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 APRIL 30, 2002 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. 23,046,915 Class A Common
Shares and 7,450,288 Class B Common Shares were outstanding as of May 31,
2002.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at April 30,
2002 (unaudited) and October 31, 2001 3
Consolidated Statements of Income for the three
and six months ended April 30, 2002 and 2001
(unaudited) 5
Consolidated Statements of Stockholders' Equity
for the six months ended April 30, 2002
(unaudited) 6
Consolidated Statements of Cash Flows for
the six months ended April 30, 2002
and 2001 (unaudited) 7
Notes to Consolidated Financial
Statements (unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 17
Item 4. Submission of Matters to a Vote of Security
Holders 29
PART II. Other Information
Item 6(a). Exhibit 10 - $165 Million Term Loan Credit
Agreement
Item 6(b). Reports on Form 8K filed during the quarter
for which this report is filed 29
Signatures 30
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
April 30, October 31,
ASSETS 2002 2001
----------- -----------
(unaudited)
Homebuilding:
Cash and cash equivalents....................... $ 34,177 $ 10,173
----------- -----------
Inventories - At the lower of cost or fair
value:
Sold and unsold homes and lots under
development................................. 848,882 593,149
Land and land options held for future
development or sale......................... 178,331 146,965
----------- -----------
Total Inventories........................... 1,027,213 740,114
----------- -----------
Receivables, deposits, and notes ............... 45,610 75,802
----------- -----------
Property, plant, and equipment - net............ 29,932 30,756
----------- -----------
Senior residential rental properties - net...... 9,697 9,890
----------- -----------
Prepaid expenses and other assets............... 79,625 46,178
Goodwill........................................ 82,385 32,618
----------- -----------
Total Homebuilding.......................... 1,308,639 945,531
----------- -----------
Financial Services:
Cash and cash equivalents....................... 3,482 5,976
Mortgage loans held for sale.................... 58,298 105,567
Other assets.................................... 10,476 6,465
----------- -----------
Total Financial Services.................... 72,256 118,008
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits........................................ 5,377 719
----------- -----------
Total Assets...................................... $1,386,272 $1,064,258
=========== ===========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Per Share Data)
April 30, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
----------- -----------
(unaudited)
Homebuilding:
Nonrecourse land mortgages........................ $ 8,280 $ 10,086
Accounts payable and other liabilities............ 138,414 124,125
Customers' deposits............................... 41,135 39,114
Nonrecourse mortgages secured by operating
properties...................................... 3,335 3,404
----------- -----------
Total Homebuilding............................ 191,164 176,729
----------- -----------
Financial Services:
Accounts payable and other liabilities............ 4,688 5,264
Mortgage warehouse line of credit................. 52,784 98,305
----------- -----------
Total Financial Services...................... 57,472 103,569
----------- -----------
Notes Payable:
Term loan......................................... 115,000
Senior notes...................................... 396,152 296,797
Senior subordinated notes......................... 150,000
Subordinated notes................................ 99,747
Accrued interest.................................. 9,822 11,770
----------- -----------
Total Notes Payable........................... 670,974 408,314
----------- -----------
Total Liabilities............................. 919,610 688,612
----------- -----------
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 27,082,863 shares at
April 2002 and 24,599,379 shares at October 2001
(including 4,295,621 shares at April 2002 and
4,195,621 at October 2001 held in Treasury)..... 271 246
Common Stock,Class B,$.01 par value-authorized
13,000,000 shares; issued 7,799,400 at April
2002 and 7,818,927 shares at October 2001
including 345,874 shares at April 2002 and
October 2001 held in Treasury).................. 78 78
Paid in Capital................................... 148,902 100,957
Retained Earnings................................. 354,177 310,106
Deferred Compensation............................. (63) (127)
Treasury Stock - at cost.......................... (36,703) (35,614)
----------- -----------
Total Stockholders' Equity.................... 466,662 375,646
----------- -----------
Total Liabilities and Stockholders' Equity.......... $1,386,272 $1,064,258
=========== ===========
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 Six Months Ended
April 30, April 30,
------------------- --------------------
2002 2001 2002 2001
--------- --------- ---------- ---------
Revenues:
Homebuilding:
Sale of homes...................... $532,386 $393,301 $ 975,484 $676,706
Land sales and other revenues...... 20,416 2,290 22,583 6,535
--------- --------- ---------- ---------
Total Homebuilding............... 552,802 395,591 998,067 683,241
Financial Services................... 8,676 6,749 17,663 12,287
--------- --------- ---------- ---------
Total Revenues................... 561,478 402,340 1,015,730 695,528
--------- --------- ---------- ---------
Expenses:
Homebuilding:
Cost of sales...................... 437,006 314,162 788,679 539,897
Selling, general and administrative 47,646 34,875 85,295 63,100
Inventory impairment loss.......... 1,424 764 2,329 938
--------- --------- ---------- ---------
Total Homebuilding............... 486,076 349,801 876,303 603,935
Financial Services................... 5,103 4,716 10,462 8,496
Corporate General and Administration. 10,629 9,401 21,505 19,279
Interest............................. 12,802 13,949 26,504 23,454
Other Operations..................... 4,400 1,906 8,691 3,757
Restructuring Charges................ 2,480
--------- --------- ---------- ---------
Total Expenses................... 519,010 379,773 943,465 661,401
--------- --------- ---------- ---------
Income Before Income Taxes and
Extraordinary Loss................... 42,468 22,567 72,265 34,127
--------- --------- ---------- ---------
State and Federal Income Taxes:
State................................ 1,534 1,028 3,407 1,427
Federal.............................. 14,442 7,479 24,205 11,717
--------- --------- ---------- ---------
Total Taxes........................ 15,976 8,507 27,612 13,144
-------- -------- --------- --------
Extraordinary Loss from Extinguishment
Of Debt, Net of Income Taxes......... (582) (582)
--------- --------- ---------- ---------
Net Income............................. $ 25,910 $ 14,060 $ 44,071 $ 20,983
========= ========= ========== =========
Per Share Data:
Basic:
Income per common share before
Extraordinary loss................. $ 0.86 $ 0.50 $ 1.50 $ 0.83
Extraordinary loss................... (.02) (.02)
--------- --------- ---------- ---------
Income............................... $ 0.84 $ 0.50 $ 1.48 $ 0.83
========= ========= ========== =========
Weighted average number of common
shares outstanding................. 30,670 28,176 29,836 25,262
Assuming dilution:
Income per common share before
Extraordinary loss................. $ 0.82 $ 0.48 $ 1.42 $ 0.80
Extraordinary loss................... (.02) (.02)
--------- --------- ---------- ---------
Income............................... $ 0.80 $ 0.48 $ 1.40 $ 0.80
========= ========= ========== =========
Weighted average number of common
shares outstanding................ 32,402 29,472 31,447 26,116
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, 2001 20,403,758 $ 246 7,473,053 $ 78 $100,957 $310,106 $ (127) $(35,614) $ 375,646
Shares issued in connection
with acquisitions....... 2,208,738 22 45,692 45,714
Sale of common stock under
employee stock option
plan.................... 193,055 2 1,297 1,299
Stock bonus plan.......... 62,164 1 956 957
Conversion of Class B to
Class A Common Stock.... 19,527 (19,527)
Deferred compensation..... 64 64
Treasury stock purchase... (100,000) (1,089) (1,089)
Net Income................ 44,071 44,071
----------- ------ ----------- ------ ------- -------- -------- -------- ---------
Balance, April 30, 2002
(unaudited)............... 22,787,242 $ 271 7,453,526 $ 78 $148,902 $354,177 $ (63) $(36,703) $ 466,662
=========== ====== =========== ====== ======= ======== ======== ======== =========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
Six Months Ended
April 30,
---------------------
2002 2001
---------- ----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 44,071 $ 20,983
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation.................................... 3,342 4,018
Amortization of goodwill........................ 1,627
(Gain) on sale and retirement of property
and assets.................................... (7) (36)
Extraordinary loss from extinguishment of debt
net of income taxes........................... 582
Deferred income taxes........................... (745) 1,033
Impairment losses............................... 2,329 938
Decrease (increase) in assets:
Mortgage notes receivable..................... 47,023 (10,615)
Receivables, prepaids and other assets........ 13,606 (22,324)
Inventories................................... (69,318) (9,087)
(Decrease) increase in liabilities:
State and Federal income taxes................ (3,761) (2,643)
Tax effect from exercise of stock options..... (152) (398)
Customers' deposits........................... 1,684 4,593
Interest and other accrued liabilities........ (7,265) (4,109)
Post development completion costs............. (811) 834
Accounts payable.............................. 4,455 (10,612)
---------- ----------
Net cash provided by (used in) operating
activities................................ 35,033 (25,798)
---------- ----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets....... 335 1,002
Purchase of property, equipment and other fixed
assets............................................ (2,091) (2,253)
Acquisition of homebuilding companies............... (140,095) (37,190)
Investment in and advances to unconsolidated
affiliates........................................ (1,095) (181)
---------- ----------
Net cash used in investing activities....... (142,946) (38,622)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 1,045,306 813,780
Proceeds from senior debt........................... 99,152
Proceeds from senior subordinated debt.............. 150,000
Principal payments on mortgages and notes...........(1,066,455) (756,487)
Principal payments on subordinated debt............. (99,747)
Purchase of treasury stock.......................... (1,089) 67
Proceeds from sale of stock and employee stock plan. 2,256 2,239
---------- ----------
Net cash provided by financing activities... 129,423 59,599
---------- ----------
Net Increase (decrease) In Cash and Cash Equivalents.. 21,510 (4,821)
Cash and Cash Equivalents Balance, Beginning
Of Period........................................... 16,149 43,253
---------- ----------
Cash and Cash Equivalents Balance, End Of Period...... $ 37,659 $ 38,432
========== ==========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to form
10-Q and Article 10 of Regulation S-X. In the opinion of management, all
adjustments for interim periods presented have been made, which include only
normal recurring accruals and deferrals necessary for a fair presentation of
consolidated financial position, results of operations, and changes in cash
flows. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates
and these differences could have a significant impact on the financial
statements. Results for the interim periods are not necessarily indicative of
the results which might be expected for a full year. The balance sheet at
October 31, 2001 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements.
2. Interest costs incurred, expensed and capitalized were:
Three Months Ended Six Months Ended
April 30, April 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
(Dollars in Thousands)
Interest Capitalized at
Beginning of Period......... $22,899 $31,365 $ 25,124 $25,694
Plus Acquired Entity Interest. 3,604
Plus Interest Incurred(1)(2).. 14,779 12,333 26,256 23,905
Less Interest Expensed(2)..... 12,802 13,949 26,504 23,454
-------- -------- -------- --------
Interest Capitalized at
End of Period (2)......... $24,876 $29,749 $ 24,876 $29,749
======== ======== ======== ========
(1) Data does not include interest incurred by our mortgage and finance
subsidiaries.
(2) 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 April 30, 2002 and October
31, 2001 amounted to $20,534,000 and $18,367,000, respectively. Senior
residential rental property accumulated depreciation at April 30, 2002 and
October 31, 2001 amounted to $2,853,000 and $2,688,000, respectively.
4. We record impairment losses on inventories related to communities
under development when events and circumstances indicate that they may be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than their related carrying amounts. In addition, from time
to time, we will write off certain residential land options including
approval, engineering, and capitalized interest costs for land management
decided not to purchase. We wrote off such costs in the amount of $1,338,000
in Poland, $63,000 in the Northeast Region, $18,000 in Metro D.C., and $5,000
in North Carolina during the three months ended April 30, 2002 and we wrote
off $801,000 in the Mid South, $84,000 in North Carolina, and $20,000 in the
Northeast Region during the three months ended January 31, 2002. We also
wrote off such costs in the amount of $735,000 in California, $18,000 in Metro
D. C., and $11,000 in the Northeast Region during the three months ended April
30, 2001 and wrote off $63,000 in the Northeast Region and $111,000 in Metro
D. C. during the three months ended January 31, 2001. Residential inventory
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 April 30, 2002 and October 31, 2001, we are
obligated under various performance letters of credit amounting to $89,954,000
and $51,647,000, respectively.
6. We have an unsecured Revolving Credit Agreement ("Agreement") with a
group of banks which provides up to $440,000,000 through July 2004. Interest
is payable monthly and at various rates of either the prime rate plus 0.40% or
LIBOR plus 1.85%. In addition, we pay a fee equal to 0.375% per annum on the
weighted average unused portion of the line. As of April 30, 2002 and October
31, 2001, there was an outstanding balance of zero.
7. On March 26, 2002, we issued $100,000,000 8% Senior Notes due 2012
and $150,000,000 8 7/8% Senior Subordinated Notes due 2012. On April 29,
2002, we redeemed our 9 3/4% Subordinated Notes due 2005. The early
retirement of these notes resulted in an extraordinary loss of $582,000 net of
income taxes of $313,000. The remaining proceeds were used to repay a portion
of our Term Loan Facility, repay the current outstanding indebtedness under
our Revolving Credit Facility, and the remainder for general corporate
purposes.
8. On January 22, 2002 we entered into a $165,000,000 Term Loan with a
group of banks which is due January 22, 2007. Interest is payable monthly at
either the prime rate plus 1.25% or LIBOR plus 2.5%. The proceeds from the
issuance of the Term Loan were primarily used to partially fund the
acquisition of the California operations of The Forecast Group, L.P.
("Forecast"). See Note 8 below. On March 27, 2002 we paid down the Term Loan
by $50,000,000.
9. 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 $57.0 million to
pay off their third party debt.
On January 10, 2002 we acquired the California homebuilding operations
of Forecast for an estimated total purchase price of $196.5 million, of which
$151.6 million was paid in cash and 2,208,738 shares of Class A Common Stock
were issued. We acquired Forecast to expand our California homebuilding
operations. In addition, we have an option to purchase additional land
parcels owned by Forecast for a price of $49.0 million. At the date of the
acquisition we also paid off approximately $88.0 million of Forecast's third
party debt. The total purchase price amounted to $90.4 million over Forecast's
book value, of which $22.8 million was added to inventory to reflect fair
value, $18.5 million was paid for two option agreements, a two year
consultant's agreement, and a three year right of first refusal agreement, and
the balance recorded as goodwill.
A Forecast condensed balance sheet (including the effects of purchase
accounting adjustments) as of the acquisition date is as follows (in
thousands):
January 10,
2002
-----------
Cash and cash equivalents........ $ 10,209
Inventories...................... 220,110
Goodwill......................... 49,107
Prepaids and other assets........ 20,676
-----------
Total Assets $ 300,102
===========
Accounts payable and other
liabilities.................... $ 35,028
Revolving credit agreement....... 219,574
Stockholders' equity............. 45,500
-----------
Total Liabilities and
Stockholders' Equity...... $ 300,102
===========
The merger with Washington Homes, Inc. and acquisition of Forecast were
accounted for as purchases with the results of operations of these entities
included in our consolidated financial statements as of the date of the merger
and acquisition. The purchase price was allocated based on estimated fair
value at the date of the merger and acquisition. An intangible asset equal to
the excess purchase price over the fair value of the net assets of $12.8
million and $49.8 for Washington Homes and Forecast, respectively, were
recorded as goodwill on the consolidated balance sheet. The Washington Homes
amount was being amortized on a straight line basis over a period of ten years
during fiscal 2001. On November 1, 2001 we adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
No. 142"). As a result of adopting SFAS No. 142, goodwill is no longer
amortized.
The following unaudited pro forma financial data for the three and six
months ended April 30, 2002 and 2001 has been prepared as if the merger with
Washington Homes, Inc. on January 23, 2001 and the acquisition of Forecast on
January 10, 2002 had occurred on November 1, 2000. Unaudited pro forma
financial data is presented for information purposes only and may not be
indicative of the actual amounts had the events occurred on the dates listed
above, nor does it purport to represent future periods (in thousands).
Three Months Ended Six Months Ended
April 30, April 30,
----------------------------------------
2002 2001 2002 2001
-------- -------- --------- --------
Revenues.............................$561,478 $521,964 $1,080,079 $969,787
Expenses............................. 519,010 487,100 1,002,450 917,189
Income Taxes......................... 15,976 13,438 29,710 19,807
Extraordinary Loss from Extinguishment
Of Debt, Net of Taxes.............. (582) (582)
-------- -------- --------- --------
Net Income...........................$ 25,910 $ 21,426 $ 47,337 $ 32,791
======== ======== ========= ========
Diluted Net Income Per Common Share..$ 0.80 $ 0.68 $ 1.47 $ 1.05
======== ======== ========= ========
10. Restructuring Charges - Restructuring charges are estimated
expenses associated with the merger of our operations with those of Washington
Homes, Inc. as a result of the merger on January 23, 2001. Under our merger
plan, administration offices in Maryland, Virginia, and North Carolina were
either closed, relocated, or combined. The merger of administration offices
was completed by July 31, 2001. At January 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. During the year ended October 31,
2001 our estimate for restructuring charges was increased to a total of $3.2
million. We have provided for the termination of 65 associates. We accrued
approximately $2.0 million to cover termination and related costs. Associates
being terminated were primarily administrative. In addition, we accrued
approximately $1.2 million to cover closing and/or relocation of various
administrative offices in these three states. Such amounts are included in
accounts payable and other liabilities in the accompanying financial
statements. $272,000 and $577,000 was charged against the reserve during the
three and six months ended April 30, 2002. At April 30, 2002 $1.8 million has
been charged against termination costs relating to the termination of 63
associates and $0.8 million has been charged against closing and relocation
costs.
11. Intangible Assets - As reported on the balance sheet we have
goodwill totaling $82.4 million. We have no other intangible assets. During
the six months ended April 30, 2002 we added $49.8 million of goodwill as a
result of the Forecast acquisition. Goodwill deductible for income tax
purposes is approximately $1,243,000 and $1,895,000 for the three and six
months ended April 30, 2002, respectively. Amortization of goodwill in the
amount of $958,000 and $1,627,000 was recorded for the three and six months
ended April 30, 2001, respectively, and is also included in other operations
in the accompanying consolidated financial statements. After income taxes the
goodwill amortization for the three and six months ended April 30, 2001,
amounted to approximately $551,000 and $1,001,000, which if eliminated from
net income would have increased earnings per share approximately $0.02 and
$0.04, respectively.
In accordance with SFAS No. 142 we no longer amortize goodwill but
instead we review goodwill for impairment. The impairment test uses a fair
value approach rather than the undiscounted cash flows approach. We have
determined that goodwill was not impaired as of April 30, 2002.
12. 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, October 2, 2000, and March
26, 2002 and Senior Subordinated Notes on March 26, 2002.
The Subsidiary Issuer acts as a finance and management entity that as of
April 30, 2002 had issued and outstanding approximately $400,000,000 senior
notes, $150,000,000 senior subordinated notes, a revolving credit agreement
with an outstanding balance of zero, and a term loan with an outstanding
balance of $115,000,000. The senior subordinated notes, senior notes, the
revolving credit agreement, and term loan 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 various subsidiaries formerly
engaged in the issuance of collateralized mortgage obligations, a mortgage
lending subsidiary, a subsidiary holding and licensing the "K. Hovnanian"
trade name, a subsidiary engaged in homebuilding activity in Poland, our title
subsidiaries, and joint ventures (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, the senior subordinated notes, the term loan, and 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 consolidating
condensed financial statements. Management does not believe that separate
financial statements of the Guarantor Subsidiaries are material to investors.
Therefore, separate financial statements and other disclosures concerning the
Guarantor Subsidiaries are not presented.
The following 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
APRIL 30, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
ASSETS
Homebuilding.......................$ (367) $ 77,114 $1,224,484 $ 7,408 $ $1,308,639
Financial Services................. 202 72,054 72,256
Income Taxes (Payables)Receivables. 2,584 (2,643) 7,662 (2,226) 5,377
Investments in and amounts due to
and from consolidated
subsidiaries..................... 464,445 607,056 (948,199) 21,827 (145,129)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$466,662 $ 681,527 $ 284,149 $ 99,063 $ (145,129)$1,386,272
======== ========== ========== ============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding.......................$ $ 11,388 $ 179,739 $ 37 $ $ 191,164
Financial Services................. 57,472 57,472
Notes Payable...................... 670,922 52 670,974
Stockholders' Equity............... 466,662 (783) 104,358 41,554 (145,129) 466,662
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$466,662 $ 681,527 $ 284,149 $ 99,063 $ (145,129)$1,386,272
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ 2,022 $ 50,565 $ 882,715 $ 10,229 $ $ 945,531
Financial Services................. 205 117,803 118,008
Income Taxes (Payables)Receivables. (5,067) (3,658) 11,893 (2,449) 719
Investments in and amounts due to
and from consolidated
subsidiaries..................... 378,691 375,514 (668,285) 14,513 (100,433)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$375,646 $ 422,421 $ 226,528 $ 140,096 $(100,433) $1,064,258
======== ========== ========== ============ ========== ==========
Liabilities
Homebuilding.......................$ $ 14,679 $ 161,759 $ 291 $ $ 176,729
Financial Services................. 103,569 103,569
Notes Payable...................... 408,206 108 408,314
Stockholders' Equity............... 375,646 (464) 64,661 36,236 (100,433) 375,646
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$375,646 $ 422,421 $ 226,528 $ 140,096 $(100,433) $1,064,258
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding and Other Operations$ $ 125 $ 551,934 $ 7,135 $ (6,392) $ 552,802
Financial Services............... 1,324 7,352 8,676
Intercompany Charges............. 34,147 4,180 (38,327)
Equity In Pretax Income of
Consolidated Subsidiaries...... 42,468 (42,468)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 42,468 34,272 557,438 14,487 (87,187) 561,478
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding and Other Operations 34,272 519,882 1,084 (41,331) 513,907
Financial Services............... 527 4,925 (349) 5,103
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 34,272 520,409 6,009 (41,680) 519,010
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 42,468 37,029 8,478 (45,507) 42,468
State and Federal Income Taxes..... 15,976 (181) 13,662 3,355 (16,836) 15,976
------- ---------- ---------- ------------ ---------- ----------
Extraordinary Loss From
Extinguishment of Debt, Net of
Income Taxes..................... (582) (582) 582 (582)
------- ---------- ---------- ------------ ---------- ----------
Net Income ........................$25,910 $ (401) $ 23,367 $ 5,123 $ (28,089) $ 25,910
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding and Other Operations$ $ 364 $ 393,839 $ 3,016 $ (1,628) $ 395,591
Financial Services............... 3,217 3,532 6,749
Intercompany Charges............. 29,809 2,387 (32,196)
Equity In Pretax Income of
Consolidated Subsidiaries...... 22,567 (22,567)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 22,567 30,173 399,443 6,548 (56,391) 402,340
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding and Other Operations 29,584 376,054 1,135 (31,716) 375,057
Financial Services............... 2,100 2,713 (97) 4,716
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 29,584 378,154 3,848 (31,813) 379,773
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 22,567 589 21,289 2,700 (24,578) 22,567
State and Federal Income Taxes..... 8,507 165 8,811 997 (9,973) 8,507
------- ---------- ---------- ------------ ---------- ----------
Net Income ........................$14,060 $ 424 $ 12,478 $ 1,703 $ (14,605) $ 14,060
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding and other operations$ $ 270 $ 996,570 $ 12,668 $ (11,441)$ 998,067
Financial Services............... 2,686 14,977 17,663
Intercompany Charges............. 64,406 6,663 (71,069)
Equity In Pretax Income of
Consolidated Subsidiaries...... 72,265 (72,265)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 72,265 64,676 1,005,919 27,645 (154,775) 1,015,730
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding and other operations 64,676 943,816 1,659 (77,148) 933,003
Financial Services............... 1,085 10,171 (794) 10,462
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 64,676 944,901 11,830 (77,942) 943,465
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 72,265 61,018 15,815 (76,833) 72,265
State and Federal Income Taxes..... 27,612 (154) 23,011 6,150 (29,007) 27,612
------- ---------- ---------- ------------ ---------- ----------
Extraordinary Loss From
Extinguishment of Debt, Net of
Income Taxes..................... (582) (582) 582 (582)
------- ---------- ---------- ------------ ---------- ----------
Net Income.........................$44,071 $ (428) $ 38,007 $ 9,665 $ (47,244)$ 44,071
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding and other operations$ $ 429 $ 680,120 $ 10,532 $ (7,840) $ 683,241
Financial Services............... 5,235 7,052 12,287
Intercompany Charges............. 60,219 433 (60,652)
Equity In Pretax Income of
Consolidated Subsidiaries...... 34,127 (34,127)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 34,127 60,648 685,788 17,584 (102,619) 695,528
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 59,497 659,139 2,389 (68,120) 652,905
Financial Services............... 3,388 5,302 (194) 8,496
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 59,497 662,527 7,691 (68,314) 661,401
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 34,127 1,151 23,261 9,893 (34,305) 34,127
State and Federal Income Taxes..... 13,144 517 8,881 3,811 (13,209) 13,144
------- ---------- ---------- ------------ ---------- ----------
Net Income ........................$20,983 $ 634 $ 14,380 $ 6,082 $ (21,096) $ 20,983
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 44,071 $ (428) $ 38,007 $ 9,665 $ (47,244) $ 44,071
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 87,095 52,923 (225,305) 40,518 47,244 2,475
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 131,166 52,495 (187,298) 50,183 46,546
Net Cash (Used In) Provided By
Investing Activities............... (44,323) (1,445) (108,845) 154 (154,459)
Net Cash Provided By (Used In)
Financing Activities............... (1,089) 264,608 (88,267) (45,829) 129,423
Intercompany Investing and Financing
Activities - Net................... (85,754) (295,948) 389,016 (7,314)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash
and Cash Equivalents............... 19,710 4,606 (2,806) 21,510
Cash and Cash Equivalents Balance,
Beginning of Period................ 10 (5,840) 15,616 6,363 16,149
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 10 $ 13,870 $ 20,222 $ 3,557 $ $ 37,659
======== ========= ========== ============ ========== ==========
<TABLE
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 20,983 $ 634 $ 14,380 $ 6,082 $ (21,096) $ 20,983
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 93,186 70,155 (232,718) 1,500 21,096 (46,781)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 114,169 70,789 (218,338) 7,582 (25,798)
Net Cash (Used In) Provided By
Investing Activities............... (46,972) (18,093) 26,542 (99) (38,622)
Net Cash Provided By (Used In)
Financing Activities............... 67 120,525 (58,043) (2,950) 59,599
Intercompany Investing and Financing
Activities - Net................... (67,198) (198,444) 271,307 (5,665)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash
and Cash Equivalents............... 66 (25,223) 21,468 (1,132) (4,821)
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......................$ 3 $ (7,594) $ 43,974 $ 2,049 $ $ 38,432
======== ========= ========== ============ ========== ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Our cash uses during the six months ended April 30, 2002 were for
operating expenses, seasonal increases in housing inventories, construction,
income taxes, interest, the repurchase of common stock, the acquisition of the
California operations of the Forecast Group, L.P. ("Forecast"), and the
acquisition of a land portfolio from another building company. We provided
for our cash requirements from housing and land sales, the revolving credit
facility, the issuance of a term loan, the issuance of $150,000,000 Senior
Subordinated Notes, the issuance of $100,000,000 Senior Notes, financial
service revenues, and other revenues. We believe that these sources of cash
are sufficient to finance our working capital requirements and other needs.
On December 31, 2000, our stock repurchase program to purchase up to 4
million shares of Class A Common Stock expired. As of December 31, 2000,
3,391,047 shares had been purchased under this program. On July 3, 2001, our
Board of Directors authorized a revision to our stock repurchase program to
purchase up to an additional 2 million shares of Class A Common Stock. As of
April 30, 2002, 558,700 have been purchased under this program of which
100,000 were repurchased during the six months ended April 30, 2002.
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 $440,000,000 through July 2004. Interest is payable
monthly and at various rates of either the prime rate plus .40% or Libor plus
1.85%. We believe that we will be able either to extend the Agreement beyond
July 2004 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
April 30, 2002, borrowings under the Agreement were zero.
On March 26, 2002, we issued $100,000,000 8% Senior Notes due 2012 and
$150,000,000 8 7/8% Senior Subordinated Notes due 2012. On April 29, 2002, we
redeemed our 9 3/4% Subordinated Notes due 2005. The early retirement of
these notes resulted in an extraordinary loss of $582,000 net of income taxes
of $313,000. The remaining proceeds were used to repay a portion of our Term
Loan Facility, repay the current outstanding indebtedness under our Revolving
Credit Facility, and the remainder for general corporate purposes. Other
senior indebtedness issued by us and outstanding as of April 30, 2002 was
$150,000,000 10 1/2% Senior Notes due 2007 and $150,000,000 9 1/8% Senior
Notes due 2009.
On January 22, 2002 we issued a $165,000,000 Term Loan to a group of
banks which is due January 22, 2007. Interest is payable monthly at either
the prime rate plus 1.25% or LIBOR plus 2.5%. The proceeds from the issuance
of the Term Loan were primarily used to partially fund the acquisition of the
California operations of Forecast. As of April 30, 2002 borrowings under the
Term Loan were $115,000,000.
Our mortgage banking subsidiary borrows under a $110,000,000 bank
warehousing arrangement which expires in June 2003. Interest is payable
monthly at the Federal Funds Rate plus 1.375%. We believe that we will be
able either to extend this agreement beyond June 2003 or negotiate a
replacement facility, but there can be no assurance of such extension or
replacement facility. 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 April 30, 2002,
the aggregate principal amount of all such borrowings was $54,876,000.
Total inventory increased $287,099,000 during the six months ended April
30, 2002. The increase in inventory was primarily due to the acquisition of
Forecast and the purchase of a land portfolio from a builder in our Northeast
Region. In addition, inventory levels increased slightly in most of our
housing markets except in the Mid-South where we are liquidating our
operations. Substantially all homes under construction or completed and
included in inventory at April 30, 2002 are expected to be closed during the
next twelve months. Most inventory completed or under development is financed
through our line of credit and subordinated indebtedness.
The following table summarizes housing lots included in our total
residential real estate. The April 30, 2002 numbers excluded lots owned and
options in locations that we have ceased development.
Active Contracted Active Proposed Total
Active Selling Not Lots Developable Lots
Communities Lots Delivered Available Lots Controlled
----------- ------- ---------- --------- ----------- -----------
April 30, 2002:
Northeast Region.. 31 6,532 1,585 4,947 11,646 18,178
North Carolina.... 61 4,950 661 4,289 3,236 8,186
Metro D.C......... 33 3,497 1,002 2,495 6,795 10,292
California........ 35 4,784 812 3,972 2,748 7,532
Texas............. 39 1,834 324 1,510 689 2,523
Mid South......... 6 534 88 446 -- 534
----------- ------- ---------- ---------- ---------- -----------
205 22,131 4,472 17,659 25,114 47,245
=========== ======= ========== ========== ========== ===========
Owned.......... 11,251 3,788 7,463 3,278 14,529
Optioned....... 10,880 684 10,196 21,836 32,716
------- ---------- ---------- ---------- -----------
Total........ 22,131 4,472 17,659 25,114 47,245
======= ========== ========== ========== ===========
Active Contracted Active Proposed Total
Active Selling Not Lots Developable Lots
Communities Lots Delivered Available Lots Controlled
----------- ------- ---------- --------- ----------- -----------
October 31, 2001:
Northeast Region.. 23 5,561 1,136 4,425 10,314 15,875
North Carolina.... 54 4,264 534 3,730 2,312 6,576
Metro D.C......... 34 2,622 779 1,843 4,946 7,568
California........ 8 1,499 172 1,327 171 1,670
Texas............. 35 1,788 263 1,525 1,040 2,828
Mid South......... 18 1,279 122 1,157 -- 1,279
Other............. -- 17 3 14 992 1,009
----------- ------- ---------- ---------- ---------- -----------
172 17,030 3,009 14,021 19,775 36,805
=========== ======= ========== ========== ========== ===========
Owned.......... 6,918 2,525 4,393 4,035 10,953
Optioned....... 10,112 484 9,628 15,740 25,852
------- ---------- ---------- ---------- -----------
Total........ 17,030 3,009 14,021 19,775 36,805
======= ========== ========== ========== ===========
The following table summarizes our started or completed unsold homes
and models:
April 30, October 31,
2002 2001
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 46 52 98 69 48 117
North Carolina...... 130 30 160 205 41 246
Metro D. C.......... 29 25 54 27 27 54
California.......... 225 37 262 60 11 71
Texas.............. 261 12 273 215 15 230
Mid South.......... 42 10 52 54 22 76
Other............... - - - 7 - 7
------ ------ ----- ------ ------ -----
Total 733 166 899 637 164 801
====== ====== ===== ====== ====== =====
Financial Services - Mortgage loans held for sale consist of
residential mortgages receivable of which $58,093,000 and $105,174,000 at
April 30, 2002 and October 31, 2001, 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.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 2002
COMPARED TO THE THREE AND SIX MONTHS ENDED APRIL 30, 2001
Our operations consist primarily of residential housing development
and sales in our Northeast Region (New Jersey, southern New York State and
eastern Pennsylvania), North Carolina, Metro D. C. (northern Virginia and
Maryland), California, Texas, and the Mid South (Tennessee, Alabama, and
Mississippi). Currently we are liquidating our operations in the Mid South
and will be substantially out of this market by fiscal year end. In
addition, we provide financial services to our homebuilding customers.
Total Revenues:
Compared to the same prior period, revenues increased (decreased)
as follows:
Three Months Ended
------------------------------------------
April 30, April 30, Dollar Percentage
2002 2001 Change Change
------------------------------------------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $ 532,386 $ 393,301 $139,085 35.4%
Land sales and other
revenues........... 20,416 2,290 18,126 791.5%
Financial Services... 8,676 6,749 1,927 28.6%
---------- ---------- -------- --------
Total Revenues... $ 561,478 $ 402,340 $159,138 39.6%
========== ========== ======== ========
Six Months Ended
------------------------------------------
April 30, April 30, Dollar Percentage
2002 2001 Change Change
------------------------------------------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $ 975,484 $ 676,706 $298,778 44.2%
Land sales and other
revenues........... 22,583 6,535 16,048 245.6%
Financial Services... 17,663 12,287 5,376 43.8%
---------- --------- -------- --------
Total Revenues... $1,015,730 $ 695,528 $320,202 46.0%
========== ========= ======== ========
Homebuilding:
Revenues from the sale of homes increased $139.1 million or 35.4%
during the three months ended April 30, 2002, and increased $298.8 million
or 44.2% during the six months ended April 30, 2002, compared to the same
period last year. Revenues from the 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 Six Months Ended
April 30, April 30,
------------------- ------------------
2002 2001 2002 2001
--------- -------- -------- --------
(Dollars in Thousands)
Northeast Region:
Housing Revenues..... $145,249 $126,700 $278,018 $250,326
Homes Delivered...... 478 420 899 847
North Carolina:(2)
Housing Revenues..... $ 64,784 $ 60,457 $121,465 $ 92,255
Homes Delivered...... 353 355 651 535
Metro D.C.:(2)
Housing Revenues..... $ 78,333 $ 74,263 $148,725 $110,954
Homes Delivered...... 295 333 558 495
California:(1)
Housing Revenues..... $178,688 $ 65,339 $293,330 $109,653
Homes Delivered...... 728 186 1,168 292
Texas:
Housing Revenues..... $ 52,820 $ 46,434 $107,346 $ 84,244
Homes Delivered...... 223 228 460 405
Mid South:(2)
Housing Revenues..... $ 12,512 $ 11,846 $ 26,147 $ 14,923
Homes Delivered...... 81 81 166 103
Other:
Housing Revenues..... $ -- $ 8,262 $ 453 $ 14,351
Homes Delivered...... -- 49 6 97
Totals:
Housing Revenues..... $532,386 $393,301 $975,484 $676,706
Homes Delivered...... 2,158 1,652 3,908 2,774
(1) April 30, 2002 includes Forecast deliveries beginning
on January 10, 2002.
(2) April 30, 2001 includes Washington Homes deliveries beginning
on January 24, 2001.
The increase in housing revenues was primarily due to the acquisition
of the Forecast Group for the second quarter 2002 and the acquisition of
the Forecast Group and Washington Homes for the six months ended April 30,
2002. In addition, these increases were due to increased deliveries in the
Northeast Region resulting from a land portfolio acquisition in late March
2002 and increased average sales prices in all our markets except
California. California average sales prices are down due to the Forecast
Group product being mostly lower priced, first time buyer homes.
Important indicators of the future results are recently signed
contracts and home contract backlog for future deliveries. Our sales
contracts and homes in contract (using base sales prices) by market area
are set forth below:
Sales Contracts for the
Six Months Ended Contract Backlog
April 30, as of April 30,
------------------------- ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(Dollars in Thousands)
Northeast Region:
Dollars.............$ 274,837 $281,126 $ 452,910 $ 371,745
Homes............... 944 1,036 1,614 1,338
North Carolina:
Dollars.............$ 143,188 $151,134 $ 125,292 $ 151,840
Homes............... 778 851 661 833
Metro D. C.:
Dollars.............$ 243,091 $170,966 $ 303,252 $ 257,958
Homes............... 781 696 1,002 1,019
California:
Dollars.............$ 345,124 $154,167 $ 231,803 $ 109,315
Homes............... 1,273 448 812 307
Texas:
Dollars.............$ 116,972 $101,520 $ 78,334 $ 82,057
Homes............... 521 495 324 372
Mid South:
Dollars.............$ 20,078 $ 24,105 $ 13,660 $ 25,331
Homes............... 132 160 88 156
Other:
Dollars.............$ 340 $ 1,299 $ -- $ 2,640
Homes............... 3 31 -- 20
Totals:
Dollars.............$1,143,630 $884,317 $1,205,251 $1,000,886
Homes............... 4,432 3,717 4,501 4,045
During May 2002 we signed an additional 764 contracts compared to 579 in
the same month last year. The May 2002 contracts along with our contract
backlog at April 30, 2002 and deliveries for the six months ended April 30,
2002 amount to approximately 90% of our planned deliveries for fiscal 2002.
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 Six Months Ended
April 30, April 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
(Dollars in Thousands)
Sale of Homes................ $532,386 $393,301 $975,484 $676,706
Cost of Sales................ 421,209 313,234 772,600 536,068
-------- -------- -------- --------
Housing Gross Margin......... $111,177 $ 80,067 $202,884 $140,638
======== ======== ======== ========
Gross Margin Percentage...... 20.9% 20.4% 20.8% 20.8%
Cost of Sales expenses as a percentage of home sales revenues are
presented below:
Three Months Ended Six Months Ended
April 30, April 30,
------------------- -------- --------
2002 2001 2002 2001
-------- -------- -------- --------
Sale of Homes................ 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of Sales:
Housing, land &
development costs.... 71.0% 71.5% 71.1% 71.0%
Commissions............ 2.2% 2.4% 2.3% 2.4%
Financing concessions.. 1.0% 0.8% 1.0% 0.8%
Overheads.............. 4.9% 4.9% 4.8% 5.0%
-------- -------- -------- --------
Total Cost of Sales.......... 79.1% 79.6% 79.2% 79.2%
-------- -------- -------- --------
Gross Margin................. 20.9% 20.4% 20.8% 20.8%
======== ======== ======== ========
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 of home types delivered, consolidated quarterly gross
margin will fluctuate up or down and may not be representative of the
consolidated gross margin for the year. Ignoring the effect of the
Forecast acquisition, we achieved substantially higher gross margins on a
market-by-market basis during the three and six months ended April 30, 2002
compared to the same period last year. These increased margins are a
result of higher sales prices, lower costs, and certain changes in product
mix.
The consolidated gross margin increased 0.5% for the three months
ended April 30, 2002, but remained flat for the six months ended April 30,
2002. The acquisition of Forecast and the merger with Washington Homes
significantly increased the number of deliveries with lower average gross
margins. This factor was offset by increased margins in our Metro D. C.
market and California markets (excluding Forecast communities), and
increased deliveries in our highest margin market, the Northeast Region.
As anticipated at the time of the Washington Homes merger, the effect of
these lower margins caused a decline in aggregate gross margin in each of
the Company's past four fiscal quarters, including the last three quarters
of fiscal 2001, when compared with the equivalent prior year periods.
Beginning April 30, 2002, there will no longer be any year-over-year effect
on quarterly gross margins from the Washington Homes merger, but the year
to date effect can either be flat or slightly lower than the gross margin
for the prior year 2001. Forecast's operations have substantially lower
gross margins than our average gross margin due to the purchase accounting
stepped-up basis we applied to the Forecast inventory. The gross margin
achieved on Forecast's deliveries during the three and six months ended
April 30, 2002 was 2.5% and 3.0% lower as a result of the stepped-up basis.
Forecast contributed a significant number of home deliveries during the
three and six months ended April 30, 2002, which had an impact on our
consolidated gross margin.
Selling, general, and administrative expenses as a percentage of
total homebuilding revenues decreased to 8.6% for the three months ended
April 30, 2002 from 8.8% for the prior year's three months and decreased to
8.5% for the six months ended April 30, 2002 from 9.2% for the prior year's
six months. Such expenses increased during the three and six months ended
April 30, 2002 by $12.8 million and $22.2 million, respectively, compared
to the same periods last year. The percentage decline for the three and
six months ended April 30, 2002 was due to the increased deliveries. The
dollar increase in selling, general, and administrative is primarily due to
a full six months of expenses from Washington Homes, Inc. and the addition
of Forecast Homes.
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 Six Months Ended
April 30, April 30,
------------------ -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Land and Lot Sales................ $18,118 $ 1,072 $18,539 $ 4,238
Cost of Sales..................... 15,797 928 16,079 3,829
-------- -------- -------- --------
Land and Lot Sales Gross Margin... 2,321 144 2,460 409
Interest Expense.................. 584 56 648 289
-------- -------- -------- --------
Land and Lot Sales Profit
Before Tax...................... $ 1,737 $ 88 $ 1,812 $ 120
======== ======== ======== ========
Land and lot sales are incidental to our residential housing
operations and are expected to continue in the future but may significantly
fluctuate up or down.
Financial Services
Financial services consist primarily of originating mortgages from
our homebuyers, selling such mortgages in the secondary market, and title
insurance activities. For the three and six months ended April 30, 2002
financial services provided a $3.6 million and $7.2 million profit before
income taxes compared to a profit of $2.0 million and $3.8 million for the
same periods in 2001. These increases are primarily due to reduced costs,
increased mortgage loan amounts, and the addition of mortgage operations
from the merger with Washington Homes and the acquisition of Forecast
Homes. In addition to our wholly-owned mortgage subsidiaries, customers
obtained mortgages from our mortgage joint ventures in our Texas division
in 2001 and our Forecast division in 2002. In 2002 our Texas homebuyers
obtained mortgages from our wholly-owned mortgage originator.
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 1.9%
for the three months ended April 30, 2002 from 2.3% for the prior year's
three months and decreased to 2.1% for the six months ended April 30, 2002
from 2.8% for the prior year's six months. Corporate general and
administrative expenses increased $1.2 million and $2.2 million during the
three and six months ended April 30, 2002 compared to the same periods last
year. The percentage decline is primarily attributed to the increase in
housing operations. Increases in corporate general and administrative
dollar expenses are primarily attributed to higher employee incentives due
to higher return on equity.
Interest
Interest expense includes housing and land and lot interest.
Interest expense is broken down as follows:
Three Months Ended Six Months Ended
April 30, April 30,
------------------ -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Sale of Homes.............. $ 12,218 $ 13,893 $ 25,856 $ 23,165
Land and Lot Sales......... 584 56 648 289
-------- -------- -------- --------
Total...................... $ 12,802 $ 13,949 $ 26,504 $ 23,454
======== ======== ======== ========
Housing interest as a percentage of sale of homes revenues decreased
to 2.3% and 2.7% for the three and six months ended April 30, 2002,
respectively, compared to 3.5% and 3.4% for the three and six months ended
April 30, 2001, respectively. These decreases are primarily the result of
quicker inventory turnover. Inventory turnover is up as a result of the
acquisition of Forecast and the merger with Washington Homes where a larger
portion of their purchases are finished lots requiring shorter holding
periods until homes are delivered.
Other Operations
Other operations consist primarily of miscellaneous residential
housing operations expenses, senior residential property operations,
amortization of senior and senior subordinated note issuance expenses,
amortization of goodwill (in 2001) earnout payments from homebuilding
company acquisitions, employee stock bonus program, amortization of the
Forecast consultant's agreements and right of first refusal agreement,
expenses related to exiting our Mid South market, and corporate owned life
insurance loan interest.
Restructuring Charges
Restructuring charges are estimated expenses associated with
the merger of our operations with those of Washington Homes, Inc. as a
result of the merger on January 23, 2001. Under our merger plan,
administration offices in Maryland, Virginia, and North Carolina were
either closed, relocated, or combined. The merger of administration
offices was completed by July 31, 2001. At January 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. During
the year ended October 31, 2001 our estimate for restructuring charges was
increased to a total of $3.2 million. We have provided for the termination
of 65 associates. We accrued approximately $2.0 million to cover
termination and related costs. Associates being terminated were primarily
administrative. In addition, we accrued approximately $1.2 million to
cover closing and/or relocation of various administrative offices in these
three states. Such amounts are included in accounts payable and other
liabilities in the accompanying financial statements. $272,000 and
$577,000 was charged against the reserve during the three and six months
ended April 30, 2002. At April 30, 2002 $1.8 million has been charged
against termination costs relating to the termination of 63 associates and
$0.8 million has been charged against closing and relocation costs.
Recent Accounting Pronouncement
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and
Other Intangible Assets." 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. We
adopted SFAS 142 on November 1, 2001. As a result, goodwill amortization
of $958,000 and $1,627,000 which was incurred in the three and six months
ended April 30, 2001 will no longer be incurred in fiscal 2002.
Total Taxes
Total taxes as a percentage of income before taxes amounted to
approximately 39.1% and 38.5% for the six months ended April 30, 2002 and
2001, respectively. The increase in this percentage from 2001 to 2002 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 2002 not deductible for federal taxes and a reduced effect of
our senior rental tax credits. Although the credits are the same in 2002
and 2001, 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 many of the components used to construct 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 58% of
our homebuilding cost of sales.
Mergers and Acquisitions
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. On January
10, 2002 we acquired The Forecast Group, L.P. for an estimated purchase
price of $196.5 million, of which $151.6 million was paid in cash and
2,208,738 shares of our Class A common stock were issued. The addition of
Forecast operations for slightly more than three full quarters is expected
to increase revenues approximately 30% in fiscal 2002 from fiscal 2001.
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, 2001.
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual stockholders meeting on March 8, 2002 at 10:30
a.m. at the offices of Simpson Thacher & Bartlett, 425 Lexington Avenue,
New York, New York. The following matters were voted at the meeting:
. Election of all Directors to hold office until the next Annual
Meeting of Stockholders. The elected Directors were:
.. Kevork S. Hovnanian
.. Ara K. Hovnanian
.. Paul W. Buchanan
.. Geaton A. DeCesaris, Jr.
.. Arthur Greenbaum
.. Desmond P. McDonald
.. Peter S. Reinhart
.. John J. Robbins
.. J. Larry Sorsby
.. Stephen D. Weinroth
. Ratification of selection of Ernst & Young, LLP as certified
independent accountants for fiscal year ending October 31, 2002.
.. Votes For Class A 16,725,359 Class B 72,544,760
.. Votes Against Class A 198,509 Class B 6,000
.. Abstain Class A 4,342 Class B 9,970
Part II. Other Information
Item 6b. Reports on Form 8-K.
(i) 8-K/A filed on February 18, 2002 amended the 8-K filed
on January 24, 2002. This amendment sets forth the
information required by Items 7(a) and 7(b) omitted from
the Form 8-K.
(ii) 8-K filed on March 21, 2002 to report the offering
of $100,000,000 Senior Notes due 2012 and $150,000,000
Senior Subordinated Notes due 2012.
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: June 13, 2002 /S/J. LARRY SORSBY
J. Larry Sorsby,
Executive Vice President and
Chief Financial Officer
DATE: June 13, 2002 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller