UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10Q
[ X ] Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For quarterly period ended JULY 31, 2001 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Commission file number 1-8551
Hovnanian Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-1851059
(State or other jurisdiction or (I.R.S. Employer
incorporation or organization) Identification No.)
l0 Highway 35, P.O. Box 500, Red Bank, N. J. 07701
(Address of principal executive offices)
732-747-7800
(Registrant's telephone number, including area code)
Same
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Sections l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 20,239,324 Class A Common
Shares and 7,483,926 Class B Common Shares were outstanding as of September 7,
2001
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at July 31,
2001 (unaudited) and October 31, 2000 3
Consolidated Statements of Income for the three
and nine months ended July 31, 2001 and 2000
(unaudited) 5
Consolidated Statements of Stockholders' Equity
for the nine months ended July 31, 2001
(unaudited) 6
Consolidated Statements of Cash Flows
for the nine months ended July 31, 2001
and 2000 (unaudited) 7
Notes to Consolidated Financial
Statements (unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 17
PART II. Other Information
Item 6(a). Exhibit 10(a) - $440,000,000 Revolving Credit
Agreement
Item 6(c). No reports on Form 8K have been filed during
the quarter for which this report is filed.
Signatures 27
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
July 31, October 31,
ASSETS 2001 2000
----------- -----------
(unaudited)
Homebuilding:
Cash and cash equivalents....................... $ 52,655 $ 40,131
----------- -----------
Inventories - At the lower of cost or fair
value:
Sold and unsold homes and lots under
development.................................. 633,772 525,116
Land and land options held for future
development or sale......................... 147,132 89,867
----------- -----------
Total Inventories........................... 780,904 614,983
----------- -----------
Receivables, deposits, and notes................ 43,350 36,190
----------- -----------
Property, plant, and equipment - net............ 32,692 35,594
----------- -----------
Senior residential rental properties - net....... 9,986 10,276
----------- -----------
Prepaid expenses and other assets............... 82,714 64,897
----------- -----------
Total Homebuilding.......................... 1,002,301 802,071
----------- -----------
Financial Services:
Cash and cash equivalents....................... 8,657 3,122
Mortgage loans held for sale.................... 106,656 61,860
Other assets.................................... 3,027 2,145
----------- -----------
Total Financial Services.................... 118,340 67,127
----------- -----------
Collateralized Mortgage Financing:
Collateral for bonds payable.................... 3,530 4,145
Other assets.................................... 201 198
----------- -----------
Total Collateralized Mortgage Financing..... 3,731 4,343
----------- -----------
Total Assets...................................... $1,124,372 $ 873,541
=========== ===========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
July 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
----------- -----------
(unaudited)
Homebuilding:
Nonrecourse land mortgages........................ $ 11,111 $ 18,166
Accounts payable and other liabilities............ 122,163 82,205
Customers' deposits............................... 41,833 31,475
Nonrecourse mortgages secured by operating
properties...................................... 3,424 3,554
----------- -----------
Total Homebuilding............................ 178,531 135,400
----------- -----------
Financial Services:
Accounts payable and other liabilities............ 2,820 2,078
Mortgage warehouse line of credit................. 97,946 56,486
----------- -----------
Total Financial Services...................... 100,766 58,564
----------- -----------
Collateralized Mortgage Financing:
Bonds collateralized by mortgages receivable...... 2,548 3,007
----------- -----------
Total Collateralized Mortgage Financing....... 2,548 3,007
----------- -----------
Notes Payable:
Revolving credit agreement........................ 78,925
Senior Notes...................................... 296,701 296,430
Subordinated notes................................ 99,747 100,000
Accrued interest.................................. 11,210 12,709
----------- -----------
Total Notes Payable........................... 486,583 409,139
----------- -----------
Income Taxes Payable................................ 877 4,072
----------- -----------
Total Liabilities............................. 769,305 610,182
----------- -----------
Stockholders' Equity:
Preferred Stock,$.01 par value-authorized 100,000
shares; none issued
Common Stock,Class A,$.01 par value-authorized
87,000,000 shares; issued 24,332,696 shares
(including 3,904,521 shares in July 2001 and
3,736,921 in October 2000 held in Treasury)..... 243 173
Common Stock,Class B,$.01 par value-authorized
13,000,000 shares; issued 7,831,649 shares
(including 345,874 shares in July 2001 and
October 2000 held in Treasury).................. 78 79
Paid in Capital................................... 98,164 46,086
Retained Earnings................................. 288,415 246,420
Deferred Compensation............................. (167)
Treasury Stock - at cost.......................... (31,666) (29,399)
----------- -----------
Total Stockholders' Equity.................... 355,067 263,359
----------- -----------
Total Liabilities and Stockholders' Equity.......... $1,124,372 $ 873,541
=========== ===========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- ---------------------
2001 2000 2001 2000
--------- --------- ---------- ----------
Revenues:
Homebuilding:
Sale of homes...................... $497,291 $278,004 $1,173,997 $763,177
Land sales and other revenues...... 3,159 2,208 11,161 7,651
--------- --------- ---------- ----------
Total Homebuilding............... 500,450 280,212 1,185,158 770,828
Financial Services................... 9,395 4,664 21,514 12,859
Collateralized Mortgage Financing.... 87 106 255 332
--------- --------- ---------- ----------
Total Revenues................... 509,932 284,982 1,206,927 784,019
--------- --------- ---------- ----------
Expenses:
Homebuilding:
Cost of sales...................... 399,283 220,967 940,647 614,574
Selling, general and administrative 38,808 25,803 101,908 76,495
Inventory impairment loss.......... 412 1,003 1,350 1,517
--------- --------- ---------- ----------
Total Homebuilding............... 438,503 247,773 1,043,905 692,586
--------- --------- ---------- ----------
Financial Services................... 5,957 4,555 14,319 13,999
Collateralized Mortgage Financing.... 93 92 227 283
Corporate General and Administrative. 10,647 10,000 29,926 24,361
Interest............................. 13,485 8,802 36,939 24,256
Other Operations..................... 5,462 1,502 9,219 6,048
Restructuring Charges................ 500 2,980
--------- --------- ---------- ----------
Total Expenses................... 474,647 272,724 1,137,515 761,533
--------- --------- ---------- ----------
Income Before Income Taxes............. 35,285 12,258 69,412 22,486
--------- --------- ---------- ----------
State and Federal Income Taxes:
State................................ 2,246 (36) 3,673 423
Federal.............................. 12,027 4,203 23,744 7,062
--------- --------- ---------- ----------
Total Taxes........................ 14,273 4,167 27,417 7,485
--------- --------- ---------- ----------
Net Income............................. $ 21,012 $ 8,091 $ 41,995 $ 15,001
========= ========= ========== ==========
Per Share Data:
Basic:
Income Per Common Share.............. $ 0.74 $ 0.37 $ 1.60 $ 0.68
Weighted average number of common
shares outstanding................. 28,375 21,904 26,312 22,089
Assuming dilution:
Income per common share............ $ 0.71 $ 0.37 $ 1.54 $ 0.68
Weighted average number of common
shares outstanding.................. 29,623 21,949 27,309 22,158
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 Deferred Treasury
Outstanding Amount Outstanding Amount Capital Earnings Comp Stock Total
----------- ------ ----------- ------ ------- -------- -------- -------- --------
Balance, October 31, 2000. 13,572,448 $ 173 7,633,029 $ 79 $46,086 $246,420 $ $(29,399) $263,359
Acquisitions.............. 6,352,900 64 48,868 48,932
Sale of common stock under
Employee stock option plan 471,023 4 2,731 2,735
Stock bonus plan.......... 52,150 1 479 480
Conversion of Class B to
Class A Common Stock.... 147,254 1 (147,254) (1)
Deferred compensation..... (167) (167)
Treasury stock purchases.. (167,600) (2,267) (2,267)
Net Income................ 41,995 41,995
----------- ------ ----------- ------ ------- -------- -------- -------- --------
Balance, July 31, 2001.... 20,428,175 $ 243 7,485,775 $ 78 $98,164 $288,415 $ (167) $(31,666) $355,067
(Unaudited) =========== ====== =========== ====== ======= ======== ======== ======== ========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
July 31,
---------------------
2001 2000
---------- ----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 41,995 $ 15,001
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation.................................... 5,901 4,933
Amortization of goodwill........................ 2,731 1,824
(Gain) on sale and retirement of property
and assets.................................... (248) (231)
Deferred income taxes........................... (597) 919
Impairment losses............................... 1,350 1,517
Decrease (increase) in assets:
Mortgage notes receivable..................... (44,163) (11,227)
Receivables, prepaids and other assets........ (7,602) (18,546)
Inventories................................... (26,482) (90,713)
Increase (decrease) in liabilities:
State and Federal income taxes................ 2,932 (3,471)
Tax effect from exercise of stock options..... (566)
Customers' deposits........................... 7,462 11,902
Interest and other accrued liabilities........ 2,915 (7,272)
Post development completion costs............. 4,440 (1,028)
Accounts payable.............................. 7,639 3,191
---------- ----------
Net cash (used in) operating activities..... (2,293) (93,201)
---------- ----------
Cash Flows From Investing Activities:
Net Proceeds from sale of property and assets....... 3,127 1,019
Purchase of property,equipment and other fixed
assets............................................ (3,439) (13,238)
Acquisition of homebuilding companies............... (37,741) (488)
Investment in and advances to unconsolidated
affiliates........................................ (462)
---------- ----------
Net cash (used in) investing activities..... (38,515) (12,707)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 1,153,357 988,015
Principal payments on mortgages and notes...........(1,095,433) (876,122)
Purchase of treasury stock.......................... (2,267) (5,036)
Proceeds from sale of stock and employee stock plan. 3,210 494
---------- ----------
Net cash provided by financing activities... 58,867 107,351
---------- ----------
Net Increase In Cash and Cash Equivalents............. 18,059 1,443
Cash and Cash Equivalents Balance,
Beginning Of Period................................. 43,253 19,365
---------- ----------
Cash and Cash Equivalents Balance, End Of Period...... $ 61,312 $ 20,808
========== ==========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. The consolidated financial statements, except for the October 31,
2000 consolidated balance sheet, have been prepared without audit. In the
opinion of management, all adjustments for interim periods presented have
been made, which include only normal recurring accruals and deferrals
necessary for a fair presentation of consolidated financial position,
results of operations, and changes in cash flows. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates and these differences could have a significant impact on
the financial statements. Results for the interim periods are not
necessarily indicative of the results which might be expected for a
full year.
2. Interest costs incurred, expensed and capitalized were:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Dollars in Thousands)
Interest Capitalized at
Beginning of Period.........$ 29,749 $ 23,632 $ 25,694 $ 21,966
Plus Acquired Entity Interest. 3,604
Plus Interest Incurred(1)(3).. 11,903 10,779 35,808 28,093
Less Interest Expensed(3)..... 13,485 8,802 36,939 24,256
Less Impairment Write-off..... 194
-------- -------- -------- --------
Interest Capitalized at
End of Period (2) (3)...... $ 28,167 $ 25,609 $ 28,167 $ 25,609
======== ======== ======== ========
(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 and
when land is not under active development.
3. Homebuilding accumulated depreciation at July 31, 2001 and October
31, 2000 amounted to $19,698,000 and $22,164,000, respectively. Rental
property accumulated depreciation at July 31, 2001 and October 31, 2000
amounted to $2,589,000 and $2,294,000, respectively.
4. 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 three months ended
July 31, 2001 we recorded a $131,000 impairment loss on land in
North Carolina. In addition, from time to time, we will write off
certain residential land options including approval, engineering and
capitalized interest costs for land management decided not to purchase.
During the three and nine months ended July 31, 2001 we wrote off
costs in New Jersey, North Carolina, Metro D. C., and California
amounting to $281,000 and $1,219,000, respectively. Costs in the
amount of $1,003,000 and $1,517,000 were written off during the
three and nine months ended July 31, 2000, respectively, in New
Jersey, North Carolina, and California. Residential
inventory FAS 121 impairment losses and option write offs are reported
in the Consolidated Statements of Income as "Homebuilding-Inventory
Impairment Loss."
5. 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. As of July 31, 2001 and October 31, 2000,
respectively, we are obligated under various performance letters of
credit amounting to $8,845,000 and $4,284,000.
6. Our credit facility was extended on August 28, 2001. Pursuant
to the Extension, our credit line increased to $440,000,000 and was
extended through August 2002. Interest is payable monthly and at
various rates of either the prime rate plus .40% or Libor plus 1.85%.
7. On January 23, 2001 we merged with Washington Homes, Inc. for a
total purchase price of $87.4 million, of which $38.5 million was paid in
cash and 6,352,900 shares of our Class A Common Stock were issued.
At the date of acquisition we loaned Washington Homes, Inc. approximately
$57,000,000 to pay off their third party debt.
The merger with Washington Homes, Inc. was accounted for as a purchase
with the results of operations of the merged entity included in our
consolidated financial statements as of the date of the merger. The
purchase price was allocated based on estimated fair value at the date
of the merger. Such allocation is preliminary and is pending
management's assessment of the deferred tax assets and liabilities
acquired. An intangible asset equal to the excess purchase price
over the fair value of the net assets of $12,794,000 is recorded
in prepaid expenses and other assets on the consolidated balance
sheet. This amount is being amortized on a straight line basis
over a period of ten years.
The following unaudited pro forma financial data for the three and
nine months ended July 31, 2001 and 2000 has been prepared as if the
merger with Washington Homes, Inc. on January 23, 2001 had occurred
on November 1, 1999. Unaudited pro forma financial data is presented
for information purposes only and may not be indicative of the actual
amounts of the Company had the events occurred on the dates listed
above, nor does it purport to represent future periods (in thousands).
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues......................$ 509,932 $ 450,515 $1,276,665 $1,162,240
Expenses...................... 474,647 429,495 1,206,750 1,122,644
Income Taxes.................. 14,273 7,730 26,875 14,649
---------- ---------- ---------- ----------
Net Income....................$ 21,012 $ 13,290 $ 43,040 $ 24,947
========== ========== ========== ==========
Diluted Net Income Per
Common Share................$ 0.71 $ 0.47 $ 1.47 $ 0.87
========== ========== ========== ==========
8. Restructuring Charges - Restructuring charges are estimated expenses
associated with the merger of our operations with those of Washington Homes,
Inc. on January 23, 2001. Under our merger plan, administration offices in
Maryland, Virginia, and North Carolina will be either closed, relocated, or
combined. The merger of administration offices was completed by July 31,
2001. Expenses were accrued for salaries, severance and outplacement costs
for the involuntary termination of associates, costs to close and/or
relocate existing administrative offices, and lost rent and leasehold
improvements. We estimate that approximately 58 associates will be
terminated. We have accrued approximately $1.9 million to cover
termination and related costs. Associates being terminated are
primarily administrative. In addition, we accrued approximately
$1.1 million to cover closing and/or relocating various administrative
offices in these three states. At July 31, 2001, $0.5 million
of the $1.1 million was accrued because the subleasing of excess
office space was estimated to take an additional six months. At
July 31, 2001 $1.2 million has been charged against termination
costs relating to the termination of 52 associates and $0.3 million
has been charged against closing and relocation costs.
9. Recent Accounting Pronouncements - Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998. This statement addresses the
accounting for and disclosure of derivative instruments, including
derivative instruments imbedded in other contracts, and hedging
activities. The statement requires us to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the
fair value of derivatives are either offset against the change in fair
value of assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's
change is recognized in earnings. The impact of the adoption of
the new statement as of November 1, 2000 did not have a significant
impact on our earnings or financial position. The effect of FAS 133
is immaterial to our financial statements.
We manage our interest rate risk on mortgage loans held for
sale and our estimated future commitments to originate and close
mortgage loans at fixed prices through the use of best-efforts
whole loan delivery commitments. These instruments are classified
as derivatives and generally have maturities of three months or less.
Accordingly, gains and losses are recognized in current earnings
during the period of change.
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001.
Use of the pooling-of-interests method is no longer permitted.
SFAS No. 141 also includes guidance on the initial recognition
and measurement of goodwill and other intangible assets acquired in
a business combination that is completed after June 30, 2001.
SFAS No. 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must be
reviewed annually (or more frequently under certain conditions) for
impairment in accordance with this statement. This impairment test
uses a fair value approach rather than the undiscounted cash flows
approach previously required by SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." The amortization of goodwill included in other expenses
will also no longer be recorded upon adoption of the new rules.
Intangible assets that do not have indefinite lives will continue to
be amortized over their useful lives and reviewed for impairment in
accordance with SFAS No. 121. We are required to adopt SFAS No. 142
no later than November 1, 2002. We are currently evaluating our
intangible assets in relation to the provisions of SFAS No. 142 to
determine the impact, if any, the adoption of SFAS No. 142 will
have on our results of operations or
financial position.
10. 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 July 31, 2001 had issued and outstanding approximately $99,747,000
of subordinated notes, $300,000,000 senior notes and a revolving credit
agreement with an outstanding balance of $78,925,000. 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
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 financial statements. Management does not
believe that separate financial statements of the Guarantor
Subsidiaries are material to investors. Therefore, separate
financial statement and other disclosures concerning the
Guarantor Subsidiaries are not presented.
The following consolidating condensed financial information present
the results of operations, financial position and cash flows of (i)
the Parent (ii) the Subsidiary Issuer (iii) the Guarantor Subsidiaries
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 - UNAUDITED
CONSOLIDATING CONDENSED BALANCE SHEET
JULY 31, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
ASSETS
Homebuilding...................... $ 10 $ 52,980 $ 940,159 $ 9,152 $ $1,002,301
Financial Services and CMO........ 806 121,265 122,071
Income Taxes (Payables)Receivables 377 (5,311) 6,909 (1,975)
Investments in and amounts due to
and from consolidated
subsidiaries.................... 354,680 450,572 (727,939) 1,632 (78,945)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets...................... $355,067 $ 498,241 $ 219,935 $ 130,074 $ (78,945) $1,124,372
======== ========== ========== ============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding...................... $ $ 11,205 $ 166,914 $ 412 $ $ 178,531
Financial Services and CMO........ 459 102,855 103,314
Notes Payable..................... 486,397 186 486,583
Income Taxes Payable.............. 877 877
Stockholders' Equity.............. 355,067 639 51,499 26,807 (78,945) 355,067
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity.......................... $355,067 $ 498,241 $ 219,935 $ 130,074 $ (78,945) $1,124,372
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ (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 - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 17 $ 499,539 $ 9,837 $ (8,943) $ 500,450
Financial Services and CMO....... 4,175 5,307 9,482
Intercompany Charges............. 31,456 2,665 (34,121)
Equity In Pretax Income of
Consolidated Subsidiaries...... 35,285 (35,285)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ $35,285 $ 31,473 $ 506,379 $ 15,144 $ (78,349) $ 509,932
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 30,857 476,703 1,033 (39,996) 468,597
Financial Services and CMO....... 2,574 4,280 (804) 6,050
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 30,857 479,277 5,313 (40,800) 474,647
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 35,285 616 27,102 9,831 (37,549) 35,285
State and Federal Income Taxes..... 14,273 257 11,139 3,699 (15,095) 14,273
------- ---------- ---------- ------------ ---------- ----------
Net Income ....................... $21,012 $ 359 $ 15,963 $ 6,132 $ (22,454) $ 21,012
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 129 $ 279,175 $ 7,045 $ (6,137) $ 280,212
Financial Services and CMO....... 1,667 3,103 4,770
Intercompany Charges............. 28,607 (716) (27,891)
Equity In Pretax Income of
Consolidated Subsidiaries...... 12,258 (12,258)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ $12,258 $ 28,736 $ 280,126 $ 10,148 $ (46,286) $ 284,982
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 28,293 264,886 191 (25,293) 268,077
Financial Services and CMO....... 1,233 3,482 (68) 4,647
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 28,293 266,119 3,673 (25,361) 272,724
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 12,258 443 14,007 6,475 (20,925) 12,258
State and Federal Income Taxes..... 4,167 277 4,626 2,298 (7,201) 4,167
------- ---------- ---------- ------------ ---------- ----------
Net Income ....................... $ 8,091 $ 166 $ 9,381 $ 4,177 $ (13,724) $ 8,091
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 446 $1,181,126 $ 20,369 $ (16,783) $1,185,158
Financial Services and CMO....... 9,410 12,359 21,769
Intercompany Charges............. 91,675 3,098 (94,773)
Equity In Pretax Income of
Consolidated Subsidiaries...... 69,412 (69,412)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ $69,412 $ 92,121 $1,193,634 $ 32,728 $(180,968) $1,206,927
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 90,354 1,137,309 3,422 (108,116) 1,122,969
Financial Services and CMO....... 5,962 9,582 (998) 14,546
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 90,354 1,143,271 13,004 (109,114) 1,137,515
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 69,412 1,767 50,363 19,724 (71,854) 69,412
State and Federal Income Taxes..... 27,417 774 20,020 7,510 (28,304) 27,417
------- ---------- ---------- ------------ ---------- ----------
Net Income.........................$41,995 $ 993 $ 30,343 $ 12,214 $ (43,550) $ 41,995
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 352 $ 768,247 $ 13,487 $ (11,258) $ 770,828
Financial Services and CMO....... 4,418 8,773 13,191
Intercompany Charges............. 76,513 3,282 (79,795)
Equity In Pretax Income of
Consolidated Subsidiaries...... 22,486 (22,486)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ $22,486 $ 76,865 $ 775,947 $ 22,260 $(113,539) $ 784,019
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 75,853 735,145 864 (64,611) 747,251
Financial Services and CMO....... 3,543 11,026 (287) 14,282
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 75,853 738,688 11,890 (64,898) 761,533
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 22,486 1,012 37,259 10,370 (48,641) 22,486
State and Federal Income Taxes..... 7,485 516 12,459 3,664 (16,639) 7,485
------- ---------- ---------- ------------ ---------- ----------
Net Income.........................$15,001 $ 496 $ 24,800 $ 6,706 $ (32,002) $ 15,001
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 41,995 $ 993 $ 30,343 $ 12,214 $ (43,550) $ 41,995
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 95,870 88,304 (224,079) (47,933) 43,550 (44,288)
-------- --------- ---------- ------------ ---------- ----------
Net Cash (Used In) Provided By
Operating Activities........... 137,865 89,297 (193,736) (35,719) (2,293)
Net Cash (Used In)
Investing Activities............... (48,453) (2,657) 11,697 898 (38,515)
Net Cash Provided By(Used In)
Financing Activities............... (1,667) 78,943 (59,409) 41,000 58,867
Intercompany Investing and Financing
Activities - Net................... (87,672) (190,125) 278,852 (1,055)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash and
Cash Equivalents................... 73 (24,542) 37,404 5,124 18,059
Cash and Cash Equivalents Balance,
Beginning of Period................ (63) 17,629 22,506 3,181 43,253
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 10 $ (6,913) $ 59,910 $ 8,305 $ $ 61,312
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JULY 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.........................$ 15,001 $ 496 $ 24,800 $ 6,706 $ (32,002) $ 15,001
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... (4,328) 67,821 (182,850) (20,847) 32,002 (108,202)
-------- --------- ---------- ------------ ---------- ----------
Net Cash (Used In) Provided By
Operating Activities........... 10,673 68,317 (158,050) (14,141) (93,201)
Net Cash (Used In)
Investing Activities............... (6) (11,020) (1,679) (2) (12,707)
Net Cash Provided By(Used In)
Financing Activities............... (5,036) 96,150 6,612 9,625 107,351
Intercompany Investing and Financing
Activities - Net................... (5,844) (147,594) 147,682 5,756
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash and
Cash Equivalents................... (213) 5,853 (5,435) 1,238 1,443
Cash and Cash Equivalents Balance,
Beginning of Period................ 46 (5,395) 24,608 106 19,365
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ (167) $ 458 $ 19,173 $ 1,344 $ $ 20,808
======== ========= ========== ============ ========== ==========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Our uses for cash during the nine months ended July 31, 2001 were
for operating expenses, seasonal increases in housing inventories,
construction, income taxes, interest, and the merger with Washington
Homes, Inc. We provided for our cash requirements from housing and
land sales, the revolving credit facility, financial service revenues,
and other revenues. We believe that these sources of cash are
sufficient to finance our working capital requirements and other needs.
In July 2001 the Board of Directors authorized a revision to our
stock repurchase program to purchase up to 2 million shares of Class A
Common Stock. This authorization expires on July 2003. As of July 31,
2001, 167,600 shares have been repurchased under this program.
Our bank borrowings are made pursuant to a revolving credit
agreement(the "Agreement") that provides a revolving credit line of
up to $440,000,000(the "Revolving Credit Facility") through August
2002. Interest is payable monthly and at various rates of either
prime plus .40% or Libor plus 1.85%. We believe that we will be
able either to extend the Agreement beyond August 2002 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 our covenants under the Agreement.
As of July 31, 2001, borrowings under the agreement were $78,925,000.
The subordinated indebtedness issued by us and outstanding as of
July 31, 2001 was $99,747,000 9 3/4% Subordinated Notes due June 2005.
The senior indebtedness issued by us and outstanding as of July 31, 2001
was $150,000,000 (issued at a discounted amount of $146,400,000), 10 1/2
Senior Notes due October 2007, and $150,000,000 9 1/8% Senior Notes due
May 2009.
Our mortgage banking subsidiary borrows under a bank warehousing
arrangement. 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 July 31, 2001, the aggregate principal amount
of all such borrowings was $100,494,000.
Total inventory increased $165,900,000 during the nine months ended
July 31, 2001. The increase was primarily due to the merger with
Washington Homes, Inc. In addition, inventory increased in most of our
housing markets. Substantially all homes under construction or completed
and included in inventory at July 31, 2001 are expected to be closed during
the next twelve months. Most inventory completed or under development is
financed through our revolving credit facility and subordinated indebtedness.
The following table summarizes housing lots in our active selling
communities under development (including Poland):
Active Contracted Active Proposed Grand Total
Active Selling Not Lots Developable Lots
Communities Lots Delivered Available Lots Available
----------- ------- ---------- --------- ----------- -----------
July 31, 2001:
Northeast Region.. 25 3,864 1,286 2,578 12,531 15,109
North Carolina.... 55 4,205 669 3,536 2,192 5,728
Metro D.C......... 33 2,818 866 1,952 5,003 6,955
California........ 11 1,502 349 1,153 584 1,737
Texas............. 40 1,891 372 1,519 299 1,818
Mid South......... 18 1,343 112 1,231 -- 1,231
Other............. 1 72 18 54 2,374 2,428
----------- ------- ---------- ---------- ---------- -----------
183 15,695 3,672 12,023 22,983 35,006
=========== ======= ========== ========== ========== ===========
Owned.......... 7,428 3,099 4,329 4,451 8,780
Optioned....... 8,267 573 7,694 18,532 26,226
------- ---------- ---------- ---------- -----------
Total........ 15,695 3,672 12,023 22,983 35,006
======= ========== ========== ========== ===========
Active Contracted Active Proposed Grand Total
Active Selling Not Lots Developable Lots
Communities Lots Delivered Available Lots Available
----------- ------- ---------- --------- ----------- -----------
October 31, 2000:
Northeast Region.. 28 4,941 1,149 3,792 11,016 14,808
North Carolina.... 29 2,331 215 2,116 400 2,516
Metro D.C......... 6 708 215 493 4,875 5,368
California........ 12 2,015 151 1,864 576 2,440
Texas............. 44 1,628 282 1,346 752 2,098
Other............. 1 186 84 102 2,374 2,476
----------- ------- ---------- ---------- ---------- -----------
120 11,809 2,096 9,713 19,993 29,706
=========== ======= ========== ========== ========== ===========
Owned.......... 6,236 1,963 4,273 3,776 8,049
Optioned....... 5,573 133 5,440 16,217 21,657
------- ---------- ---------- ---------- -----------
Total........ 11,809 2,096 9,713 19,993 29,706
======= ========== ========== ========== ===========
The following table summarizes our started or completed unsold homes in
active, substantially complete and suspended communities:
July 31, October 31,
2001 2000
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 74 46 120 133 48 181
North Carolina...... 216 40 256 102 31 133
Metro D.C........... 50 30 80 6 7 13
California.......... 54 18 72 136 32 168
Texas............... 234 16 250 238 8 246
Mid South........... 53 18 71 -- -- --
Other............... 14 -- 14 58 -- 58
------ ------ ----- ------ ------ -----
Total 695 168 863 673 126 799
====== ====== ===== ====== ====== =====
Financial Services - Mortgage loans held for sale consist of residential
mortgages receivable of which $106,450,000 and $61,549,000 at July 31, 2001 and
October 31, 2000, respectively, are being temporarily warehoused and awaiting
sale in the secondary mortgage market. The balance of such mortgages is being
held as an investment by us. We may incur risk with respect to mortgages that
are delinquent, but only to the extent the losses are not covered by mortgage
insurance or resale value of the house. Historically, we have incurred minimal
credit losses. Collateral Mortgage Financing - Collateral for bonds payable
consist of collateralized mortgages receivable which are pledged against non-
recourse collateralized mortgage obligations.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2001
COMPARED TO THE THREE AND NINE MONTHS ENDED JULY 31, 2000
Our operations consist primarily of residential housing development
and sales in our Northeast Region (comprising New Jersey, southern
New York State and eastern Pennsylvania), North Carolina, Metro D. C.
(northern Virginia and Maryland), southern California, Texas, and
the Mid South (Tennessee, Alabama, and Mississippi). Our Mid South
operations are the result of the merger with Washington Homes, Inc.
In addition, we provide financial services to our homebuilding
customers.
Important indicators of our future results are recently signed
contracts and home contract backlog for future deliveries. Our sales
contracts and homes in contract (using base sales prices) by market area
is set forth below:
Sales Contracts for the
Nine Months Ended Contract Backlog
July 31, as of July 31,
------------------------- ---------------------
2001 2000 2001 2000
----------- --------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Dollars.............$ 400,199 $398,815 $354,132 $357,359
Homes............... 1,483 1,506 1,286 1,308
North Carolina:
Dollars.............$ 211,007 $ 93,210 $125,823 $ 46,276
Homes............... 1,174 501 669 243
Metro D.C.:
Dollars.............$ 248,219 $ 62,052 $224,171 $ 50,107
Homes............... 984 241 866 205
California:
Dollars.............$ 220,961 $117,303 $118,981 $ 52,640
Homes............... 658 369 349 123
Texas:
Dollars.............$ 165,160 $141,209 $ 85,693 $ 61,272
Homes............... 781 693 372 286
Mid South:
Dollars.............$ 36,499 -- $ 18,725 --
Homes............... 239 -- 112 --
Other:
Dollars.............$ 1,578 $ 19,290 $ 1,009 $ 16,354
Homes............... 46 116 18 105
Totals:
Dollars.............$1,283,623 $831,879 $928,534 $584,008
Homes............... 5,365 3,426 3,672 2,270
Total Revenues:
Revenues for the three months ended July 31, 2001 increased $225.0
million or 79.0%, compared to the same period last year. This was the
result of a $219.3 million increase in revenues from the sale of homes,
a $1.0 million increase in land sales and other homebuilding revenues and
a $4.7 million increase in financial services revenues.
Revenues for the nine months ended July 31, 2001 increased $422.9
million or 53.9%, compared to the same period last year. This was the
result of a $410.8 million increase in revenues from the sale of homes,
a $3.5 million increase in land sales and other homebuilding revenues,
and a $8.7 million increase in financial services revenues. These
increases were partially offset by a $0.1 million decrease in collateralized
mortgage financing.
Homebuilding:
Revenues from the sale of homes increased $219.3 million or 79.0%
during the three months ended July 31, 2001, and increased $410.8 million
or 53.8% during the nine months ended July 31, 2001 compared to the same
periods last year. Revenues from sales of homes are recorded at the time
each home is delivered and title and possession have been transferred to
the buyer.
Information on homes delivered by market area is set forth below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- ---------------------
2001 2000 2001 2000
--------- -------- ---------- --------
(Dollars in Thousands)
Northeast Region:
Housing Revenues..... $156,366 $131,668 $ 406,692 $372,652
Homes Delivered...... 499 452 1,346 1,323
North Carolina:
Housing Revenues..... $ 85,887 $ 33,319 $ 178,142 $ 91,580
Homes Delivered...... 487 167 1,022 465
Metro D. C.:
Housing Revenues..... $109,535 $ 13,901 $ 221,343 $ 47,205
Homes Delivered...... 439 54 938 185
California:
Housing Revenues..... $ 61,830 $ 48,055 $ 171,483 $104,004
Homes Delivered...... 168 164 460 375
Texas:
Housing Revenues..... $ 62,360 $ 47,318 $ 146,604 $134,106
Homes Delivered...... 286 228 691 668
Mid South:
Housing Revenues..... $ 18,774 -- $ 33,697 --
Homes Delivered...... 123 -- 226 --
Other:
Housing Revenues..... $ 2,539 $ 3,743 $ 16,036 $ 13,630
Homes Delivered...... 19 21 112 61
Totals:
Housing Revenues..... $497,291 $278,004 $1,173,997 $763,177
Homes Delivered...... 2,021 1,086 4,795 3,077
The increase in housing revenues compared to the prior year was
primarily due to the merger with Washington Homes, Inc., an increase in
average sales prices in the Northeast Region, California, and Texas and
increased home sales in all major markets. Continued strong housing
demandin our major markets enabled us to increase home prices and
home sales.
Cost of sales includes expenses for housing and land and lot sales.
A breakout of such expenses for housing sales and housing gross margin
is set forth below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- --------------------
2001 2000 2001 2000
-------- -------- ---------- --------
(Dollars in Thousands)
Sale of Homes................ $497,291 $278,004 $1,173,997 $763,177
Cost of Sales................ 398,304 220,000 935,839 612,006
-------- -------- ---------- --------
Housing Gross Margin......... $ 98,987 $ 58,004 $ 238,158 $151,171
======== ======== ========== =========
Gross Margin Percentage...... 19.9% 20.9% 20.3% 19.8%
Cost of Sales expenses as a percentage of home sales revenues are
presented below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Sale of Homes................ 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of Sales:
Housing, land &
development costs.... 72.4 71.2 71.8 71.9
Commissions............ 2.3 2.2 2.3 2.3
Financing concessions.. 1.1 0.8 0.9 0.9
Overheads.............. 4.3 4.9 4.7 5.1
-------- -------- -------- --------
Total Cost of Sales.......... 80.1 79.1 79.7 80.2
-------- -------- -------- --------
Gross Margin................. 19.9% 20.9% 20.3% 19.8%
======== ======== ======== ========
We sell a variety of home types in various local communities, each
yielding a different gross margin. As a result, depending on the mix of both
communities and on home types delivered, consolidated quarterly gross margin
will fluctuate up or down and may not be representative of the consolidated
gross margin for the year. In addition, gross margin percentages are higher
in the Northeast Region compared to our other markets. For the three
months ended July 31, 2001 our gross margin percentage decreased 1.0%
compared to the same period last year. This decrease is due to
increased activity in Metro D. C., North Carolina, and added markets
in the Mid South that report lower margins. The increased activity
in these areas is the result of the merger with Washington Homes, Inc.
For the nine months ended July 31, 2001 our gross margin percentage
increased 0.5% compared to the same period last year. This can be
attributable to improved gross margins in the Northeast Region, Texas,
and North Carolina. The improvements are primarily attributed to
increased sales prices and tighter cost controls.
Selling, general, and administrative costs as a percentage of
total homebuilding revenues decreased to 7.8% for the three months
ended July 31, 2001 from 9.2% for the prior year's three months,
and decreased to 8.6% for the nine months ended July 31, 2001 from
9.9% for the prior year's nine months. Such expenses increased during
the three and nine months ended July 31, 2001 by $13.0 million and
$25.4 million, repsectively, compared to the same periods last year.
The dollar increase in selling, general, and administrataive is due to
increased advertising and selling costs in California due to the
addition of five new communities, increases in administrataive costs
in our Northeast Region and Texas due to increased bonus accruals,
and the addition of Washington Homes, Inc.
Land Sales and Other Revenues:
Land sales and other revenues consist primarily of land
and lot sales. A breakout of land and lot sales is set forth below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Land and Lot Sales................ $ 1,160 $ 1,328 $ 5,398 $ 3,144
Cost of Sales..................... 979 966 4,808 2,568
-------- -------- -------- --------
Land and Lot Sales Gross Margin... 181 362 590 576
Interest Expense.................. 58 111 347 350
-------- -------- -------- --------
Land and Lot Sales Profit
Before Tax...................... $ 123 $ 251 $ 243 $ 226
======== ======== ======== ========
Land and lot sales are incidental to our residential housing
perations and are expected to continue in the future but may
significantly fluctuate up or down.
Financial Services
Financial services consist primarily of originating mortgages
from our homebuyers, selling such mortgages in the secondary market,
and title insurance activities. For the three and nine months ended
July 31, 2001 financial services provided a $3.4 million and $7.2
million profit before income taxes compared to a profit of $0.1
million and a loss of $1.1 million for the same period in 2000.
These increases are primarily due to a change in management,
reduced costs, and increased mortgage loan amounts.
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 ("CMO's"). 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 include the
operations at our headquarters in Red Bank, New Jersey. Such
expenses include our executive offices, information services,
human resources, corporate accounting, training, treasury,
process redesign, internal audit, construction services, and
administration of insurance, quality, and safety. As a percentage
of total revenues, such expenses decreased to 2.1% for the three
months ended July 31, 2001 from 3.5% for the prior year's three
months and decreased to 2.5% for the nine months ended July 31, 2001
from 3.1% for the prior year's nine months. Corporate general
and administrative expenses increased $0.6 million and $5.7 million
during the three and nine months ended July 31, 2001 compared to the
same periods last year. Increases in corporate general and
administrataive expenses are primarily attributed to less process
redesign costs capitalized during the three and nine months ended
July 31, 2001 compared to the same period last year, increased
depreciation resulting from capitalized process redesign
costs in prior years, increased bonus accruals based upon
increased return on equity and increased staff levels in order
to serve a much larger company resulting from the merger with
Washington Homes, Inc. Process redesign costs are capitalized
in accordance with SOP 98-1 "Accounting For the Cost of Computer
Software Development For or Obtained for Internal Use."
Interest
Interest expense includes housing and land and lot interest.
Interest expense is broken down as follows:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Sale of Homes.............. $13,427 $ 8,691 $36,592 $23,906
Land and Lot Sales......... 58 111 347 350
-------- -------- -------- --------
Total...................... $13,485 $ 8,802 $36,939 $24,256
======== ======== ======== ========
Housing interest as a percentage of sale of homes revenues
decreased to 2.7% from 3.1% for the three months ended July 31, 2001
compared to the same period last year. During the nine months ended
July 31, 2001 and 2000 housing interest amounted to 3.1%, respectively.
Other Operations
Other operations consist primarily of miscellaneous residential
housing operations expenses, amortization of senior and subordinated
note issuance expenses, amortization of goodwill from homebuilding
company acquisitions, earnout payments from homebuilding company
acquisitions, and corporate owned life insurance loan interest.
Restructuring Charges
Restructuring charges are estimated expenses associated with
the integration of our operations with those of Washington Homes,
Inc. These expenses are salaries, severance and outplacement costs
for the termination of associates, and costs to close and relocate
existing administrative offices, and lost rent and leasehold
improvements. At July 31, 2001, $1.2 million has been charged
against the $1.9 million accrual for termination and related costs
while $0.3 million has been charged against the $1.1 million
accrual established for closing and relocation costs.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations," and No. 142, "Goodwill and Other
Intangible Assets."
SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001.
Use of the pooling-of-interests method is no longer permitted.
SFAS No. 141 also includes guidance on the initial recognition
and measurement of goodwill and other intangible assets acquired
in a business combination that is completed after June 30, 2001.
SFAS No. 142 no longer permits the amortization of goodwill
and indefinite-lived intangible assets. Instead, these assets
must be reviewed annually (or more frequently under certain
conditions) for impairment in accordance with this statement.
This impairment test uses a fair value approach rather than the
undiscounted cash flows approach previously required by SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The amortization of
goodwill included in our other expenses will also no longer be
recorded upon adoption of the new rules.
Intangible assets that do not have indefinite lives will continue
to be amortized over their useful lives and reviewed for
impairment in accordance with SFAS No. 121. We are required
to adopt SFAS No. 142 no later than November 1, 2002. We are
currently evaluating our intangible assets in relation ot the
provisions of SFAS No. 142 to determine the impact, if any,
the adoption of SFAS No. 142 will have on our results of
operations or financial position.
Total Taxes
Total taxes as a percentage of income before taxes amounted
to approximately 39.5% and 33.3% for the nine months ended July 31,
2001 and 2000, respectively. The increase in this percentage from
2000 to 2001 is primarily attributed to an increase in the effective
federal income tax rate. The increased effective rate is due
primarily to higher amounts of expenses in 2001 not deductible
for federal taxes and a reduced effect of our senior rental tax credits.
Although the credits are the same in 2001 and 2000, they reduce
our effective tax rate less when pretax profits are higher. Deferred
federal and state income tax assets primarily represent the deferred
tax benefits arising from temporary differences between book and
tax income which will be recognized in future years as an offset
against future taxable income. If for some reason the combination
of future years income (or loss) combined with the reversal of
the timing differences results in a loss, such losses can be carried
back to prior years to recover the deferred tax assets. As a
result, management is confident such deferred tax assets are
recoverable regardless of future income.
Inflation
Inflation has a long-term effect on us because increasing costs
of land, materials, and labor result in increasing sale prices of our
homes. In general, these price increases have been commensurate
with the general rate of inflation in our housing markets and have
not had a significant adverse effect on the sale of our homes.
A significant risk faced by the housing industry generally is
that rising house costs, including land and interest costs, will
substantially outpace increases in the income of potential purchasers.
In recent years, in the price ranges in which our homes sell, we
have not found this risk to be a significant problem.
Inflation has a lesser short-term effect on us because we
generally negotiate fixed price contracts with our subcontractors
and material suppliers for the construction of our homes. These
prices usually are applicable for a specified number of residential
buildings or for a time period of between four to twelve months.
Construction costs for residential buildings represent
approximately 57% of our homebuilding cost of sales.
Merger With Washington Homes, Inc.
On January 23, 2001 we merged with Washington Homes, Inc.
for a total purchase price of $87.4 million, of which $38.5 was
paid in cash and 6,352,900 shares of our Class A common stock were
issued. The addition of Washington Homes operations for slightly
more than three full quarters is expected to increase revenues
more than 40% in fiscal 2001 from fiscal 2000.
Safe Harbor Statement
Certain statements contained in this Form 10-Q that are not
historical facts should be considered as "Forward-Looking
Statements" within the meaning of the Private Securities
Litigation Act of 1995. Such statements involve known and
unknown risks, uncertainties and other factors that may cause
actual results 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 our Form 10-K
for the year ended October 31, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOVNANIAN ENTERPRISES, INC.
(Registrant)
DATE: September 14, 2001 /S/J. LARRY SORSBY
J. Larry Sorsby,
Executive Vice President and
Chief Financial Officer
DATE: September 14, 2001 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller