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, 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 Section l3 or l5(d) of the Securities
Exchange Act of l934 during the preceding l2 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [ X ]
No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 23,159,119
Class A Common Shares and 7,444,430 Class B Common Shares were outstanding
as of September 3, 2002
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at July 31,
2002 (unaudited) and October 31, 2001 3
Consolidated Statements of Income for the three
and nine months ended July 31, 2002 and 2001
(unaudited) 5
Consolidated Statements of Stockholders' Equity
for the nine months ended July 31, 2002
(unaudited) 6
Consolidated Statements of Cash Flows
for the nine months ended July 31, 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
PART II. Other Information
Item 6(a). Exhibits
(i) Exhibit 10(a) Amended and Restated Credit
Agreement dated June 21, 2002.
(ii) Exhibit 10(b) $110,000,000 K. Hovnanian Mortgage,
Inc. Revolving Credit Agreement dated June 7, 2002.
(iii) Exhibit 10(c) First Amendment to K. Hovnanian
Mortgage, Inc. Revolving Credit Agreement dated
July 25, 2002.
(iv) Exhibit 99(a) Certification of Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
(v) Exhibit 99(b) Certification of Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
Item 6(b). No reports on Form 8K have been filed during
the quarter for which this report is filed.
Signatures 31
Certifications 32
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
July 31, October 31,
ASSETS 2002 2001
----------- -----------
(unaudited)
Homebuilding:
Cash and cash equivalents....................... $ 97,366 $ 10,173
----------- -----------
Inventories - At the lower of cost or fair
value:
Sold and unsold homes and lots under
development.................................. 890,942 593,149
Land and land options held for future
development or sale......................... 173,900 146,965
----------- -----------
Total Inventories........................... 1,064,842 740,114
----------- -----------
Receivables, deposits, and notes................ 56,675 75,802
----------- -----------
Property, plant, and equipment - net............ 17,634 30,756
----------- -----------
Senior residential rental properties - net....... 9,600 9,890
----------- -----------
Prepaid expenses and other assets............... 79,953 46,178
----------- -----------
Goodwill........................................ 82,441 32,618
----------- -----------
Total Homebuilding.......................... 1,408,511 945,531
----------- -----------
Financial Services:
Cash and cash equivalents....................... 6,271 5,976
Mortgage loans held for sale.................... 62,572 105,567
Other assets.................................... 10,162 6,465
----------- -----------
Total Financial Services.................... 79,005 118,008
----------- -----------
Income Taxes Receivable - Including deferred
tax benefits.................................. 2,327 719
----------- -----------
Total Assets...................................... $1,489,843 $1,064,258
=========== ===========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
July 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
----------- -----------
(unaudited)
Homebuilding:
Nonrecourse land mortgages........................ $ 8,950 $ 10,086
Accounts payable and other liabilities............ 187,522 124,125
Customers' deposits............................... 43,542 39,114
Nonrecourse mortgages secured by operating
properties...................................... 3,299 3,404
----------- -----------
Total Homebuilding............................ 243,313 176,729
----------- -----------
Financial Services:
Accounts payable and other liabilities............ 4,998 5,264
Mortgage warehouse line of credit................. 57,238 98,305
----------- -----------
Total Financial Services...................... 62,236 103,569
----------- -----------
Notes Payable:
Term loan......................................... 115,000
Senior notes...................................... 396,270 296,797
Senior Subordinated notes......................... 150,000
Subordinated notes................................ 99,747
Accrued interest.................................. 15,388 11,770
----------- -----------
Total Notes Payable........................... 676,658 408,314
----------- -----------
Total Liabilities............................. 982,207 688,612
----------- -----------
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 27,186,408 shares at
July 31, 2002 and 24,599,379 shares at
October 31, 2001 (including 4,295,621 shares at
July 2002 and 4,195,621 in October 2001 held
in Treasury).................................... 272 246
Common Stock,Class B,$.01 par value-authorized
13,000,000 shares; issued 7,792,394 shares
at July 31, 2002 and 7,818,927 shares at
October 31, 2001 (including 345,874 shares at
July 2002 and October 2001 held in Treasury).... 78 78
Paid in Capital................................... 150,666 100,957
Retained Earnings................................. 393,364 310,106
Deferred Compensation............................. (41) (127)
Treasury Stock - at cost.......................... (36,703) (35,614)
----------- -----------
Total Stockholders' Equity.................... 507,636 375,646
----------- -----------
Total Liabilities and Stockholders' Equity.......... $1,489,843 $1,064,258
=========== ===========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------- ----------------------
2002 2001 2002 2001
--------- --------- ---------- ----------
Revenues:
Homebuilding:
Sale of homes......................$ 681,329 $ 497,291 $1,656,813 $1,173,997
Land sales and other revenues...... 12,651 2,477 34,564 9,012
--------- --------- ---------- ----------
Total Homebuilding............... 693,980 499,768 1,691,377 1,183,009
Financial Services................... 10,656 9,482 28,319 21,769
--------- --------- ---------- ----------
Total Revenues................... 704,636 509,250 1,719,696 1,204,778
--------- --------- ---------- ----------
Expenses:
Homebuilding:
Cost of sales...................... 539,676 398,601 1,327,685 938,498
Selling, general and administrative 52,882 38,808 138,177 101,908
Inventory impairment loss.......... 426 412 2,755 1,350
--------- --------- ---------- ----------
Total Homebuilding............... 592,984 437,821 1,468,617 1,041,756
Financial Services................... 5,694 6,050 16,156 14,546
Corporate General and Administrative. 12,195 10,647 33,700 29,926
Interest............................. 15,849 13,485 42,353 36,939
Other Operations..................... 3,953 4,358 12,644 6,488
Restructuring Charges/Asset Writeoff. 12,000 500 12,000 2,980
Goodwill Amortization................ 1,104 2,731
--------- --------- ---------- ----------
Total Expenses................... 642,675 473,965 1,585,470 1,135,366
--------- --------- ---------- ----------
Income Before Income Taxes and
Extraordinary Loss................... 61,961 35,285 134,226 69,412
--------- --------- ---------- ----------
State and Federal Income Taxes:
State................................ 1,679 2,246 5,086 3,673
Federal.............................. 21,095 12,027 45,300 23,744
--------- --------- ---------- ----------
Total Taxes........................ 22,774 14,273 50,386 27,417
--------- --------- ---------- ----------
Extraordinary Loss from Extinguishment
Of Debt, Net of Income Taxes......... (582)
--------- --------- ---------- ----------
Net Income.............................$ 39,187 $ 21,012 $ 83,258 $ 41,995
========= ========= ========== ==========
Per Share Data:
Basic:
Income per common share before
Extraordinary loss.................$ 1.27 $ 0.74 $ 2.78 $ 1.60
Extraordinary loss................... (.02)
--------- --------- ---------- ----------
Net Income...........................$ 1.27 $ 0.74 $ 2.76 $ 1.60
========= ========= ========== ==========
Weighted average number of common
shares outstanding................. 30,877 28,375 30,188 26,312
Assuming dilution:
Income per common share before
Extraordinary loss.................$ 1.20 $ 0.71 $ 2.63 $ 1.54
Extraordinary loss................... (.02)
--------- --------- ---------- ----------
Net Income...........................$ 1.20 $ 0.71 $ 2.61 $ 1.54
========= ========= ========== ==========
Weighted average number of common
shares outstanding................ 32,703 29,623 31,902 27,309
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 45,691 45,713
Sale of common stock under
Employee stock option
plan.................... 288,550 3 3,036 3,039
Stock bonus plan.......... 63,208 1 982 983
Conversion of Class B to
Class A Common Stock.... 26,533 (26,533)
Deferred compensation..... 86 86
Treasury stock purchases.. (100,000) (1,089) (1,089)
Net Income................ 83,258 83,258
----------- ------ ----------- ------ ------- -------- -------- -------- --------
Balance, July 31, 2002.... 22,890,787 $ 272 7,446,520 $ 78 $150,666 $393,364 $ (41) $(36,703) $507,636
(Unaudited) =========== ====== =========== ====== ======= ======== ======== ======== ========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
July 31,
---------------------
2002 2001
---------- ----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 83,258 $ 41,995
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation.................................... 5,003 5,901
Amortization of goodwill........................ - 2,731
Loss (gain) on sale and retirement of property
and assets.................................... 11,858 (248)
Extraordinary loss from extinguishment of debt
net of income taxes........................... 582
Deferred income taxes........................... (5,742) (597)
Impairment losses............................... 2,755 1,350
Decrease (increase) in assets:
Mortgage notes receivable..................... 43,162 (44,163)
Receivables, prepaids and other assets........ 8,617 (7,602)
Inventories................................... (80,489) (26,482)
Increase (decrease) in liabilities:
State and Federal income taxes................ 5,521 2,932
Tax effect from exercise of stock options..... (1,074) (566)
Customers' deposits........................... 4,102 7,462
Interest and other accrued liabilities........ 17,960 2,915
Post development completion costs............. (901) 4,440
Accounts payable.............................. 7,769 7,639
---------- ----------
Net cash provided by (used in) operating
activities................................ 102,381 (2,293)
---------- ----------
Cash Flows From Investing Activities:
Net Proceeds from sale of property and assets....... 611 3,127
Purchase of property,equipment and other fixed
assets............................................ (2,730) (3,439)
Acquisition of homebuilding companies............... (140,130) (37,741)
Investment in and advances to unconsolidated
affiliates........................................ (8,679) (462)
---------- ----------
Net cash (used in) investing activities..... (150,928) (38,515)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 1,587,017 1,153,357
Proceeds from senior debt........................... 99,152
Proceeds from senior subordinated debt.............. 150,000
Principal payments on mortgages and notes...........(1,603,320)(1,095,433)
Principal payments on subordinated debt............. (99,747)
Purchase of treasury stock.......................... (1,089) (2,267)
Proceeds from sale of stock and employee stock plan. 4,022 3,210
---------- ----------
Net cash provided by financing activities... 136,035 58,867
---------- ----------
Net Increase In Cash and Cash Equivalents............. 87,488 18,059
Cash and Cash Equivalents Balance,
Beginning Of Period................................. 16,149 43,253
---------- ----------
Cash and Cash Equivalents Balance, End Of Period...... $ 103,637 $ 61,312
========== ==========
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 accounting principles
generally accepted in the United States for interim financial information
and with the instructions to form 10-Q and Article 10 of Regulation S-X.
In the opinion of management, all adjustments for interim periods presented
have been made, which include only normal recurring accruals and deferrals
necessary for a fair presentation of 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 Nine Months Ended
July 31, July 31,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
(Dollars in Thousands)
Interest Capitalized at
Beginning of Period.........$ 24,876 $ 29,749 $ 25,124 $ 25,694
Plus Acquired Entity Interest. 3,604
Plus Interest Incurred(1)(2).. 15,746 11,903 42,002 35,808
Less Interest Expensed(2)..... 15,849 13,485 42,353 36,939
-------- -------- -------- --------
Interest Capitalized at
End of Period (2).......... $ 24,773 $ 28,167 $ 24,773 $ 28,167
======== ======== ======== ========
(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 July 31, 2002 and
October 31, 2001 amounted to $17,278,000 and $18,367,000, respectively.
Rental property accumulated depreciation at July 31, 2002 and October 31,
2001 amounted to $2,952,000 and $2,688,000, respectively.
4. In accordance with Financial Accounting Standards No. 144 ("SFAS
144") "Accounting for the Impairment of or Disposal of Long Lived Assets",
we record impairment losses on inventories related to communities under
development when events and circumstances indicate that they may be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than their related carrying amounts. 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, 2002 we wrote off costs in
New Jersey, North Carolina, Metro D. C., and Poland amounting to $426,000
and $2,755,000, respectively. Costs in the amount of $281,000 and
$1,219,000 were written off during the three and nine months ended July 31,
2001, respectively, in New Jersey, North Carolina, Metro D. C., and
California. Residential inventory SFAS 144 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, 2002 and October 31, 2001,
respectively, we are obligated under various performance letters of credit
amounting to $81,071,000 and $51,647,000.
6. Our credit facility has been amended as of June 21, 2002.
Pursuant to the amendment, our credit line was extended through July 2005.
Interest is payable monthly and at various rates of either the prime rate
plus .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 July
31, 2002 and October 31, 2001, there was no outstanding balance.
Our mortgage warehouse line of credit has been amended as of June 7,
2002. Pursuant to the amendment, our credit line was extended through June
2003 and we have the option to borrow up to $150,000,000. Interest is
payable monthly at the Federal Funds Rate plus 1.375%. As of July 31, 2002
and October 31, 2001 borrowings were $57,238,000 and $98,305,000,
respectively.
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 11 below. On March 27, 2002 we paid
down the Term Loan by $50,000,000.
9. Per Share Calculations - Statement of Financial Accounting
Standards (FSAS) No. 128 "Earnings Per Share" requires the presentation of
basic earnings per share and diluted earnings per share. Basic earnings
per share is computed using the weighted average number of shares
outstanding. Diluted earnings per common share is computed using the basic
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options to purchase common stock.
10. Recent Accounting Pronouncements - In May 2002, the Financial
Accounting Standards Board issued (SFAS) No. 145, "Reporting Gains and
Losses from Extinguishment of Debt", which rescinded SFAS No. 4, No. 44,
and No. 64 and amended SFAS No. 13. The new standard addresses the income
statement classification of gains or losses from the extinguishment of debt
and criteria for classification as extraordinary items. We will adopt SFAS
No. 145 effective for our fiscal year beginning November 1, 2002. We do
not anticipate that the adoption of the new statement will have a material
effect on the financial position or results of operations of our Company.
11. 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 The Forecast Group, LP ("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, but reviewed for
impairment.The following unaudited pro forma financial data for the three
and nine months ended July 31, 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 Nine Months Ended
July 31, July 31,
------------------------------------------
2002 2001 2002 2001
-------- -------- ---------- ----------
Revenues.........................$704,636 $636,958 $1,784,045 $1,606,745
Expenses......................... 642,675 585,109 1,644,455 1,502,298
Income Taxes..................... 22,774 20,915 52,484 40,722
Extraordinary Loss from
Extinguishment Of Debt, Net
of Taxes...................... (582)
-------- -------- --------- --------
Net Income.......................$ 39,187 $ 30,934 $ 86,524 $ 63,725
======== ======== ========= ========
Diluted Net Income Per Common
Share $ 1.20 $ 0.97 $ 2.66 $ 2.03
======== ======== ========= ========
12. 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. $94,000 and $671,000 was charged against the reserve during
the three and nine months ended July 31, 2002. At July 31, 2002 $1.8
million has been charged against termination costs relating to the
termination of 63 associates and $0.9 million has been charged against
closing and relocation costs.
13. Asset Write Off - We wrote off costs during the three months
ended July 31, 2002 associated with SAP, our enterprise-wide operating
software, totaling $12.0 million pretax included in Restructuring
Charges/Asset Write Off in the accompanying Consolidated Statements of
Income or $7.6 million after taxes equal to $0.23 per fully diluted share.
These unamortized costs are those associated with the development of the
SAP system. We were not successful implementing SAP, due to the
complexities and limitations in the software program. We have $2.5 million
initiative costs remaining, all of which will be amortized over the
remaining life of the communities using SAP software, which are scheduled
to be substantially complete by the end of 2003.
14. Intangible Assets - As reported on the balance sheet we have
goodwill totaling $82.4 million. We have no other intangible assets.
During the nine months ended July 31, 2002 we added $49.8 million of
goodwill as a result of the Forecast acquisition. Goodwill amortization
deductible for income tax purposes is approximately $1,426,000 and
$3,383,000 for the three and nine months ended July 31, 2002, respectively.
After income taxes the goodwill amortization for the three and nine months
ended July 31, 2001, amounted to approximately $679,000 and $1,680,000,
which if eliminated from net income would have increased earnings per share
approximately $0.02 and $0.06, 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 July 31, 2002.
15. 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 July 31, 2002 had issued and outstanding $400,000,000 face value 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
JULY 31, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor
Elimin- Consol-
Parent Issuer iaries Subsidiaries
ations idated
-------- ---------- ---------- ------------ -----
- ----- ----------
ASSETS
Homebuilding......................$ 13 $ 124,067 $1,276,891 $ 7,540 $
$1,408,511
Financial Services................ (583) 79,588
79,005
Income Taxes (Payables)Receivables (6,613) 3,494 7,666 (2,220)
2,327
Investments in and amounts due to
and from consolidated
subsidiaries.................... 514,236 563,917 (784,438) 866
(294,581)
-------- ---------- ---------- ------------ ----
- ------ ----------
Total Assets...................... $507,636 $ 691,478 $ 499,536 $ 85,774
$(294,581) $1,489,843
======== ========== ========== ============
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding...................... $ $ 30,991 $ 212,266 $ 56 $
$ 243,313
Financial Services................ 62,236
62,236
Notes Payable..................... 661,270 15,388
676,658
Income Taxes Payable..............
Stockholders' Equity.............. 507,636 (783) 271,882 23,482
(294,581) 507,636
-------- ---------- ---------- ------------ ----
- ------ ----------
Total Liabilities and Stockholders'
Equity.......................... $507,636 $ 691,478 $ 499,536 $ 85,774
$(294,581) $1,489,843
======== ========== ========== ============
========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor
Elimin- Consol-
Parent Issuer iaries Subsidiaries
ations idated
-------- ---------- ---------- ------------ ----
- ------ ----------
Assets
Homebuilding.......................$ 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) $1,064,258
======== ========== ========== ============
========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor
Elimin- Consol-
Parent Issuer iaries Subsidiaries
ations idated
------- ---------- ---------- ------------ -----
- ----- ----------
Revenues:
Homebuilding.....................$ $ 295 $ 693,357 $ 7,807 $
(7,479) $ 693,980
Financial Services............... 2,270 8,386
10,656
Intercompany Charges............. 54,869 (10,326)
(44,543)
Equity In Pretax Income of
Consolidated Subsidiaries...... 61,961
(61,961)
------- ---------- ---------- ------------ -----
- ----- ----------
Total Revenues................ $61,961 $ 55,164 $ 685,301 $ 16,193
$(113,983) $ 704,646
------- ---------- ---------- ------------ -----
- ----- ----------
Expenses:
Homebuilding..................... 55,164 644,464 322
(62,969) 636,981
Financial Services............... 683 5,266
(255) 5,694
------- ---------- ---------- ------------ -----
- ----- ----------
Total Expenses................. 55,164 645,147 5,588
(63,224) 642,675
------- ---------- ---------- ------------ -----
- ----- ----------
Income Before Income Taxes......... 61,961 - 40,154 10,605
(50,759) 61,961
State and Federal Income Taxes..... 22,774 (26) 14,971 3,908
(18,853) 22,774
Extraordinary Loss from
Extinguishment of Debt, Net of
Income Taxes....................
------- ---------- ---------- ------------ -----
- ----- ----------
Net Income ....................... $39,187 $ 26 $ 25,183 $ 6,697 $
(31,906) $ 39,187
======= ========== ========== ============
========== ==========
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 $ 498,857 $ 9,837 $
(8,943) $ 499,768
Financial Services............... 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 $ 505,697 $ 15,144 $
(78,349) $ 509,250
------- ---------- ---------- ------------ -----
- ----- ----------
Expenses:
Homebuilding.................... 30,857 476,021 1,033
(39,996) 467,915
Financial Services............... 2,574 4,280
(804) 6,050
------- ---------- ---------- ------------ -----
- ----- ----------
Total Expenses................. 30,857 478,595 5,313
(40,800) 473,965
------- ---------- ---------- ------------ -----
- ----- ----------
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
NINE MONTHS ENDED JULY 31, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor
Elimin- Consol-
Parent Issuer iaries Subsidiaries
ations idated
------- ---------- ---------- ------------ -----
- ----- ----------
Revenues:
Homebuilding....................$ $ 565 $1,689,257 $ 20,475 $
(18,920) $1,691,377
Financial Services............... 4,956 23,363
28,319
Intercompany Charges............. 119,275 (3,663)
(115,612)
Equity In Pretax Income of
Consolidated Subsidiaries......134,226
(134,226)
------- ---------- ---------- ------------ -----
- ----- ----------
Total Revenues................$134,226 $119,840 $1,690,550 $ 43,838
$(268,758) $1,719,696
------- ---------- ---------- ------------ -----
- ----- ----------
Expenses:
Homebuilding..................... 119,840 1,587,610 1,981
(140,117) 1,569,314
Financial Services............... 1,768 15,437
(1,049) 16,156
------- ---------- ---------- ------------ -----
- ----- ----------
Total Expenses................. 119,840 1,589,378 17,418
(141,166) 1,585,470
------- ---------- ---------- ------------ -----
- ----- ----------
Income Before Income Taxes.........134,226 101,172 26,420
(127,592) 134,226
State and Federal Income Taxes..... 50,386 (180) 37,982 10,058
(47,860) 50,386
Extraordinary Loss From
Extinguishment of Debt, Net of
Income Taxes..................... (582) (582)
582 (582)
------- ---------- ---------- ------------ -----
- ----- ----------
Net Income.........................$83,258 $ (402) $ 63,190 $ 16,362 $
(79,150) $ 83,258
======= ========== ========== ============
========== ==========
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 $1,178,977 $ 20,369 $
(16,783) $1,183,009
Financial Services................ 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 $1,191,485 $ 32,728
$(180,968) $1,204,778
------- ---------- ---------- ------------ -----
- ----- ----------
Expenses:
Homebuilding..................... 90,354 1,135,160 3,422
(108,116) 1,120,820
Financial Services............... 5,962 9,582
(998) 14,546
------- ---------- ---------- ------------ -----
- ----- ----------
Total Expenses................. 90,354 1,141,122 13,004
(109,114) 1,135,366
------- ---------- ---------- ------------ -----
- ----- ----------
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 CASH FLOWS
NINE MONTHS ENDED JULY 31, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor
Elimin- Consol-
Parent Issuer iaries Subsidiaries
ations idated
-------- --------- ---------- ------------ ---
- ------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 83,258 $ (402) $ 63,190 $ 16,362 $
(79,150) $ 83,258
Adjustments to reconcile net income
to net cash (Used In) Provided
By operating activities.......... 99,463 11,817 (182,793) 11,486
79,150 19,123
-------- --------- ---------- ------------ ---
- ------- ----------
Net Cash (Used In) Provided By
Operating Activities........... 182,721 11,415 (119,603) 27,848
102,381
Net Cash (Used In)
Investing Activities............... (46,087) (1,929) (103,096) 184
(150,928)
Net Cash (Used In) Provided By
Financing Activities............... (1,089) 264,726 (85,867) (41,735)
136,035
Intercompany Investing and Financing
Activities - Net...................(135,545) (188,403) 310,301 13,647
-------- --------- ---------- ------------ ---
- ------- ----------
Net Increase (Decrease) In Cash and
Cash Equivalents................... 85,809 1,735 (56)
87,488
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 $ 79,969 $ 17,351 $ 6,307 $
$ 103,637
======== ========= ========== ============
========== ==========
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 (Used In) Provided
By 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
======== ========= ========== ============
========== ==========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Use of Estimates - 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.
Business Combinations - When we make an acquisition of another
company, we use the purchase method of accounting in accordance with
Financial Accounting Standards No. 141 ("SFAS 141") "Business
Combinations". Under SFAS No. 141 we record as our cost the acquired
assets less liabilities assumed. Any difference between the cost of an
acquired company and the sum of the fair values of tangible and identified
intangible assets less liabilities is recorded as goodwill. The reported
income of an acquired company includes the operations of the acquired
company after acquisition, based on the acquisition costs.
Income Recognition from Home Sales - Income from home sales is
recorded when each home is closed, title is conveyed to the buyer, and the
sales price has been paid.
Income Recognition from Mortgage Loans - Profits and losses relating
to the sale of mortgage loans are recognized when all indications of legal
control pass to the buyer and the sales price is collected.
Inventories - For inventories of communities under development, a
loss is recorded when events and circumstances indicate impairment and the
undiscounted future cash flows generated are less than the related carrying
amounts. The impairment loss is based on expected revenue, cost to
complete including interest, and selling costs. Inventories and long-lived
assets held for sale are recorded at the lower of cost or fair value less
selling costs. Fair value is defined in Statement of Financial Accounting
Standard (SFAS)No. 144 "Accounting for the Impairment of or Disposal of
Long-Lived Assets" as the amount at which an asset could be bought or sold
in a current transaction between willing parties, that is, other than in a
forced or liquidation sale. SFAS No. 144 provides accounting guidance for
financial accounting and reporting for impairment or disposal of long-lived
assets. Construction costs are accumulated during the period of
construction and charged to cost of sales under specific identification
methods. Land, land development, and common facility costs are allocated
based on buildable acres to product types within each community, then
amortized equally based upon the number of homes to be constructed in the
community.
Interest costs related to properties under development are
capitalized during the land development and home construction period and
expensed along with the associated cost of sales as the related inventories
are sold.
The cost of land options is capitalized when incurred and either
included as part of the purchase price when the land is acquired or charged
to operations when we determine we will not exercise the option.
Intangible Assets - The intangible asset recorded on our balance
sheet is goodwill resulting from company acquisitions. In accordance with
the Financial Accounting Standards No. 142 ("SFAS No. 142") " Goodwill and
Other Intangible Assets", we no longer amortize goodwill, but instead
review goodwill for impairment. The impairment test uses a fair value
approach rather than the undiscounted cash flows approach.
Post Development Completion Costs - In those instances where a
development is substantially completed and sold and we have additional
construction work to be incurred, an estimated liability is provided to
cover the cost of such work.
CAPITAL RESOURCES AND LIQUIDITY
Our cash uses during the nine months ended July 31, 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.
At July 31, 2002 we had approximately $90.0 million of excess cash.
Management anticipates using the excess cash to pay down long term debt,
grow existing operations, and fund future acquisitions.
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 July 31, 2002, 558,700 have been purchased under this program
of which 100,000 were repurchased during the nine months ended July 31,
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 2005.
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 2005 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 July 31, 2002, there were no
borrowings under the Agreement.
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 July 31, 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 July 31, 2002
borrowings under the Term Loan were $115,000,000.
Our mortgage banking subsidiary borrows up to $150,000,000 under a
bank warehousing arrangement that 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. As of July 31, 2002 borrowings under the greement
were $57,238,000.
Total inventory increased $324,728,000 during the nine months ended
July 31, 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 July 31, 2002 are expected to be
closed during the next twelve months. Most inventory completed or under
development is financed through our line of credit, subordinated
indebtedness, and cash flow generated from operations.
The following table summarizes housing lots included in our total
residential real estate. The July 31, 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
----------- ------- ---------- --------- -----------
- -----------
July 31, 2002:
Northeast Region.. 28 5,972 1,548 4,424 12,196
18,168
North Carolina.... 64 5,785 564 5,221 1,943
7,728
Metro D.C......... 28 3,301 920 2,381 6,915
10,216
California........ 41 5,660 1,007 4,653 2,798
8,458
Texas............. 37 2,415 295 2,120 734
3,149
Mid South......... 1 393 39 354 --
393
----------- ------- ---------- ---------- ----------
- -----------
199 23,526 4,373 19,153 24,586
48,112
=========== ======= ========== ========== ==========
===========
Owned.......... 11,308 3,512 7,796 2,504
13,812
Optioned....... 12,218 861 11,357 22,082
34,300
------- ---------- ---------- ----------
- -----------
Total........ 23,526 4,373 19,153 24,586
48,112
======= ========== ========== ==========
===========
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:
July 31, October 31,
2002 2001
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 39 48 87 69 48 117
North Carolina...... 173 20 193 205 41 246
Metro D.C........... 32 25 57 27 27 54
California.......... 181 54 235 60 11 71
Texas............... 252 10 262 215 15 230
Mid South........... 21 2 23 54 22 76
Other............... -- -- -- 7 -- 7
------ ------ ----- ------ ------ -----
Total 698 159 857 637 164 801
====== ====== ===== ====== ====== =====
Financial Services - Mortgage loans held for sale consist of
residential mortgages receivable of which $62,457,000 and $105,174,000 at
July 31, 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 NINE MONTHS ENDED JULY 31, 2002
COMPARED TO THE THREE AND NINE MONTHS ENDED JULY 31, 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 as follows:
Three Months Ended
------------------------------------------
July 31, July 31, Dollar Percentage
2002 2001 Change Change
------------------------------------------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $ 681,329 $ 497,291 $184,038 37.0%
Land sales and other
revenues........... 12,651 2,477 10,174 410.7%
Financial Services... 10,656 9,482 1,174 12.4%
---------- ---------- -------- --------
Total Revenues... $ 704,636 $ 509,250 $195,386 38.4%
========== ========== ======== ========
Nine Months Ended
------------------------------------------
July 31, July 31, Dollar Percentage
2002 2001 Change Change
------------------------------------------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $1,656,813 $1,173,997 $482,816 41.1%
Land sales and other
revenues........... 34,564 9,012 25,552 283.5%
Financial Services... 28,319 21,769 6,550 30.1%
---------- --------- -------- --------
Total Revenues... $1,719,696 $1,204,778 $514,918 42.7%
========== ========= ======== ========
Homebuilding:
Revenues from the sale of homes increased $184.0 million or 37.0%
during the three months ended July 31, 2002, and increased $482.8 million
or 41.1% during the nine months ended July 31, 2002 compared to the same
periods last year. Revenues from the sale 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,
------------------- ---------------------
2002 2001 2002 2001
--------- -------- ---------- --------
(Dollars in Thousands)
Northeast Region:
Housing Revenues..... $177,153 $156,366 $ 455,171 $ 406,692
Homes Delivered...... 570 499 1,469 1,346
North Carolina(2):
Housing Revenues..... $ 72,437 $ 85,887 $ 193,902 $ 178,142
Homes Delivered...... 393 487 1,044 1,022
Metro D. C.(2):
Housing Revenues..... $110,030 $109,535 $ 258,755 $ 221,343
Homes Delivered...... 386 439 944 938
California(1):
Housing Revenues..... $242,631 $ 61,830 $ 535,961 $ 171,483
Homes Delivered...... 926 168 2,094 460
Texas:
Housing Revenues..... $ 65,432 $ 62,360 $ 172,778 $ 146,604
Homes Delivered...... 286 286 746 691
Mid South(2):
Housing Revenues..... $ 13,646 $ 18,774 $ 39,793 $ 33,697
Homes Delivered...... 86 123 252 226
Other:
Housing Revenues..... $ -- $ 2,539 $ 453 $ 16,036
Homes Delivered...... -- 19 6 112
Totals:
Housing Revenues..... $681,329 $497,291 $1,656,813 $1,173,997
Homes Delivered...... 2,647 2,021 6,555 4,795
(1) July 31, 2002 includes Forecast deliveries beginning
on January 10, 2002.
(2) July 31, 2001 includes Washington Homes deliveries beginning
on January 24, 2001.
The increase in housing revenues was primarily due to the acquisition
of Forecast for the third quarter 2002 and the acquisition of Forecast and
a full nine months of operations from Washington Homes for the nine months
ended July 31, 2002. In addition, these increases were due to increased
deliveries in the Northeast Region resulting from a land portfolio
acquisition in late March 2002 and increased average sales prices in all
our markets except California. California's average sales price is down
due to the Forecast Group product being mostly lower priced, first time
buyer homes.
Important indicators of our future results are recently signed
contracts and home contract backlog for future deliveries. Our sales
contracts and homes in contract (using base sales prices) by market area is
set forth below:
Sales Contracts for the
Nine Months Ended Contract Backlog
July 31, as of July 31,
------------------------- ---------------------
2002 2001 2002 2001
----------- --------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Dollars.............$ 423,227 $ 400,199 $ 442,037 $354,132
Homes............... 1,478 1,483 1,578 1,286
North Carolina:
Dollars.............$ 198,848 $ 211,007 $ 108,502 $125,823
Homes............... 1,074 1,174 564 669
Metro D.C.:
Dollars.............$ 341,919 $ 248,219 $ 292,044 $224,171
Homes............... 1,085 984 920 866
California:
Dollars.............$ 634,009 $ 220,961 $ 286,876 $118,981
Homes............... 2,394 658 1,007 349
Texas:
Dollars.............$ 171,409 $ 165,160 $ 69,556 $ 85,693
Homes............... 778 781 295 372
Mid South:
Dollars.............$ 26,521 $ 36,499 $ 6,456 $ 18,725
Homes............... 169 239 39 112
Other:
Dollars.............$ 340 $ 1,578 $ -- $ 1,009
Homes............... 3 46 -- 18
Totals:
Dollars.............$1,796,273 $1,283,623 $1,205,471 $928,534
Homes............... 6,981 5,365 4,403 3,672
The following pro forma information for the nine months ended July
31, 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. Total sales contracts were
$1,882,706 and $1,688,912 and total homes were 7,379 and 7,303 for the nine
months ended July 31, 2002 and 2001, respectively. Total contract backlog
was $1,205,471 and $1,050,432 and total homes in backlog were 4,403 and
4,215 as of July 31, 2002 and 2001, respectively.
During August 2002 we signed an additional 782 contracts compared to 414 in
the same month last year.
Cost of sales includes expenses for housing and land and lot sales.
A breakout of such expenses for housing sales and housing gross margin is
set forth below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- ---------------------
2002 2001 2002 2001
-------- -------- ---------- ---------
(Dollars in Thousands)
Sale of Homes................ $681,329 $497,291 $1,656,813 $1,173,997
Cost of Sales................ 530,154 397,622 1,303,637 933,690
-------- -------- ---------- ---------
Housing Gross Margin......... $151,175 $ 99,669 $ 353,176 $ 240,307
======== ======== ========== ==========
Gross Margin Percentage...... 22.2% 20.0% 21.3% 20.5%
Cost of Sales expenses as a percentage of home sales revenues are
presented below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Sale of Homes................ 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of Sales:
Housing, land &
development costs.... 70.7% 72.3% 71.0% 71.6%
Commissions............ 2.2% 2.3% 2.2% 2.3%
Financing concessions.. 0.9% 1.1% 1.0% 0.9%
Overheads.............. 4.0% 4.3% 4.5% 4.7%
-------- -------- -------- --------
Total Cost of Sales.......... 77.8% 80.0% 78.7% 79.5%
-------- -------- -------- --------
Gross Margin................. 22.2% 20.0% 21.3% 20.5%
======== ======== ======== ========
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. We achieved higher gross margins
during the three and nine months ended July 31, 2002 compared to the same
period last year. The consolidated gross margin increased 2.2% and 0.8%
for the three and nine months ended July 31, 2002. Gross margins increased
in our Metro D. C. market, California markets (excluding Forecast
communities), and in our highest margin market, the Northeast Region.
These increased margins are primarily the result of higher sales prices and
increased national contract rebates, while housing costs remained
relatively stable.
Selling, general, and administrative costs as a percentage of total
homebuilding revenues decreased to 7.6% for the three months ended July 31,
2002 from 7.8% for the prior year's three months, and decreased to 8.2% for
the nine months ended July 31, 2002 from 8.6% for the prior year's nine
months. Such expenses increased during the three and nine months ended
July 31, 2002 by $14.1 million and $36.3 million, repsectively, compared to
the same periods last year. The percentage decline for the three and nine
months ended July 31, 2002 was due to the increased deliveries. The dollar
increase in selling, general, and administrataive was primarily due to a
full nine months of expenses from Washington Homes, Inc., increased
administrataive staff in the Northeast Region, 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 Nine Months Ended
July 31, July 31,
------------------ -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Land and Lot Sales................ $ 10,587 $ 1,160 $29,127 $ 5,398
Cost of Sales..................... 9,522 979 24,048 4,808
-------- -------- -------- --------
Land and Lot Sales Gross Margin... 1,065 181 5,079 590
Interest Expense.................. 112 58 760 347
-------- -------- -------- --------
Land and Lot Sales Profit
Before Tax...................... $ 953 $ 123 $ 4,319 $ 243
======== ======== ======== ========
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 nine months ended July 31, 2002
financial services provided a $5.0 million and $12.2 million profit before
income taxes compared to a profit of $3.4 million and $7.2 million for the
same period 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 for a full nine months 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.
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 1.7%
for the three months ended July 31, 2002 from 2.1% for the prior year's
three months and decreased to 2.0% for the nine months ended July 31, 2002
from 2.5% for the prior year's nine months. Corporate general and
administrative expenses increased $1.5 million and $3.8 million during the
three and nine months ended July 31, 2002, respectively, 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 a higher return on equity.
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,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Sale of Homes.............. $ 15,737 $13,427 $41,593 $36,592
Land and Lot Sales......... 112 58 760 347
-------- -------- -------- --------
Total...................... $ 15,849 $13,485 $42,353 $36,939
======== ======== ======== ========
Housing interest as a percentage of sale of homes revenues decreased
to 2.3% and 2.5% for the three and nine months ended July 31, 2002,
respectively, compared to 2.7% and 3.1% for the three and nine months ended
July 31, 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,
earnout payments from homebuilding company acquisitions, employee stock
bonus program, amortization of the Forecast consultant's agreements and the
right of first refusal agreement, expenses related to exiting our Mid South
market, and corporate owned life insurance loan interest. For the nine
months ended July 31, 2002, other operations increased primarily due to the
amortization of the Forecast consulting and right of first refusal
agreements (starting in 2002), increased amortization of senior and
subordinated note issuance expenses, and increased expenses from the
employee stock bonus program.
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. $94,000 and $671,000
was charged against the reserve during the three and nine months ended
July 31, 2002, respectively. At July 31, 2002 $1.8 million has been
charged against termination costs relating to the termination of 63
associates and $0.9 million has been charged against closing and relocation
costs.
Asset Write Off
We wrote off costs during the three months ended July 31, 2002
associated with SAP, our enterprise-wide operating software, totaling $12.0
million pretax included in Restructuring Charges/Asset Write Off in the
accompanying Consolidated Statements of Income or $7.6 million after taxes
equal to $0.23 per fully diluted share. These unamortized costs are those
associated with the development of the SAP system. We were not successful
in implementing SAP, due to the complexities and limitations in the
software program. We have $2.5 million initiative costs remaining, all of
which will be amortized over the remaining life of the communities using
SAP software, which are scheduled to be substantially complete by the end
of 2003. We have recently identified an alternative software package that
will offer us the information system functionality we need. We are
planning to have our first pilot community on line by the end of this
calendar year, which will utilize this alternative software package.
Recent Accounting Pronouncements
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 $1,104,000 and $2,731,000 which was incurred in the three and nine
months ended July 31, 2001, respectively, is no longer incurred in fiscal
2002.
In May 2002, the Financial Accounting Standards Board issued (SFAS)
No. 145, "Reporting Gains and Losses from Extinguishment of Debt", which
rescinded SFAS No. 4, No. 44, and No. 64 and amended SFAS No. 13. The new
standard addresses the income statement classification of gains or losses
from the extinguishment of debt and criteria for classification as
extraordinary items. We will adopt SFAS No. 145 effective for our fiscal
year beginning November 1, 2002. We do not anticipate that the adoption of
the new standard will have a material effect on the financial position or
results of operations of our Company.
Total Taxes
Total taxes as a percentage of income before taxes amounted to
approximately 37.6% and 39.5% for the nine months ended July 31, 2002 and
2001, respectively. The decrease in this percentage from 2001 to 2002 is
primarily attributed to a lower state income tax percentage and a decrease
in the effective federal income tax rate. The decrease in the state tax
percentage was primarily the result of reduced taxes in New Jersey and
Maryland which were partially offset by increases in California and
Virginia. The decreased federal effective rate is due primarily to a
reserve set up in 2001 for potential adjustments. 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 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 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
All statements in this Form 10-Q that are not historical facts should
be considered as "Forward-Looking Statements" within the meaning of the
Private Securities Litigation Act of 1995. Such statements involve known
and unknown risks, uncertainties and other factors that may cause actual
results, performance or achievements expressed or implied by the forward
looking statements. Such risks, uncertainties and other factors include,
but are not limited to:
. Changes in general and local economic and business conditions
. Weather conditions
. Changes in market conditions
. Changes in home prices and sales activity in the markets where the
Company builds homes
. Government regulation, including regulations concerning
development of
land, the homebuilding process, and the environment
. Fluctuations in interest rates and the availability of mortgage
financing
. Increases in raw materials and labor costs
. The availability and cost of suitable land and improved lots
. Levels of competition
. Availability of financing to the Company
. Terrorist acts and other acts of war
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.
Quantitative and Qualitative Disclosures About Market Risk.
The primary market risk facing us is interest rate risk on our long
term debt. In connection with our mortgage operations, mortgage loans held
for sale and the associated mortgage warehouse line of credit are subject
to interest rate risk; however, such obligations reprice frequently and are
short-term in duration. In addition, we hedge the interest rate risk on
mortgage loans by obtaining forward commitments from FNMA, FHLMC, GNMA
securities and private investors. Accordingly the risk from mortgage loans
is not material. We do not hedge interest rate risk other than on mortgage
loans using financial instruments. We are also subject to foreign currency
risk but this risk is not material. The following table sets forth as of
July 31, 2002, our long term debt obligations, principal cash flows by
scheduled maturity, weighted average interest rates and estimated fair
market value ("FMV").
As of July 31, 2002 for the
Nine Months Ended July 31,
--------------------------------------
FMV @
2003 2004 2005 2006 2007 Thereafter Total
7/31/02
------- ------ ------ ------ ------ ---------- -------- --
- -----
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate...... $11,549 $ 75 $ 81 $ 88 $ 96 $ 550,360 $562,249
$552,749
Average interest
rate.......... 6.71% 8.38% 8.38% 8.38% 8.38% 9.23% 9.17%
- --
Variable rate... -- -- -- -- $115,000 -- $115,000
$115,000
Average interest
rate.......... -- -- -- -- (2) -- --
- --
(1) Does not include bonds collateralized by mortgages receivable.
(2) Libor plus 2.5%
Part II. Other Information
Item 6(a). Exhibits
(i) Exhibit 10(a) Amended and Restated Credit
Agreement dated June 21, 2002.
(ii) Exhibit 10(b) $110,000,000 K. Hovnanian Mortgage,
Inc. Revolving Credit Agreement dated June 7, 2002.
(iii) Exhibit 10(c) First Amendment to K. Hovnanian
Mortgage Inc. Revolving Credit Agreement dated
July 25, 2002.
(iv) Exhibit 99(a) Certification of Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
(v) Exhibit 99(b) Certification of Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
Item 6(b). No reports on Form 8K have been filed during
the quarter for which this report is filed.
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 13, 2002 /S/J. LARRY SORSBY
J. Larry Sorsby,
Executive Vice President and
Chief Financial Officer
DATE: September 13, 2002 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
CERTIFICATION
I, Ara K. Hovnanian, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hovnanian
Enterprises, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
/S/ARA K. HOVNANIAN
Ara K. Hovnanian
President and Chief Executive
Officer
Date: September 13, 2002
CERTIFICATION
I, J. Larry Sorsby, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hovnanian
Enterprises, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
/S/J. LARRY SORSBY
J. Larry Sorsby
Executive Vice-President
And Chief Financial Officer
Date: September 13, 2002