UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
( X )ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the twelve months ended OCTOBER 31, 2000
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number: 1-8551
Hovnanian Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-1851059
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
10 Highway 35, P.O. Box 500, Red Bank, N. J. 07701
(Address of principal executive offices)
732-747-7800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- -------------------- ------------------------
Class A Common Stock, $.01 par value American Stock Exchange
per share
Securities registered pursuant to Section 12(g) of the Act - None
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 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. ( X )Yes ( ) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
As of the close of business on December 31, 2000, there were outstanding
13,692,196 shares of the Registrant's Class A Common Stock and 7,591,579
shares of its Class B Common Stock. The approximate aggregate market value
(based upon the closing price on the American Stock Exchange) of these shares
held by non-affiliates of the Registrant as of December 31, 2000 was
$63,933,000. (The value of a share of Class A Common Stock is used as the
value for a share of Class B Common Stock as there is no established market
for Class B Common Stock and it is convertible into Class A Common Stock on a
share-for-share basis.)
Documents Incorporated by Reference:
Part III - Those portions of registrant's definitive proxy statement to be
filed pursuant to Regulation l4A in connection with registrant's annual
meeting of shareholders to be held on March 8, 2001 which are responsive to
Items l0, ll, l2 and l3.
HOVNANIAN ENTERPRISES, INC.
FORM 10-K
TABLE OF CONTENTS
Item Page
PART I
1 and 2 Business and Properties...................... 4
3 Legal Proceedings............................ 15
4 Submission of Matters to a Vote of
Security Holders........................... 15
Executive Officers of the Registrant......... 15
PART II
5 Market for the Registrant's Common Equity
and Related Stockholder Matters............ 15
6 Selected Consolidated Financial Data......... 16
7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 18
8 Financial Statements and Supplementary
Data....................................... 36
9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................. 36
PART III
10 Directors and Executive Officers of the
Registrant................................. 37
Executive Officers of the Registrant......... 37
11 Executive Compensation....................... 38
12 Security Ownership of Certain Beneficial
Owners and Management...................... 38
13 Certain Relationships and Related
Transactions............................... 38
PART IV
14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K....................... 39
SIGNATURES................................... 41
PART I
ITEMS 1 AND 2 - BUSINESS AND PROPERTIES
BUSINESS OVERVIEW
We design, construct and market high quality single-family detached
homes and attached condominium apartments and townhouses in planned
residential developments in the Northeast (primarily in New Jersey, southern
New York state, and eastern Pennsylvania), North Carolina, southeastern
Florida, Metro D.C. (northern Virginia and Maryland), southern California,
Texas, and Poland. We market our homes to first-time buyers, first-time and
second-time move-up buyers, luxury buyers, active adult buyers and empty
nesters. We offer a variety of homestyles in the United States at prices
ranging from $37,000 to $1,400,000 with an average sales price in fiscal 2000
of $257,000. We are currently offering homes for sale in 120 communities.
Since the incorporation of our predecessor company in 1959, we have delivered
in excess of 67,000 homes, including 4,367 homes in fiscal 2000. In addition,
we provide financial services (mortgage loans and title insurance) to our
homebuilding customers.
We employed approximately 1,450 full-time associates as of October 31,
2000. We were incorporated in New Jersey in 1967 and we reincorporated in
Delaware in 1982.
BUSINESS STRATEGIES, OPERATING POLICIES AND PROCEDURES
Over the past few years, our strategies have included several
initiatives to fundamentally transform our traditional practices used to
design, build and sell homes and focus on "building better." We believe that
the adoption and implementation of processes and systems successfully used in
other manufacturing industries, such as rapid cycle times, vendor
consolidation, vendor partnering and just-in-time material procurement, will
dramatically improve our business and give us a clear advantage over our
competitors. Our concentration in selected markets is a key factor that
enables us to achieve powers and economies of scale and differentiate
ourselves from most of our competitors. These performance enhancing
strategies are designed to achieve operational excellence through the
implementation of standardized and streamlined "best practice processes."
Strategic Initiatives - To improve our homebuilding gross profit
margins, we have introduced a number of strategic initiatives, including:
Partners In Excellence, Process Redesign and Training.
Partners In Excellence, our total quality management initiative, is
intended to focus on improving the way operations are performed. It involves
all of our associates through a systematic, team-oriented approach to
improvement. It increases our profits by streamlining processes and by
reducing costly errors. We were recognized for our efforts by receiving the
1997 Gold National Housing Quality Award from Professional Builder magazine
and the NAHB Research Center.
Process Redesign is the fundamental rethinking and radical redesign of
our processes to achieve dramatic improvements in performance. Our Process
Redesign efforts are currently focused on streamlining and standardizing all
of our key business processes. In addition, we are working to streamline our
processes and implement SAP's enterprise-wide "Enterprise Resource Package"
computer software system throughout our organization.
Training is designed to provide our associates with the knowledge,
attitudes, skill and habits necessary to succeed at their jobs. Our Training
Department regularly conducts training classes in sales, construction,
administration, and managerial skills. In addition, as Process Redesign
develops new processes, the Training Department is responsible for educating
our associates on the processes, procedures and operations.
Land Acquisition, Planning and Development - Before entering into a
contract to acquire land, we complete extensive comparative studies and
analyses which assist us in evaluating the economic feasibility of such land
acquisition. We generally follow a policy of acquiring options to purchase
land for future community developments. We attempt to acquire land with a
minimum cash investment and negotiate takedown options, thereby limiting the
financial exposure to the amounts invested in property and predevelopment
costs. This policy significantly reduces the risk and generally allows us to
obtain necessary development approvals before acquisition of the land, thereby
enhancing the value of the options and the land eventually acquired.
Our option and purchase agreements are typically subject to numerous
conditions, including, but not limited to, our ability to obtain necessary
governmental approvals for the proposed community. Generally, the deposit on
the agreement will be returned to us if all approvals are not obtained,
although predevelopment costs may not be recoverable. By paying an
additional, nonrefundable deposit, we have the right to extend a significant
number of our options for varying periods of time. In most instances, we have
the right to cancel any of our land option agreements by forfeiture of our
deposit on the agreement. In such instances, we generally are not able to
recover any predevelopment costs.
Our development activities include site planning and engineering,
obtaining environmental and other regulatory approvals and constructing roads,
sewer, water and drainage facilities, and for our residential developments,
recreational facilities and other amenities. These activities are performed
by our staff, together with independent architects, consultants and
contractors. Our staff also carries out long-term planning of communities.
Design - Our residential communities are generally located in suburban
areas near major highways. The communities are designed as neighborhoods that
fit existing land characteristics. We strive to create diversity within the
overall planned community by offering a mix of homes with differing
architecture, textures and colors. Recreational amenities such as swimming
pools, tennis courts, club houses and tot lots are often included.
Construction - We design and supervise the development and building of
our communities. Our homes are constructed according to standardized
prototypes which are designed and engineered to provide innovative product
design while attempting to minimize costs of construction. We employ
subcontractors for the installation of site improvements and construction of
homes. Agreements with subcontractors are generally short term and provide
for a fixed price for labor and materials. We rigorously control costs
through the use of a computerized monitoring system. Because of the risks
involved in speculative building, our general policy is to construct an
attached condominium or townhouse building only after signing contracts for
the sale of at least 50% of the homes in that building. A majority of our
single family detached homes are constructed after the signing of a contract
and mortgage approval has been obtained.
Materials and Subcontractors - Hovnanian attempts to maintain efficient
operations by utilizing standardized materials available from a variety of
sources. In addition, Hovnanian contracts with subcontractors to construct
our homes. Hovnanian has reduced construction and administrative costs by
consolidating the number of vendors serving our Northeast market and by
executing national purchasing contracts with select vendors. Hovnanian plans
to implement this strategy throughout all of our markets. In recent years,
Hovnanian has experienced no significant construction delays due to shortages
of materials or labor. Hovnanian cannot predict, however, the extent to which
shortages in necessary materials or labor may occur in the future.
Marketing and Sales - Our residential communities are sold principally
through on-site sales offices. In order to respond to our customers' needs
and trends in housing design, we rely upon our internal market research group
to analyze information gathered from, among other sources, buyer profiles,
exit interviews at model sites, focus groups and demographic data bases. We
make use of newspaper, radio, magazine, our website, billboard, video and
direct mail advertising, special promotional events, illustrated brochures,
full-sized and scale model homes in our comprehensive marketing program. In
addition, we have opened home design galleries in our Northeast region, Texas,
North Carolina, and California, have increased option sales and profitability
in these markets. We plan to open similar galleries in each of our markets.
Customer Service and Quality Control - Associates responsible for
customer service participate in pre-closing quality control inspections as
well as responding to post-closing customer needs. Prior to closing, each
home is inspected and any necessary completion work is undertaken by us. In
some of our markets, we are enrolled in a standard limited warranty program
which, in general, provides a homebuyer with a one-year warranty for the
home's materials and workmanship, a two-year warranty for the home's heating,
cooling, ventilating, electrical and plumbing systems and a ten-year warranty
for major structural defects. All of the warranties contain standard
exceptions, including, but not limited to, damage caused by the customer.
Customer Financing - We sell our homes to customers who generally
finance their purchases through mortgages. During the year ended October 31,
2000, over 54% of our non-cash customers obtained mortgages originated by our
wholly-owned mortgage banking subsidiary, with a substantial portion of our
remaining customers obtaining mortgages from various independent lending
institutions. Mortgages originated by our wholly-owned mortgage banking
subsidiary are sold in the secondary market. In addition, in Fiscal 2000 in
our Texas division approximately 40% of our homebuying customers obtained
mortgages from our mortgage joint venture.
RESIDENTIAL DEVELOPMENT ACTIVITIES
Our residential development activities include evaluating and purchasing
properties, master planning, obtaining governmental approvals and
constructing, marketing and selling homes. A residential development
generally includes a number of residential buildings containing from two to
twenty-four individual homes per building and/or single family detached homes,
together with amenities such as recreational buildings, swimming pools, tennis
courts and open areas.
We attempt to reduce the effect of certain risks inherent in the housing
industry through the following policies and procedures:
- Through our presence in multiple geographic markets, our goal is to
reduce the effects that housing industry cycles, seasonality and local
conditions in any one area may have on our business. In addition, we
plan to achieve a significant market presence in each of our markets in
order to obtain powers and economies of scale.
- We typically acquire land for future development principally through
the use of land options which need not be exercised before the
completion of the regulatory approval process. We structure these
options in most cases with flexible takedown schedules rather than with
an obligation to takedown the entire parcel upon approval.
Additionally, we purchase improved lots in certain markets by acquiring
a small number of improved lots with an option on additional lots. This
allows us to minimize the economic costs and risks of carrying a large
land inventory, while maintaining our ability to commence new
developments during favorable market periods.
- - We generally begin construction on an attached condominium or
townhouse building only after entering into contracts for the sale of at
least 50% of the homes in that building. A majority of our single
family detached homes are started after a contract is signed and
mortgage approvals obtained. This limits the build-up of inventory of
unsold homes and the costs of maintaining and carrying that inventory.
- We offer a broad product array to provide housing to a wide range of
customers. Our customers consist of first-time buyers, first- and
second-time move-up buyers, luxury buyers, active adult buyers and empty
nesters.
- We offer a wide range of customer options to satisfy individual
customer tastes. We opened larger regional home design galleries in
New Jersey, North Carolina, Texas, and California. It is our
expectation to open regional design galleries in each of our major
markets.
Current base prices for our homes in contract backlog at October 31,
2000 (exclusive of upgrades and options) range from $37,000 to $1,400,000 in
our Northeast Region, from $106,000 to $380,000 in North Carolina, from
$230,000 to $267,000 in Florida, from $172,000 to $525,000 in Metro D.C., from
$190,000 to $877,000 in California, from $119,000 to $680,000 in Texas and
from $12,000 to $78,000 in Poland. Closings generally occur and are typically
reflected in revenues from two to nine months after sales contracts are
signed.
Information on homes delivered by market area is set forth below:
Year Ended
----------------------------------
October October October
31, 2000 31, 1999 31, 1998
---------- -------- --------
(Housing Revenue in Thousands)
Northeast Region(1):
Housing Revenues........$ 561,422 $560,586 $595,873
Homes Delivered......... 1,939 2,063 2,530
Average Price...........$ 289,542 $271,733 $235,522
North Carolina:
Housing Revenues........$ 126,596 $145,153 $127,592
Homes Delivered......... 653 756 687
Average Price...........$ 193,868 $192,001 $185,723
Florida:
Housing Revenues........$ 19,114 $ 36,566 $ 44,168
Homes Delivered......... 74 159 241
Average Price...........$ 258,297 $229,974 $183,269
Metro D.C.:
Housing Revenues........$ 66,137 $ 45,493 $ 38,904
Homes Delivered......... 263 198 152
Average Price...........$ 251,471 $229,762 $255,947
California:
Housing Revenues........$ 143,729 $105,941 $ 82,546
Homes Delivered......... 480 514 457
Average Price...........$ 299,435 $206,110 $180,625
Texas:
Housing Revenues........$ 186,294 $ 13,184 --
Homes Delivered......... 914 66 --
Average Price...........$ 203,823 $199,757 --
Poland:
Housing Revenues........$ 2,174 $ 1,630 $ 6,561
Homes Delivered......... 44 12 71
Average Price...........$ 49,409 $135,833 $ 92,408
Combined Total:
Housing Revenues........$1,105,466 $908,553 $895,644
Homes Delivered........ 4,367 3,768 4,138
Average Price...........$ 253,141 $241,123 $216,443
(1) Fiscal years ended 2000 and 1999 include $63,940,000 and $31,961,000
housing revenues and 178 and 88 homes, respectively, from a New Jersey
homebuilder acquired on August 7, 1999.
The value of our net sales contracts increased 38.4% to $1,102,000 for
the year ended October 31, 2000 from $796,453,000 for the year ended October
31, 1999. This increase was the net result of a 28.5% increase in the number
of homes contracted to 4,542 in 2000 from 3,535 in 1999, and a 7.7% increase
in the average home base sales prices. By United States market, on a dollar
basis, Metro D. C. increased 53.0%, California increased 38.7%, and the
Northeast Region increased 15.1%. Texas also increased as the result of a
full year of sales resulting from an acquisition on October 1, 1999. The
increase in Metro D. C. was due to an increase in the number of active selling
communities. The increase in California was primarily the result of an
increase in the average home price. The increase in the Northeast Region was
due to slight increases in sales and average home prices. These increases
were slightly offset by Florida and North Carolina. The 22.3% decrease in
Florida was due to the closing of our Florida operations. The 12.9% decrease
in North Carolina was the result of a highly competitive market.
The following table summarizes our active communities under development
as of October 31, 2000. The remaining home sites available in our active
communities under development are included in the 31,802 total home lots under
the total residential real estate chart in Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations.
(1) (2)
Contracted Remaining
Commun- Approved Homes Not Home Sites
ities Lots Delivered Delivered Available
------- -------- --------- --------- ----------
Northeast Region...... 28 6,716 1,832 1,101 3,783
North Carolina........ 29 3,380 1,084 194 2,102
Florida............... -- 173 128 45 --
Metro D.C............. 6 998 306 202 490
California............ 12 2,332 317 151 1,864
Texas................. 44 2,739 1,147 267 1,325
Poland................ 1 146 38 39 69
------- -------- --------- --------- ----------
Total 120 16,484 4,852 1,999 9,633
======= ======== ========= ========= ==========
(1) Includes 132 lots under option.
(2) Of the total home sites available, 775 were under construction or
completed (including 124 models and sales offices), 5,325 were under
option, and 261 were financed through purchase money mortgages.
In addition, as of October 31, 2000, in substantially completed or
suspended developments, we had 101 homes under construction or completed
including 76 homes which are under contract. We also had 76 lots without
construction (21 under contract) in these substantially completed or suspended
developments.
The following table summarizes our total started or completed unsold
homes as of October 31, 2000:
Unsold
Homes Models Total
------ ------ -----
Northeast Region.................. 133 48 181
North Carolina.................... 102 31 133
Florida........................... -- -- --
Metro D.C......................... 6 7 13
California........................ 136 32 168
Texas............................. 238 8 246
Poland............................ 58 -- 58
------ ------ -----
Total 673 126 799
====== ====== =====
BACKLOG
At October 31, 2000 and October 31, 1999, we had a backlog of signed
contracts for 2,096 homes and 1,921 homes, respectively, with sales values
aggregating $538,546,000 and $460,660,000, respectively. Substantially all of
our backlog at October 31, 2000 is expected to be completed and closed within
the next nine months. At November 30, 2000 and 1999, our backlog of signed
contracts was 2,190 homes and 1,903 homes, respectively, with sales values
aggregating $572,452,000 and $455,866,000, respectively.
Sales of our homes typically are made pursuant to a standard sales
contract and provides the customer with a statutorily mandated right of
rescission for a period ranging up to 15 days after execution. This contract
requires a nominal customer deposit at the time of signing. In addition, in
the Northeast Region and Metro D. C. we typically obtain an additional 5% to
10% down payment due 30 to 60 days after signing. The contract may include a
financing contingency, which permits the customer to cancel his obligation in
the event mortgage financing at prevailing interest rates (including financing
arranged or provided by us) is unobtainable within the period specified in the
contract. This contingency period typically is four to eight weeks following
the date of execution.
RESIDENTIAL LAND INVENTORY
It is our objective to control a supply of land, primarily through
options, consistent with anticipated homebuilding requirements in its housing
markets. Controlled land as of October 31, 2000, exclusive of communities
under development described under "Business and Properties -- Residential
Development Activities," is summarized in the following table. The proposed
developable lots in communities under development are included in the 31,802
total home lots under the total residential real estate chart in Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Number
of Proposed Total Land
Proposed Developable Option Book
Communities Lots Price Value(1)(2)
----------- ----------- ----------- -----------
(In Thousands)
Northeast Region:
Under Option........ 47 10,673 $ 239,329 $ 38,279
Owned............... 3 343 7,831
-------- ----------- -----------
Total............ 50 11,016 46,110
-------- ----------- -----------
North Carolina:
Under Option........ 1 400 $ 4,800 2
-------- ----------- -----------
Florida:
Owned............... 2 992 1,669
-------- ----------- -----------
Metro D.C.:
Under Option........ 11 3,017 $ 42,265 2,862
Owned............... 2 1,858 16,857
------- ----------- -----------
Total............ 13 4,875 19,719
------- ----------- -----------
California:
Under Option........ 2 433 $ 44,930 3,729
Owned............... 1 143 11,722
------- ----------- -----------
Total............ 3 576 15,451
------- ----------- -----------
Texas:
Under Option........ 11 712 $ 34,369 1,416
Owned............... 1 40 1,670
------- ----------- -----------
Total............ 12 752 3,086
------- ----------- -----------
Poland:
Under Option........ 1 400 $ 5,600 2,331
Owned............... 2 982 1,499
------- ----------- -----------
Total............ 3 1,382 3,830
------- ----------- -----------
Totals:
Under Option........ 73 15,635 48,619
Owned............... 11 4,358 41,248
-------- ----------- -----------
Combined Total........ 84 19,993 $ 89,867
======== =========== ===========
(1) Properties under option also includes costs incurred on properties not
under option but which are under investigation. For properties under option,
we paid, as of October 31, 2000, option fees and deposits aggregating
approximately $23,513,000. As of October 31, 2000, we spent an additional
$25,106,000 in non-refundable predevelopment costs on such properties.
(2) The book value of $89,867,000 is identified on the balance sheet as
"Inventories - land, land options, and cost of projects in planning."
In our Northeast Region, our objective is to control a supply of land
sufficient to meet anticipated building requirements for at least three to
five years. We typically option parcels of unimproved land for development.
In North Carolina and Metro D.C., a portion of the land we acquired was
from land developers on a lot takedown basis. In Texas, we primarily acquire
improved lots from land developers. Under a typical agreement with the lot
developer, we purchase a minimal number of lots. The balance of the lots to
be purchased are covered under an option agreement or a non-recourse purchase
agreement. Due to the dwindling supply of improved lots in these markets, we
are currently optioning parcels of unimproved land for development.
In California, we have focused our development efforts in the southern
portion of the state. Where possible, we plan to option developed or
partially developed lots with no more than fifty to seventy-five lots to be
taken down during any twelve month period. With a limited supply of developed
lots in California, we are currently optioning parcels of unimproved land for
development.
CUSTOMER FINANCING
At our communities (except in Texas), on-site personnel facilitate sales
by offering to arrange financing for prospective customers through K.
Hovnanian Mortgage, Inc. ("KHM"). We believe that the ability to offer
financing to customers on competitive terms as a part of the sales process is
an important factor in completing sales.
KHM's business consists of providing our customers with competitive
financing and coordinating and expediting the loan origination transaction
through the steps of loan application, loan approval and closing. KHM has its
headquarters in West Palm Beach, Florida. It originates loans in New Jersey,
New York, Pennsylvania, Maryland, Virginia, North Carolina, Florida, and
California.
KHM, like other mortgage bankers, customarily sells nearly all of the
loans that it originates. Additionally, KHM sells virtually all of the loan
servicing rights to loans it originates. Loans are sold either individually
or in pools to GNMA, FNMA, or FHLMC or against forward commitments to
institutional investors, including banks, mortgage banking firms, and savings
and loan associations.
KHM plans to grow its mortgage banking operations. KHM's objective is
to increase the capture rate of non-cash homebuyers from the 54% rate achieved
in fiscal 2000 to 70% over the next several years.
In Texas, we originate mortgage loans through a joint venture where
approximately 40% of our homebuying customers obtained mortgages.
RENTAL PROPERTY DEVELOPMENT ACTIVITIES AND LAND INVENTORY
We had previously diversified our business, on a limited scale, through
the development, acquisition and ownership of commercial properties, primarily
in central New Jersey, and, to a lesser extent, in Florida, but exited this
business in fiscal 1997.
COMPETITION
Our residential business is highly competitive. We compete with
numerous real estate developers in each of the geographic areas in which we
operate. Our competition range from small local builders to larger regional
and national builders and developers, some of which have greater sales and
financial resources than us. Resale of housing and the availability of rental
housing provide additional competition. We compete primarily on the basis of
reputation, price, location, design, quality, service and amenities.
REGULATION AND ENVIRONMENTAL MATTERS
General. We are subject to various local, state and federal statutes,
ordinances, rules and regulations concerning zoning, building design,
construction and similar matters, including local regulations which impose
restrictive zoning and density requirements in order to limit the number of
homes that can eventually be built within the boundaries of a particular
locality. In addition, we are subject to registration and filing requirements
in connection with the construction, advertisement and sale of our communities
in certain states and localities in which we operate even if all necessary
government approvals have been obtained. We may also be subject to periodic
delays or may be precluded entirely from developing communities due to
building moratoriums that could be implemented in the future in the states in
which we operate. Generally, such moratoriums relate to insufficient water or
sewerage facilities or inadequate road capacity.
Environmental. We are also subject to a variety of local, state and
federal statutes, ordinances, rules and regulations concerning protection of
health and the environment ("environmental laws"). The particular
environmental laws which apply to any given community vary greatly according
to the community site, the site'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 and other costs, and prohibit or
severely restrict development in certain environmentally sensitive regions or
areas.
The Florida Growth Management Act of 1985 became fully effective in Palm
Beach County on February 1, 1990. The act requires that infrastructure,
including roads, sewer and water lines must be in existence concurrently with
the construction of the development. If such infrastructure is not
concurrently available, then the community cannot be developed. This will
have an effect on limiting the amount of land available for development and
may delay approvals of some developments.
Fair Housing Act. In July 1985, New Jersey adopted the Fair Housing Act
which established an administrative agency to adopt criteria by which
municipalities will determine and provide for their fair share of low and
moderate income housing. This agency adopted such criteria in May 1986. Its
implementation thus far has caused some delay in approvals for some of our New
Jersey communities and may result in a reduction in the number of homes
planned for some properties.
Both prior to the enactment of the Fair Housing Act and in its
implementation thus far, municipal approvals in some of the New Jersey
municipalities in which we own land or land options required us to set aside
up to 22% of the approved homes for sale at prices affordable to persons of
low and moderate income. In order to comply with such requirements, we must
sell these homes at a loss. We attempt to reduce some of these losses through
increased density, certain cost saving construction measures and reduced land
prices from the sellers of property. Such losses are absorbed by the market
priced homes in the same developments.
State Planning Act. Pursuant to the 1985 State Planning Act, the New
Jersey State Planning Commission has adopted a State Development and
Redevelopment Plan ("State Plan"). The State Plan, if fully implemented,
would designate large portions of the state as unavailable for development or
as available for development only at low densities, and other portions of the
state for more intense development. State government agencies would be
required to make permitting decisions in accordance with the State Plan, if it
is fully implemented. The state government agencies have not yet adopted
policies and regulations to fully implement the State Plan. The Governor has
issued an Executive Order to all state agencies requiring compliance with the
State Plan. It is unclear what effect this Executive Order may have on our
ability to develop our land.
The California Environmental Quality Act (CEQA) requires that every
community comply with the CEQA. Compliance with CEQA may result in delay in
obtaining the necessary approvals for commencement of the community, a
reduction in the density permitted in the community, additional costs in
developing the community, or denial of the permits necessary to construct the
community.
Conclusion. Despite our past ability to obtain necessary permits and
approvals for our communities, 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
substantial expenditures for pollution and water quality control, which could
have a material adverse effect on us. 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 interpretation and
application.
Company Offices. We own our corporate headquarters, a four-story,
24,000 square feet office building located in Red Bank, New Jersey, a 22,000
square feet office building located in Winston-Salem, North Carolina, and
19,992 square feet in a Middletown, New Jersey condominium office building.
We lease office space consisting of 101,691 square feet in various New Jersey
locations, 13,963 square feet in the Metro D. C. area, 24,193 square feet in
various North Carolina locations, 9,946 square feet in West Palm Beach,
Florida, 17,566 square feet in southern California, and 20,775 square feet in
various Texas locations.
ITEM 3 - LEGAL PROCEEDINGS
We are involved from time to time in litigation arising in the ordinary
course of business, none of which is expected to have a material adverse
effect on us.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended October 31, 2000 no matters
were submitted to a vote of security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information on executive officers of the registrant is incorporated
herein from Part III, Item 10.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
Our Class A Common Stock is traded on the American Stock Exchange and
was held by 723 shareholders of record at December 31, 2000. There is no
established public trading market for our Class B Common Stock, which was held
by 603 shareholders of record at December 31, 2000. In order to trade Class B
Common Stock, the shares must be converted into Class A Common Stock on a one-
for-one basis. The high and low sales prices for our Class A Common Stock
were as follows for each fiscal quarter during the years ended October 31,
2000, 1999, and 1998:
Class A Common Stock
------------------------------------------------
Oct. 31, 2000 Oct. 31, 1999 Oct. 31, 1998
-------------- -------------- --------------
Quarter High Low High Low High Low
- ------- ------ ------ ------ ------ ------ ------
First........ $ 6.88 $ 5.25 $ 9.25 $ 7.75 $ 9.25 $ 6.50
Second....... $ 6.62 $ 5.44 $ 8.94 $ 6.81 $11.50 $ 8.56
Third........ $ 6.38 $ 5.44 $ 9.50 $ 7.88 $11.19 $ 8.50
Fourth....... $ 7.94 $ 5.88 $ 8.88 $ 6.00 $ 9.88 $ 6.00
On August 7, 1999 and October 1, 1999 we acquired two homebuilding
companies. As part of the purchase price 1,845,359 shares of unregistered
Class A Common Stock were issued to the sellers. At October 31, 2000, 435,683
of these shares are being held in escrow (and thus not reported as issued and
outstanding). There were no underwriters associated with these transactions.
These shares were issued in private transactions in reliance upon Section 4(2)
of the Securities Act of 1933.
Certain debt instruments to which we are a party contain restrictions on
the payment of cash dividends. As a result of the most restrictive of these
provisions, approximately $45,765,000 was free of such restrictions at October
31, 2000. We have never paid a cash dividend nor do we currently intend to
pay dividends.
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data and should be
read in conjunction with the financial statements included elsewhere in this
Form 10-K. Percommon share data and weighted average number of common shares
outstanding reflect all stock splits.
Year Ended
--------------------------------------------------
Summary Consolidated October October October October October
Income Statement Data 31, 2000 31, 1999 31, 1998 31, 1997 31, 1996
- ------------------------------- ---------- -------- -------- -------- --------
(In Thousands Except Per Share Data)
Revenues....................... $1,137,807 $946,720 $937,729 $770,379 $796,248
Expenses....................... 1,085,989 896,103 896,437 782,503 771,242
---------- -------- -------- -------- --------
Income(loss) before income
taxes and extraordinary loss. 51,818 50,617 41,292 (12,124) 25,006
State and Federal income taxes. 18,655 19,674 15,141 (5,154) 7,719
Extraordinary loss............. (868) (748) -- --
---------- -------- -------- -------- --------
Net income (loss).............. $ 33,163 $ 30,075 $ 25,403 $ (6,970) $ 17,287
========== ======== ======== ======== ========
Per Share Data:
Basic:
Income (loss) before
extraordinary loss......... $ 1.51 $ 1.45 $ 1.20 $ (0.31) $ 0.75
Extraordinary loss........... (.04) (0.03) -- --
---------- -------- -------- -------- --------
Net income (loss)............ $ 1.51 $ 1.41 $ 1.17 $ (0.31) $ 0.75
========== ======== ======== ======== ========
Weighted average number of
common shares outstanding.. 21,933 21,404 21,781 22,409 23,037
Assuming Dilution:
Income (loss) before
extraordinary loss......... $ 1.50 $ 1.43 $ 1.19 $ (0.31) $ 0.75
Extraordinary loss........... (.04) (0.03)
---------- -------- -------- -------- --------
Net income (loss)............ $ 1.50 $ 1.39 $ 1.16 $ (0.31) $ 0.75
========== ======== ======== ======== ========
Weighted average number of
common shares outstanding.. 22,043 21,612 22,016 22,506 23,120
Summary Consolidated October October October October October
Balance Sheet Data 31, 2000 31, 1999 31, 1998 31, 1997 31, 1996
- ------------------------------- ---------- -------- -------- -------- --------
Total assets................... $ 873,541 $712,861 $589,102 $637,082 $614,111
Mortgages and notes payable.... $ 78,206 $110,228 $150,282 $184,519 $145,336
Bonds collateralized by
mortgages receivable......... $ 3,007 $ 3,699 $ 5,652 $ 7,855 $ 9,231
Senior notes, participating
senior subordinated
debentures and subordinated
notes........................ $ 396,430 $250,000 $145,449 $190,000 $200,000
Stockholders' equity........... $ 263,359 $236,426 $201,392 $178,762 $193,622
Note: See Item 7 "Results of Operations" for impact of our 1999 acquisitions in our
2000 operating results.
RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
For purposes of computing the ratios of earnings to fixed charges
and earnings to combined fixed charges and preferred dividends, earnings consist
of earnings (loss) from continuing operations before income taxes, minority
interest, extraordinary items and cumulative effect of accounting changes, plus
fixed charges(interest charges and preferred share dividend requirements of
subsidiaries, adjusted to a pretax basis), less interest capitalized, less
preferred share dividend requirements of subsidiaries adjusted to a pretax
basis and less undistributed earnings of affiliates whose debt is not
guaranteed by us.
The following table sets forth the ratios of earnings to fixed charges
and earnings to combined fixed charges and preferred dividends for the periods
indicated:
Years Ended October 31,
--------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- ----------
Ratio of earnings to
fixed charges............ 2.2 3.0 2.5 (a) 1.6
Ratio of earnings to
combined fixed charges
and preferred stock
dividends................. 2.2 3.0 2.5 (a) 1.6
(a) No ratio is presented for the year ended October 31, 1997 as the earnings
for such period were insufficient to cover fixed charges by $9,197,000.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Our cash uses during the twelve months ended October 31, 2000 were
for operating expenses, seasonal increases in housing inventories,
construction, income taxes, interest, and the repurchase of common stock.
We provided for our cash requirements from housing and land sales, the
issuance of $150,000,000 Senior Notes, the revolving credit facility,
financial service revenues, and other revenues. We believe that these
sources of cash are sufficient to finance our working capital requirements
and other needs.
Our net income historically does not approximate cash flow from
operating activities. The difference between net income and cash flow from
operating activities is primarily caused by changes in inventory levels,
mortgage loans and liabilities, and depreciation and impairment losses. When
we are expanding our operations, which was the case in fiscal 2000 and 1999,
inventory levels increase causing cash flow from operating activities to
decrease. Liabilities also increase as inventory levels increase. The
increase in liabilities partially offsets the negative effect on cash flow
from operations caused by the increase in inventory levels. As our mortgage
warehouse loan liability increases, cash flow from operations decreases.
Conversely, as such loans decrease, cash flow from operations increases.
Depreciation and impairment losses always increase cash flow from operating
activities since they are non-cash charges to operations. We expect to be
in an expansion mode in fiscal 2001. As a result, we expect cash flow from
operations to be less than net income in fiscal 2001.
In March 2000 the Board of Directors authorized a revision to our
stock repurchase program to purchase up to 4 million shares of Class A
Common Stock. This authorization expired on December 31, 2000. As of
October 31, 2000, 3,391,047 shares were repurchased under this program
of which 1,026,647 were repurchased during the year ended October 31, 2000.
Our homebuilding bank borrowings are made pursuant to a revolving
credit agreement (the "Agreement") that provides a revolving credit line
and letter of credit line of up to $375,000,000 through July 2003.
Interest is payable monthly and at various rates of either the prime rate
plus .25% or Libor plus 1.70%. We believe that we will be able either
to extend the Agreement beyond July 2003 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. As of October 31, 2000,
borrowings under the Agreement were zero.
The subordinated indebtedness issued by us and outstanding as of
October 31, 2000 was $100,000,000 9 3/4% Subordinated Notes due
June 2005. On October 2, 2000, we issued $150,000,000 10 1/2% Senior
Notes due in October 2007. The proceeds were used to repay outstanding
debt under our "Revolving Credit Facility". On May 4, 1999, we issued
$150,000,000 9 1/8% Senior Notes due in April 2009.
Our mortgage banking subsidiary borrows under a $70,000,000 bank
warehousing arrangement which expires in July 2001. Other finance
subsidiaries formerly borrowed from a multi-builder owned financial
corporation and a builder owned financial corporation to finance mortgage
backed securities but in fiscal 1988 decided to cease further borrowing
from multi-builder and builder owned financial corporations. These
non-recourse borrowings have been generally secured by mortgage loans
originated by one of our subsidiaries. As of October 31, 2000, the
aggregate outstanding principal amount of such borrowings was $56,486,000.
Total inventory increased $87,753,000 from October 31, 1999 to
October 31, 2000. This increase was due to significant anticipated
openings of a number of communities in the Northeast Region and
California and our expansion in Maryland. These increases were
slightly offset by decreased inventory levels in Florida, due to
the closing of our Florida Operations. Substantially, all homes
under construction and included in inventory at October 31, 2000
are expected to be closed during the next twelve months. Most
inventory completed or under development is financed through our
revolving credit facility, senior notes and subordinated indebtedness.
We usually option property for development prior to acquisition.
By optioning property, we are only subject to the loss of a small
option fee and predevelopment costs if we choose not to exercise
the option. As a result, our commitment for major land acquisitions
is reduced.
The following table summarizes housing lots included in our total
residential real estate:
Total Contracted Remaining
Home Not Lots
Lots Delivered Available
-------- ---------- ---------
October 31, 2000:
Northeast Region.................. 15,957 1,149 14,808
North Carolina.................... 2,731 215 2,516
Florida........................... 1,070 45 1,025
Metro D. C........................ 5,583 215 5,368
California........................ 2,591 151 2,440
Texas............................. 2,380 282 2,098
Poland............................. 1,490 39 1,451
-------- ---------- ---------
31,802 2,096 29,706
======== ========== =========
Owned.......................... 10,012 1,963 8,049
Optioned....................... 21,790 133 21,657
-------- ---------- ---------
Total........................ 31,802 2,096 29,706
======== ========== =========
October 31, 1999:
Northeast Region.................. 13,370 1,125 12,245
North Carolina.................... 3,253 207 3,046
Florida........................... 1,185 37 1,148
Metro D. C........................ 3,230 149 3,081
California........................ 2,474 129 2,345
Texas............................. 2,595 261 2,334
Poland............................. 701 13 688
-------- ---------- ---------
26,808 1,921 24,887
======== ========== =========
Owned.......................... 9,730 1,825 7,905
Optioned....................... 17,078 96 16,982
-------- ---------- ---------
Total........................ 26,808 1,921 24,887
======== ========== =========
The following table summarizes our started or completed unsold homes in
active, substantially completed and suspended communities:
October 31, October 31,
2000 1999
-------------------------- -------------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ------ ------ ------ ------
Northeast Region.... 133 48 181 114 31 145
North Carolina...... 102 31 133 129 -- 129
Florida............. -- -- -- 5 -- 5
Metro D.C........... 6 7 13 13 9 22
California.......... 136 32 168 53 10 63
Texas............... 238 8 246 225 28 253
Poland.............. 58 -- 58 14 -- 14
------ ------ ------ ------ ------ ------
Total 673 126 799 553 78 631
====== ====== ====== ====== ====== ======
Financial Services - mortgage loans held for sale consist of residential
mortgages receivable of which $61,549,000 and $32,844,000 at October 31, 2000
and October 31, 1999, respectively, are being temporarily warehoused and
awaiting sale in the secondary mortgage market. The balance of mortgage loans
held for sale are being held as an investment. We may incur risk with respect
to mortgages that are delinquent, but only to the extent the losses are not
covered by mortgage insurance or resale value of the house. Historically, we
have incurred minimal credit losses. Collateral Mortgage Financing -
collateral for bonds payable consists of collateralized mortgages receivable
which are pledged against non-recourse collateralized mortgage obligations.
RESULTS OF OPERATIONS
Our operations consist primarily of residential housing development and
sales in our Northeast Region (comprised primarily of New Jersey, southern New
York state, and eastern Pennsylvania), in southeastern Florida, North
Carolina, Metro D. C. (northern Virginia and Maryland), southern California,
Texas and Poland. In addition, we provide financial services to our
homebuilding customers.
Total Revenues
Compared to the same prior period, revenues increased (decreased) as
follows:
Year Ended
-----------------------------
October October October
31, 2000 31, 1999 31, 1998
--------- --------- ---------
(Dollars in Thousands)
Homebuilding:
Sale of homes......................$ 196,913 $ 12,909 $163,837
Land sales and other revenues...... (4,392) 1,998 (11,572)
Financial services................... (1,384) 1,141 8,363
Collateralized mortgage financing.... (50) (164) (171)
Other Operations..................... (6,893) 6,893
--------- --------- ---------
Total change....................$ 191,087 $ 8,991 $167,350
========= ========= =========
Percent change.................... 20.2% 1.0% 21.7%
========= ========= =========
Homebuilding
Compared to the same prior period, housing revenues increased $196.9
million or 21.7% for the year ended October 31, 2000, increased $12.9 million
or 1.4% for the year ended October 31, 1999, and increased $163.8 million or
22.4% for the year ended October 31, 1998. Housing revenues are recorded at
the time each home is delivered and title and possession have been transferred
to the buyer.
Information on homes delivered by market area is set forth below:
Year Ended
-----------------------------------
October October October
31, 2000 31, 1999 31, 1998
----------- --------- ---------
(Dollars in Thousands)
Northeast Region (1):
Housing Revenues............$ 561,422 $560,586 $595,873
Homes Delivered............. 1,939 2,063 2,530
North Carolina:
Housing Revenues............$ 126,596 $145,153 $127,592
Homes Delivered............. 653 756 687
Florida:
Housing Revenues............$ 19,114 $ 36,566 $ 44,168
Homes Delivered............. 74 159 241
Metro D.C.:
Housing Revenues............$ 66,137 $ 45,493 $ 38,904
Homes Delivered............. 263 198 152
California:
Housing Revenues............$ 143,729 $ 105,941 $ 82,546
Homes Delivered............. 480 514 457
Texas:
Housing Revenues............$ 186,294 $ 13,184 --
Homes Delivered............. 914 66 --
Poland:
Housing Revenues............$ 2,174 $ 1,630 $ 6,561
Homes Delivered............. 44 12 71
Totals:
Housing Revenues............$1,105,466 $ 908,553 $895,644
Homes Delivered............. 4,367 3,768 4,138
(1) Fiscal years ended 2000 and 1999 include $63,940,000 and $31,961,000
housing revenues and 178 and 88 homes, respectively, from a New Jersey
homebuilder acquired on August 7, 1999.
The increase in housing revenues was primarily due to a full year of
operations in our Texas division, an increase of three communities in the
Metro D. C. market, and an increase in the average sales price in California.
The increased average sales price in California was due to a change in product
mix to larger, more expensive homes. These increases were partially offset by
decreased deliveries in the Northeast Region, North Carolina, and Florida.
The decrease in deliveries in the Northeast Region was due to fewer selling
communities open for sale, resulting in fewer deliveries during the year ended
October 31, 2000. Although deliveries decreased in the Northeast Region,
housing revenues slightly increased due to a 6.6% increase in average sales
prices. The decrease in deliveries in North Carolina was attributed to a
highly competitive market. In Florida, the deliveries decreased due to our
decision to discontinue operations and have only one active community
delivering homes. In fiscal 2001 we expect a significant increase in home
deliveries and housing revenues due to the August 28, 2000 agreement to merge
with Washington Homes, Inc., headquartered in Landover, Maryland.
Unaudited quarterly housing revenues and net sales contracts using base
sales prices by market area for the years ending October 31, 2000, 1999, and
1998 are set forth below:
Quarter Ended
------------------------------------------
October July April January
31, 2000 31, 2000 30, 2000 31, 2000
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region........... $188,770 $131,668 $113,732 $127,252
North Carolina............. 35,016 33,319 30,891 27,370
Florida.................... 6,218 3,310 5,087 4,499
Metro D.C.................. 18,932 13,901 17,459 15,845
California................. 39,725 48,055 30,313 25,636
Texas...................... 52,188 47,318 37,573 49,215
Poland..................... 1,440 433 -- 301
--------- --------- --------- ---------
Total.................. $342,289 $278,004 $235,055 $250,118
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region........... $121,179 $115,649 $174,126 $109,040
North Carolina............. 29,317 32,338 33,980 26,892
Florida.................... 3,759 3,974 10,557 3,134
Metro D. C................. 20,354 23,459 25,144 13,449
California................. 43,551 41,350 52,114 23,839
Texas...................... 51,251 54,708 46,671 39,830
Poland..................... 812 438 128 1,059
--------- --------- --------- ---------
Total.................. $270,223 $271,916 $342,720 $217,243
========= ========= ========= =========
Quarter Ended
------------------------------------------
October July April January
31, 1999 31, 1999 30, 1999 31, 1999
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region (1)....... $164,899 $142,503 $126,501 $126,683
North Carolina............. 47,251 38,269 30,553 29,080
Florida.................... 9,012 9,690 9,531 8,333
Metro D.C.................. 15,541 11,400 6,005 12,547
California................. 37,290 24,792 26,548 17,311
Texas...................... 13,184 -- -- --
Poland..................... 282 417 -- 931
--------- --------- --------- ---------
Total.................. $287,459 $227,071 $199,138 $194,885
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region (1)....... $135,514 $111,083 $114,924 $ 90,163
North Carolina............. 25,757 33,078 50,673 31,111
Florida.................... 2,532 4,471 9,050 11,530
Metro D.C.................. 12,246 14,338 16,201 11,077
California................. 36,197 37,788 24,135 17,817
Texas...................... 5,416 -- -- --
Poland..................... 698 172 -- 482
--------- --------- --------- ---------
Total.................. $218,360 $200,930 $214,983 $162,180
========= ========= ========= =========
(1) Includes $31,961,000 housing revenues and $12,922,000 sales contracts in
the quarter ended October 31, 1999 from a New Jersey homebuilder acquired
on August 7, 1999.
Quarter Ended
------------------------------------------
October July April January
31, 1998 31, 1998 30, 1998 31, 1998
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region........... $157,882 $162,847 $136,133 $139,011
North Carolina............. 38,997 34,655 28,264 25,676
Florida.................... 11,291 8,111 15,254 9,512
Metro D.C.................. 16,687 11,256 4,843 6,118
California................. 22,980 18,832 17,613 23,121
Poland..................... 2,283 2,199 1,460 619
--------- --------- --------- ---------
Total.................. $250,120 $237,900 $203,567 $204,057
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region........... $114,144 $124,144 $188,082 $ 98,814
North Carolina............. 37,085 33,302 35,990 23,903
Florida.................... 5,385 9,503 8,631 7,802
Metro D.C.................. 11,834 15,265 9,583 3,866
California................. 21,325 25,402 9,535 18,769
Poland..................... 1,758 516 332 1,277
--------- --------- --------- ---------
Total.................. $191,531 $208,132 $252,153 $154,431
========= ========= ========= =========
Our contract backlog using base sales prices by market area is set forth
below:
October October October
31, 2000 31, 1999 31, 1998
--------- --------- ---------
(Dollars in Thousands)
Northeast Region (1):
Total Contract Backlog........$311,539 $286,149 $270,753
Number of Homes............... 1,149 1,125 1,132
North Carolina:
Total Contract Backlog........$ 40,635 $ 44,534 $ 48,713
Number of Homes............... 215 207 235
Florida:
Total Contract Backlog........$ 12,625 $ 8,705 $ 14,800
Number of Homes............... 45 37 73
Metro D.C.:
Total Contract Backlog........$ 52,339 $ 34,484 $ 26,083
Number of Homes............... 215 149 115
California:
Total Contract Backlog........$ 58,089 $ 34,313 $ 20,721
Number of Homes............... 151 129 119
Texas:
Total Contract Backlog........$ 61,703 $ 51,610 --
Number of Homes............... 282 261 --
Poland:
Total Contract Backlog........$ 1,616 $ 865 $ 746
Number of Homes............... 39 13 7
Totals:
Total Contract Backlog........$538,546 $460,660 $381,816
Number of Homes............... 2,096 1,921 1,681
(1) Fiscal years 2000 and 1999 include $42,708,000 and $38,832,000 total
contract backlog and 116 and 123 number of homes, respectively, from a
New Jersey homebuilder acquired on August 7, 1999.
We have written down or written off certain inventories totaling $1.8,
$2.1, and $4.0 million during the years ended October 31, 2000, 1999, and
1998, respectively, to their estimated fair value. See "Notes to Consolidated
Financial Statements - Note 11" for additional explanation. These writedowns
and write-offs were incurred primarily because of lower property values, a
change in the marketing strategy to liquidate a particular property, or the
decision not to exercise an option.
During the year ended October 31, 2000 we wrote off land options
including approval and engineering costs amounting to $1.8 million. We did
not exercise those options because the communities' proforma profitability did
not produce adequate returns on investment commensurate with the risk. Those
communities were located in New Jersey, New York, North Carolina, and
California.
During the year ended October 31, 1999 we wrote off one residential land
option including approval and engineering costs amounting to $0.3 million. We
did not exercise this option because the community's proforma profitability
did not produce an adequate return on investment commensurate with the risk.
In addition, we wrote down one land parcel in Florida, one residential
community in New York and two residential communities in North Carolina. The
Florida land parcel was written down based on recent purchase offers. The
communities were written down based on our decision to discontinue selling
homes and offer the remaining lots for sale. The result of the above
decisions was a reduction in inventory carrying amounts to fair value,
resulting in a $1.8 million impairment loss in accordance with FAS 121.
During the year ended October 31, 1998, we wrote down one Florida
residential community and one New Jersey parcel of land for sale. In the
Florida residential community, higher discounts were being offered to speed up
sales. At the New Jersey land site, lots were being contracted at prices
lower than anticipated. The result of the above decisions was a reduction in
inventory carrying amounts to fair value, resulting in a $1.9 million
impairment loss in accordance with FAS 121. We also wrote off three New
Jersey residential land options including approval, engineering and
capitalized interest costs amounting to $2.1 million. We did not exercise
these options because of changes in local market conditions and difficulties
in obtaining government approvals.
Cost of sales includes expenses for housing and land and lot sales. A
breakout of such expenses for housing sales and housing gross margin is set
forth below:
Year Ended
-----------------------------------
October October October
31, 2000 31, 1999 31, 1998
----------- --------- ---------
(Dollars In Thousands)
Sale of homes.............. $1,105,466 $908,553 $895,644
Cost of sales.............. 878,740 718,259 740,871
----------- --------- ---------
Housing gross margin....... $ 226,726 $190,294 $154,773
=========== ========= =========
Gross margin percentage.... 20.5% 20.9% 17.3%
=========== ========= =========
Cost of sales expenses as a percentage of home sales revenues are
presented below:
Year Ended
---------------------------------
October October October
31, 2000 31, 1999 31, 1998
--------- --------- ---------
Sale of homes.............. 100.0% 100.0% 100.0%
--------- --------- ---------
Cost of sales:
Housing, land and
development costs....... 71.3 71.0 74.8
Commissions.............. 2.2 2.0 1.9
Financing concessions.... 0.9 0.8 0.7
Overheads................ 5.1 5.3 5.3
--------- --------- ---------
Total cost of sales........ 79.5 79.1 82.7
--------- --------- ---------
Gross margin percentage.... 20.5% 20.9% 17.3%
========= ========= =========
We sell a variety of home types in various local communities, each
yielding a different gross margin. As a result, depending on the mix of both
the communities and of home types delivered, consolidated gross margin will
fluctuate up or down. During the year ended October 31, 2000, our gross
margin percentage decreased 0.4% from the previous year. This decrease was
primarily attributed to a full year of operations from our Texas division
where they report lower margins. Excluding Texas, our consolidated gross
margin percentage increased 0.3% to 21.3% from 21.0%. During the year ended
October 31, 1999, our gross margin percentage increased 3.6% from the previous
year. This can be attributed to higher gross margins being achieved in each
of our markets. In 1999, the gross margin was negatively affected by a lower
percentage of housing revenues from the Northeast Region amounting to 61.7% in
fiscal 1999 compared to 66.5% in fiscal 1998. This is primarily the result of
a higher percentage of deliveries coming from outside the Northeast Region
where margins are historically lower.
Selling and general administrative expenses as a percentage of
homebuilding revenues increased to 9.4% for the year ended October 31, 2000
and increased to 8.8% for the year ended October 31, 1999 from 7.4% for the
year ended October 31, 1998. The dollar amount of selling and general
expenses has increased the last two years to $104.8 million for the year ended
October 31, 2000 from $81.4 million for the year ended October 31, 1999 which
increased from $67.5 million for the previous year. The percentage and dollar
increases in 2000 are primarily attributable to a full year of operations from
our Texas division and increases in the number of active selling communities
in California. The overall percentage and dollar increases in such expenses
in 1999 were attributable to increases in all our markets but primarily due to
fewer deliveries in our Northeast Region and due to Northeast Region and
California administration cost increases.
Land Sales and Other Revenues
Land sales and other revenues consist primarily of land and lot sales,
interest income, contract deposit forfeitures, cash discounts, national
contract rebates, and corporate owned life insurance benefits.
A breakout of land and lot sales is set forth below:
Year Ended
----------------------------
October October October
31, 2000 31, 1999 31, 1998
-------- -------- --------
(In Thousands)
Land and lot sales................... $ 6,549 $12,077 $ 8,636
Cost of sales........................ 3,971 11,766 8,070
-------- -------- --------
Land and lot sales gross margin...... $ 2,578 $ 311 $ 566
======== ======== ========
Land and lot sales are incidental to our residential housing operations
and are expected to continue in the future but may significantly fluctuate up
or down.
Year ended October 2000 gross margin includes a legal settlement in
California amounting to $1,924,000.
Financial Services
Financial services consists primarily of originating mortgages from our
homebuyers, selling such mortgages in the secondary market, and title
insurance activities. During the year ended 2000, financial services resulted
in $0.5 million loss before income taxes. During the year ended October 31,
1999 and 1998 financial services provided a $1.0 and $2.1 million pretax
profit, respectively. In the market areas served by our wholly-owned mortgage
banking subsidiaries, approximately 54%, 57%, and 58% of our non-cash
homebuyers obtained mortgages originated by these subsidiaries during the
years ended October 31, 2000, 1999, and 1998, respectively. In addition in
fiscal 2000 in our Texas division approximately 40% of our homebuying
customers obtained mortgages from our mortgage joint venture. Our mortgage
banking goals are to improve profitability by increasing the capture rate of
our homebuyers to 70%. Most servicing rights on new mortgages originated by
us will be sold as the loans are closed.
Collateralized Mortgage Financing
In the years prior to February 29, 1988 we pledged mortgage loans
originated by our mortgage banking subsidiaries against collateralized
mortgage obligations ("CMOs"). Subsequently, we discontinued our CMO program.
As a result, CMO operations are diminishing as pledged loans are decreasing
through principal amortization and loan payoffs, and related bonds are
reduced. In recent years, as a result of bonds becoming callable, we have
also sold a portion of our CMO pledged mortgages.
Corporate General and Administrative
Corporate general and administrative expenses includes 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, and administration of
insurance, quality, and safety. As a percentage of total revenues, such
expenses were 2.9%, 3.0%, and 2.2% for the years ended October 31, 2000, 1999,
and 1998, respectively. The decrease in corporate general and administrative
expenses in fiscal year 2000 was due to increase housing revenues and the
adoption of SOP 98-1, "Accounting For the Cost of Computer Software
Development For or Obtained for Internal Use." See "Notes to Consolidated
Financial Statement - Note 2" for additional explanation. In 1999, the
increase was primarily attributed to increased expenditures for long term
improvement initiatives. Our long term improvement initiatives include total
quality, process redesign (net of capitalized expenses), and training. Such
initiatives resulted in additional expenses for the years ended October 31,
2000, 1999, and 1998 which were not capitalized amounting to $6.9 million,
$7.5 million, and $3.8 million, respectively.
Interest
Interest expense includes housing, and land and lot interest. Interest
expense is broken down as follows:
Year Ended
-------------------------------
October October October
31, 2000 31, 1999 31, 1998
--------- --------- ---------
(In Thousands)
Sale of homes.................. $ 34,541 $29,261 $ 33,771
Land and lot sales............. 415 1,082 652
--------- --------- ---------
Total.......................... $ 34,956 $30,343 $ 34,423
========= ========= =========
Housing interest as a percentage of sale of home revenues amounted to
3.1%, 3.2%, and 3.8% for the years ended October 31, 2000, 1999, and 1998,
respectively.
Other Operations
Other operations consist primarily of miscellaneous senior residential
rental operations, amortization of senior and subordinated note issuance
expenses, earnout payments from homebuilding company acquisitions and
corporate owned life insurance loan interest.
Total Taxes
Total taxes as a percentage of income before income taxes amounted to
36.0%, 38.9%, and 36.7% for the years ended October 31, 2000, 1999, and 1998,
respectively. 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. (See "Notes to
Consolidated Financial Statements - Note 10" for an additional explanation of
taxes.)
Extraordinary Loss
On June 7, 1999, we redeemed $45,449,000 of our outstanding 11 1/4%
Subordinated Notes due 2002 at an average price of 101.875% of par which
resulted in an extraordinary loss of $868,000 net of income taxes of $468,000.
In October 1998, we redeemed $44,551,000 of our outstanding 11 1/4%
Subordinated Notes due 2002 at an average price of 101.6% of par, which
resulted in an extraordinary loss of $748,000 net of income taxes of $403,000.
Inflation
Inflation has a long-term effect on us because increasing costs of land,
materials and labor result in increasing sales 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 inflationary risk faced by the
housing industry generally is that rising housing costs, including land and
interest costs, will substantially outpace increases in the income of
potential purchasers. In recent years, in the price ranges in which we sell
homes, we have not found this risk to be a significant problem.
Inflation has a lesser short-term effect on us because we generally
negotiate fixed price contracts with our subcontractors and material suppliers
for the construction of our homes. These prices usually are applicable for a
specified number of residential buildings or for a time period of between four
to twelve months. Construction costs for residential buildings represent
approximately 57% of our homebuilding cost of sales.
Merger with Washington Homes, Inc.
As previously announced we entered into a merger agreement with
Washington Homes, Inc. on August 28, 2000. On January 23, 2001, the
shareholders ratified the merger and as a result the merger closed the same
day. We believe our line of credit is adequate to provide working capital for
our Washington Homes operations. The addition of Washington Homes operations
for slightly more than three full quarters of fiscal 2001 is expected to add
approximately $.05 to $.10 per share to our net earnings. We expect total
revenues to increase more than 40% in fiscal 2001 from fiscal 2000 levels,
largely as a result of the merger with Washington Homes.
Safe Harbor Statement
Certain statements contained in this Form 10-K that are not
historical facts should be considered as "Forward-Looking Statements"
within the meaning of the Private Securities Litigation Act of 1995.
Such statements involve known and unknown risks, uncertainties and other
factors that may cause actual results to differ materially. Such risks,
uncertainties and other factors include, but are not limited to:
. Changes in general economic and market conditions
. Changes in interest rates and the availability of mortgage financing
. Changes in costs and availability of material, supplies and labor
. General competitive conditions
. The availability of capital
. The ability to successfully effect acquisitions
These risks, uncertainties, and other factors are described in detail in
Item 1 and 2 Business and Properties in this Form 10-K for the year ended
October 31, 2000.
Item 7(A) - Quantitative and Qualitative Disclosures About Market Risk.
The primary market risk facing us is interest rate risk on our long
term debt. In connection with our mortgage operations, mortgage loans held
for sale and the associated mortgage warehouse line of credit are subject to
interest rate risk; however, such obligations reprice frequently and are
short-term in duration. In addition, we hedge the interest rate risk on
mortgage loans by obtaining forward commitments from FNMA, FHLMC, GNMA
securities and private investors. Accordingly the risk from mortgage
loans is not material. We do not hedge interest rate risk other than
on mortgage loans using financial instruments. We are also subject to
foreign currency risk but this risk is not material. The following tables
set forth as of October 31, 2000 and 1999, our long term debt obligations,
principal cash flows by scheduled maturity, weighted average interest
rates and estimated fair market value ("FMV"). There have been no significant
changes in our market risk from October 31, 1999 to October 31, 2000.
As of October 31, 2000 for the
Year Ended October 31,
--------------------------------------
FMV @
2001 2002 2003 2004 2005 Thereafter Total 10/31/00
------ ------ ------ ------ ------ ---------- -------- ---------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate.......$11,797 $ 138 $2,594 $ 74 $ 81 $ 400,534 $415,218 $379,629
Average interest
rate........... 4.63% 7.63% 7.04% 8.38% 8.38% 9.79% 9.63% --
As of October 31, 1999 for the
Year Ended October 31,
--------------------------------------
FMV @
2000 2001 2002 2003 2004 Thereafter Total 10/31/99
------ ------ ------ ------ ------ ---------- -------- ---------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate.......$4,999 $ 132 $ 138 $2,585 $ 74 $250,613 $258,541 $246,164
Average interest
rate........... 8.80% 7.60% 7.63% 7.04% 8.38% 9.37% 9.34% --
Variable Rate....$ 600 $ 927 -- -- -- -- $ 1,527 $ 1,527
Average interest
rate........... 6.00% 8.75% -- -- -- -- 7.67% --
(1) Does not include bonds collateralized by mortgages receivable.
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements of Hovnanian Enterprises, Inc. and its consolidated
subsidiaries are set forth herein beginning on Page F-1.
Item 9 - CHANGES IN OR DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the years ended October 31, 2000, 1999, and 1998, there have not
been any changes in or disagreements with accountants on accounting and
financial disclosure.
PART III
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item l0, except as set forth below under
the heading "Executive Officers of the Registrant", is incorporated herein by
reference to our definitive proxy statement to be filed pursuant to Regulation
l4A, in connection with the Company's annual meeting of shareholders to be
held on March 8, 2001, which will involve the election of directors.
Executive Officers of the Registrant
Our executive officers are listed below and brief summaries of their
business experience and certain other information with respect to them are set
forth following the table. Each executive officer holds such office for a one
year term.
Year Started
Name Age Position With Company
Kevork S. Hovnanian 77 Chairman of the Board and l967
Director of the Company.
Ara K. Hovnanian 43 Chief Executive Officer, President 1979
and Director of the Company.
Paul W. Buchanan 50 Senior Vice President-Corporate l981
Controller and Director of the
Company.
William L. Carpitella 46 Senior Vice President, 1997
Organizational Development
Kevin C. Hake 41 Vice President, Finance and 2000
Treasurer
Peter S. Reinhart 50 Senior Vice President and General 1978
Counsel and Director of the
Company.
J. Larry Sorsby 45 Executive Vice President and 1988
Chief Financial Officer and
Director of the Company
Mr. K. Hovnanian founded the predecessor of the Company in l959
(Hovnanian Brothers, Inc.) and has served as Chairman of the Board of the
Company since its incorporation in l967. Mr. K. Hovnanian was also Chief
Executive Officer of the Company from 1967 to July 1997.
Mr. A. Hovnanian was appointed President in April 1988, after serving as
Executive Vice President from March 1983. He has also served as Chief
Executive Officer since July 1997. Mr. A. Hovnanian was elected a Director of
the Company in December l98l. Mr. A. Hovnanian is the son of Mr. K.
Hovnanian.
Mr. Buchanan has been Senior Vice President-Corporate Controller since
May l990. Mr. Buchanan was elected a Director of the Company in March l982.
Mr. Carpitella joined the Company in September 1997 as Senior Vice
President, Organizational Development. Prior to joining the Company Mr.
Carpitella was Vice President, Human Resources for a division of Pulte Home
Corp. from April 1995 to August 1997. From February 1992 Mr. Carpitella was
Vice President Human Resources for Geo. J. Ball Co.
Mr. Reinhart has been Senior Vice President and General Counsel since
April 1985. Mr. Reinhart was elected a Director of the Company in December
l98l.
Mr. Sorsby was appointed Executive Vice President and Chief Financial
Officer of the Company in October 2000 after serving as Senior Vice President,
Treasurer, and Chief Financial Officer from February 1996 and as Vice
President-Finance/Treasurer of the Company since March 1991.
Mr. Hake joined the Company in July 2000 as Vice President, Finance and
Treasurer. Prior to joining the Company, Mr. Hake was Director, Real Estate
Finance at BankBoston Corporation from 1994 to June 2000.
Item 11 - EXECUTIVE COMPENSATION
The information called for by Item ll is incorporated herein by
reference to our definitive proxy statement to be filed pursuant to Regulation
l4A, in connection with our annual meeting of shareholders to be held on March
8, 2001, which will involve the election of directors.
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item l2 is incorporated herein by
reference to our definitive proxy statement to be filed pursuant to Regulation
l4A, in connection with our annual meeting of shareholders to be held on March
8, 2001, which will involve the election of directors.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item l3 is incorporated herein by
reference to our definitive proxy statement with the exception of the
information regarding certain relationships as described below to be filed
pursuant to Regulation l4A, in connection with our annual meeting of
shareholders to be held on March 8, 2001, which will involve the election of
directors.
The weighted average interest rate on Mr. K. Hovnanian and Mr. A.
Hovnanian related party debt was 5.87%, 4.62%, and 5.03% for the years ended
October 31, 2000, 1999, and 1998, respectively. The largest amount of debt
outstanding held by Mr. K. Hovnanian for the years ending October 31, 2000,
1999, and 1998 was $386,000, $1,026,000, and zero, respectively. The largest
amount of debt outstanding held by Mr. A. Hovnanian for the years ending
October 31, 2000, 1999, and 1998 was $3,124,000, $2,407,000, and $2,092,000,
respectively. The interest rate on six month Treasury bills at October 31,
2000, 1999, and 1998 was 6.08%, 5.12%, and 4.46%. During the years ended
October 31, 2000, 1999, and 1998, we received $85,000, $80,000, and $67,000,
respectively, from our affected partnerships.
PART IV
Item 14 - EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
Page
Financial Statements:
Index to Consolidated Financial Statements....................... F-1
Report of Independent Auditors................................... F-2
Consolidated Balance Sheets at October 31, 2000 and 1999......... F-3
Consolidated Statements of Income for the years ended
October 31, 2000, 1999, and 1998.............................. F-5
Consolidated Statements of Stockholders' Equity for the years
ended October 31, 2000, 1999, and 1998........................ F-6
Consolidated Statements of Cash Flows for the years ended
October 31, 2000, 1999, and 1998.............................. F-7
Notes to Consolidated Financial Statements....................... F-8
No schedules are applicable to us or have been omitted because the
required information is included in the financial statements or notes thereto.
Exhibits:
3(a) Certificate of Incorporation of the Registrant.(1)
3(b) Certificate of Amendment of Certificate of Incorporation of the
Registrant.(6)
3(c) Bylaws of the Registrant.(6)
4(a) Specimen Class A Common Stock Certificate.(6)
4(b) Specimen Class B Common Stock Certificate.(6)
4(c) Indenture dated as of May 28, 1993, relating to 9 3/4%
Subordinated Notes between Registrant and First Fidelity Bank,
National Association, New Jersey, as Trustee, including form
of 9 3/4% Subordinated Note due 2005.(4)
4(d) Indenture dated as of May 4, 1999, relating to 9 1/8% Senior
Notes between the Registrant and First Fidelity Bank,
including form of 9 1/8% Senior Notes due May 1, 2009.(7)
4(e) Indenture dated as of October 2, 2000, relating to 10 1/2%
SeniorNotes between the Registrant and First Union National
Bank, including form of 10 1/2% Senior Notes due October 1,
2007.
10(a) Second Amended and Restated Credit Agreement dated February 22,
2000 among K. Hovnanian Enterprises, Inc., Hovnanian
Enterprises, Inc., certain subsidiaries Thereof, PNC Bank,
National Association, First Union National Bank, BankBoston,
National Association, Bank of America, National Association,
Bank One, National Association, Comerica Bank, Guaranty
Federal Bank, F.S.B., AmSouth Bank, Bank United and Sun
Trust Bank. (8)
10(b) Description of Management Bonus Arrangements.(6)
10(c) Description of Savings and Investment Retirement Plan.(1)
10(d) 1999 Stock Incentive Plan (9).
10(e) 1983 Stock Option Plan (as amended and restated May 4, 1990,
and amended through May 14, 1998).(10)
10(f) Management Agreement dated August 12, 1983 for the management
of properties by K. Hovnanian Investment Properties, Inc.(1)
10(g) Agreement dated July 8, 1981 between Hovnanian Properties of
Atlantic County, Inc. and Kevork S. Hovnanian.(2)
10(h) Management Agreement dated December 15, 1985, for the management
of properties by K. Hovnanian Investment Properties, Inc.(3)
10(i) Description of Deferred Compensation Plan.(5)
10(j) Senior Executive Short-Term Incentive Plan.(11)
12 Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors
(1) Incorporated by reference to Exhibits to Registration
Statement (No. 2-85198) on Form S-1 of the Registrant.
(2) Incorporated by reference to Exhibits to Registration Statement
(No. 33-46064) on Form S-3 of the Registrant.
(3) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended February 28, 1986 of the
Registrant.
(4) Incorporated by reference to Exhibits to Registration Statement
(No. 33-61778) on Form S-3 of the Registrant.
(5) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended February 28, 1990 of the
Registrant.
(6) Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended February 28, 1994 of the
Registrant.
(7) Incorporated by reference to Exhibits to Registration
Statement (No. 333-75939) on Form S-3 of the Registrant.
(8) Incorporated by reference to Exhibits to Quarterly Report
on Form 10Q for the quarter ended April 30, 2000 of the
Registrant.
(9) Incorporated by the Proxy Statement of the Registrant Filed
on Schedule 14A dated January 15, 1999.
(10) Incorporated by reference to Annex A of the Proxy Statement of
the Registrant filed on Schedule 14A dated January 26, 2000.
(11) Incorporated by reference to Annex B of the Proxy Statement of
the Registrant files on Schedule 14A dated January 26, 2000.
Reports on Form 8-K
(i) On August 28, 2000 the Company filed a report on Form 8-K to
regarding its announcement that it and Washington Homes, Inc.
had entered into an agreement and Plan of Merger.
(ii) On September 20, 2000 the Company filed a report on Form 8-K
regarding the offering of $150 million of Senior Notes due 2007.
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) 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.
By:
/S/KEVORK S. HOVNANIAN
Kevork S. Hovnanian
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of l934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated
/S/KEVORK S. HOVNANIAN Chairman of The Board 1/26/01
Kevork S. Hovnanian and Director
/S/ARA K. HOVNANIAN Chief Executive Officer, 1/26/01
Ara K. Hovnanian President and Director
/S/PAUL W. BUCHANAN Senior Vice President 1/26/01
Paul W. Buchanan Corporate Controller and
Director
/S/PETER S. REINHART Senior Vice President and 1/26/01
Peter S. Reinhart General Counsel and Director
/S/J. LARRY SORSBY Executive Vice President, 1/26/01
J. Larry Sorsby Chief Financial Officer
and Director
/S/WILLIAM L. CARPITELLA Senior Vice President, 1/26/01
William L. Carpitella Organizational Development
/S/KEVIN C. HAKE Vice President, Finance 1/26/01
Kevin C. Hake and Treasurer
HOVNANIAN ENTERPRISES, INC.
Index to Consolidated Financial Statements
Page
Financial Statements:
Independent Auditors' Report................................... F-2
Consolidated Balance Sheets as of October 31, 2000 and 1999.... F-3
Consolidated Statements of Income for the Years Ended
October 31, 2000, 1999, and 1998............................... F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended October 31, 2000, 1999, and 1998......................... F-6
Consolidated Statements of Cash Flows for the Years Ended
October 31, 2000, 1999, and 1998............................... F-7
Notes to Consolidated Financial Statements..................... F-8
No schedules have been prepared because the required information of such
schedules is not present, is not present in amounts sufficient to require
submission of the schedule or because the required information is included in
the financial statements and notes thereto.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and
Board of Directors of
Hovnanian Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Hovnanian
Enterprises, Inc. and subsidiaries as of October 31, 2000 and 1999, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended October 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hovnanian
Enterprises, Inc. and subsidiaries at October 31, 2000 and 1999 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 31, 2000 in conformity with accounting
principles generally accepted in the United States.
/S/Ernst & Young LLP
New York, New York
December 13, 2000, except for Note 15, paragraph 4,
as to which the date is January 23, 2001
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
October 31, October 31,
ASSETS 2000 1999
------------ ------------
Homebuilding:
Cash and cash equivalents(Note 5)................. $ 40,131 $ 17,163
------------ ------------
Inventories - At the lower of cost or fair
value (Notes 7 and 11):
Sold and unsold homes and lots under
development................................... 525,116 475,196
Land and land options held for future
development or sale........................... 89,867 52,034
------------ ------------
Total Inventories............................. 614,983 527,230
------------ ------------
Receivables, deposits, and notes (Note 12)........ 36,190 30,675
------------ ------------
Property, plant, and equipment - net (Note 4)..... 35,594 26,500
------------ ------------
Senior residential rental properties - net (Notes 4
and 7)......................................... 10,276 10,650
------------ ------------
Prepaid expenses and other assets (Note 15)....... 64,897 56,753
------------ ------------
Total Homebuilding............................ 802,071 668,971
------------ ------------
Financial Services:
Cash.............................................. 3,122 2,202
Mortgage loans held for sale (Notes 6 and 7)...... 61,860 33,158
Other assets...................................... 2,145 1,563
------------ ------------
Total Financial Services...................... 67,127 36,923
------------ ------------
Collateralized Mortgage Financing:
Collateral for bonds payable (Note 6)............. 4,145 5,006
Other assets...................................... 198 238
------------ ------------
Total Collateralized Mortgage Financing....... 4,343 5,244
------------ ------------
Income Taxes Receivable - Including deferred tax
benefits (Note 10)................................ 1,723
------------ ------------
Total Assets........................................ $873,541 $712,861
============ ============
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
October 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
------------ ------------
Homebuilding:
Nonrecourse land mortgages (Note 7)...................... $ 18,166 $ 6,407
Accounts payable and other liabilities................... 82,205 73,989
Customers' deposits (Note 5)............................. 31,475 25,647
Nonrecourse mortgages secured by operating
properties (Note 7).................................... 3,554 3,662
------------ ------------
Total Homebuilding................................... 135,400 109,705
------------ ------------
Financial Services:
Accounts payable and other liabilities................... 2,078 1,218
Mortgage warehouse line of credit (Notes 6 and 7)........ 56,486 30,034
------------ ------------
Total Financial Services............................. 58,564 31,252
------------ ------------
Collateralized Mortgage Financing:
Bonds collateralized by mortgages receivable (Note 6).... 3,007 3,699
------------ ------------
Total Collateralized Mortgage Financing.............. 3,007 3,699
------------ ------------
Notes Payable:
Revolving credit agreement (Note 7)...................... 70,125
Senior notes (Note 8).................................... 296,430 150,000
Subordinated notes (Note 8).............................. 100,000 100,000
Accrued interest......................................... 12,709 11,654
------------ ------------
Total Notes Payable.................................. 409,139 331,779
------------ ------------
Income Taxes Payable (Note 10)............................. 4,072
------------ ------------
Total Liabilities.................................... 610,182 476,435
------------ ------------
Commitments and Contingent Liabilities (Notes 5, 9,
14 and 15)
Stockholders' Equity (Notes 13 and 15):
Preferred Stock,$.01 par value-authorized 100,000
shares; none issued
Common Stock,Class A,$.01 par value-authorized
87,000,000 shares; issued 17,309,369 shares in 2000
and 17,218,442 shares in 1999 (including 3,736,921
shares in 2000 and 2,710,274 shares in 1999 held
in Treasury)........................................... 173 172
Common Stock,Class B,$.01 par value
(convertible to Class A at time of sale)
-authorized 13,000,000 shares; issued 7,978,903
shares in 2000 and 7,997,083 shares in 1999
(both years include 345,874 shares held in Treasury)... 79 79
Paid in Capital.......................................... 46,086 45,856
Retained Earnings (Note 8)............................... 246,420 213,257
Treasury Stock - at cost................................. (29,399) (22,938)
------------ ------------
Total Stockholders' Equity........................... 263,359 236,426
------------ ------------
Total Liabilities and Stockholders' Equity................. $873,541 $712,861
============ ============
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
Year Ended
-------------------------------------
October October October
31, 2000 31, 1999 31, 1998
----------- ----------- -----------
Revenues:
Homebuilding:
Sale of homes.............................$1,105,466 $ 908,553 $ 895,644
Land sales and other revenues (Notes 12
and 14)................................ 13,017 17,409 15,411
----------- ----------- -----------
Total Homebuilding...................... 1,118,483 925,962 911,055
Financial Services.......................... 18,855 20,239 19,098
Collateralized Mortgage Financing........... 469 519 683
Other Operations............................ 6,893
----------- ----------- -----------
Total Revenues.......................... 1,137,807 946,720 937,729
----------- ----------- -----------
Expenses:
Homebuilding:
Cost of sales............................. 882,711 730,025 748,941
Selling, general and administrative....... 104,771 81,396 67,519
Inventory impairment loss (Note 11)....... 1,791 2,091 3,994
----------- ----------- -----------
Total Homebuilding...................... 989,273 813,512 820,454
----------- ----------- -----------
Financial Services.......................... 19,334 19,195 17,010
----------- ----------- -----------
Collateralized Mortgage Financing........... 416 504 672
----------- ----------- -----------
Corporate General and Administrative(Note 3) 33,309 28,652 21,048
----------- ----------- -----------
Interest (Notes 7 and 8).................... 34,956 30,343 34,423
----------- ----------- -----------
Other operations............................ 8,701 3,897 2,830
----------- ----------- -----------
Total Expenses.......................... 1,085,989 896,103 896,437
----------- ----------- -----------
Income Before Income Taxes and
Extraordinary Loss.......................... 51,818 50,617 41,292
----------- ----------- -----------
State and Federal Income Taxes:
State (Note 10)............................. 2,495 5,093 3,572
Federal (Note 10)........................... 16,160 14,581 11,569
----------- ----------- -----------
Total Taxes............................... 18,655 19,674 15,141
----------- ----------- -----------
Extraordinary Loss From Extinguishment of
Debt, Net of Income Taxes (Note 8).......... (868) (748)
----------- ----------- -----------
Net Income....................................$ 33,163 $ 30,075 $ 25,403
=========== =========== ===========
Per Share Data:
Basic:
Income Per Common Share Before
Extraordinary Loss......................$ 1.51 $ 1.45 $ 1.20
Extraordinary Loss........................ (.04) (.03)
----------- ----------- -----------
Income....................................$ 1.51 $ 1.41 $ 1.17
=========== =========== ===========
Weighted Average Number of Common Shares
Outstanding................................. 21,933 21,404 21,781
=========== =========== ===========
Assuming Dilution:
Income Per Common Share Before
Extraordinary Loss...................... $ 1.50 $ 1.43 $ 1.19
Extraordinary Loss........................ (.04) (.03)
----------- ----------- -----------
Income.................................... $ 1.50 $ 1.39 $ 1.16
=========== =========== ===========
Weighted Average Number of Common Shares
Outstanding................................. 22,043 21,612 22,016
=========== =========== ===========
See notes to consolidated financial statements
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
A Common Stock B Common Stock
------------------- -------------------
Shares Shares
Issued and Issued and Paid-In Retained Treasury
Outstanding Amount Outstanding Amount Capital Earnings Stock Total
----------- ------ ----------- ------ ------- -------- --------- ---------
Balance, October 31, 1997... 14,097,841 $ 156 7,754,812 $ 81 $33,935 $157,779 $(13,189) $ 178,762
Sale of common stock under
employee stock option
plan...................... 114,667 626 626
Conversion of Class B to
Class A common stock...... 60,515 1 (60,515) (1)
Treasury stock purchases.... (407,100) (3,399) (3,399)
Net Income.................. 25,403 25,403
----------- ------ ----------- ------ ------- -------- --------- ---------
Balance, October 31, 1998... 13,865,923 157 7,694,297 80 34,561 183,182 (16,588) 201,392
Sale of common stock under
employee stock option
plan...................... 10,000 1 58 59
Acquisitions................ 1,362,057 13 11,237 11,250
Conversion of Class B to
Class A common stock...... 43,088 1 (43,088) (1)
Treasury stock purchases.... (772,900) (6,350) (6,350)
Net Income.................. 30,075 30,075
----------- ------ ----------- ------ ------- -------- --------- ---------
Balance, October 31, 1999... 14,508,168 172 7,651,209 79 45,856 213,257 (22,938) 236,426
Acquisitions................ 47,619 1 (270) (269)
Stock option plan........... 346 346
Stock bonus plan............ 25,128 154 154
Conversion of Class B to
Class A common stock...... 18,180 (18,180)
Treasury stock purchases.... (1,026,647) (6,461) (6,461)
Net Income ................. 33,163 33,163
----------- ------ ----------- ------ ------- -------- --------- ---------
Balance, October 31, 2000... 13,572,448 $ 173 7,633,029 $ 79 $46,086 $246,420 $(29,399) $ 263,359
=========== ====== =========== ====== ======= ======== ========= =========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended
----------------------------------
October October October
31, 2000 31, 1999 31, 1998
---------- ---------- ----------
Cash Flows From Operating Activities:
Net Income...................................... $ 33,163 $ 30,075 $ 25,403
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation................................ 6,423 6,314 4,293
Amortization of Goodwill.................... 2,513 261 134
(Gain) loss on sale and retirement of
property and assets....................... (728) 283 (6,189)
Extraordinary loss from extinguishment of
Debt net of income taxes.................. 868 748
Deferred income taxes....................... 2,551 3,056 1,987
Impairment losses........................... 1,791 2,091 5,032
Decrease (increase) in assets:
Mortgage notes receivable................. (27,703) 46,012 (17,343)
Receivables, prepaids and other assets.... (13,256) (9,736) 6,276
Inventories............................... (89,544) (53,592) 30,666
Increase (decrease) in liabilities:
State and Federal income taxes............ 3,244 3,020 3,651
Customers' deposits....................... 6,240 (1,269) 1,490
Interest and other accrued liabilities.... 8,222 9,203 2,235
Post development completion costs......... (2,555) 3,293 4,438
Accounts payable.......................... 8,994 (4,400) 2,233
Net cash (used in) provided by ---------- ---------- ----------
operating activities.................... (60,645) 35,479 65,054
---------- ---------- ----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets... 1,517 18,251 26,592
Purchase of property, equipment, and other
fixed assets.................................. (15,607) (13,381) (3,135)
Acquisition of homebuilding companies........... (3,845) (12,249)
Investment in and advances to unconsolidated
affiliates.................................... 249 243
Net cash (used in) provided by ---------- ---------- ----------
investing activities.................... (17,935) (7,130) 23,700
---------- ---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes............... 1,433,150 850,320 632,531
Proceeds from senior debt....................... 146,430 150,000
Principal payments on mortgages and notes..... (1,470,805) (972,265) (668,987)
Principal payments on subordinated debt......... (46,302) (45,284)
Purchase of treasury stock...................... (6,461) (6,350) (3,399)
Proceeds from sale of stock and employee stock
plan.......................................... 154 59 626
Net cash provided by (used in) ---------- ---------- ----------
financing activities.................... 102,468 (24,538) (84,513)
---------- ---------- ----------
Net Increase In Cash.............................. 23,888 3,811 4,241
Cash and Cash Equivalents Balance, Beginning
Of Year......................................... 19,365 15,554 11,313
---------- ---------- ----------
Cash and Cash Equivalents Balance, End Of Year.....$ 43,253 $ 19,365 $ 15,554
========== ========== ==========
Supplemental Disclosures Of Cash Flow:
Cash paid during the year for:
Interest (net of amount capitalized).......... $ 33,814 $ 23,731 $ 35,315
========== ========== ==========
Income Taxes.................................. $ 12,858 $ 16,395 $ 12,303
========== ========== ==========
Non-cash Investing and Finance Activities:
Debt assumed on sale of property and assets..... $ 13,530
==========
Stock issued for acquisitions/extension of options
granted......................................... $ 721 $ 11,250
========== ==========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2000, 1999, AND 1998.
1. BASIS OF PRESENTATION AND SEGMENT INFORMATION
Basis of Presentation - The accompanying consolidated financial
statements include our accounts and all wholly-owned subsidiaries after
elimination of all significant intercompany balances and transactions.
Segment Information - Statement of Financial Accounting Standards
No. 131("FAS 131") "Disclosures About Segments of an Enterprise and Related
Information" established new standards for segment reporting based on the
way managementorganizes segments within a company for making operating
decisions and assessing performance. Our financial reporting segments
consist of homebuilding, financial services, collateralized mortgage
financing, and corporate. Our homebuilding operations comprise the most
substantial part of our business, with approximately 98% of consolidated
revenues in years ended October 31, 2000 and 1999 and approximately 97% in
the year ended October 31, 1998 contributed by the homebuilding operations.
We are a Delaware corporation, currently building and selling homes in
more than 120 new home communities in New Jersey, Pennsylvania, New York,
North Carolina, Virginia, California, Texas, Maryland, Florida, and Poland.
We offer a wide variety of homes that are designed to appeal to first time
buyers, first and second time move up buyers, luxury buyers, active adult
buyers and empty nesters. Our financial services operations provide
mortgage banking and title services primarily to the homebuilding operations'
customers. We do not retain or service the mortgages that we originate but
rather, sell the mortgages and related servicing rights to investors.
Corporate primarily includes the operations of our corporate office whose
primary purpose is to provide information services, human resources,
management reporting, training, cash management, internal audit, risk
management, and administration of process redesign, quality and safety.
Assets, liabilities, revenues and expenses of our reportable segments are
separately included in the consolidated balance sheets and consolidated
statements of income.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles 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.
Business Combinations - When we make an acquisition of another
company, we use the purchase method of accounting in accordance with
Accounting Principal Board Opinion 16 ("APB 16") "Business Combinations".
Under APB 16 we record as our cost the acquired assets less liabilities
assumed. Any difference between the cost of an acquired company and the
sum of the fair values of tangible and identified intangible assets less
liabilities is recorded as goodwill. The reported income of an acquired
company includes the operations of the acquired company after acquisition,
based on the acquisition costs.
Income Recognition - Income from home sales is recorded when title
is conveyed to the buyer, subject to the buyer's financial commitment being
sufficient to provide economic substance to the transaction.
Cash and Cash Equivalents - Cash and cash equivalents include
cash deposited in checking accounts, overnight repurchase agreements,
certificates of deposit, Treasury bills and government money market
funds with original maturities of 90 days or less when purchased.
Fair Value of Financial Instruments - The fair value of
financial instruments is determined by reference to various market data
and other valuation techniques as appropriate. Our financial instruments
consist of cash equivalents, mortgages and notes receivable, mortgages and
notes payable, and the senior andsubordinated notes payable. Unless
otherwise disclosed, the fair value of financial instruments approximates
their recorded values.
Inventories - For inventories of communities under development,
a loss is recorded when events and circumstances indicate impairment and
the undiscounted future cash flows generated are less than the related
carrying amounts. The impairment loss is based on expected revenue,
cost to complete including interest, and selling costs. Inventories
and long-lived assets held for sale are recorded at the lower of cost
or fair value less selling costs. Fair value is defined in Statement
of Financial Accounting Standard No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("FAS 121") as the amount at which an asset could be bought or sold in
a current transaction between willing parties, that is, other than in
a forced or liquidation sale. Construction costs are accumulated
during the period of construction and charged to cost of sales under
specific identification methods. Land, land development, and common
facility costs are allocated based on buildable acres to product types
within each community, then amortized equally based upon the number
of homes to be constructed in the community.
Interest costs related to properties under development are
capitalized during the land development and home construction period
and expensed along with the associated cost of sales as the related
inventories are sold (see Note 7).
The cost of land options is 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.
Intangible Assets - Any intangible assets acquired by us are
amortized on a straight line basis over its useful life. Goodwill
resulting from company acquisitions during the year ended October 31,
1999 is being amortized over 5 to 10 years and reported in the
consolidated statements of income as "Other Operations". During
the years ended October 31, 2000, 1999, and 1998, goodwill amortization
amounted to $2,513,000, $261,000, and $134,000, respectively. The
carrying amountof goodwill is reviewed if facts and circumstances
suggest that it may be impaired. If this review indicates that goodwill
will not be recoverable, as determined based on the estimated
undiscounted cash flows of the company acquired over the remaining
amortization period, the carrying amount of the goodwill is reduced
by the estimated shortfall of cash flows. In addition, we assess
long-lived assets for impairment under FAS 121. Under those rules,
goodwill associated with assets acquired in a purchase business
combination is included in impairment evaluations when events or
circumstances exist that indicate the carrying amount of those
assets may not be recoverable. Total accumulated amortization
at October 31, 2000 and 1999 was $3,815,000 and $1,302,000,
respectively.
Deferred Bond Issuance Costs - Costs associated with
the issuance of our Senior and Subordinated Notes are capitalized
and amortized over the associated term of each note issuance into
other operations on the consolidated statementsof income.
Debt Issued At a Discount - Debt issued at a discount to
the face amount is accredited back up to its face amount utilizing
the effective interest method over the term of the note and recorded
as a component of Interest on the consolidated statements of income.
Post Development Completion Costs - In those instances where
a developmentis 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.
Advertising Costs - Advertising costs are treated as period
costs and expensed as incurred. During the years ended October 31,
2000, 1999, and 1998,advertising costs expensed amounted to $14,418,000,
$11,995,000, and $10,531,000, respectively.
Deferred Income Tax - Deferred income taxes or income tax
benefits are provided for temporary differences between amounts
recorded for financial reporting and for income tax purposes.
Common Stock - Each share of Class A Common Stock entitles
its holder to one vote per share and each share of Class B Common
Stock entitles its holder to ten votes per share. The amount of
any regular cash dividend payable on a share of Class A Common
Stock will be an amount equal to 110% of the corresponding regular
cash dividend payable on a share of Class B Common Stock. If a
shareholder desires to sell shares of Class B Common Stock, such
stock must be converted into shares of Class A Common Stock.
On March 16, 2000, our Board of Directors approved an
increase in the stock repurchase plan to purchase up to 4 million
shares. The 4 million shares equals 17.0% of our total and
outstanding shares as of December 16, 1996 when the initial
repurchase plan was approved by the Board. As of October 31, 2000,
3,391,047 shares have been repurchased under this program.
Depreciation - The straight-line method is used for both
financial and tax reporting purposes for all assets.
Prepaid Expenses - Prepaid expenses which relate to
specific housing communities (model setup, architectural fees,
homeowner warranty, etc.) are amortized to costs of sales as
the applicable inventories are sold. All other prepaid expenses
are amortized over a specific time period or as used and charged
to overhead expense.
Stock Options - Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" establishes
a fair value-based method of accounting for stock-based compensation
plans, including stock options. Registrants may elect to continue
accounting for stock option plans under Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued
to Employees," but are required to provide proforma net income
and earningsper share information "as if" the new fair value
approach had been adopted. We intend to continue accounting for
our stock option plan under APB 25. Under APB 25, no compensation
expense is recognizedwhen the exercise price of our employee stock
options equals the market price of the underlying stock on the date
of grant (see Note 13).
Per Share Calculations - Statement of Financial Accounting
Standards No. 128 ("FAS 128") "Earnings Per Share" requires the
presentation of basicearnings per share and diluted earnings per
share, and is effective for annual periods ending after December 15,
1997. We adopted FAS 128 in the year ended October 31, 1998.
Basic earnings per common share is computed using the weighted
average number of shares outstanding and is the same calculation
as reported in prior years. Basic weighted average shares outstanding
at October 31, 2000, 1999, and 1998 amounted to 21,933,022 shares,
21,404,473 shares, and 21,781,105 shares, respectively. Diluted
earnings per common share is computed using the weighted average
number of shares outstanding adjusted for the incremental shares
attributed to outstanding options to purchase common stock of 110,000,
208,000, and 235,000 for the years ended October 31, 2000, 1999,
and 1998, respectively.
Computer Software Development - On November 1, 1999 we
adopted SOP-98-1, Accounting For the Costs of Computer Software
Developed For or Obtained For Internal Use. The SOP-98-1 requires
the capitalization of certain costs incurred in connection with
developing or obtaining software for internal use.Prior to the
adoption of SOP-98-1, we expensed such internal use software
related costs as incurred. The effect of adopting SOP-98-1 was
to increase net income for the year ended October 31, 2000 by
$2,570,000 or $0.12 pershare.
Accounting Pronouncement Not Yet Adopted - The FASB issued
Statement No. 137, Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133. The Statement deferred for one year
the effective date of FASB Statement No. 133, Accounting for
Derivatives Instruments and Hedging Activities. We adopted
FAS 133 and 137 on November 1,2000. We do not currently utilize
derivatives, and do not anticipate that the adoption of the new
statement will have a significant effect on earnings or the
financial position of our Company.
Reclassifications - Certain amounts in the 1999 and 1998
consolidated financial statements have been reclassified to conform
to the 2000 presentation.
3. CORPORATE INITIATIVES
We have embarked on long term improvement initiatives of
total quality, process redesign, and training. Included in
Corporate General and Administrativeis $6,902,000, $7,502,000,
and $3,756,000 for the years ended October 31, 2000, 1999, and
1998, respectively, related to such initiatives. These amounts are
in addition to software development costs capitalized in those years.
4. PROPERTY
Homebuilding property, plant, and equipment consists of land,
land improvements, buildings, building improvements, furniture and
equipment used to conduct day to day business. Homebuilding
accumulated depreciation related tothese assets at October 31, 2000
and October 31, 1999 amounted to $22,164,000 and $19,550,000,
respectively. In addition we have two senior citizen residential
rental communities. Accumulated depreciation on rental property
at October 31, 2000 and October 31, 1999 amounted to $2,294,000
and $2,211,000, respectively.
5. ESCROW CASH
We hold escrow cash amounting to $3,424,000 and $5,578,000
at October 31, 2000 and October 31, 1999, respectively, which
primarily represents customers'deposits which are restricted
from use by us. We are able to release escrow cash by pledging
letters of credit and surety bonds. Escrow cash accounts are
substantially invested in short-term certificates of deposit,
time deposits,or money market accounts.
6. MORTGAGES AND NOTES RECEIVABLE
Our wholly-owned mortgage banking subsidiary originates
mortgage loans, primarily from the sale of our homes. Such
mortgage loans are sold in the secondary mortgage market,
servicing released, or prior to February 28, 1987 pledged against,
collateralized mortgage obligations ("CMOs"). At October 31,2000
and 1999, respectively, $61,549,000 and $32,844,000 of such
mortgages were pledged against our mortgage warehouse line
(see Note 7). We may incur risk with respect to mortgages
that are delinquent and not pledged against CMOs, but only to
the extent the losses are not covered by mortgage insurance or
resale value of the home. Historically, we have incurred
minimal credit losses. The mortgage loans held for sale are
carried at the lower of cost or market value, determined on an
aggregate basis. There was no valuation adjustment at
October 31, 2000.
7. MORTGAGES AND NOTES PAYABLE
Substantially all of the nonrecourse land mortgages are
short-term borrowings. Nonrecourse mortgages secured by
operating properties are installment obligations having annual
principal maturities in the following years ending October 31,
of approximately $132,000 in 2001, $138,000 in 2002, $2,595,000 in
2003, $75,000 in 2004, $81,000 in 2005 and $533,000 after 2005.
The interest rates on these obligations range from 7.000% to 8.375%.
We have an unsecured Revolving Credit Agreement ("Agreement")
with a group of banks which provides up to $375,000,000 through
July 2003. Interest is payable monthly and at various rates of
either prime plus .25%or LIBOR plus 1.70%. In addition, we pay a
fee equal to .325% per annum on the weighted average unused
portion of the line.
Interest costs incurred, expensed and capitalized were:
Year Ended
----------------------------
October October October
31, 2000 31, 1999 31, 1998
-------- -------- --------
(Dollars in Thousands)
Interest capitalized at
beginning of year.............. $21,966 $25,545 $35,950
Plus acquired entity interest.... 3,397
Plus interest incurred(1)(3)..... 38,878 24,594 28,947
Less interest expensed(3)........ 34,956 30,343 34,423
Less impairment write-off........ 194 460
Less sale of assets.............. 1,227 4,469
------- ------- -------
Interest capitalized at
end of year(2)(3).............. $25,694 $21,966 $25,545
======= ======= =======
(1) Data does not include interest incurred by our mortgage and
finance subsidiaries.
(2) Data does not include a reduction for depreciation.
(3) Represents acquisition interest for construction, land and
development costs which is charged to interest expense when
homes are delivered or when land is not under active development,
and interest incurred and expensed on operating properties
and senior residential rental properties.
Average interest rates and average balances outstanding for
short-term debt are as follows:
October October October
31, 2000 31, 1999 31, 1998
-------- -------- --------
(Dollars In Thousands)
Average outstanding
borrowings................. $128,788 $ 55,495 $ 98,090
Average interest rate during
period..................... 10.0% 9.2% 8.4%
Average interest rate at end
of period(1)............... 8.4% 7.2% 6.9%
Maximum outstanding at any
month end.................. $170,800 $117,085 $125,325
(1) Average interest rate at the end of the period excludes any charges
on unused loan balances.
In addition, we have a secured mortgage loan warehouse
agreement with a group of banks which provides up to $70,000,000
through July 26, 2001. Interest is payable monthly and at
various rates. The interest rate at October 31, 2000 was 8.0%.
8. SENIOR AND SUBORDINATED NOTES
On April 29, 1992, we issued $100,000,000 principal amount of
11 1/4% Subordinated Notes due April 15, 2002. In October 1998, we
redeemed $44,551,000 principal amount at an average price of 101.6%
of par. The funds were provided by the revolving credit agreement
and resulted in an extraordinary loss of $748,000 net of an income
tax benefit of $403,000. In June 1999, we redeemed the remaining
$45,449,000 principal amount at an average price of 101.875% of par.
The funds for this redemption were provided by the issuance of Senior
Notes and resulted in an extraordinary loss of $868,000
net of an income tax benefit of $468,000.
On June 7, 1993, we issued $100,000,000 principal amount of
9 3/4% Subordinated Notes due June 1, 2005. Interest is payable
semi-annually. The notes are redeemable in whole or in part at our
option, initially at 104.875% of their principal amount on or after
June 1, 1999 and reducing to 100% of their principal amount on or
after June 1, 2002.
On May 4, 1999, we issued $150,000,000 principal amount of
9 1/8% Senior Notes due May 1, 2009. Interest is payable
semi-annually. The notes are redeemable in whole or in part
at our option, initially at 104.563% of their principal amount
on or after May 1, 2004 and reducing to 100% of their
principal amount on or after May 1, 2007.
On October 2, 2000, we issued $150,000,000 principal
amount of 10 1/2% Senior Notes due October 1, 2007. The 10 1/2%
Senior Notes were issued at a discount to yield 11% and have been
reflected net of the unamortized discount in the accompanying
consolidated balance sheet. Interest is payable semi-annually.
The notes are redeemable in whole or in part at our option at 100%
of their principal amount upon payment of a make-whole price.
The indentures relating to the Senior and Subordinated
Notes and the Revolving Credit Agreement contain restrictions
on the payment of cash dividends. At October 31, 2000,
$45,765,000 of retained earnings were free of such restrictions.
The fair value of both the Senior Notes and Subordinated
Notes is estimated based on the quoted market prices for the
same or similar issues or on the current rates offered to us
for debt of the same remaining maturities. The fair value of the
Senior Notes and Subordinated Notes is estimated at $271,500,000
and $94,000,000, respectively, as of October 31, 2000.
9. RETIREMENT PLAN
In December 1982, we established a defined contribution
savings and investment retirement plan. Under such plan there are
no prior service costs. All associates are eligible to participate
in the retirement plan and employer contributions are based
on a percentage of associate contributions. Plan costs charged
to operations amount to $2,948,000, $2,760,000, and $1,523,000 for
the years ended October 31, 2000, 1999, and 1998, respectively.
10. INCOME TAXES
Income Taxes payable (receivable) including deferred benefits,
consists of the following:
October October
31, 2000 31, 1999
--------- ---------
(In Thousands)
State income taxes:
Current.......................... $ 1,552 $ 437
Deferred......................... 163 (758)
Federal income taxes:
Current.......................... 5,519 4,311
Deferred......................... (3,162) (5,713)
--------- ---------
Total.......................... $ 4,072 $ (1,723)
========= =========
The provision for income taxes is composed of the following
charges (benefits):
Year Ended
-----------------------------------
October October October
31, 2000 31, 1999 31, 1998
--------- --------- ---------
(In Thousands)
Current income tax expense:
Federal(1)....................... $ 13,609 $ 13,253 $ 9,177
State(2)......................... 1,574 4,954 3,484
--------- --------- ---------
15,183 18,207 12,661
--------- --------- ---------
Deferred income tax expense:
Federal.......................... 2,551 860 1,989
State............................ 921 139 88
--------- --------- ---------
3,472 999 2,077
--------- --------- ---------
Total.......................... $ 18,655 $ 19,206 $ 14,738
========= ========= =========
(1) The current federal income tax expense includes a tax benefit of
$468,000 and $403,000 in the years ended October 31, 1999 and
1998, respectively, relating to the loss on the redemption of
Subordinated Notes that was reported as an extraordinary
item in the "Statements of Income."
(2) The current state income tax expense is net of the use of state
loss carryforwards amounting to $21,330,000, $5,860,000, and
$8,495,000 for the years ended October 31, 2000, 1999, and 1998.
The deferred tax liabilities or assets have been recognized in
the consolidated balance sheets due to temporary differences as follows:
October October
31, 2000 31, 1999
-------- ---------
(In Thousands)
Deferred tax assets:
Deferred income...................... $ -- $ 40
Maintenance guarantee reserves....... 740 711
Inventory impairment loss............ 1,785 2,545
Uniform capitalization of overhead... 6,008 3,365
Post development completion costs.... 3,194 4,238
State net operating loss
carryforwards...................... 30,916 29,440
Other................................ 2,970 1,378
-------- ---------
Total.............................. 45,613 41,717
Valuation allowance(3)............... (30,916) (29,440)
-------- ---------
Deferred tax assets.................. 14,697 12,277
-------- ---------
Deferred tax liabilities:
Deferred interest.................... 31 31
Installment sales.................... 96 137
Accelerated depreciation............. 3,965 2,916
Acquisition goodwill................. 2,279 2,722
Software development expenses........ 5,327 --
-------- ---------
Total............................... 11,698 5,806
-------- ---------
Net deferred tax assets................ $ 2,999 $ 6,471
======== =========
(3) The net change in the valuation allowance of $1,476,000 results
from an increase in the separate company state net operating
losses that may not be fully utilized.
The effective tax rates varied from the expected rate.
The sources of these differences were as follows:
Year Ended
------------------------------
October October October
31, 2000 31, 1999 31, 1998
-------- -------- --------
Computed "expected" tax rate...... 35.0 % 35.0 % 35.0 %
State income taxes, net of Federal
income tax benefit.............. 3.1 6.5 6.0
Company owned life insurance...... -- (.1) (1.6)
Low income housing tax credit..... (2.6) (2.8) (3.4)
Other............................. .5 .4 .7
-------- -------- --------
Effective tax rate................ 36.0 % 39.0 % 36.7 %
======== ======== ========
We have state net operating loss carryforwards for financial
reporting and tax purposes of $406,000,000 due to expire between
the years October 31, 2001 and October 31, 2015.
11. REDUCTION OF INVENTORY TO FAIR VALUE
In accordance with "Financial Accounting Standards No. 121
("FAS 121") "Accounting for the Impairment of Long Lived Assets and
for Long Lived Assets to Be Disposed Of", we record impairment losses
on inventories related to communities under development when events
and circumstances indicate that they may be impaired and the
undiscounted cash flows estimated to be generated by those assets
are less than their related carrying amounts. During the year ended
October 31, 1998, inventory with a carrying amount of $3,077,000
was written down by $353,000 to its fair value. This was based
on our evaluation of the expected revenue, cost to complete including
interest and selling cost. The writedown during the year ended
October 31, 1998 was attributed to one community in Florida where
homes are being discounted to accelerate sales.
Also in accordance with FAS 121, we record impairment losses
on inventories and long-lived assets held for sale when the related
carrying amount exceeds the fair value less the selling cost. As of
October 31, 1999 and 1998, inventory with a carrying amount of
$4,539,000 and $4,629,000, respectively, was written down by
$1,801,000 and $2,588,000, respectively, to its fair value. No
inventory was written down during the year ended October 31, 2000.
The writedowns during the year ended October 31, 1999 were attributed
to one land parcel in Florida and two residential communities in North
Carolina. The Florida land parcel was written down based on purchase
offers. The communities were written down based on our decision to
discontinue selling homes and offer the remaining lots for sale.
The writedowns during the year ended October 31, 1998 were
attributed to one parcel of land being sold as lots and a commercial
retail center parcel of land which incurred higher land development
costs, both in New Jersey. During the year ended October 31, 1998,
when these commercial facilities were liquidated, we recovered the
carrying value. During the years ended October 31, 1999 and 1998,
we recovered the carrying value or recognized nominal losses on the
land held for sale which was subsequently liquidated.
The total aggregate impairment losses, which are presented in
the consolidated statements of income, in inventory held for future
development or sale were zero, $1,801,000, and $2,941,000 for the
years ended October 31, 2000, 1999, and 1998, respectively.
No aggregate impairment loss was recorded for the year ended
October 31, 2000.
On the statement of income the line entitled "Homebuilding -
Inventory impairment loss" also includes write-offs of options including
approval, engineering, and capitalized interest costs. During the
years ended October 31, 2000, 1999, and 1998 write-offs amounted to
$1,791,000, $290,000 and $2,106,000, respectively. During the year
ended October 31, 2000 we did not exercise options in various locations
because the communities proforma profitability did not produce
adequate returns on investment commensurate with the risk.
Those communities were located in New Jersey, New York, North Carolina,
and California. During 1999, we did not exercise an option because
the community's proforma did not produce an adequate return on
investment commensurate with the risk. During 1998, we did not
exercise three residential options because of changes in local
market conditions and difficulties in obtaining government approvals.
12. TRANSACTIONS WITH RELATED PARTIES
Our Board of Directors has adopted a general policy providing
that it will not make loans to our officers or directors or their
relatives at an interest rate less than the interest rate at the date
of the loan on six month U.S. Treasury Bills, that the aggregate
of such loans will not exceed $3,000,000 at any one time, and that
such loans will be made only with the approval of the members of
our Board of Directors who have no interest in the transaction.
At October 31, 2000 and 1999 included in receivables, deposits
and notes are related party receivables from officers and
directors amounted to $3,127,000 and $2,718,000, respectively.
Due to an oversight the loan balances exceeded $3,000,000 at
October 31, 2000. On November 9, 2000 a $250,000 payment was
received which reduced the loans to within authorized limits.
Interest income from these loans for October 31, 2000, 1999, and
1998 amounted to $167,000, $108,000, and $97,000, respectively.
We provide property management services to various limited
partnerships including one partnership in which Mr. A. Hovnanian,
our Chief Executive Officer, President and a Director, is a general
partner, and members of his family and certain officers and
directors are limited partners. During the years ended
October 31, 2000, 1999, and 1998 we received $85,000, $80,000,
and $67,000, respectively, in fees for such management services.
At October 31, 2000 and 1999, no amounts were due us by these
partnerships.
13. STOCK PLANS
We have a stock option plan for certain officers and key
employees. Options are granted by a Committee appointed by the
Board of Directors. The exercise price of all stock options
must be at least equal to the fair market value of the underlying
shares on the date of the grant. Options granted prior to
May 14, 1998 vest in three equal installments on the first,
second and third anniversaries of the date of the grant.
Options granted on or after May 14, 1998 vest in four equal
installments on the third, fourth, fifth and sixth anniversaries
of the date of the grant. We extended the life of options that
expired on May 4, 2000 five years which resulted in additional
compensation expense of $346,000 net of taxes. All options expire
ten years after the date of the grant. In addition, during the
years ended October 31, 2000 and 1999 each of the three outside
directors of the Company were granted options to purchase 10,000
shares at the same price and terms as those granted to officers
and key employees. Stock option transactions are summarized as
follows:
Weighted Weighted Weighted
Average Average Average
Fair Fair Fair
Value (1) Value (1) Value (1)
And And And
October Exercise October Exercise October Exercise
31, 2000 Price 31, 1999 Price 31, 1998 Price
--------- -------- --------- -------- --------- --------
Options outstanding at
beginning of period. 1,656,000 $8.02 1,415,000 $8.13 1,336,500 $7.83
Granted............ 429,500 $6.06 251,000 $7.87 291,500 $9.09
Exercised.......... 10,000 $5.81 114,667 $5.45
Forfeited.......... 120,000 $8.60 98,333 $9.98
--------- --------- ---------
Options outstanding at
end of period....... 1,965,500 $9.44 1,656,000 $8.29 1,415,000 $8.13
========= ========= =========
Options exercisable at
end of period....... 1,276,708 1,106,666 1,013,166
Price range of options $5.13- $5.13- $5.13-
outstanding......... $11.50 $11.50 $11.50
Weighted-average
remaining contractual
life................ 7.0 yrs. 5.0 yrs. 5.4 yrs.
(1) Fair value of options at grant date approximate exercise price.
Pro forma information regarding net income and earnings per share
is required under the fair value method of Financial Accounting Standards
No. 123 ("FAS 123") "Accounting for Stock-Based Compensation" and
is to be calculated as if we had accounted for our stock options
under the fair value method of FAS 123. The fair value for
these options is established at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 2000, 1999, and 1998: risk- free interest rate of
5.9%, 6.4%, and 4.5%, respectively; dividend yield of zero;
volatility factor of the expected market price of our common
stock of 0.40, 0.41, and 0.46, respectively; and a weighted-average
expected life of the option of 7.0, 7.7, and 7.5 years, respectively.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because our employee stock options
have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options and are not
likely to be representative of the effects on reported net income for
future years, if applicable.
For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options'
vesting period. Our pro forma information follows (in thousands
except for earnings per share information):
Year Ended
-----------------------------------
October October October
31, 2000 31, 1999 31, 1998
---------- ---------- -----------
Pro forma net income.....................$ 32,322 $ 29,851 $ 25,107
========== ========== ===========
Pro forma basic earnings per share.......$ 1.47 $ 1.39 $ 1.15
========== ========== ===========
Pro forma diluted earnings per share.....$ 1.47 $ 1.38 $ 1.14
========== ========== ===========
During the year ended October 31, 1999, we modified our bonus plan
for certain associates. A portion of their bonus will be paid by issuing
a deferred right to receive our Class A Common Stock. The number of shares
will be calculated by dividing the portion of the bonus subject to the
deferred right award by our stock price on the date the bonus is earned.
25% of the deferred right award will vest, and shares will be issued,
one year after the year end and then 25% a year for the next three years.
During the year ended October 31, 2000, 25,000 shares were issued and 26,000
shares were forfeited under this plan. For the years ended October 31,
2000 and 1999, approximately 281,000 and 200,000 deferred rights were awarded
in lieu of $1,923,000 and $1,534,000 of bonus payments, respectively.
14. COMMITMENTS AND CONTINGENT LIABILITIES
We are involved from time to time in litigation arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on us. We were involved in an action resulting from the
non-performance by a land owner (the "Defendant") to sell real property
to us. In 1999, we entered into a Settlement Agreement and Mutual Release
("SAMR") relating to this action. Pursuant to the terms of the SAMR,
the Defendant stipulated to a judgement in our favor in the amount of
$3,535,349. In 2000 the judgement was upheld in bankruptcy proceedings.
As a result of the bankruptcy proceeding and evaluation of the
collateral underlying our claim, we recorded a net gain on settlement
of $1.8 million which is included in land sales and other
revenues in the consolidated statements of income at October 31, 2000.
As of October 31, 2000 and 1999, respectively, we are obligated
under various performance letters of credit amounting to $4,284,000 and
$4,091,000. (See Note 5)
15. ACQUISITIONS
On August 7, 1999 we acquired the Matzel and Mumford Organization,
Inc. ("M & M"), a New Jersey homebuilder and its related entities. On
October 1, 1999 we acquired the Goodman Family of Builders, L.P.
("Goodman"), a Texas homebuilder and its related entities. The
combined purchase price for both acquisitions was approximately
$24,400,000 in cash and 1,845,359 shares of our Class A
Common Stock at a weighted average share price of $7.18, of which
483,302 shares were held in escrow (and thus not reported as
issued and outstanding) for pre-acquisition contingencies.
As of October 31, 2000, 47,619 of those shares held in escrow were
released. At the dates of the acquisition we loaned the acquired
entities approximately $85,000,000 to pay off their third
party debt. In addition, both the M & M and Goodman acquisitions provide
for other payments to be made generally dependent upon the achievement of
certain future operating and return objectives.
Both acquisitions were accounted for as a purchase with the
results of operations of the acquired entities included in our
consolidated financial statements as of the dates of acquisitions.
The purchase prices were allocated based on estimated fair values at the
dates of the acquisitions. An intangible asset equal to the excess
purchase prices over the fair values of net assets acquired of
$19,998,000 has been recorded in prepaid expenses and other assets
on the consolidated balance sheet; this amount is being amortized
on a straight-line basis over a period of ten years.
On August 28, 2000, we entered into an agreement and plan of
merger with Washington Homes, Inc. for a total purchase price of
approximately $84.0 million. The transaction is expected to close
January 2001, following the receipt of shareholder approvals and the
satisfaction of customary closing conditions. Under the terms of the
agreement, Washington Homes shareholders receive the equivalent
of 1.39 shares of Hovnanian Class A common stock or $10.08 in cash for
each share of Washington Homes common stock, subject to certain adjustments
and prorations as set out in the merger agreement. If the total amount of
cash elected by Washington Homes stockholders exceeds 49.9%, or if the
total amount of stock elected by Washington Homes stockholders exceeds
60% of the aggregate dollar value of the merger consideration, we will
adjust the forms of consideration to be received as set out in the
merger agreement.
On January 23, 2001 the shareholders of our Company and of
Washington Homes elected to ratify the merger, and as a result the
merger closed the same day.
16. UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION
Summarized quarterly financial information for the years ended
October 31, 2000 and 1999 is as follows:
Three Months Ended
-----------------------------------------
October July April January
31, 2000 31, 2000 30, 2000 31, 2000
-------- -------- -------- ---------
(In Thousands Except Per Share Data)
Revenues........................... $353,788 $284,982 $241,888 $257,149
Expenses........................... $324,456 $272,724 $236,436 $252,373
Income before income taxes......... $ 29,332 $ 12,258 $ 5,452 $ 4,776
State and Federal income tax....... $ 11,170 $ 4,167 $ 1.994 $ 1,324
Net Income......................... $ 18,162 $ 8,091 $ 3,458 $ 3,452
Per Share Data:
Basic:
Net Income....................... $ 0.85 $ 0.37 $ 0.16 $ 0.15
Weighted average number of
common shares outstanding...... 21,463 21,904 22,054 22,327
Assuming Dilution:
Net Income....................... $ 0.84 $ 0.37 $ 0.16 $ 0.15
Weighted average number of
common shares outstanding...... 21,704 21,949 22,111 22,413
Three Months Ended
-----------------------------------------
October July April January
31, 1999 31, 1999 30, 1999 31, 1999
-------- -------- -------- ---------
(In Thousands Except Per Share Data)
Revenues........................... $298,429 $236,286 $208,885 $203,120
Expenses........................... $284,529 $222,216 $196,416 $192,942
Income before income taxes and
extraordinary loss............... $ 13,900 $ 14,070 $ 12,469 $ 10,178
State and Federal income tax....... $ 5,015 $ 5,592 $ 5,017 $ 4,050
Extraordinary loss from extinguish-
ment of debt, net of income taxes $ (868)
Net Income......................... $ 8,885 $ 7,610 $ 7,452 $ 6,128
Per Share Data:
Basic:
Income per common share before
extraordinary loss............. $ 0.41 $ 0.40 $ 0.35 $ 0.28
Extraordinary loss............... $ (.04)
Net Income....................... $ 0.41 $ 0.36 $ 0.35 $ 0.28
Weighted average number of
common shares outstanding...... 21,726 20,979 21,266 21,512
Assuming Dilution:
Income per common share
before extraordinary loss...... $ 0.41 $ 0.40 $ 0.35 $ 0.28
Extraordinary loss............... $ (.04)
Net Income....................... $ 0.41 $ 0.36 $ 0.35 $ 0.28
Weighted average number of
common shares outstanding...... 21,902 21,206 21,488 21,725
17. FINANCIAL INFORMATION OF SUBSIDIARY ISSUER AND SUBSIDIARY GUARANTORS
Hovnanian Enterprises, Inc., the parent company (the "Parent")
is the issuer of publicly traded common stock. One of its wholly owned
subsidiaries, K. Hovnanian Enterprises, Inc., (the "Subsidiary Issuer")
was the issuer of certain Senior Notes on May 4, 1999 and October 2, 2000.
The Subsidiary Issuer acts as a finance and management entity that
as of October 31, 2000 had issued and outstanding $100,000,000 subordinated
notes, $300,000,000 senior notes and a revolving credit agreement with an
outstanding balance of zero. The subordinated notes, senior notes and the
revolving credit agreement are fully and unconditionally guaranteed by
the Parent.
Each of the wholly owned subsidiaries of the Parent (collectively the
"Guarantor Subsidiaries"), with the exception of four subsidiaries formerly
engaged in the issuance of collateralized mortgage obligations, a mortgage
lending subsidiary, a subsidiary holding and licensing the "K. Hovnanian" trade
name and a subsidiary engaged in homebuilding activity in Poland (collectively
the "Non-guarantor Subsidiaries"), have guaranteed fully and unconditionally,
on a joint and several basis, the obligation to pay principal and interest
under the senior notes and revolving credit agreement of the Subsidiary Issuer.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries we have included the accompanying consolidated
condensed financialstatements. Management does not believe that separate
financial statements of the Guarantor Subsidiaries are material to investors.
Therefore, separate financial statements and other disclosures concerning the
Guarantor Subsidiaries are not presented.
The following consolidating condensed financial information presents the
results of operations, financial position and cash flows of (i) the Parent (ii)
the Subsidiary Issuer (iii) the Guarantor Subsidiaries of the Parent (iv) the
Non-guarantor Subsidiaries of the Parent and (v) the eliminations to arrive
at the information for Hovnanian Enterprises, Inc. on a consolidated basis.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ (63) $ 76,648 $ 717,484 $ 8,002 $ $ 802,071
Financial Services and CMO......... 994 70,476 71,470
Income Taxes (Payables)Receivables. (4,585) (5,873) 12,567 (2,109)
Investments in and amounts due to
and from consolidated
subsidiaries..................... 268,007 353,115 (473,872) 577 (147,827)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$263,359 $ 423,890 $ 257,173 $ 76,946 $(147,827) $ 873,541
======== ========== ========== ============ ========== ==========
Liabilities
Homebuilding.......................$ $ 11,533 $ 122,807 $ 1,060 $ $ 135,400
Financial Services and CMO......... 457 61,114 61,571
Notes Payable...................... 409,041 98 409,139
Income Taxes Payable............... 4,072 4,072
Stockholders' Equity............... 263,359 3,316 129,739 14,772 (147,827) 263,359
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$263,359 $ 423,890 $ 257,173 $ 76,946 $(147,827) $ 873,541
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 1999
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ 53 $ 34,735 $ 630,074 $ 4,109 $ $ 668,971
Financial Services and CMO......... (4,807) 46,974 42,167
Income Taxes (Payables)Receivables. (4,303) (374) 8,562 (2,162) 1,723
Investments in and amounts due to
and from consolidated
subsidiaries..................... 240,676 304,811 (305,942) 2,252 (241,797)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$236,426 $ 339,172 $ 327,887 $ 51,173 $(241,797) $ 712,861
======== ========== ========== ============ ========== ==========
Liabilities
Homebuilding.......................$ $ 7,060 $ 102,282 $ 363 $ $ 109,705
Financial Services and CMO......... 495 34,456 34,951
Notes Payable...................... 331,491 288 331,779
Stockholders' Equity............... 236,426 621 224,822 16,354 (241,797) 236,426
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$236,426 $ 339,172 $ 327,887 $ 51,173 $(241,797) $ 712,861
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF INCOME
TWELVE MONTHS ENDED OCTOBER 31, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 391 $1,114,421 $ 21,397 $ (17,726) $1,118,483
Financial Services and CMO...... 6,028 13,296 19,324
Intercompany Charges............ 82,051 34,505 (116,556)
Equity In Pretax Income of
Consolidated Subsidiaries..... 51,818 (51,818)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................$51,818 $ 82,442 $1,154,954 $ 34,693 $ (186,100) $1,137,807
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding.................... 66,232 1,096,455 2,831 (99,279) 1,066,239
Financial Services and CMO...... 4,591 15,426 (267) 19,750
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................ 66,232 1,101,046 18,257 (99,546) 1,085,989
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes. 51,818 16,210 53,908 16,436 (86,554) 51,818
State and Federal Income Taxes.... 18,655 6,616 18,438 5,757 (30,811) 18,655
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss).................$33,163 $ 9,594 $ 35,470 $ 10,679 $ (55,743) $ 33,163
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF INCOME
TWELVE MONTHS ENDED OCTOBER 31, 1999
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ (159) $ 1,120 $ 922,639 $ 22,767 $ (20,405) $ 925,962
Financial Services and CMO....... 3,561 17,197 20,758
Intercompany Charges............. 91,695 72 (91,767)
Equity In Pretax Income of
Consolidated Subsidiaries...... 50,776 (50,776)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 50,617 92,815 926,272 39,964 (162,948) 946,720
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 90,111 866,042 2,248 (81,997) 876,404
Financial Services and CMO....... 2,757 17,370 (428) 19,699
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 90,111 868,799 19,618 (82,425) 896,103
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 50,617 2,704 57,473 20,346 (80,523) 50,617
State and Federal Income Taxes..... 19,674 917 21,453 7,771 (30,141) 19,674
Extraordinary Loss................. (868) (868) 868 (868)
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$30,075 $ 919 $ 36,020 $ 12,575 $ (49,514) $ 30,075
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF INCOME
TWELVE MONTHS ENDED OCTOBER 31, 1998
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 1,441 $ 909,845 $ 26,210 $ (19,548) $ 917,948
Financial Services and CMO....... 3,817 15,964 19,781
Intercompany Charges............. 84,166 3,844 (88,010)
Equity In Pretax Income of
Consolidated Subsidiaries...... 41,292 (41,292)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 41,292 85,607 917,506 42,174 (148,850) 937,729
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 84,040 869,364 6,748 (81,397) 878,755
Financial Services and CMO....... 3,049 14,837 (204) 17,682
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 84,040 872,413 21,585 (81,601) 896,437
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 41,292 1,567 45,093 20,589 (67,249) 41,292
State and Federal Income Taxes..... 15,141 (64) 16,315 7,975 (24,226) 15,141
Extraordinary Loss................. (748) (748) 748 (748)
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$25,403 $ 883 $ 28,778 $ 12,614 $ (42,275) $ 25,403
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED OCTOBER 31, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 33,163 $ 9,594 $ 35,470 $ 10,679 $ (55,743) $ 33,163
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 751 80,742 (196,014) (35,030) 55,743 (93,808)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 33,914 90,336 (160,544) (24,351) (60,645)
Net Cash Provided By (Used In)
Investing Activities............... (231) (13,262) (4,433) (9) (17,935)
Net Cash Provided By (Used In)
Financing Activities............... (6,461) 76,305 6,864 25,760 102,468
Intercompany Investing and Financing
Activities - Net................... (27,331) (130,355) 156,011 1,675
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease).............. (109) 23,024 (2,102) 3,075 23,888
In Cash and Cash Equivalents Balance,
Beginning of Period................ 46 (5,395) 24,608 106 19,365
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ (63) $ 17,629 $ 22,506 $ 3,181 $ 43,253
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED OCTOBER 31, 1999
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 30,075 $ 919 $ 36,020 $ 12,575 $ (49,514) $ 30,075
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 15,774 311 (123,977) 63,782 49,514 5,404
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 45,849 1,230 (87,957) 76,357 35,479
Net Cash Provided By (Used In)
Investing Activities............... (9,478) 1,868 480 (7,130)
Net Cash Provided By (Used In)
Financing Activities............... (6,291) 106,676 (40,326) (84,597) (24,538)
Intercompany Investing and Financing
Activities - Net................... (39,526) (94,163) 128,000 5,689
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease).............. 32 4,265 1,585 (2,071) 3,811
In Cash and Cash Equivalents Balance,
Beginning of Period................ 14 (9,660) 23,023 2,177 15,554
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 46 $ (5,395) $ 24,608 $ 106 $ 19,365
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED OCTOBER 31, 1998
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 25,403 $ 883 $ 28,778 $ 12,614 $ (42,275) $ 25,403
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities... (22,675) 1,708 33,340 (14,997) 42,275 39,651
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 2,728 2,591 62,118 (2,383) 65,054
Net Cash Provided By (Used In)
Investing Activities............... (1,789) 26,090 (601) 23,700
Net Cash Provided By (Used In)
Financing Activities............... (2,773) (71,551) (26,687) 16,498 (84,513)
Intercompany Investing and Financing
Activities - Net................... 49 66,574 (52,355) (14,268)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease).............. 4 (4,175) 9,166 (754) 4,241
In Cash and Cash Equivalents Balance,
Beginning of Period................ 10 (5,485) 13,857 2,931 11,313
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 14 $ (9,660) $ 23,023 $ 2,177 $ 15,554
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