 257,151 $ 354,124 $ 686,500 $ 764,697 Homes.............. 574 906 1,493 1,861 Consolidated Total: Dollars............ $1,153,657 $ 993,659 $ 4,008,216 $2,475,635 Homes.............. 3,350 3,174 12,096 7,404 Unconsolidated Joint Ventures (4): Dollars............ $ 108,572 $ 41,347 $ 924,762 $ 239,851 Homes.............. 274 66 2,029 399 Totals: Dollars............ $1,262,229 $1,035,006 $ 4,932,978 $2,715,486 Homes............... 3,624 3,240 14,125 7,803 (1) Net contracts are defined as new contracts during the period for the purchase of homes, less cancellations of
|
prior contracts.
(2) The number and the dollar amount of net contracts and contract backlog
in the NortheastMidwest in the 2006 first quarter include the
|
effect of the Oster Homes acquisition, which closed in August 2005. (3) The number and the dollar amount of net contracts and contract backlog in the Southeast in the 2006 first quarter include the
| ||
|
effects of the Cambridge Homes and First Home Builders of Florida acquisitions, which closed in March 2005 and August 2005, respectively. (4) The number and the dollar amount of net contracts and contract backlog in Unconsolidated Joint Ventures in
| ||
|
Our reported level the 2006 first quarter include the
effect of net contracts has been impacted by an increasethe Town & Country Homes acquisition, which closed in
our cancellation rates over the past few quarters, due to weakening market conditions. The cancellation rate represents the number of cancelled contracts in the quarter divided by the number of gross sales contracts executed in the quarter. For comparison, the following are historical cancellation rates, excluding unconsolidated joint ventures:
Quarter | 2003 | 2004 | 2005 | 2006 |
|
|
|
|
|
First | 23% | 23% | 27% | 30% |
Second | 18% | 19% | 21% | 32% |
Third | 21% | 20% | 24% | 33% |
Fourth | 25% | 24% | 25% |
|
|
|
|
|
|
Most cancellations occur within the legal rescission period, which varies by state but is generally less than two weeks. However, in recent quarters we have experienced a higher than normal number of cancellations later in the construction process. Cancellations also occur as a result of buyer failure to qualify for a mortgage, which generally occurs during the first few weeks after signing. Cancellation rates can be higher in markets where buyers sign contracts so as to tie up a house they like and then cancel within the rescission period once they reach a final decision on the house they want. This situation is more common in certain markets, particularly California.
March 2005. Cost of sales includes expenses for homebuilding and land sales. A breakout of such expenses for homebuilding sales and homebuilding gross margin is set forth below:
| Three Months Ended July 31, |
| Nine Months Ended July 31, | ||||
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| (Dollars in Thousands) | ||||||
|
|
|
|
|
|
|
|
Sale of homes | $1,499,826 |
| $1,289,373 |
| $4,225,571 |
| $3,495,014 |
|
|
|
|
|
|
|
|
Cost of sales, excluding interest | 1,148,530 |
| 939,815 |
| 3,203,882 |
| 2,571,916 |
|
|
|
|
|
|
|
|
Homebuilding gross margin, before interest expense | 351,296 |
| 349,558 |
| 1,021,689 |
| 923,098 |
|
|
|
|
|
|
|
|
Homebuilding cost of sales interest | 25,551 |
| 22,304 |
| 61,523 |
| 58,324 |
Homebuilding gross margin, after interest expense | $ 325,745 |
| $ 327,254 |
| $ 960,166 |
| $ 864,774 |
|
|
|
|
|
|
|
|
Gross margin percentage, before interest expense | 23.4% |
| 27.1% |
| 24.2% |
| 26.4% |
|
|
|
|
|
|
|
|
Gross margin percentage, after interest expense | 21.7% |
| 25.4% |
| 22.7% |
| 24.7% |
|
|
|
|
|
|
|
|
|
| Cost of Sales expenses as a percentage of home sales revenues are presented below: |
| ||||||||
|
|
|
|
|
|
|
|
| |||
|
| Three Months Ended July 31, |
| Nine Months Ended July 31, | |||||||
|
|
|
|
|
|
|
|
| |||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 | |||
|
|
|
|
|
|
|
|
| |||
Sale of homes |
| 100.0% |
| 100.0% |
| 100.0% |
| 100.0% | |||
|
|
|
|
|
|
|
|
| |||
Cost of sales, excluding interest: |
|
|
|
|
|
|
|
| |||
homebuilding, land & development |
| 68.6% |
| 64.8% |
| 67.7% |
| 65.5% | |||
Commissions |
| 2.3% |
| 2.6% |
| 2.3% |
| 2.3% | |||
Financing concessions |
| 1.0% |
| 1.0% |
| 0.9% |
| 1.0% | |||
Overheads |
| 4.7% |
| 4.6% |
| 4.9% |
| 4.9% | |||
Total cost of sales, before interest |
| 76.6% |
| 72.9% |
| 75.8% |
| 73.6% | |||
Gross margin percentage, before |
| 23.4% |
| 27.1% |
| 24.2% |
| 26.4% | |||
|
|
|
|
|
|
|
|
| |||
Cost of sales interest |
| 1.7% |
| 1.7% |
| 1.5% |
| 1.7% | |||
Gross margin percentage, after interest |
| 21.7% |
| 25.4% |
| 22.7% |
| 24.7% | |||
|
|
|
|
|
|
|
|
| |||
Three Months Ended
January 31,
----------------------
2006 2005
---------- ----------
(Dollars in Thousands)
Sale of Homes.............. $1,246,197 $1,015,969
Cost of Sales, excluding
interest................. 926,822 757,086
---------- ----------
Homebuilding Gross Margin,
before interest expense.. 319,375 258,883
Homebuilding Cost of
Sales Interest........... 16,111 17,579
---------- ----------
Homebuilding Gross Margin,
after interest expense... $ 303,264 $ 241,304
========== ==========
Gross Margin Percentage,
before interest expense... 25.6% 25.5%
Gross Margin Percentage,
after interest expense.... 24.3% 23.8%
Cost of Sales expenses as a percentage of home sales revenues are
presented below:
Three Months Ended
January 31,
-------------------
2006 2005
-------- --------
Sale of Homes................ 100.0% 100.0%
-------- --------
Cost of Sales, excluding
interest:
Homebuilding, land &
development costs.... 65.8% 66.1%
Commissions............ 2.3% 2.1%
Financing concessions.. 0.9% 0.9%
Overheads.............. 5.4% 5.4%
-------- --------
Total Cost of Sales, before
interest expense........... 74.4% 74.5%
-------- --------
Gross Margin Percentage,
before interest expense.... 25.6% 25.5%
Cost of sales interest....... 1.3% 1.7%
-------- --------
Gross Margin Percentage,
after interest expense..... 24.3% 23.8%
======== ========
We sell a variety of home types in various local communities, each
yielding a different gross margin, depending on local factors such as competition, economic trends and community location.margin. As a result, depending on the
geographic mix of deliveries and the mix of specificboth communities and of home
types delivered, consolidated quarterly gross margin will fluctuate up or
down and may not be representative of the consolidated gross margin for the
year. The consolidated gross margin before interest expense for the three
and nine months ended JulyJanuary 31, 2006 was 370 and 22010 basis points lowerhigher than the same
period in 2005, respectively.2005. Our gross margin after interest expense for the three
and nine months ended JulyJanuary 31, 2006 was 370 and 20050 basis points lessmore than the same period
last year, respectively.year. These decreasesminor fluctuations from period to period in cost of sales
interest as a percentage of home revenues are attributeddue to home price reductions, more prevalent usethe mix of incentiveshomes sold
and increases in land and material costs such as asphalt and copper.
the inventory carrying period for those homes.
Homebuilding selling, general, and administrative expenses as a
percentage of homebuilding revenues increased to 10.1%10.9% for the three months
ended JulyJanuary 31, 2006, compared to 9.0%9.5% for the three months ended July 31, 2005 and increased to 10.2% for the nine months ended July 31, 2006, compared to 9.1% for the nine months ended JulyJanuary
31, 2005. Such expenses increased $37.7$38.6 million for the three months ended
July 31, 2006 and increased $121.5 million for the nine months ended JulyJanuary 31, 2006 compared to the same period last year. IncludedThe dollar and
percentage increases were in these expenses are increased advertisingline with our growth goals as we increase
selling, general and administrative costs associated with new community openings and morethe expected
increase in the number of active selling communities in total, as well as additional advertising expenditures to generate traffic and sales during current slower market conditions, and higher costs due to the acquisitionsall of Cambridge Homes, First Home Builders of Florida, Oster Homes and to a lesser extent CraftBuilt Homes in the last 13 months.
our regions. Land Sales and Other Revenues:
Land sales and other revenues consist primarily of land and lot sales. A breakout of land and lot sales is set forth below:
|
|
|
| ||||
| Three Months Ended July 31, |
| Nine Months Ended July 31, | ||||
| 2006 |
| 2005 |
| 2006 |
| 2005 |
|
|
|
|
|
|
|
|
Land sales | $ 23,045 |
| $ 441 |
| $103,838 |
| $ 24,618 |
Cost of sales, excluding interest | 21,742 |
| 387 |
| 81,376 |
| 16,369 |
Land sales gross margin, excluding | 1,303 |
| 54 |
| 22,462 |
| 8,249 |
Interest expense | 50 |
| 28 |
| 930 |
| 239 |
Land sales gross margin, including | $ 1,253 |
| $ 26 |
| $ 21,532 |
| $ 8,010 |
|
|
|
|
|
|
|
|
Three Months Ended
January 31,
------------------
2006 2005
-------- --------
Land Sales........................ $ 10,555 $23,004
Cost of Sales, Excluding Interest. 7,865 14,171
-------- --------
Land Sales Gross Margin,
Excluding Interest.............. 2,690 8,833
-------- --------
Interest Expense.................. 458 188
-------- --------
Land Sales Gross Margin,
Including Interest.............. $ 2,232 $ 8,645
======== ========
Land sales are ancillaryincidental to our residential homebuilding
operations and are expected to continue in the future but may significantly
fluctuate up or down. Profits from land sales in the first nine months of the year were significantly more than the first nine months of 2005, and forFor the full fiscal year 2006, we expect pre-tax
profit from land sales to be higher than they were in fiscal 2005.
The increase inHowever, land sale profits has to do with a few larger developments that we have undertaken, where we have strategically decided at the outset to sell some portion of the community to one or more other builders. Although we budget land sales they are often dependent upon receiving approvals and
entitlements, the timing of which can be uncertain. As a result,
projecting the amount and timing of land sales is difficult.
Financial Services
Financial services consist primarily of originating mortgages from
our homebuyers and selling such mortgages in the secondary market, and
title insurance activities. For the three and nine months ended JulyJanuary 31, 2006,
financial services provided a $7.5 million and $19.9$5.7 million profit before income taxes,
compared to a profit of $6.2 million and $15.3$4.3 million for the same period in 2005, respectively.2005. The
increase in pretax profit for the three and nine months ended JulyJanuary 31, 2006 is
primarily due to increased mortgage settlements and the addition of
mortgage operations as a result of our 2005 acquisitions.
Corporate General and Administrative
Corporate general and administrative expenses represent the
operations at our headquarters in Red Bank, New Jersey. Such expenses
include our executive offices, information services, human resources,
corporate accounting, training, treasury, process redesign, internal audit,
construction services, and administration of insurance, quality, and
safety. As a percentage of total revenues, such expenses increased to 1.7%2.2%
for the three months ended JulyJanuary 31, 2006 from 1.4%1.5% for the prior year’syear's
three months and increased to 1.8% from the nine months ended July 31, 2006 from 1.4% for the prior year’s nine months. Corporate general and administrative expenses increased
$7.9 and $30.7$11.8 million during the three and nine months ended JulyJanuary 31, 2006, respectively, compared to
the same period last year. The increase in corporate general and
administrative expenses is primarily attributed to increased depreciation
expense for new software systems, increased consulting services related to
the new software implementation, Sarbanes-OxleySarbanes Oxley compliance costs, increased
compensation with more headcount and higher profit based bonuses, as well
as the adoption of SFASFAS 123R resulting in the expensing of stock options.
The
While the sum of homebuilding, selling, general and administrative
expenses and corporate general and administrative expenses as a percentage
of total revenues for the thirdfirst quarter is higher than the prior year’s third
year's
first quarter percentage. Wepercentage, we expect the increase in these expenses as a percentage of
revenues for the full fiscal year comparedto be similar to the prior full fiscal year to be similar.
year. Other Interest
Other interest decreased $0.5 million and increased $0.3$0.7 million for the three and nine months ended
JulyJanuary 31, 2006, compared to three and nine months ended JulyJanuary 31, 2005. This
slight decrease for the three months and increase for the nine months is primarily due to a fluctuationan increase in interest incurred and expensed
on nonrecourse land mortgages directly related to property not yet under
development.
Other Operations
Other operations consist primarily of miscellaneous residential
housing operations expenses, senior rental residential property operations,
amortization of senior and senior subordinated note issuance expenses,
earnout payments from homebuilding company acquisitions, minority interest
relating to consolidated joint ventures, and corporate owned life
insurance. OtherThe increase in other operations increased to $8.4 and $23.9$7.0 million for the three
and nine months ended JulyJanuary 31, 2006, respectively, compared to $7.4 and $10.6$1.9 million for the three
and nine months ended JulyJanuary 31, 2005, respectively. The increases areis primarily due to an increase in minority interest resulting from increased profits in a consolidated joint venture for the three and nine months ended July 31, 2006 and increased earnout
expenses related to several recent acquisitions for the nine months ended July 31, 2006.
acquisitions. Intangible Amortization
We are amortizing our definite life intangibles over their expected
useful life, ranging from three to eightseven years. Intangible amortization
increased $1.6 million and $6.1 million for the three and nine months ended JulyJanuary 31, 2006, when
compared to the same period last year. This increase was the result of the
amortization expense related to the acquisition of Cambridge Homes in March
2005, Oster Homes in August 2005 and First Home Builders of Florida in
August 2005, and CraftBuilt Homes in April 2006, offset by reduced amortization on older acquisitions.
Recent Accounting Pronouncements
In May 2005, the FASB issued SFAS 154, “Accounting"Accounting Changes and Error
Corrections”Corrections". This statement, which replaces APB Opinion No. 20,
“Accounting Changes”"Accounting Changes" and SFAS No. 3, “Reporting"Reporting Accounting Changes in
Interim Financial Statements”Statements", changes the requirements for the accounting
for and reporting of a change in accounting principle. The statement
requires retrospective application of changes in accounting principle to
prior periods’periods' financial statements unless it is impracticable to determine
the period-specific effects or the cumulative effect of the change. SFAS
No. 154 is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. The adoption of SFAS
No. 154 is not expected to have a material impact on our consolidated
financial position, results of operations or cash flows.
In June 2005, the Emerging Issues Task Force (“EITF”("EITF") released Issue
No. 04-5 “Determining"Determining Whether a General Partner, or the General Partners as
a Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights” (“Rights" ("EITF 04-5”04-5"). EITF 04-5 creates a framework
for evaluating whether a general partner or a group of general partners
controls a limited partnership and therefore should consolidate the
partnership. EITF 04-5 states that the presumption of general partner
control would be overcome only when the limited partners have certain
specific rights as outlined in EITF 04-5. EITF 04-5 is effective
immediately for all newly formed limited partnerships and for existing
limited partnership agreements that are modified. For general partners in
all other limited partnerships, EITF 04-5 is effective no later than the
beginning of the first reporting period in fiscal years beginning after
December 15, 2005. Implementation of EITF 04-5 is not expected to have a
material impact on the Company’sCompany's results of operations or financial
position.
In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting to Uncertainty in Income
Total Taxes
– An Interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for the Company’s first quarter ending January 31, 2007. We are in the process of assessing the impact, if any, this will have on our financial statements.
Total Taxes
Total taxes as a percentage of income before taxes decreased for the
three months ended JulyJanuary 31, 2006 to 36.3%37.8% from 40.4%38.2% for the three
months ended July 31, 2005, and for the nine months ended July 31, 2006 to 36.8% from 39.4% for the nine months ended JulyJanuary 31, 2005. This decrease is primarily due to the
benefit of the tax deduction on qualified production activities provided by
the American Jobs Creation Act of 2004 and tax return to provision adjustments for 2005 tax returns filed in the third quarter of 2006. In addition, in the quarter ended July 31, 2006, the percentage of earnings declined in California where state income rates are higher, and increased in Florida where due to prior year loss carryforwards, the Company does not currently pay state income taxes.
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 has a long-term effect, because increasing costs of land,
materials, and labor result in increasing sale prices of our homes. In
general, these price increases have been commensurate with the general rate
of inflation in our housing markets and have not had a significant adverse
effect on the sale of our homes. A significant risk faced by the housing
industry generally is that rising house construction costs, including land and interest
costs, will substantially outpace increases in the income of potential
purchasers. Recently in the more highly regulated markets that have seen
significant home price appreciation, customer affordability has become a
concern. Our broad product array insulates us to some extent, but customer affordability of our homesit is
something we monitorare monitoring closely.
Inflation has a lesser short-term effect, because we generally negotiate fixed price contracts with many, but not all, of our subcontractors and material suppliers for the construction of our homes. These prices usually are applicable for a specified number of residential buildings or for a time period of between three to twelve months. Construction costs for residential buildings represent approximately 60% of our homebuilding cost of sales.
Mergers and Acquisitions
On March 1, 2005, we acquired for cash the assets of Cambridge Homes,
a privately held Orlando homebuilder and provider of related financial
services, headquartered in Altamonte Springs, Florida. The acquisition
provides us with a presence in the greater Orlando market. Cambridge Homes
designs, markets and sells both single family homes and attached townhomes
and focuses on first-time, move-up and luxury homebuyers. Cambridge Homes
also provides mortgage financing, as well as title and settlement services
to its homebuyers.
The Cambridge Homes acquisition was accounted for as a purchase, with
the results of its operations included in our consolidated financial
statements as of the date of the acquisition.
On March 2, 2005, we acquired the operations of Town & Country Homes,
a privately held homebuilder and land developer headquartered in Lombard,
Illinois, which occurred concurrently with our entering into a joint
venture agreement with affiliates of Blackstone Real Estate Advisors in New
York to own and develop Town & Country's existing residential communities.
The joint venture is being accounted for under the equity method. Town &
Country Homes' operations beyond the existing owned and optioned
communities, as of the acquisition date, are wholly owned and included in
our consolidated financial statements.
The Town & Country acquisition provides us with a strong initial
position in the greater Chicago market, and expands our operations into the
Florida markets of West Palm Beach, Boca Raton and Fort Lauderdale and
bolsters our current presence in Minneapolis/St. Paul. Town & Country
designs, markets and sells a diversified product portfolio in each of its
markets, including single family homes and attached townhomes, as well as
mid-rise condominiums in Florida. Town & Country serves a broad customer
base including first-time, move-up and luxury homebuyers.
On August 3, 2005, we acquired substantially all of the homebuilding
assets of Oster Homes, a privately held Ohio homebuilder, headquartered in
Lorain, Ohio. The acquisition provides Hovnanian with a complementary
presence to its Ohio “build-on-your-own-lot”"build-on-your-own-lot" homebuilding operations.
Oster Homes builds in Lorain County in Northeast Ohio, just west of
Cleveland. Oster Homes designs, markets and sells single family homes,
with a focus on first-time and move-up homebuyers. Additionally, Oster
Homes utilizes a design center to market extensive pre-prices, options and
upgrades.
On August 8, 2005, we acquired substantially all of the assets of First Home Builders of Florida, a privately held homebuilder and provider of related financial services headquartered in Cape Coral, Florida. First Home
Builders is a leading builder in Western Florida and ranked first in
the greater Fort Myers-Cape Coral market. First Home Builders of Florida
designs, markets and sells single family homes, with a focus on the first-timefirst-
time home buying segment. The company also provides mortgage financing,
title and settlement services to its homebuyers.
Both the First Home Builders of Florida and the Oster Homes acquisitions were accounted for as purchases with the results of their operations included in our consolidated financial statements as of the dates of the acquisitions.
On April 17, 2006, we acquired for cash the assets of CraftBuilt Homes, a privately held homebuilder headquartered in Bluffton, South Carolina. The acquisition expands our operations into the coastal markets of South Carolina and Georgia. CraftBuilt Homes designs, markets and sells single family detached homes. Due to its close proximity to Hilton Head, CraftBuilt Homes focuses on first-time, move-up, empty-nester and retiree homebuyers. This acquisition is being accounted for as a purchase with the results of its operations included in our consolidated financial statements as of the date of the acquisition.
On May 1, 2006, we acquired through the issuance of 175,936 shares of Class A common stock substantially all of the assets of two mechanical contracting businesses.
All fiscal 2006 and 2005 acquisitions provide for other payments to be made,
generally dependant upon achievement of certain future operating and return
objectives.
Transactions with Related Parties
In December 2005, we entered into an agreement to purchase land in
New Jersey from an entity that is owned by family relatives of our Chairman
of the Board and our Chief Executive Officer at a base price of $25
million. The land will be acquired in four phases over a period of 30
months from the date of acquisition of the first phase. The purchase
prices for phases two through four are subject to an increase in the
purchase price for the phase of not less than 6% per annum and not more
than 8% per annum from the date of the closing of the first phase based on
an identified prime rate. As of the end of the thirdfirst quarter of 2006, no
land has been acquired. A deposit in the amount of $500,000, however, has
been made by the Company. Neither the Company nor the Chairman of the
Board or the Chief Executive Officer has a financial interest in the
relatives’relatives' company from whom the land will be purchased.
During the second quarter of 2006, an existing lease on a building occupied by one of our companies in the Southeast Region was amended. The lessor is a company, whom at the time of the transaction, was owned partly by Geaton A. Decesaris, Jr., formerly a member of the Company’s Board of Directors. The amendment provided for an increase in the square footage of the lease space, an increased security deposit related to the square footage increase and an increase in the lease term. In total the lease is for 39,637 square feet at $18.86 per square foot per year, with a total security deposit of $34,511.
Pursuant to the Board of Director requirements, prior to these agreementsthe
agreement being finalized, an independent appraisal of each transactionthe property being
purchased was performed. Upon review of the appraisalsappraisal by the independent
members of the Board of Directors the transactions weretransaction was approved.
Safe Harbor Statement
All statements in this Form 10-Q10-Q/A that are not historical facts
should be considered as “Forward-Looking Statements”"Forward-Looking Statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such statements
involve known and unknown risks, uncertainties and other factors that may
cause actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. Although we
believe that our plans, intentions and expectations reflected in, or
suggested by such forward-looking statements are reasonable, we can give no
assurance that such plans, intentions, or expectations will be achieved.
Such risks, uncertainties and other factors include, but are not limited
to:
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. Changes in general and local economic and business conditions;
. Adverse weather conditions and natural disasters;
. Changes in market conditions;
. Changes in home prices and sales activity in the markets where the
Company builds homes;
. Government regulation, including regulations concerning
development of land, the home building, sales and customer
financing processes, 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"Business and Properties”Properties" in our Form 10-K10-K/A for the
year ended October 31, 2005.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk facing us is interest rate risk on 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 JulyJanuary 31, 2006, our
long term debt obligations, principal cash flows by scheduled maturity,
weighted average interest rates and estimated fair market value (“FMV”("FMV").
| As of July 31, 2006 |
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| Total |
| FMV @ 7/31/06 |
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Long term debt(1): |
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Fixed rate | $33,046 |
| $140,937 |
| $736 |
| $786 |
| $100,841 |
| $1,835,802 |
| $2,112,148 |
| $1,937,190 |
Average interest rate | 5.98% |
| 10.48% |
| 6.70% |
| 6.72% |
| 6.01% |
| 7.26% |
| 7.39% |
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(1) Does not include bonds collateralized by mortgages receivable or the warehouse line of credit.
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’sCompany'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’sCommission's rules and forms, and that such
information is accumulated and communicated to the Company’sCompany'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’sCompany's management, with the participation of the
Company’sCompany's chief executive officer and chief financial officer, has
evaluated the effectiveness of the design and operation of the Company’sCompany's
disclosure controls and procedures as of JulyJanuary 31, 2006. Based upon that
evaluation and subject to the foregoing, the Company’sCompany's chief executive
officer and chief financial officer concluded that the design and
operation of the Company’sCompany's disclosure controls and procedures are
effective to accomplish their objectives.
In addition, there was no change in the Company’sCompany's internal control over
financial reporting that occurred during the quarter ended JulyJanuary 31,
2006 that has materially affected, or is reasonably likely to materially
affect, the Company’sCompany's internal control over financial reporting.
As described in Note 3 to our condensed consolidated financial statements, we have restated Note 3 to the condensed consolidated financial statements included in the Report to revise our segment disclosures to show six reportable homebuilding segments, rather than treating our homebuilding business as a single national reportable segment. The treatment of our homebuilding business as a single, national, reportable segment was in accordance with the practice followed by substantially all the large, geographically diverse homebuilders that file reports with the SEC. The restatement represents a change in judgment as to the application of Statement of Financial Accounting Standards No. 131 ("SFAS 131"). The restatement has no impact on our previously reported consolidated financial position, results of operations or cash flows for any of the periods presented. Our Company management, with the participation of the Company's chief executive officer and chief financial officer, has re-evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of January 31, 2006, to determine whether the restatement changes their prior conclusion. Subject to the foregoing, and based upon that re-evaluation, the Company's chief executive officer and chief financial officer have determined that it does not change their conclusions that, as of January 31, 2006, the design and operation of the Company's disclosure controls and procedures were effective to accomplish their objectives. We had previously included in the description of our business and in our Management's Discussion and Analysis of Financial Condition and Results of Operations some information, which is not subject to SFAS 131, on the basis of purely geographic regions, without taking account of other factors that affect what are appropriate reportable segments under SFAS 131. We are now presenting that information on the basis of the same regions we are using to report segment information, so that all regional information in our reports will be presented on the basis of the same regions. However, we are doing that for the purpose of consistency, not because our management has concluded that presenting information on the prior basis was not appropriate. Therefore, our management does not believe the fact that we have changed the basis on which we are presenting information that is not subject to SFAS 131 indicates that our disclosure controls and procedures were not effective to ensure that the 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 SEC's rules and forms. PART II. Other Information
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Item 1. Legal Proceedings We are involved in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial position or results of operations and we are subject to extensive and complex regulations that affect the development and home building, sales and customer financing processes, including zoning, density, building standards and mortgage financing. These regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding.
We also are subject to a variety of local, state, federal and
foreign laws and regulations concerning protection of health and the
environment. The particular environmental laws which apply to any given
community vary greatly according to the community site, the site’ssite's
environmental conditions and the present and former uses of the site.
These environmental laws may result in delays, may cause us to incur
substantial compliance, remediation, and/or other costs, and can prohibit
or severely restrict development and homebuilding activity in certain
environmentally sensitive regions or areas.
In March 2005, we received two requests for information pursuant to
Section 308 of the Clean Water Act from Region 3 of the Environmental
Protection Agency (the “EPA”"EPA"). These requests sought information
concerning storm water discharge practices in connection with completed,
ongoing and planned homebuilding projects by subsidiaries in the states
and district that comprise EPA Region 3. We also received a notice of
violations for one project in Pennsylvania and requests for sampling plan
implementation in two projects in Pennsylvania. The amount requested by
the EPA to settle the asserted violations at the one project was not
material. We provided the EPA with information in response to its
requests. We have since been advised by the Department of Justice (“DOJ”("DOJ")
that it will be involved in the review of our storm water discharge
practices. We cannot predict the outcome of the review of these practices
or estimate the costs that may be involved in resolving the matter. To
the extent that the EPA or the DOJ asserts violations of regulatory
requirements and request injunctive relief or penalties, we will defend
and attempt to resolve such asserted violations.
In addition, in November 2005, we received two notices from the California Regional Water Quality Control Board alleging violations of certain storm water discharge rules and assessing an administrative civil liability of $0.2 million and $0.3 million. We do not consider these assessments to be material and are considering our response to the notices.
It can be anticipated that increasingly stringent requirements will be imposed on developers and homebuilders in the future. Although we cannot predict the effect of these requirements, they could result in time-consuming and expensive compliance programs and in substantial expenditures, which could cause delays and increase our cost of operations. In addition, the continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which are beyond our control, such as changes in policies, rules and regulations and their interpretations and application.
Our sales and customer financing processes are subject to the
jurisdiction of the U. S. Department of Housing and Urban Development
(“HUD”("HUD"). In connection with the Real Estate Settlement Procedures Act,
HUD hasrecently inquired about our process of referring business to our
affiliated mortgage company and has separately requested documents related
to customer financing. We have responded to HUD’sHUD's inquiries. In
connection with these inquiries, the Inspector General of HUD has
recommended to the Secretary of HUD that we indemnify HUD for any losses
that it may sustain in connection with nine loans that it alleges were
improperly underwritten. We cannot predict the outcome of HUD’sHUD's inquiry
or estimate the costs that may be involved in resolving the matter. We do
not expect the ultimate cost to be material.
In August 2006, the Company canceled a purchase contract for a property located in Southern California based on the seller’s failure to perform certain obligations, and requested return of its $16.5 million contract deposit. Refund of the deposit is currently in dispute with the seller and the Company anticipates that arbitration proceedings will commence during the fourth quarter of 2006 to resolve the dispute. At this time, the Company can not predict the outcome of this dispute.
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
or any affiliated purchaser during the third fiscal first quarter of 2006.
Issuer Purchases of Equity Securities (1)
(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.
No shares of our Class B Common Stock or of our 7.625% Series A Preferred
Stock were purchased by or on behalf of Hovnanian Enterprises or any
affiliated purchaser during the
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)
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