UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For quarterly period ended JANUARY 31, 2006 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-8551
Hovnanian Enterprises, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-1851059
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
l0 Highway 35, P.O. Box 500, Red Bank, NJ 07701
(Address of Principal Executive Offices) (Zip Code)
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 by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. (See definition
of "accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act).
Large Accelerated Filer [ X ] Accelerated Filer [ ]
Non-Accelerated Filer { }
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 47,043,772
shares of Class A Common Stock and 14,672,000 shares of Class B Common
Stock were outstanding as of March 2, 2006.
HOVNANIAN ENTERPRISES, INC.
FORM 10-Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Financial Statements:
Condensed Consolidated Balance Sheets as of January 31,
2006 (unaudited) and October 31, 2005 3
Condensed Consolidated Statements of Income for the
three months ended January 31, 2006 and
2005 (unaudited) 5
Condensed Consolidated Statement of Stockholders'
Equity for the three months ended
January 31, 2006 (unaudited) 6
Condensed Consolidated Statements of Cash Flows for
the three months ended January 31, 2006
and 2005 (unaudited) 7
Notes to Condensed Consolidated Financial
Statements (unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 26
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 46
Item 4. Controls and Procedures 47
PART II. Other Information
Item 1. Legal Proceedings 48
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 50
Item 6. Exhibits 51
Signatures 54
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
January 31, October 31,
ASSETS 2006 2005
----------- -----------
(unaudited)
Homebuilding:
Cash and cash equivalents.................... $ 44,521 $ 218,830
----------- -----------
Inventories - At the lower of cost or fair
value:
Sold and unsold homes and lots under
development.............................. 2,831,845 2,459,431
----------- -----------
Land and land options held for future
development or sale...................... 663,665 595,806
----------- -----------
Consolidated Inventory Not Owned:
Specific performance options............. 8,550 9,289
Variable interest entities............... 241,988 242,825
Other options............................ 140,375 129,269
----------- -----------
Total Consolidated Inventory Not Owned.. 390,913 381,383
----------- -----------
Total Inventories........................ 3,886,423 3,436,620
----------- -----------
Investments in and advances to unconsolidated
joint ventures............................. 196,276 187,205
----------- -----------
Receivables, deposits, and notes ............ 84,327 125,388
----------- -----------
Property, plant, and equipment - net......... 102,920 96,891
----------- -----------
Prepaid expenses and other assets............ 152,322 125,662
----------- -----------
Goodwill..................................... 32,658 32,658
----------- -----------
Definite life intangibles.................... 211,894 249,506
----------- -----------
Total Homebuilding....................... 4,711,341 4,472,760
----------- -----------
Financial Services:
Cash and cash equivalents.................... 12,424 10,669
Mortgage loans held for sale................. 152,396 211,248
Other assets................................. 3,988 15,375
----------- -----------
Total Financial Services................. 168,808 237,292
----------- -----------
Income Taxes Receivable - Including Deferred
Tax Benefits................................. 28,630 9,903
----------- -----------
Total Assets................................... $ 4,908,779 $ 4,719,955
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
January 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2006 2005
----------- -----------
(unaudited)
Homebuilding:
Nonrecourse land mortgages....................... $ 37,685 $ 48,673
Accounts payable and other liabilities........... 482,503 510,529
Customers' deposits.............................. 249,743 259,930
Nonrecourse mortgages secured by operating
properties..................................... 24,179 24,339
Liabilities from inventory not owned............. 180,819 177,014
----------- -----------
Total Homebuilding........................... 974,929 1,020,485
----------- -----------
Financial Services:
Accounts payable and other liabilities........... 6,345 8,461
Mortgage warehouse line of credit................ 137,749 198,856
----------- -----------
Total Financial Services..................... 144,094 207,317
----------- -----------
Notes Payable:
Revolving credit agreement....................... 226,250
Senior notes..................................... 1,098,990 1,098,739
Senior subordinated notes........................ 400,000 400,000
Accrued interest................................. 13,460 20,808
----------- -----------
Total Notes Payable.......................... 1,738,700 1,519,547
----------- -----------
Total Liabilities.................................. 2,857,723 2,747,349
----------- -----------
Minority interest from inventory not owned......... 175,009 180,170
----------- -----------
Minority interest from consolidated joint ventures. 1,243 1,079
----------- -----------
Stockholders' Equity:
Preferred Stock,$.01 par value-authorized 100,000
shares; issued 5,600 shares at January 31,
2006 and at October 31, 2005 with a
liquidation preference of $140,000.
Common Stock,Class A,$.01 par value-authorized
200,000,000 shares; issued 58,290,396 shares at
January 31, 2006 and 57,976,455 shares at
October 31, 2005 (including 11,145,656 shares
at January 31, 2006 and 10,995,656 shares at
October 31, 2005 held in Treasury).............. 583 580
Common Stock,Class B,$.01 par value (convertible
to Class A at time of sale) authorized
30,000,000 shares; issued 15,365,053 shares at
January 31, 2006 and 15,370,250 shares at
October 31, 2005 (including 691,748 shares at
January 31, 2006 and October 31, 2005 held in
Treasury)....................................... 154 154
Paid in Capital................................... 378,475 371,390
Retained Earnings................................. 1,604,379 1,522,952
Deferred Compensation............................. (17,415) (19,648)
Treasury Stock - at cost.......................... (91,372) (84,071)
----------- -----------
Total Stockholders' Equity.................... 1,874,804 1,791,357
----------- -----------
Total Liabilities and Stockholders' Equity..........$ 4,908,779 $ 4,719,955
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Ended
January 31,
-----------------------
2006 2005
----------- ----------
Revenues:
Homebuilding:
Sale of homes...................... $ 1,246,197 $1,015,969
Land sales and other revenues...... 12,533 24,399
----------- ----------
Total Homebuilding............... 1,258,730 1,040,368
Financial Services................... 19,262 14,193
----------- ----------
Total Revenues................... 1,277,992 1,054,561
----------- ----------
Expenses:
Homebuilding:
Cost of sales, excluding interest.. 934,687 771,256
Cost of sales interest............. 16,569 17,767
----------- ----------
Total Cost of Sales.............. 951,256 789,023
----------- ----------
Selling, general and administrative 135,234 96,588
Inventory impairment loss.......... 3,109 498
----------- ----------
Total Homebuilding............... 1,089,599 886,109
Financial Services................... 13,530 9,920
Corporate General and Administrative. 27,722 15,878
Other Interest....................... 820 155
Other Operations..................... 7,001 1,940
Intangible Amortization.............. 11,669 10,088
----------- ----------
Total Expenses................... 1,150,341 924,090
----------- ----------
Income from unconsolidated joint
ventures........................... 7,575 1,435
----------- ----------
Income Before Income Taxes............. 135,226 131,906
----------- ----------
State and Federal Income Taxes:
State................................ 4,874 5,446
Federal.............................. 46,256 44,978
----------- ----------
Total Taxes........................ 51,130 50,424
----------- ----------
Net Income............................. 84,096 81,482
Less: Preferred Stock Dividends....... 2,669
----------- ----------
Net Income Available to Common
Stockholders......................... $ 81,427 $ 81,482
=========== ==========
Per Share Data:
Basic:
Income per common share.............. $ 1.30 $ 1.31
Weighted average number of common
shares outstanding................. 62,810 62,240
Assuming dilution:
Income per common share.............. $ 1.25 $ 1.25
Weighted average number of common
shares outstanding................ 65,403 65,419
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars In Thousands)
(Unaudited)
A Common Stock B Common Stock Preferred Stock
------------------ ------------------ ----------------------
Shares Shares Shares
Issued and Issued and Issued and Paid-In Retained Deferred Treasury
Outstanding Amount Outstanding Amount Outstanding Amount Capital Earnings Comp. Stock Total
----------- ------ ----------- ------ ----------- ---------- -------- ---------- -------- --------- ----------
Balance,
October 31, 2005. 46,980,799 $ 580 14,678,502 $ 154 5,600 $ - $371,390 $1,522,952 $(19,648) $(84,071) $1,791,357
Issuance costs..... (90) (90)
Preferred Dividend
Declared ($476.56
per Share)....... (2,669) (2,669)
Stock Options,
amortization and
issuances, net
of tax........... 122,914 1 6,078 6,079
Restricted Stock
grants, issuances
and forfeitures,
Net of tax....... 185,830 2 1,097 947 2,046
Amortization of
Restricted Stock. 1,286 1,286
Conversion of Class B
to Class A
common stock..... 5,197 (5,197)
Treasury Stock
Purchases........ (150,000) (7,301) (7,301)
Net Income......... 84,096 84,096
----------- ------ ----------- ------ ----------- ---------- -------- ---------- -------- --------- ---------
Balance,
January 31, 2006. 47,144,740 $ 583 14,673,305 $ 154 5,600 $ - $378,475 $1,604,379 $(17,415) $(91,372) $1,874,804
=========== ====== =========== ====== =========== ========== ======== ========== ======== ========= ==========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands - unaudited)
Three Months Ended
January 31,
------------------------
2006 2005
----------- -----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 84,096 $ 81,482
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation.................................... 3,086 1,620
Intangible amortization......................... 11,669 10,088
Amortization of deferred compensation........... 7,867 2,087
Amortization of bond discounts.................. 251 153
Excess tax benefits from share-based payment.... (3,443) -
Loss on sale and retirement of property
and assets.................................... 74 41
Undistributed income from unconsolidated
joint ventures................................ (5,100) -
Deferred income taxes........................... (30,701) (7,394)
Impairment losses............................... 3,109 498
Decrease (increase) in assets:
Mortgage notes receivable..................... 58,854 52,665
Receivables, prepaids and other assets........ 51,556 (37,745)
Inventories................................... (446,247) (112,248)
(Decrease) increase in liabilities:
State and Federal income taxes................ 11,974 (37,424)
Customers' deposits........................... (10,303) 11,366
Interest and other accrued liabilities........ (24,275) (21,510)
Accounts payable.............................. (19,522) (35,960)
----------- -----------
Net cash (used in) operating activities..... (307,055) (92,281)
----------- -----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets....... 89 35
Purchase of property, equipment and other fixed
assets............................................ (9,147) (13,478)
Net investments of capital in unconsolidated
affiliates........................................ (3,929) (6,156)
----------- -----------
Net cash (used in) investing activities..... (12,987) (19,599)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 18,246 17,380
Net proceeds (payments) related to revolving
credit agreement.................................. 226,250 (115,000)
Net proceeds (payments) related to mortgage
warehouse line of credit.......................... (61,107) (57,170)
Proceeds from senior debt........................... - 200,000
Proceeds from senior subordinated debt.............. - 100,000
Payments of issuance costs.......................... (90) -
Principal payments on mortgages and notes........... (30,828) (19,182)
Excess tax benefits from share-based payment........ 3,443 -
Preferred dividends paid........................... (2,669) -
Purchase of treasury stock.......................... (7,301) -
Proceeds from sale of stock and employee stock plan. 1,544 1,107
----------- -----------
Net cash provided by financing activities.... 147,488 127,135
----------- -----------
Net (Decrease) increase in Cash........................ (172,554) 15,255
Cash and Cash Equivalents Balance, Beginning
of Period........................................... 229,499 78,024
----------- -----------
Cash and Cash Equivalents Balance, End of Period...... $ 56,945 $ 93,279
=========== ===========
Supplemental Disclosures of Cash Flow
Cash paid during the year for:
Interest......................................... $ 26,642 $ 17,711
=========== ===========
Income taxes..................................... $ 38,885 $ 92,210
=========== ===========
Supplemental disclosures of noncash operating
activities:
Consolidated Inventory Not Owned:
Specific performance options..................... $ 8,075 $ 2,941
Variable interest entities....................... 227,983 150,793
Other options.................................... 137,834 30,072
----------- -----------
Total Inventory Not Owned.......................... $ 373,892 $ 183,806
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
In the opinion of management, all adjustments for interim periods
presented have been made, which include only normal recurring accruals and
deferrals necessary for a fair presentation of our consolidated financial
position, results of operations, and changes in cash flows. The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates and these differences could have a significant impact on
the financial statements. Results for interim periods are not necessarily
indicative of the results which might be expected for a full year. The
balance sheet at October 31, 2005 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. Effective November 1, 2005, the Company adopted Statement of
Financial Accounting Standards ("SFAS") 123R, "Share-Based Payments",
which revises SFAS 123, "Accounting for Stock-Based Compensation". Prior
to fiscal year 2006, the Company accounted for stock awards granted to
employees under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations. As a result, the recognition of
stock-based compensation expense was generally limited to the expense
attributed to nonvested stock awards, as well as the amortization of
certain acquisition-related deferred compensation.
SFAS 123R applies to new awards and to awards modified, repurchased,
or cancelled after the required effective date, as well as to the unvested
portion of awards outstanding as of the required effective date. The
Company uses the Black-Scholes model to value its new stock option grants
under SFAS 123R, applying the "modified prospective method" for existing
grants which requires the Company to value stock options prior to its
adoption of SFAS 123R under the fair value method and expense the unvested
portion over the remaining vesting period. The fair value for options is
established at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions for January 31,
2006: risk-free interest rate of 4.15%; dividend yield of zero;
volatility factor of the expected market price of our common stock of
0.43; and a weighted average expected life of the option of 5.0 years.
SFAS 123R also requires the Company to estimate forfeitures in calculating
the expense related to stock-based compensation (estimated at 2% for
fiscal 2006 and fiscal 2005, respectively,) and requires the Company to
reflect the benefits of tax deductions in excess of recognized
compensation cost to be reported as both a financing cash inflow and an
operating cash outflow upon adoption.
Compensation cost arising from nonvested stock granted to employees
and from non-employee stock awards is recognized as expense using the
straight-line method over the vesting period. Unearned compensation is
included in deferred compensation in stockholders' equity beginning in the
first quarter of fiscal 2004. As of January 31, 2006, there was $17.4
million of total unrecognized compensation cost related to nonvested
stock.
For the three months ended January 31, 2006, the Company's total
stock-based compensation expense was $7.9 million ($4.9 million net of
tax). Included in this total stock-based compensation expense was
incremental expense for stock options of $3.3 million ($2.1 million net of
tax) for the quarter ended January 31, 2006.
The following table illustrates the effect (in thousands, except per
share amounts) on net income and earnings per share for the three months
ended January 31, 2005 as if the Company's stock-based compensation had
been determined based on the fair value at the grant dates for awards made
prior to fiscal 2006, under those plans and consistent with SFAS 123R:
Three Months Ended
January 31,
------------------
2005
------------------
Net income as reported.......... $ 81,482
Deduct: total stock-based employee
compensation expense determined
using Black-Scholes fair value
based method for all awards... 1,352
--------
Pro forma net income............ $ 80,130
========
Pro forma basic earnings per share $ 1.29
========
Basic earnings per share as
reported...................... $ 1.31
========
Pro forma diluted earnings per
share......................... $ 1.22
========
Diluted earnings per share as
reported...................... $ 1.25
========
Pro forma information regarding net income and earnings per share is
calculated as if we had accounted for our stock-based compensation under
the fair value method of SFAS 123R. The fair value for options is
established at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions for January 31,
2005: risk-free interest rate of 4.19%; dividend yield of zero;
volatility factor of the expected market price of our common stock of
0.43; and a weighted average expected life of the option of 5.2 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because our employee stock options have
characteristics significantly different from traded options, and changes
in the subjective input assumptions can materially affect the fair value
estimate, management believes the existing models do not necessarily
provide a reliable measure of the fair value of its employee stock
options.
On November 10, 2005, the FASB issued FASB Staff Position No. SFAS
123(R)-3, "Transition Election Related to Accounting for Tax Effects of
Share-Based Payment Awards" (FSP 123R-3). The alternative transition
method includes simplified methods to establish the beginning balance of
the additional paid-in capital pool (APIC pool) related to the tax effects
of employee stock-based compensation, and to determine the subsequent
impact on the APIC pool and Consolidated Statements of Cash Flows of the
tax effects of employee stock-based compensation awards that are
outstanding upon adoption of SFAS 123R. The Company has until November
2006 to make a one-time election to adopt the transition method described
in FSP 123R-3. The Company is currently evaluating FSP 123R-3; however, if
the Company were to make the one-time election, it is not expected to
affect operating income or net income.
3. Interest costs incurred, expensed and capitalized were:
Three Months Ended
January 31,
------------------
2006 2005
-------- --------
(Dollars in Thousands)
Interest Capitalized at
Beginning of Period(1)..... $ 48,366 $ 37,465
Plus Interest Incurred(2).... 30,804 21,044
Less Cost of Sales Interest
Expensed(3)................ 16,569 17,767
Less Other Interest Expensed. 820 155
-------- --------
Interest Capitalized at
End of Period.............. $ 61,781 $ 40,587
======== ========
(1) Beginning balance for 2006 does not include interest incurred of
$2.3 million which is capitalized in property, plant, and equipment.
(2) Data does not include interest incurred by our mortgage and finance
subsidiaries.
(3) Represents interest on borrowings for construction, land and
development costs, which are charged to interest expense when homes
are delivered.
4. Accumulated depreciation at January 31, 2006 and October 31,
2005 amounted to $33.3 million and $30.5 million, respectively, for our
homebuilding assets.
5. 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 carrying amounts. In addition, from time
to time, we will write off certain residential land options including
approval and engineering costs for land we decided not to purchase. We
wrote off such costs in the amount of $3.1 million and $0.5 million during
the three months ended January 31, 2006 and 2005, respectively.
Residential inventory impairment losses and option write-offs are reported
in the Condensed Consolidated Statements of Income as "Homebuilding-
Inventory impairment loss".
6. We provide a warranty accrual for repair costs over $1,000 to
homes, community amenities, and land development infrastructure. We
accrue for warranty costs as part of cost of sales at the time each home
is closed and title and possession have been transferred to the homebuyer.
In addition, we accrue warranty costs under our $20 million per occurrence
general liability insurance deductible for fiscal 2006 (deductible was $5
million per occurrence for homes built in fiscal 2005 and $150,000 per
occurrence for homes built between fiscal 2001 and fiscal 2004) as part of
selling, general and administrative costs. Warranty accruals are based
upon historical experience. Additions and charges incurred in the
warranty accrual and general liability accrual for the three months ended
January 31, 2006 and 2005 are as follows:
Three Months Ended
January 31,
-------- --------
2006 2005
-------- --------
(Dollars in Thousands)
Balance, beginning of period..... $86,706 $64,922
Additions........................ 7,264 13,337
Charges incurred................. (6,339) (4,143)
-------- --------
Balance, end of period.......... $87,631 $74,116
======== ========
7. We are involved in litigation arising in the ordinary course of
business, none of which is expected to have a material adverse effect on
our financial position or results of operations and we are subject to
extensive and complex regulations that affect the development and home
building, sales and customer financing processes, including zoning,
density, building standards and mortgage financing. These regulations
often provide broad discretion to the administering governmental
authorities. This can delay or increase the cost of development or
homebuilding.
We also are subject to a variety of local, state, federal and
foreign laws and regulations concerning protection of health and the
environment. The particular environmental laws which apply to any given
community vary greatly according to the community site, the site's
environmental conditions and the present and former uses of the site.
These environmental laws may result in delays, may cause us to incur
substantial compliance, remediation, and/or other costs, and can prohibit
or severely restrict development and homebuilding activity in certain
environmentally sensitive regions or areas.
In March 2005, we received two requests for information
pursuant to Section 308 of the Clean Water Act from Region 3 of the
Environmental Protection Agency (the "EPA"). These requests sought
information concerning storm water discharge practices in connection with
completed, ongoing and planned homebuilding projects by subsidiaries in
the states and district that comprise EPA Region 3. We also received a
notice of violations for one project in Pennsylvania and requests for
sampling plan implementation in two projects in Pennsylvania. The amount
requested by the EPA to settle the asserted violations at the one project
was not material. We provided the EPA with information in response to its
requests. We have since been advised by the Department of Justice ("DOJ")
that it will be involved in the review of our storm water discharge
practices. We cannot predict the outcome of the review of these practices
or estimate the costs that may be involved in resolving the matter. To
the extent that the EPA or the DOJ asserts violations of regulatory
requirements and requests injunctive relief or penalties, we will defend
and attempt to resolve such asserted violations.
In addition, in November 2005, we received two notices from the
California Regional Water Quality Control Board alleging violations of
certain storm water discharge rules and assessing an administrative civil
liability of $0.2 million and $0.3 million. We do not consider these
assessments to be material and are considering our response to the
notices.
It can be anticipated that increasingly stringent requirements will
be imposed on developers and homebuilders in the future. Although we
cannot predict the effect of these requirements, they could result in
time-consuming and expensive compliance programs and in substantial
expenditures, which could cause delays and increase our cost of
operations. In addition, the continued effectiveness of permits already
granted or approvals already obtained is dependent upon many factors, some
of which are beyond our control, such as changes in policies, rules and
regulations and their interpretations and application.
Our sales and customer financing processes are subject to the
jurisdiction of the U. S. Department of Housing and Urban Development
("HUD"). In connection with the Real Estate Settlement Procedures Act,
HUD recently inquired about our process of referring business to our
affiliated mortgage company and has separately requested documents related
to customer financing. We have responded to HUD's inquiries. In
connection with these inquiries, the Inspector General of HUD has
recommended to the Secretary of HUD that we indemnify HUD for any losses
that it may sustain in connection with nine loans that it alleges were
improperly underwritten. We cannot predict the outcome of HUD's inquiry
or estimate the costs that may be involved in resolving the matter. We do
not expect the ultimate cost to be material.
8. As of January 31, 2006 and October 31, 2005, respectively, we
are obligated under various performance letters of credit amounting to
$391.0 million and $330.8 million.
9. Our amended and restated unsecured Revolving Credit Agreement
("Agreement") with a group of banks provides a revolving credit line of
$1.2 billion through July 2009. The facility contains an accordion
feature under which the aggregate commitment can be increased to $1.3
billion subject to the availability of additional commitments. Interest
is payable monthly at various rates based on a margin ranging from 1.00%
to 1.95% per annum, depending on our Consolidated Leverage Ratio, as
defined in the Agreement, plus, at the Company's option, either (1) a base
rate determined by reference to the higher of (a) PNC Bank, National
Association's prime rate and (b) the federal funds rate plus 1/2% or (2) a
LIBOR-based rate for a one, two, three, or six month interest period as
selected by the Company. In addition, we pay a fee ranging from 0.20% to
0.30% per annum on the unused portion of the revolving credit line
depending on our Consolidated Leverage Ratio and the average percentage
unused portion of the revolving credit line. We and each of our
significant subsidiaries, except for various subsidiaries formerly engaged
in the issuance of collateralized mortgage obligations, a subsidiary
formerly engaged in homebuilding activity in Poland, our financial
services subsidiaries, joint ventures, and certain other subsidiaries, is
a guarantor under the Agreement. As of January 31, 2006 and October 31,
2005, the outstanding balance under the Agreement was $226.3 million and
zero, respectively.
Our amended secured mortgage loan warehouse agreement with a group
of banks, which is a short-term borrowing facility, provided up to $250
million through April 2006. Interest is payable monthly at the Eurodollar
Rate plus 1.25%. The loan is repaid when we sell the underlying mortgage
loans to permanent investors. We also have a $100 million commercial
paper facility. The facility expires in September 2006 and interest of
LIBOR plus .65% is payable monthly. As of January 31, 2006 and October 31,
2005, borrowings under both agreements were $137.7 million and $198.9
million, respectively. On March 7, 2006, we amended our secured mortgage
loan warehouse agreement. Pursuant to the new agreement, we may borrow up
to $250 million. It expires on October 30, 2006 and interest is payable
monthly at the Eurodollar Rate plus 1.0%.
10. On November 30, 2004, we issued $200 million of 6 1/4% Senior
Notes due 2015 and $100 million of 6% Senior Subordinated Notes due 2010.
The net proceeds of the issuance were used to repay the outstanding
balance on our revolving credit facility as of November 30, 2004 and for
general corporate purposes.
On August 8, 2005, we issued $300 million 6 1/4% Senior Notes due
2016. The notes were issued at a discount to yield 6.46% and have been
reflected net of the unamortized discount in the Condensed Consolidated
Balance Sheets. The notes are redeemable in whole or in part at our
option at 100% of their principal amount plus the payment of a make-whole
amount. The net proceeds of the issuance were used to repay the
outstanding balance under our revolving credit facility as of August 8,
2005, and for general corporate purposes, including acquisitions.
At January 31, 2006, we had $1,105.3 million of outstanding senior
notes ($1,099.0 million, net of discount), comprised of $140.3 million 10
1/2% Senior Notes due 2007, $100 million 8% Senior Notes due 2012, $215
million 6 1/2% Senior Notes due 2014, $150 million 6 3/8% Senior Notes due
2014, $200 million 6 1/4% Senior Notes due 2015, and $300 million 6 1/4%
Senior Notes due 2016. At January 31, 2006, we had $400 million of
outstanding senior subordinated notes, comprised of $150 million 8 7/8%
Senior Subordinated Notes due 2012, $150 million 7 3/4% Senior
Subordinated Notes due 2013, and $100 million 6% Senior Subordinated Notes
due 2010.
As a subsequent event, on February 27, 2006, we issued $300 million
of 7 1/2% Senior Notes due 2016. The notes are redeemable in whole or in
part at our option at 100% of their principal amount plus the payment of a
make-whole amount. The net proceeds of the issuance were used to repay a
portion of the outstanding balance under our revolving credit facility as
of February 27, 2006.
Under the terms of the indentures governing our debt securities, we
have the right to make certain redemptions and depending on market
conditions, may do so from time to time.
11. Per Share Calculations - Basic earnings per common share is
computed using the weighted average number of shares outstanding. Diluted
earnings per common share is computed using the weighted average number of
shares outstanding adjusted for the incremental shares attributed to non-
vested stock and outstanding options to purchase common stock, of
approximately 2.6 million and 3.2 million for the three months ended
January 31, 2006 and 2005, respectively.
12. On July 12, 2005, we issued 5,600 shares of 7.625% Series A
Preferred Stock, with a liquidation preference of $25,000 per share for
net proceeds of $135 million. Dividends on the Series A Preferred Stock
are not cumulative and are paid at an annual rate of 7.625%. The Series A
Preferred Stock is not convertible into the Company's common stock and is
redeemable in whole or in part at our option at the liquidation preference
of the shares beginning on the fifth anniversary of their issuance. The
Series A Preferred Stock is traded as depositary shares, with each
depositary share representing 1/1000th of a share of Series A Preferred
Stock. The depositary shares are listed on the Nasdaq National Market
under the symbol "HOVNP". The net proceeds from the offering, reflected
in Paid in Capital in the Condensed Consolidated Balance Sheet, were
used for the partial repayment of the outstanding balance under our
revolving credit facility as of July 12, 2005. On January 17, 2006,
we paid $2.7 million of dividends on the Series A Preferred Stock.
13. Variable Interest Entities - In January 2003, the Financial
Accounting Standards Board ("FASB") issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). A Variable
Interest Entity ("VIE") is created when (i) the equity investment at risk
is not sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties or (ii)
equity holders either (a) lack direct or indirect ability to make
decisions about the entity, (b) are not obligated to absorb expected
losses of the entity or (c) do not have the right to receive expected
residual returns of the entity if they occur. If an entity is deemed to
be a VIE pursuant to FIN 46, an enterprise that absorbs a majority of the
expected losses of the VIE is considered the primary beneficiary and must
consolidate the VIE.
Based on the provisions of FIN 46, we have concluded that whenever
we option land or lots from an entity and pay a non-refundable deposit, a
VIE is created under condition (ii) (b) and (c) of the previous paragraph.
We are deemed to have provided subordinated financial support, which
refers to variable interests that will absorb some or all of an entity's
expected theoretical losses if they occur. For each VIE created with a
significant nonrefundable option fee, we compute expected losses and
residual returns based on the probability of future cash flows as outlined
in FIN 46. If we are deemed to be the primary beneficiary of the VIE we
consolidate it on our balance sheet. The fair value of the VIEs inventory
is reported as "Consolidated Inventory Not Owned - Variable interest
entities".
Management believes FIN 46 was not clearly thought out for
application in the homebuilding industry for land and lot options. Under
FIN 46, we can have an option and put down a small deposit as a percentage
of the purchase price and still have to consolidate the entity. Our
exposure to loss as a result of our involvement with the VIE is only the
deposit, not its total assets consolidated on the balance sheet. In
certain cases, we will have to place inventory the VIE has optioned to
other developers on our balance sheet. In addition, if the VIE has
creditors, its debt will be placed on our balance sheet even though the
creditors have no recourse against us. Based on these observations we
believe consolidating VIEs based on land and lot option deposits does not
reflect the economic realities or risks of owning and developing land.
At January 31, 2006, all 31 VIEs we were required to consolidate
were the result of our options to purchase land or lots from the selling
entities. We paid cash or issued letters of credit deposits to these VIEs
totaling $27.4 million. Our option deposits represent our maximum
exposure to loss. The fair value of the property owned by these VIEs was
$242.0 million. Since we do not own an equity interest in any of the
unaffiliated variable interest entities that we must consolidate pursuant
to FIN 46, we generally have little or no control or influence over the
operations of these entities or their owners. When our requests for
financial information are denied by the land sellers, certain assumptions
about the assets and liabilities of such entities are required. In most
cases, the fair value of the assets of the consolidated entities have been
based on the remaining contractual purchase price of the land or lots we
are purchasing. In these cases, it is assumed that the entities have no
debt obligations and the only asset recorded is the land or lots we have
the option to buy with a related offset to minority interest for the
assumed third party investment in the variable interest equity. At
January 31, 2006, the balance reported in minority interest from inventory
not owned was $175.0 million. Creditors of these VIEs have no recourse
against the Company.
We will continue to control land and lots using options. Not all
our deposits are with VIEs. Including the deposits with the 31 VIEs
above, at January 31, 2006, we have total cash and letters of credit
deposits amounting to approximately $409.5 million to purchase land lots
with a total purchase price of $5.0 billion. The maximum exposure to loss
is limited to the deposits although some deposits are refundable at our
request or refundable if certain conditions are not met.
14. Investments in Unconsolidated Homebuilding and Land Development
Joint Ventures - We enter into homebuilding and land development joint
ventures from time to time as a means of accessing lot positions,
expanding our market opportunities, establishing strategic alliances,
managing our risk profile, leveraging our capital base, and enhancing
returns on capital. Our homebuilding joint ventures are generally entered
into with third party investors to develop land and construct homes that
are sold directly to third party homebuyers. Our land development joint
ventures include those entered into with developers and other
homebuilders, as well as financial investors, to develop finished lots for
sale to the joint venture's members or other third parties. As of January
31, 2006, we have investments in nine homebuilding joint ventures and nine
land development joint ventures. The tables set forth below summarize the
combined financial information related to our unconsolidated homebuilding
and land development joint ventures that are accounted for under the
equity method.
January 31, 2006
------------------------------------------------
Homebuilding Land Development Total
-------------- ---------------- --------------
Assets:
Cash and cash equivalents....... $ 52,191 $ 1,341 $ 53,532
Inventories..................... 701,865 194,888 896,753
Other assets.................... 169,666 3,113 172,779
-------------- ---------------- --------------
Total assets.................... $ 923,722 $ 199,342 $ 1,123,064
============== ================ ==============
Liabilities and Equity:
Accounts payable and
accrued liabilities........... $ 176,327 $ 16,234 $ 192,561
Notes payable................... 359,340 59,405 418,745
Equity of:
Hovnanian Enterprises, Inc.... 82,821 87,467 170,288
Others........................ 305,234 36,236 341,470
-------------- ---------------- --------------
Total Equity.................... 388,055 123,703 511,758
-------------- ---------------- --------------
Total liabilities and equity.... $ 923,722 $ 199,342 $ 1,123,064
============== ================ ==============
Debt to Capitalization Ratio.... 48% 32% 45%
October 31, 2005
------------------------------------------------
Homebuilding Land Development Total
-------------- ---------------- --------------
Assets:
Cash and cash equivalents....... $ 46,200 $ 5,012 $ 51,212
Inventories..................... 694,408 198,267 892,675
Other assets.................... 166,974 295 167,269
-------------- ---------------- --------------
Total assets.................... $ 907,582 $ 203,574 $ 1,111,156
============== ================ ==============
Liabilities and Equity:
Accounts payable and
accrued liabilities........... $ 228,264 $ 21,523 $ 249,787
Notes payable................... 316,532 59,131 375,663
Equity of:
Hovnanian Enterprises, Inc.... 75,349 86,593 161,942
Others........................ 287,437 36,327 323,764
-------------- ---------------- --------------
Total Equity.................... 362,786 122,920 485,706
-------------- ---------------- --------------
Total liabilities and equity.... $ 907,582 $ 203,574 $ 1,111,156
============== ================ ==============
Debt to Capitalization Ratio.... 47% 32% 44%
As of January 31, 2006 and October 31, 2005, we had advances
outstanding of approximately $21.2 million and $23.7 million,
respectively, to these unconsolidated joint ventures, which were included
in the accounts payable and accrued liabilities balances in the table
above. On our Hovnanian Enterprises, Inc. Condensed Consolidated Balance
Sheet our "Investments in and advances to unconsolidated joint ventures"
amounted to $196.3 million and $187.2 million at January 31, 2006 and
October 31, 2005, respectively. The minor difference between the
Hovnanian equity balance plus advances to unconsolidated joint ventures
balance disclosed here compared to the Hovnanian Enterprises, Inc.
Condensed Consolidated Balance Sheet is due to a different inside basis
versus outside basis in certain joint ventures.
For the Three Months Ended January 31,2006
------------------------------------------------
Homebuilding Land Development Total
-------------- ---------------- --------------
Revenues........................ $ 216,048 $ 8,400 $ 224,448
Cost of sales and expenses...... (193,332) (7,648) (200,980)
-------------- ---------------- --------------
Net income...................... $ 22,716 $ 752 $ 23,468
============== ================ ==============
Our share of net earnings....... $ 7,299 $ 276 $ 7,575
============== ================ ==============
For the Three Months Ended January 31,2005
------------------------------------------------
Homebuilding Land Development Total
-------------- ---------------- --------------
Revenues........................ $ 12,168 $ 2,730 $ 14,898
Cost of sales and expenses...... (9,276) (3,165) (12,441)
-------------- ---------------- --------------
Net income (loss)............... $ 2,892 $ (435) $ 2,457
============== ================ ==============
Our share of net earnings (losses)$ 1,633 $ (198) $ 1,435
============== ================ ==============
Income from unconsolidated joint ventures is reflected as a separate
line in the accompanying Condensed Consolidated Financial Statements and
reflects our proportionate share of the income of these unconsolidated
homebuilding and land development joint ventures. Our ownership interests
in the joint ventures vary but are generally less than or equal to 50
percent. In determining whether or not we must consolidate joint
ventures, where we are the manager of the joint venture, we consider the
guidance in EITF 04-5 in assessing whether the other partners have
specific rights to overcome the presumption of control by us or the
manager of the joint venture.
Typically, our unconsolidated joint ventures obtain separate project
specific mortgage financing for each venture. Generally, the amount of
such financing is limited to no more than 50% of the joint venture's total
assets, and such financing is obtained on a non-recourse basis, with
guarantees from us limited only to performance and completion guarantees
and environmental indemnification. In some instances, the joint venture
entity is considered a variable interest entity (VIE) under FIN 46 due to
the returns being limited to the equity holders; however, in these
instances, we are not the primary beneficiary, therefore we do not
consolidate these entities.
15. Recent Accounting Pronouncements - In May 2005, the FASB issued
SFAS 154, "Accounting Changes and Error Corrections". This statement,
which replaces APB Opinion No. 20, "Accounting Changes", and SFAS No. 3,
"Reporting Accounting Changes in Interim Financial Statements", changes
the requirements for the accounting for and reporting of a change in
accounting principle. The statement requires retrospective application of
changes in accounting principle to prior periods' financial statements
unless it is impracticable to determine the period-specific effects or the
cumulative effect of the change. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after
December 15, 2005. The adoption of SFAS No. 154 is not expected to have a
material impact on our consolidated financial position, results of
operations or cash flows.
In June 2005, the Emerging Issues Task Force ("EITF") released Issue
No. 04-5, "Determining Whether a General Partner, or the General Partners
as a Group, Controls a Limited Partnership or Similar Entity When the
Limited Partners Have Certain Rights" ("EITF 04-5"). EITF 04-5 creates a
framework for evaluating whether a general partner or a group of general
partners controls a limited partnership and therefore should consolidate
the partnership. EITF 04-5 states that the presumption of general partner
control would be overcome only when the limited partners have certain
specific rights as outlined in EITF 04-5. EITF 04-5 is effective
immediately for all newly formed limited partnerships and for existing
limited partnership agreements that are modified. For general partners in
all other limited partnerships, EITF 04-5 is effective no later than the
beginning of the first reporting period in fiscal years beginning after
December 15, 2005. Implementation of EITF 04-5 is not expected to have a
material impact on our consolidated financial position, results of
operations or cash flows.
16. Intangible Assets - The intangible assets recorded on our
balance sheet are goodwill, definite life intangibles, tradenames,
architectural designs, distribution processes, and contractual agreements
with both definite and indefinite lives resulting from our acquisitions.
We no longer amortize goodwill or indefinite life intangibles, but instead
assess them periodically for impairment. We are amortizing the definite
life intangibles over their expected useful life, ranging from three to
seven years.
17. On March 1, 2005, we acquired for cash the assets of Cambridge
Homes, a privately held Orlando homebuilder and provider of related
financial services, headquartered in Altamonte Springs, Florida. Cambridge
Homes also provides mortgage financing, as well as title and settlement
services to its homebuyers. In connection with the acquisition, based on
an appraisal of acquisition intangibles, we have definite life intangible
assets equal to the excess of purchase price over the fair value of the
net tangible assets of $22 million. We are amortizing the various
definite life intangibles over their estimated lives.
On March 2, 2005, we acquired the operations of Town & Country
Homes, a privately held homebuilder and land developer headquartered in
Lombard, Illinois, which occurred concurrently with our entering into a
joint venture agreement with affiliates of Blackstone Real Estate Advisors
in New York to own and develop Town & Country's existing residential
communities. The joint venture is being accounted for under the equity
method. Town & Country Homes' operations beyond the existing owned and
optioned communities, as of the acquisition date, are wholly-owned and
included in our consolidated financial statements.
On August 3, 2005, we acquired substantially all of the homebuilding
assets of Oster Homes, a privately held Ohio homebuilder, headquartered in
Lorain, Ohio.
On August 8, 2005, we acquired substantially all of the assets of
First Home Builders of Florida, a privately held homebuilder and provider
of related financial services headquartered in Cape Coral, Florida.
In connection with the First Home Builders of Florida and Oster
Homes acquisitions, we have definite life intangible assets equal to the
excess purchase price over the fair value of $121 million in the
aggregate. We are awaiting the appraisal from these acquisitions. Until
the appraisals are received, we estimated the intangible value for
amortization calculations. We expect to have final appraisals by the
third quarter ended July 31, 2006. We expect to amortize the definite
life intangibles over their estimated lives.
18. Hovnanian Enterprises, Inc., the parent company (the "Parent"),
is the issuer of publicly traded common stock and preferred stock. One of
its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc. (the
"Subsidiary Issuer"), acts as a finance entity that as of January 31, 2006
had issued and outstanding $400 million of Senior Subordinated Notes,
$1,105.3 million face value of Senior Notes, and $226.3 million drawn on a
Revolving Credit Agreement. The Senior Subordinated Notes, Senior Notes
and the Revolving Credit Agreement are fully and unconditionally
guaranteed by the Parent.
In addition to the Parent, each of the wholly owned subsidiaries of
the Parent other than the Subsidiary Issuer (collectively, the "Guarantor
Subsidiaries"), with the exception of various subsidiaries formerly
engaged in the issuance of collateralized mortgage obligations, our
mortgage lending subsidiaries, a subsidiary formerly engaged in
homebuilding activity in Poland, our title insurance subsidiaries, joint
ventures, and certain other subsidiaries (collectively, the "Non-guarantor
Subsidiaries"), have guaranteed fully and unconditionally, on a joint and
several basis, the obligation of the Subsidiary Issuer to pay principal
and interest under the Senior Notes, Senior Subordinated Notes, and the
Revolving Credit Agreement.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries we have included the accompanying condensed
consolidating financial statements. Management does not believe that
separate financial statements of the Guarantor Subsidiaries are material
to investors. Therefore, separate financial statements and other
disclosures concerning the Guarantor Subsidiaries are not presented.
The following condensed consolidating financial information presents
the results of operations, financial position, and cash flows of (i) the
Parent, (ii) the Subsidiary Issuer, (iii) the Guarantor Subsidiaries, (iv)
the Non-guarantor Subsidiaries, and (v) the eliminations to arrive at the
information for Hovnanian Enterprises, Inc. on a consolidated basis.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 31, 2006
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
---------- ---------- ------------ ------------ ----------- ----------
ASSETS
Homebuilding..................... $ 1,235 $ 106,918 $ 4,337,002 $ 266,186 $ $4,711,341
Financial Services................. 138 168,670 168,808
Income Taxes (Payable) Receivable.. (30,377) 59,492 (485) 28,630
Investments in and amounts due to
and from consolidated
subsidiaries.................... 1,903,946 1,894,929 (2,054,260) (241,687) (1,502,928)
---------- ---------- ------------ ------------ ----------- ----------
Total Assets..................... $1,874,804 $2,001,847 $ 2,342,372 $ 192,684 $(1,502,928)$4,908,779
========== ========== ============ ============ =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding................... $ $ $ 944,377 $ 30,552 $ $ 974,929
Financial Services............. 34 144,060 144,094
Notes Payable................... 1,737,988 712 1,738,700
Minority Interest................ 175,009 1,243 176,252
Stockholders' Equity............. 1,874,804 263,859 1,222,240 16,829 (1,502,928) 1,874,804
---------- ---------- ------------ ------------ ----------- ----------
Total Liabilities and Stockholders'
Equity......................... $1,874,804 $2,001,847 $ 2,342,372 $ 192,684 $(1,502,928)$4,908,779
========== ========== ============ ============ =========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 2005
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
---------- ---------- ------------ ------------ ---------- -----------
Assets
Homebuilding......................$ 1,192 $ 325,997 $ 3,931,333 $ 214,238 $ $4,472,760
Financial Services................ 200 237,092 237,292
Income Taxes (Payable) Receivable. (22,704) 32,970 (363) 9,903
Investments in and Amounts Due to
And From Consolidated
Subsidiaries.................... 1,812,869 1,413,666 (1,617,271) (189,626)(1,419,638)
---------- ---------- ------------ ------------ ----------- ----------
Total Assets......................$1,791,357 $1,739,663 $ 2,347,232 $ 261,341$(1,419,638) $4,719,955
========== ========== ============ ============ =========== ==========
Liabilities
Homebuilding......................$ $ 20,431 $ 996,428 $ 3,626 $ $1,020,485
Financial Services................. 81 207,236 207,317
Notes Payable...................... 1,498,739 (3,531) 24,339 1,519,547
Minority Interest.................. 180,170 1,079 181,249
Stockholders' Equity...............1,791,357 220,493 1,174,084 25,061 (1,419,638) 1,791,357
---------- ----------- ------------ ------------ ----------- ----------
Total Liabilities and Stockholders'
Equity......................... $1,791,357 $ 1,739,663 $ 2,347,232 $ 261,341$(1,419,638) $4,719,955
========== =========== ============ ============ =========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2006
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.................... $ $ 153 $1,256,427 $ 2,150 $ $1,258,730
Financial Services............... 2,255 17,007 19,262
Intercompany Charges............. 66,758 66,703 (133,461)
Equity In Pretax Income of
Consolidated Subsidiaries...... 135,226 (135,226)
-------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 135,226 66,911 1,325,385 19,157 (268,687) 1,277,992
-------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 208 1,165,341 1,455 (30,193) 1,136,811
Financial Services............... 883 12,892 (245) 13,530
-------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 208 1,166,224 14,347 (30,438) 1,150,341
-------- ---------- ---------- ------------ ---------- ----------
Income from Unconsolidated
Joint Ventures................... 7,575 7,575
-------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes. 135,226 66,703 166,736 4,810 (238,249) 135,226
State and Federal Income Taxes..... 51,130 23,411 61,864 1,912 (87,187) 51,130
-------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)................. $ 84,096 $ 43,292 $ 104,872 $ 2,898 $ (151,062)$ 84,096
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2005
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 42 $1,039,598 $ 728 $ $1,040,368
Financial Services............... 1,029 13,164 14,193
Intercompany Charges............. 48,397 48,985 (97,382)
Equity In Pretax Income of
Consolidated Subsidiaries...... 131,906 (131,906)
-------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 131,906 48,439 1,089,612 13,892 (229,288) 1,054,561
-------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... (545) 936,455 1,171 (22,911) 914,170
Financial Services............... 730 10,075 (885) 9,920
-------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. (545) 937,185 11,246 (23,796) 924,090
-------- ---------- ---------- ------------ ---------- ----------
Income from Unconsolidated Joint
Ventures........................ 1,435 1,435
-------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes. 131,906 48,984 153,862 2,646 (205,492) 131,906
State and Federal Income Taxes..... 50,424 17,098 54,923 4,158 (76,179) 50,424
-------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss).................$ 81,482 $ 31,886 $ 98,939 $ (1,512)$ (129,313)$ 81,482
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2006
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income........................$ 84,096 $ 43,292 $ 104,872 $ 2,898 $ (151,062)$ 84,096
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 2,815 (6,934) (424,587) (113,507) 151,062 (391,151)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 86,911 36,358 (319,715) (110,609) (307,055)
Net Cash (Used In)
Investing Activities............... (7,583) (5,404) (12,987)
Net Cash Provided By (Used In)
Financing Activities.............. 4,166 226,250 (26,149) (56,779) 147,488
Intercompany Investing and Financing
Activities - Net................... (91,077) (481,263) 396,005 176,335
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... (218,655) 42,558 3,543 (172,554)
Balance, Beginning of Period......... 16 298,596 (79,835) 10,722 229,499
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period.....................$ 16 $ 79,941 $ (37,277)$ 14,265 $ $ 56,945
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2005
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income........................$ 81,482 $ 31,886 $ 98,939 $ (1,512)$ (129,313)$ 81,482
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... (23,356) (1,330) (321,900) 43,510 129,313 (173,763)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 58,126 30,556 (222,961) 41,998 (92,281)
Net Cash (Used In)
Investing Activities............... (1,600) (17,964) (35) (19,599)
Net Cash Provided By (Used In)
Financing Activities............... (2,087) 185,000 1,427 (57,205) 127,135
Intercompany Investing and Financing
Activities - Net................... (54,439) (148,758) 187,849 15,348
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... 66,798 (51,649) 106 15,255
Balance, Beginning of Period......... 15 29,369 35,441 13,199 78,024
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period.....................$ 15 $ 96,167 $ (16,208)$ 13,305 $ $ 93,279
======== ========= ========== ============ ========== ==========
19. Subsequent Events -
On February 27, 2006, our wholly-owned subsidiary K. Hovnanian
Enterprises, Inc. issued $300 million of 7 1/2% Senior Notes due 2016.
The notes are guaranteed by Hovnanian Enterprises, Inc. and each of its
other wholly-owned subsidiaries, except for various subsidiaries formerly
engaged in the issuance of collateralized mortgage obligations, our
mortgage lending subsidiaries, a subsidiary formerly engaged in
homebuilding activity in Poland, our title insurance subsidiaries, joint
ventures, and certain other subsidiaries. The net proceeds of the
issuance were used to repay a portion of the outstanding balance under our
revolving credit facility as of February 27, 2006.
On March 7, 2006, we amended our secured mortgage loan warehouse
agreement. Pursuant to the new agreement, we may borrow up to $250
million. It expires on October 30, 2006 and interest is payable monthly
at the Eurodollar Rate plus 1.0%.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Management believes that the following critical accounting policies
affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements:
Business Combinations - When we make an acquisition of another
company, we use the purchase method of accounting in accordance with the
Statement of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations". Under SFAS No. 141, we record as our cost the estimated
fair value of the acquired assets less liabilities assumed. Any
difference between the cost of an acquired company and the sum of the fair
values of tangible and intangible assets less liabilities is recorded as
goodwill. The reported income of an acquired company includes the
operations of the acquired company from the date of acquisition.
Income Recognition from Home and Land Sales - Income from home and
land sales is recorded when title is conveyed to the buyer, adequate cash
payment has been received and there is no continued involvement.
Additionally, in certain markets, we sell lots to customers,
transferring title, collecting proceeds, and entering into contracts to
build homes on these lots. In these cases, we do not recognize the
revenue from the lot sale until we deliver the completed home and have no
continued involvement related to that home. The cash received on the lot
is recorded as customer deposits until the revenue is recognized.
Income Recognition from Mortgage Loans - Profits and losses relating
to the sale of mortgage loans are recognized when legal control passes to
the buyer of the mortgage and the sales price is collected.
Interest Income Recognition for Mortgage Loans Receivable and
Recognition of Related Deferred Fees and Costs - Interest income is
recognized as earned for each mortgage loan during the period from the loan
closing date to the sale date when legal control passes to the buyer and
the sale price is collected. All fees related to the origination of
mortgage loans and direct loan origination costs are deferred and recorded
as either (a) an adjustment to the related mortgage loans upon the closing
of a loan or (b) recognized as a deferred asset or deferred revenue while
the loan is in process. These fees and costs include loan origination fees,
loan discount, and salaries and wages. Such deferred fees and costs
relating to the closed loans are recognized over the life of the loans as
an adjustment of yield or taken into operations upon sale of the loan to a
permanent investor.
Inventories - Inventories and long-lived assets held for sale are
recorded at the lower of cost or fair value less selling costs. Fair
value is defined as the amount at which an asset could be bought or sold
in a current transaction between willing parties, that is, other than in a
forced or liquidation sale. Construction costs are accumulated during the
period of construction and charged to cost of sales under specific
identification methods. Land, land development, and common facility costs
are allocated based on buildable acres to product types within each
community, except for high-rise and mid-rise buildings, then charged to
cost of sales equally based upon the number of homes to be constructed in
each product type. For high-rise and mid-rise buildings, land, land
development and common facility costs are allocated to homes based on the
relative sales value of each home. For inventories of communities under
development, a loss is recorded when events and circumstances indicate
impairment and the undiscounted future cash flows generated are less than
the related carrying amounts. The impairment loss is based on discounted
future cash flows generated from expected revenue, less cost to complete
including interest, and selling costs.
Insurance Deductible Reserves - For fiscal 2006, our deductible is
$20 million per occurrence with an aggregate $20 million for premise
liability claims and an aggregate $20 million for construction defect
claims under our general liability insurance. Our worker's compensation
insurance deductible is $1 million per occurrence in fiscal 2006.
Reserves have been established based upon actuarial analysis of estimated
losses incurred during fiscal 2006 and fiscal 2005.
Interest - In accordance with SFAS 34 "Capitalization of Interest
Cost", interest incurred is first capitalized to properties under
development during the land development and home construction period and
expensed along with the associated cost of sales as the related
inventories are sold. Interest in excess of interest capitalized or
interest incurred on borrowings directly related to properties not under
development is expensed immediately in "Other Interest".
Land Options - Costs are capitalized when incurred and either
included as part of the purchase price when the land is acquired or
charged to operations when we determine we will not exercise the option.
In accordance with Financial Accounting Standards Board ("FASB")
Interpretation No. 46 ("FIN 46") "Consolidation of Variable Interest
Entities", an interpretation of Accounting Research Bulletin No. 51, SFAS
No. 49 "Accounting for Product Financing Arrangements" ("SFAS 49"), SFAS
No. 98 "Accounting for Leases" ("SFAS 98"), and Emerging Issues Task Force
("EITF") No. 97-10 "The Effects of Lessee Involvement in Asset
Construction" ("EITF 97-10"), we record on the Condensed Consolidated
Balance Sheet specific performance options, options with variable interest
entities, and other options under "Consolidated Inventory Not Owned" with
the offset to "Liabilities from inventory not owned", "Minority interest
from inventory not owned", and "Minority interest from consolidated joint
ventures".
Unconsolidated Homebuilding and Land Development Joint Ventures -
Investments in unconsolidated homebuilding and land development joint
ventures are accounted for under the equity method of accounting. Under
the equity method, we recognize our proportionate share of earnings and
losses earned by the joint venture upon the delivery of lots or homes to
third parties. Our ownership interests in our unconsolidated joint
ventures range from 20% to 50%. In some instances, the joint venture
entity is considered a variable interest entity (VIE) under FIN 46 due to
the returns being limited to the equity holders; however, in these
instances, we are not the primary beneficiary, therefore we do not
consolidate these entities.
Intangible Assets - The intangible assets recorded on our balance
sheet are goodwill definite life intangibles, tradenames, architectural
designs, distribution processes, and contractual agreements with both
definite and indefinite lives resulting from our acquisitions. We no
longer amortize goodwill or indefinite life intangibles, but instead
assess them periodically for impairment. We are amortizing the definite
life intangibles over their expected useful life, ranging from three to
eight years.
Post Development Completion and Warranty Costs - In those instances
where a development is substantially completed and sold and we have
additional construction work to be incurred, an estimated liability is
provided to cover the cost of such work. In addition, our warranty
accrual includes estimated costs for construction work that is unforeseen,
but estimable based on past history, at the time of closing. Both of
these liabilities are recorded in "Accounts payable and other liabilities"
in the Condensed Consolidated Balance Sheets.
CAPITAL RESOURCES AND LIQUIDITY
Our operations consist primarily of residential housing development
and sales in our Northeast Region (New Jersey, New York State,
Pennsylvania, Ohio, Michigan, Illinois and Minnesota), our Southeast
Region (Washington D. C., Delaware, Maryland, Virginia, West Virginia,
North Carolina, South Carolina, and Florida), our Southwest Region (Texas
and Arizona), and our West Region (California). In addition, we provide
financial services to our homebuilding customers.
Our cash uses during the three months ended January 31, 2006 were
for operating expenses, increases in housing inventories, construction,
income taxes, interest, preferred stock dividends and repayments of our
revolving credit facility. We provided for our cash requirements from
housing and land sales, the revolving credit facility, financial service
revenues, and other revenues. We believe that these sources of cash are
sufficient to finance our working capital requirements and other needs.
On July 3, 2001, our Board of Directors authorized a stock
repurchase program to purchase up to 4 million shares of Class A Common
Stock. As of January 31, 2006, 2.7 million shares of Class A Common Stock
have been purchased under this program.
On July 12, 2005, we issued 5,600 shares of 7.625% Series A
Preferred Stock, with a liquidation preference of $25,000 per share for
net proceeds of $135 million. Dividends on the Series A Preferred Stock
are not cumulative and are paid at an annual rate of 7.625%. The Series A
Preferred Stock is not convertible into the Company's common stock and is
redeemable in whole or in part at our option at the liquidation preference
of the shares beginning on the fifth anniversary of their issuance. The
Series A Preferred Stock is traded as depositary shares, with each
depositary share representing 1/1000th of a share of Series A Preferred
Stock. The depositary shares are listed on the Nasdaq National Market
under the symbol "HOVNP". The net proceeds from the offering,
reflected in Paid in Capital in the Condensed Consolidated
Balance Sheet, were used for the partial repayment of the outstanding
balance under our revolving credit facility as of July 12, 2005. On
January 17, 2006, we paid $2.7 million of dividends on the Series A
Preferred Stock.
Our homebuilding bank borrowings are made pursuant to an amended and
restated unsecured revolving credit agreement (the "Agreement") effective
June 17, 2005, that provides a revolving credit line and letter of credit
line of $1.2 billion through July 2009. The facility contains an
accordion feature under which the aggregate commitment can be increased to
$1.3 billion subject to the availability of additional commitments.
Interest is payable monthly at various rates based on a margin ranging
from 1.00% to 1.95% per annum, depending on our Consolidated Leverage
Ratio, as defined in the Agreement, plus, at the Company's option, either
(1) a base rate determined by reference to the higher of (a) PNC Bank,
National Association's prime rate and (b) the federal funds rate plus 1/2%
or (2) a LIBOR-based rate for a one, two, three or six month interest
period as selected by the Company. In addition, we pay a fee ranging from
0.20% to 0.30% per annum on the unused portion of the revolving credit
line depending on its Leverage Ratio and the average percentage unused
portion of the revolving credit line. At January 31, 2006, there was
$226.3 million drawn under this Agreement and we had approximately $44.5
million of homebuilding cash. At January 31, 2006, we had issued $391.0
million of letters of credit which reduces cash available under the
Agreement. We believe that we will be able either to extend the Agreement
beyond July 2009 or negotiate a replacement facility, but there can be no
assurance of such extension or replacement facility. We currently are in
compliance and intend to maintain compliance with the covenants under the
Agreement. We and each of our significant subsidiaries, except for
various subsidiaries formerly engaged in the issuance of collateralized
mortgage obligations, a subsidiary formerly engaged in homebuilding
activity in Poland, our financial services subsidiaries, joint ventures,
and certain other subsidiaries, is a guarantor under the Agreement.
At January 31, 2006, we had $1,105.3 million of outstanding senior
notes ($1,099.0 million, net of discount), comprised of $140.3 million 10
1/2% Senior Notes due 2007, $100 million 8% Senior Notes due 2012, $215
million 6 1/2% Senior Notes due 2014, $150 million 6 3/8% Senior Notes due
2014, $200 million 6 1/4% Senior Notes due 2015, and $300 million 6 1/4%
Senior Notes due 2016. At January 31, 2006, we had $400 million of
outstanding senior subordinated notes, comprised of $150 million 8 7/8%
Senior Subordinated Notes due 2012, $150 million 7 3/4% Senior
Subordinated Notes due 2013, and $100 million 6% Senior Subordinated Notes
due 2010. On February 27, 2006, we issued $300 million of 7 1/2% Senior
Notes due 2016. We and each of our wholly owned subsidiaries, except
for K. Hovnanian Enterprises, Inc., the issuer of the senior and senior
subordinated notes, and various subsidiaries formerly engaged in the
issuance of collateralized mortgage obligations, our mortgage lending
subsidiaries, a subsidiary formerly engaged in homebuilding activity in
Poland, our title insurance subsidiaries, joint ventures, and certain
other subsidiaries is a guarantor of the senior notes and senior
subordinated notes.
Our mortgage banking subsidiary's warehouse agreement was amended on
March 7, 2006. Pursuant to the agreement, we may borrow up to $250
million. The agreement expires in October 2006 and interest is payable
monthly at the Eurodollar Rate plus 1.0%. We also have a $100 million
commercial paper facility. The facility expires in September 2006 and
interest of LIBOR plus .65% is payable monthly. As of January 31, 2006,
the aggregate principal amount of all borrowings under this agreement was
$137.7 million.
Total inventory increased $440.2 million during the three months
ended January 31, 2006. This increase excluded the increase in
consolidated inventory not owned of $9.5 million consisting of specific
performance options, options with variable interest entities, and other
options that were added to our balance sheet in accordance with SFAS 49,
SFAS 98, and EITF 97-10, and variable interest entities in accordance with
FIN 46. See "Notes to Condensed Consolidated Financial Statements" - Note
13 for additional information on FIN 46. Total inventory in our Northeast
Region increased $110.4 million, the Southeast Region increased $138.1
million, the Southwest Region increased $41.0 million, and our West Region
increased $150.7 million. The increase in inventory was primarily the
result of future planned organic growth in our existing markets.
Substantially all homes under construction or completed and included in
inventory at January 31, 2006 are expected to be closed during the next
twelve months. Most inventory completed or under development is partially
financed through our revolving credit agreement and senior and senior
subordinated indebtedness.
We usually option property for development prior to acquisition. By
optioning property, we are only subject to the loss of the cost of the
option and predevelopment costs if we choose not to exercise the option.
As a result, our commitment for major land acquisitions is reduced.
The following table summarizes the number of buildable homes
included in our total residential real estate. The January 31, 2006 and
October 31, 2005 numbers exclude real estate owned and options in
locations where we have ceased development.
Active Proposed Grand
Active Communities Developable Total
Communities Homes Homes Homes
----------- --------- ------------ ---------
January 31, 2006:
Northeast Region.. 67 10,720 22,092 32,812
Southeast Region.. 153 22,307 27,954 50,261
Southwest Region.. 99 13,418 8,922 22,340
West Region....... 52 9,409 10,464 19,873
----------- --------- ------------ ---------
Consolidated Total 371 55,854 69,432 125,286
===========
Unconsolidated
Joint Ventures.. 6,601 2,431 9,032
--------- ------------ ---------
Total Including
Unconsolidated
Joint Ventures.. 62,455 71,863 134,318
========= ============ =========
Owned.......... 26,248 7,219 33,467
Optioned....... 24,656 62,213 86,869
--------- ------------ ---------
Controlled Lots... 50,904 69,432 120,336
Construction to
Permanent Financing
Lots........... 4,950 - 4,950
Lots Controlled by
Unconsolidated
Joint ventures. 6,601 2,431 9,032
--------- ------------ ---------
Total Including
Unconsolidated
Joint Ventures. 62,455 71,863 134,318
========= ============ =========
Active Proposed Grand
Active Communities Developable Total
Communities Homes Homes Homes
----------- ----------- ------------ ----------
October 31, 2005:
Northeast Region.. 65 10,797 22,928 33,725
Southeast Region.. 148 21,713 26,113 47,826
Southwest Region.. 102 12,905 7,547 20,452
West Region....... 52 9,285 9,718 19,003
----------- ----------- ----------- -----------
Consolidated Total 367 54,700 66,306 121,006
===========
Unconsolidated
Joint Ventures.. 6,655 3,396 10,051
----------- ----------- -----------
Total Including Unconsolidated
Joint Ventures.. 61,355 69,702 131,057
=========== =========== ===========
Owned.......... 24,731 5,657 30,388
Optioned....... 25,046 60,649 85,695
----------- ----------- -----------
Controlled Lots... 49,777 66,306 116,083
Construction to
Permanent Financing
Lots........... 4,923 - 4,923
Lots Controlled by
Unconsolidated
Joint ventures. 6,655 3,396 10,051
----------- ----------- -----------
Total Including
Unconsolidated
Joint Ventures. 61,355 69,702 131,057
=========== =========== ===========
The following table summarizes our started or completed unsold homes
and models. The increase in total started or completed unsold homes
compared to the prior year is primarily due to the increase in mid-rise
and high-rise buildings for which we count all units started when vertical
construction begins and the growth in the number of active selling
communities.
January 31, October 31,
2006 2005
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 546 49 595 469 35 504
Southeast Region.... 412 64 476 417 56 473
Southwest Region.... 1,150 92 1,242 901 70 971
West Region......... 460 133 593 275 157 432
------ ------ ----- ------ ------ -----
Total 2,568 338 2,906 2,062 318 2,380
====== ====== ===== ====== ====== =====
Investments in and advances to unconsolidated joint ventures
increased $9.0 million during the three months ended January 31, 2006.
This increase is due to income from joint ventures not distributed and
additional investment in joint ventures. As of January 31, 2006, we have
investments in nine homebuilding joint ventures and nine land development
joint ventures. Other than performance and completion guarantees and
environmental indemnifications, no other guarantees associated with
unconsolidated joint ventures have been given.
Receivables, deposits, and notes decreased $41.1 million to $84.3
million at January 31, 2006. The decrease was primarily due to a decrease
in miscellaneous receivables for a payment received in the first quarter
of 2006 from an unconsolidated joint venture. It was also due to the
reduction in the receivables from home sales which amounted to $26.8
million and $39.4 million at January 31, 2006 and October 31, 2005,
respectively.
Prepaid expenses and other assets are as follows:
January 31, October 31, Dollar
2006 2005 Change
---------- ----------- ---------
Prepaid insurance.................... $ 14,877 $ - $ 14,877
Prepaid project costs................ 66,548 61,773 4,775
Senior residential rental properties. 8,659 8,754 (95)
Other prepaids....................... 29,166 24,547 4,619
Other assets......................... 33,072 30,588 2,484
----------- ----------- ---------
$ 152,322 $ 125,662 $ 26,660
=========== =========== =========
Prepaid insurance increased due to a payment of a full year of
insurance costs during the first quarter of every year. These costs are
amortized on a straight line basis. Prepaid project costs and other
prepaids increased due to new communities. Prepaid project costs consist
of community specific expenditures that are used over the life of the
community. Such prepaids are expensed as homes are delivered. The
increase in other assets is attributable to the Executive Deferred
Compensation Plan, due to increased profit sharing contributions for
Senior Management.
At January 31, 2006, we had $32.7 million of goodwill. This amount
resulted from Company acquisitions prior to fiscal 2000.
Definite life intangibles decreased $37.6 million to $211.9 million
at January 31, 2006. The decrease was the result of amortization during
the three months of $11.7 million, and an adjustment to the First Home
Builders of Florida acquisition accounting. As we finalize our valuation
of the assets acquired, we established a deferred tax asset as part of the
purchase price allocation, which reduced the recorded intangibles, offset
by our Cambridge Homes acquisition earnout and contingent payments related
to past acquisitions. For any acquisition, professionals are hired to
appraise all acquired intangibles. See "- Critical Accounting Policies -
Intangible Assets" above for additional information on intangibles. For
tax purposes all our intangibles, except those resulting from an
acquisition classified as a tax free exchange, are being amortized over 15
years.
Accounts payable and other liabilities are as follows:
January 31, October 31, Dollar
2006 2005 Change
--------- ----------- --------
Accounts payable.......................$ 172,010 $ 191,469 $(19,459)
Reserves............................... 98,258 95,310 2,948
Accrued expenses....................... 41,379 48,647 (7,268)
Accrued compensation................... 64,356 75,655 (11,299)
Other liabilities...................... 106,500 99,448 7,052
--------- ----------- --------
$ 482,503 $ 510,529 $(28,026)
========= =========== ========
The decrease in accounts payable was primarily due to decreases in
homes under construction in the first quarter of 2006 compared to the
fourth quarter of 2005 throughout our markets, which results in less
activity and lower payables. Reserves increased for our general liability
insurance deductible, owner controlled insurance program and bonding. The
decrease in accrued expenses is due to timing of property tax payments and
acquisition earnout obligations. The decrease in accrued compensation was
primarily due to the payout of our fiscal year 2005 bonuses during the
first quarter of 2006. The increase in other liabilities is mainly due to
increased contributions to our deferred compensation plan, increased
payroll withholding due to timing of insurance claims, and a lot option
advance in the Southwest Region.
Financial Services - Mortgage loans held for sale consist of
residential mortgages receivable of which $152.4 million and $211.2
million at January 31, 2006 and October 31, 2005, respectively, are being
temporarily warehoused and awaiting sale in the secondary mortgage market.
We may incur risk with respect to mortgages that are delinquent, but only
to the extent the losses are not covered by mortgage insurance or resale
value of the house. Historically, we have incurred minimal credit losses.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2006 COMPARED
TO THE THREE MONTHS ENDED JANUARY 31, 2005
Total Revenues:
Compared to the same prior period, revenues increased as follows:
Three Months Ended
--------------------------------------------
January 31, January 31, Dollar Percentage
2006 2005 Change Change
----------- ----------- -------- ----------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $1,246,197 $1,015,969 $230,228 22.7%
Land sales and other
revenues........... 12,533 24,399 (11,866) (48.6)%
Financial Services..... 19,262 14,193 5,069 35.7%
----------- ----------- -------- ----------
Total Revenues... $1,277,992 $1,054,561 $223,431 21.2%
=========== =========== ======== ==========
Homebuilding:
Compared to the same prior period, housing revenues increased $230.2
million or 22.7% during the three months ended January 31, 2006. Housing
revenues are recorded when title is conveyed to the buyer, adequate cash
payment has been received, and there is no continued involvement. Land
sales are incidental to our residential housing operations and are
expected to continue in the future but may significantly fluctuate up or
down. For further details on land sales and other revenues, see paragraph
titled "Land Sales and Other Revenues" later in this document.
Information on homes delivered by market area is set forth below:
Three Months Ended
January 31,
---------------------
2006 2005
---------- ----------
(Dollars in Thousands)
Northeast Region (1):
Dollars............ $ 225,502 $ 238,461
Homes.............. 612 687
Southeast Region (2):
Dollars............ $ 467,656 $ 263,834
Homes.............. 1,527 902
Southwest Region:
Dollars............ $ 183,259 135,911
Homes.............. 872 715
West Region:
Dollars............ $ 369,780 $ 377,763
Homes.............. 834 962
Consolidated Total:
Dollars............ $ 1,246,197 $1,015,969
Homes.............. 3,845 3,266
Unconsolidated Joint
Ventures (3):
Dollars............ $ 214,612 $ 11,585
Homes.............. 585 22
Totals:
Housing Revenues... $ 1,460,809 $1,027,554
Homes Delivered.... 4,430 3,288
(1) Northeast Region includes deliveries from our Ohio acquisition of
Oster Homes on August 3, 2005.
(2) Southeast Region includes deliveries from our Florida acquisitions
of Cambridge Homes and First Home Builders of Florida on March 1,
2005 and August 8, 2005, respectively.
(3) Unconsolidated Joint Ventures includes deliveries from our joint
venture with affiliates of Blackstone Real Estate Advisors that
acquired Town & Country Homes existing residential communities on
March 2, 2005.
An important indicator of our future results are recently signed
contracts and home contract backlog for future deliveries. Our sales
contracts and homes in contract backlog using base sales prices by market
area are set forth below:
Net Contracts(1) for the
Three Months Ended Contract Backlog
January 31, as of January 31,
------------------------- ------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
(Dollars in Thousands)
Northeast Region (2):
Dollars............ $ 224,401 $ 189,605 $ 803,498 $ 720,675
Homes.............. 608 522 2,160 2,091
Southeast Region (3):
Dollars............ $ 501,401 $ 284,882 $2,242,102 $ 792,978
Homes.............. 1,367 849 7,218 2,346
Southwest Region:
Dollars............ $ 170,704 $ 165,048 $ 276,116 $ 197,285
Homes.............. 801 897 1,225 1,106
West Region:
Dollars............ $ 257,151 $ 354,124 $ 686,500 $ 764,697
Homes.............. 574 906 1,493 1,861
Consolidated Total:
Dollars............ $1,153,657 $ 993,659 $ 4,008,216 $2,475,635
Homes.............. 3,350 3,174 12,096 7,404
Unconsolidated Joint
Ventures (4):
Dollars............ $ 108,572 $ 41,347 $ 924,762 $ 239,851
Homes.............. 274 66 2,029 399
Totals:
Dollars............ $1,262,229 $1,035,006 $ 4,932,978 $2,715,486
Homes............... 3,624 3,240 14,125 7,803
(1) Net contracts are defined as new contracts during the period for the
purchase of homes, less cancellations of prior contracts.
(2) The number and the dollar amount of net contracts and contract
backlog in the Northeast in the 2006 first quarter include the
effect of the Oster Homes acquisition, which closed in August 2005.
(3) The number and the dollar amount of net contracts and contract
backlog in the Southeast in the 2006 first quarter include the
effects of the Cambridge Homes and First Home Builders of Florida
acquisitions, which closed in March 2005 and August 2005,
respectively.
(4) The number and the dollar amount of net contracts and contract
backlog in Unconsolidated Joint Ventures in the 2006 first quarter
include the effect of the Town & Country Homes acquisition, which
closed in March 2005.
Cost of sales includes expenses for homebuilding and land sales.
A breakout of such expenses for homebuilding sales and homebuilding
gross margin is set forth below:
Three Months Ended
January 31,
----------------------
2006 2005
---------- ----------
(Dollars in Thousands)
Sale of Homes.............. $1,246,197 $1,015,969
Cost of Sales, excluding
interest................. 926,822 757,086
---------- ----------
Homebuilding Gross Margin,
before interest expense.. 319,375 258,883
Homebuilding Cost of
Sales Interest........... 16,111 17,579
---------- ----------
Homebuilding Gross Margin,
after interest expense... $ 303,264 $ 241,304
========== ==========
Gross Margin Percentage,
before interest expense... 25.6% 25.5%
Gross Margin Percentage,
after interest expense.... 24.3% 23.8%
Cost of Sales expenses as a percentage of home sales revenues are
presented below:
Three Months Ended
January 31,
-------------------
2006 2005
-------- --------
Sale of Homes................ 100.0% 100.0%
-------- --------
Cost of Sales, excluding
interest:
Homebuilding, land &
development costs.... 65.8% 66.1%
Commissions............ 2.3% 2.1%
Financing concessions.. 0.9% 0.9%
Overheads.............. 5.4% 5.4%
-------- --------
Total Cost of Sales, before
interest expense........... 74.4% 74.5%
-------- --------
Gross Margin Percentage,
before interest expense.... 25.6% 25.5%
Cost of sales interest....... 1.3% 1.7%
-------- --------
Gross Margin Percentage,
after interest expense..... 24.3% 23.8%
======== ========
We sell a variety of home types in various local communities, each
yielding a different gross margin. As a result, depending on the
geographic mix of deliveries and 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. The consolidated gross margin before interest expense for the
three months ended January 31, 2006 was 10 basis points higher than the
same period in 2005. Our gross margin after interest expense for the
three months ended January 31, 2006 was 50 basis points more than the same
period last year. These minor fluctuations from period to period in cost
of sales interest as a percentage of home revenues are due to the mix of
homes sold and the inventory carrying period for those homes.
Homebuilding selling, general, and administrative expenses as a
percentage of homebuilding revenues increased to 10.9% for the three
months ended January 31, 2006, compared to 9.5% for the three months ended
January 31, 2005. Such expenses increased $38.6 million for the three
months ended January 31, 2006 compared to the same period last year. The
dollar and percentage increases were in line with our growth goals as we
increase selling, general and administrative costs associated with the
expected increase in the number of active selling communities in all of
our regions.
Land Sales and Other Revenues:
Land sales and other revenues consist primarily of land and lot
sales. A breakout of land and lot sales is set forth below:
Three Months Ended
January 31,
------------------
2006 2005
-------- --------
Land Sales........................ $ 10,555 $23,004
Cost of Sales, Excluding Interest. 7,865 14,171
-------- --------
Land Sales Gross Margin,
Excluding Interest.............. 2,690 8,833
-------- --------
Interest Expense.................. 458 188
-------- --------
Land Sales Gross Margin,
Including Interest.............. $ 2,232 $ 8,645
======== ========
Land sales are incidental to our residential homebuilding
operations and are expected to continue in the future but may
significantly fluctuate up or down. For the full fiscal year 2006, we
expect pre-tax profit from land sales to be higher than they were in
fiscal 2005. However, land sales are often dependent upon receiving
approvals and entitlements, the timing of which can be uncertain. As a
result, projecting the amount and timing of land sales is difficult.
Financial Services
Financial services consist primarily of originating mortgages from
our homebuyers and selling such mortgages in the secondary market, and
title insurance activities. For the three months ended January 31, 2006,
financial services provided a $5.7 million profit before income taxes,
compared to a profit of $4.3 million for the same period in 2005. The
increase in pretax profit for the three months ended January 31, 2006 is
primarily due to increased mortgage settlements and the addition of
mortgage operations as a result of our 2005 acquisitions.
Corporate General and Administrative
Corporate general and administrative expenses represent the
operations at our headquarters in Red Bank, New Jersey. Such expenses
include our executive offices, information services, human resources,
corporate accounting, training, treasury, process redesign, internal
audit, construction services, and administration of insurance, quality,
and safety. As a percentage of total revenues, such expenses increased to
2.2% for the three months ended January 31, 2006 from 1.5% for the prior
year's three months. Corporate general and administrative expenses
increased $11.8 million during the three months ended January 31, 2006,
compared to the same period last year. The increase in corporate general
and administrative expenses is primarily attributed to increased
depreciation expense for new software systems, increased consulting
services related to the new software implementation, Sarbanes Oxley
compliance costs, increased compensation with more headcount and higher
profit based bonuses, as well as the adoption of FAS 123R resulting in the
expensing of stock options.
While the sum of homebuilding, selling, general and administrative
expenses and corporate general and administrative expenses as a percentage
of total revenues for the first quarter is higher than the prior year's
first quarter percentage, we expect these expenses as a percentage of
revenues for the full fiscal year to be similar to the prior year.
Other Interest
Other interest increased $0.7 million for the three months ended
January 31, 2006, compared to three months ended January 31, 2005. This
increase is primarily due to an increase in interest incurred and expensed
on nonrecourse land mortgages directly related to property not yet under
development.
Other Operations
Other operations consist primarily of miscellaneous residential
housing operations expenses, senior rental residential property
operations, amortization of senior and senior subordinated note issuance
expenses, earnout payments from homebuilding company acquisitions,
minority interest relating to consolidated joint ventures, and corporate
owned life insurance. The increase in other operations to $7.0 million
for the three months ended January 31, 2006, compared to $1.9 million for
the three months ended January 31, 2005, is primarily due to increased
earnout expenses related to several recent acquisitions.
Intangible Amortization
We are amortizing our definite life intangibles over their expected
useful life, ranging from three to seven years. Intangible amortization
increased $1.6 million for the three months ended January 31, 2006, when
compared to the same period last year. This increase was the result of
the amortization expense related to the acquisition of Cambridge Homes in
March 2005, Oster Homes in August 2005 and First Home Builders of Florida
in August 2005, offset by reduced amortization on older acquisitions.
Recent Accounting Pronouncements
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections". This statement, which replaces APB Opinion No. 20,
"Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements", changes the requirements for the accounting
for and reporting of a change in accounting principle. The statement
requires retrospective application of changes in accounting principle to
prior periods' financial statements unless it is impracticable to
determine the period-specific effects or the cumulative effect of the
change. SFAS No. 154 is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005. The
adoption of SFAS No. 154 is not expected to have a material impact on our
consolidated financial position, results of operations or cash flows.
In June 2005, the Emerging Issues Task Force ("EITF") released Issue
No. 04-5 "Determining Whether a General Partner, or the General Partners
as a Group, Controls a Limited Partnership or Similar Entity When the
Limited Partners Have Certain Rights" ("EITF 04-5"). EITF 04-5 creates a
framework for evaluating whether a general partner or a group of general
partners controls a limited partnership and therefore should consolidate
the partnership. EITF 04-5 states that the presumption of general partner
control would be overcome only when the limited partners have certain
specific rights as outlined in EITF 04-5. EITF 04-5 is effective
immediately for all newly formed limited partnerships and for existing
limited partnership agreements that are modified. For general partners in
all other limited partnerships, EITF 04-5 is effective no later than the
beginning of the first reporting period in fiscal years beginning after
December 15, 2005. Implementation of EITF 04-5 is not expected to have a
material impact on the Company's results of operations or financial
position.
Total Taxes
Total taxes as a percentage of income before taxes decreased for the
three months ended January 31, 2006 to 37.8% from 38.2% for the three
months ended January 31, 2005. This decrease is primarily due to the
benefit of the tax deduction on qualified production activities provided
by the American Jobs Creation Act of 2004.
Deferred federal and state income tax assets primarily represent the
deferred tax benefits arising from temporary differences between book and
tax income which will be recognized in future years as an offset against
future taxable income. If, for some reason, the combination of future
years income (or loss) combined with the reversal of the timing
differences results in a loss, such losses can be carried back to prior
years to recover the deferred tax assets. As a result, management is
confident such deferred tax assets are recoverable regardless of future
income.
Inflation
Inflation has a long-term effect, because increasing costs of land,
materials, and labor result in increasing sale prices of our homes. In
general, these price increases have been commensurate with the general
rate of inflation in our housing markets and have not had a significant
adverse effect on the sale of our homes. A significant risk faced by the
housing industry generally is that rising house costs, including land and
interest costs, will substantially outpace increases in the income of
potential purchasers. Recently in the more highly regulated markets that
have seen significant home price appreciation, customer affordability has
become a concern. Our broad product array insulates us to some extent,
but it is something we are monitoring closely.
Inflation has a lesser short-term effect, because we generally
negotiate fixed price contracts with many, but not all, of our
subcontractors and material suppliers for the construction of our homes.
These prices usually are applicable for a specified number of residential
buildings or for a time period of between three to twelve months.
Construction costs for residential buildings represent approximately 60%
of our homebuilding cost of sales.
Mergers and Acquisitions
On March 1, 2005, we acquired for cash the assets of Cambridge
Homes, a privately held Orlando homebuilder and provider of related
financial services, headquartered in Altamonte Springs, Florida. The
acquisition provides us with a presence in the greater Orlando market.
Cambridge Homes designs, markets and sells both single family homes and
attached townhomes and focuses on first-time, move-up and luxury
homebuyers. Cambridge Homes also provides mortgage financing, as well as
title and settlement services to its homebuyers.
The Cambridge Homes acquisition was accounted for as a purchase,
with the results of its operations included in our consolidated financial
statements as of the date of the acquisition.
On March 2, 2005, we acquired the operations of Town & Country
Homes, a privately held homebuilder and land developer headquartered in
Lombard, Illinois, which occurred concurrently with our entering into a
joint venture agreement with affiliates of Blackstone Real Estate Advisors
in New York to own and develop Town & Country's existing residential
communities. The joint venture is being accounted for under the equity
method. Town & Country Homes' operations beyond the existing owned and
optioned communities, as of the acquisition date, are wholly owned and
included in our consolidated financial statements.
The Town & Country acquisition provides us with a strong initial
position in the greater Chicago market, and expands our operations into
the Florida markets of West Palm Beach, Boca Raton and Fort Lauderdale and
bolsters our current presence in Minneapolis/St. Paul. Town & Country
designs, markets and sells a diversified product portfolio in each of its
markets, including single family homes and attached townhomes, as well as
mid-rise condominiums in Florida. Town & Country serves a broad customer
base including first-time, move-up and luxury homebuyers.
On August 3, 2005, we acquired substantially all of the homebuilding
assets of Oster Homes, a privately held Ohio homebuilder, headquartered in
Lorain, Ohio. The acquisition provides Hovnanian with a complementary
presence to its Ohio "build-on-your-own-lot" homebuilding operations.
Oster Homes builds in Lorain County in Northeast Ohio, just west of
Cleveland. Oster Homes designs, markets and sells single family homes,
with a focus on first-time and move-up homebuyers. Additionally, Oster
Homes utilizes a design center to market extensive pre-prices, options and
upgrades.
On August 8, 2005, we acquired substantially all of the assets of
First Home Builders of Florida, a privately held homebuilder and provider
of related financial services headquartered in Cape Coral, Florida. First
Home Builders is a leading builder in Western Florida and ranked first in
the greater Fort Myers-Cape Coral market. First Home Builders of Florida
designs, markets and sells single family homes, with a focus on the first-
time home buying segment. The company also provides mortgage financing,
title and settlement services to its homebuyers.
Both the First Home Builders of Florida and the Oster Homes
acquisitions were accounted for as purchases with the results of their
operations included in our consolidated financial statements as of the
dates of the acquisitions.
All fiscal 2005 acquisitions provide for other payments to be made,
generally dependant upon achievement of certain future operating and return
objectives.
Transactions with Related Parties
In December 2005, we entered into an agreement to purchase land in
New Jersey from an entity that is owned by family relatives of our
Chairman of the Board and our Chief Executive Officer at a base price of
$25 million. The land will be acquired in four phases over a period of 30
months from the date of acquisition of the first phase. The purchase
prices for phases two through four are subject to an increase in the
purchase price for the phase of not less than 6% per annum and not more
than 8% per annum from the date of the closing of the first phase based on
an identified prime rate. As of the end of the first quarter of 2006, no
land has been acquired. A deposit in the amount of $500,000, however, has
been made by the Company. Neither the Company nor the Chairman of the
Board or the Chief Executive Officer has a financial interest in the
relatives' company from whom the land will be purchased.
Pursuant to the Board of Director requirements, prior to the
agreement being finalized, an independent appraisal of the property being
purchased was performed. Upon review of the appraisal by the independent
members of the Board of Directors the transaction was approved.
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 Reform Act of 1995. Such statements
involve known and unknown risks, uncertainties and other factors that may
cause actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. Although we
believe that our plans, intentions and expectations reflected in, or
suggested by such forward-looking statements are reasonable, we can give
no assurance that such plans, intentions, or expectations will be
achieved. Such risks, uncertainties and other factors include, but are
not limited to:
. Changes in general and local economic and business conditions;
. Adverse weather conditions and natural disasters;
. Changes in market conditions;
. Changes in home prices and sales activity in the markets where
the Company builds homes;
. Government regulation, including regulations concerning
development of land, the home building, sales and customer
financing processes, and the environment;
. Fluctuations in interest rates and the availability of mortgage
financing;
. Shortages in, and price fluctuations of, raw materials and labor;
. The availability and cost of suitable land and improved lots;
. Levels of competition;
. Availability of financing to the Company;
. Utility shortages and outages or rate fluctuations; and
. Geopolitical risks, terrorist acts and other acts of war.
Certain risks, uncertainties, and other factors are described in
detail in Item 1 and 2 "Business and Properties" in our Form 10-K for the
year ended October 31, 2005.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk facing us is interest rate risk on our long-
term debt. In connection with our mortgage operations, mortgage loans
held for sale and the associated mortgage warehouse line of credit are
subject to interest rate risk; however, such obligations reprice
frequently and are short-term in duration. In addition, we hedge the
interest rate risk on mortgage loans by obtaining forward commitments from
private investors. Accordingly, the risk from mortgage loans is not
material. We do not hedge interest rate risk other than on mortgage loans
using financial instruments. We are also subject to foreign currency risk
but this risk is not material. The following table sets forth as of
January 31, 2006, our long term debt obligations, principal cash flows by
scheduled maturity, weighted average interest rates and estimated fair
market value ("FMV").
As of January 31, 2006
-------------------------------------------
Expected Maturity Date
FMV @
2006 2007 2008 2009 2010 Thereafter Total 1/31/06
------ ------- ------- -------- -------- ---------- ---------- ---------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate.... $37,686 $140,915 $ 711 $ 760 $100,813 $1,286,230 $1,567,115 $1,535,245
Average
interest rate 6.10% 10.48% 6.69% 6.71% 6.01% 6.93% 7.17% -
(1) Does not include bonds collateralized by mortgages receivable or the
warehouse line of credit.
In addition, we have reassessed the market risk for our variable rate debt,
which is based upon a margin plus at our option either (1) a base rate
determined by reference to the higher of (a) a PNC Bank, National Association's
prime rate and (b) the federal funds rate plus 1/2% or (2) a LIBOR-based rate
for a one, two, three, or six month interest period as selected by us, and we
believe that a one percent increase in this rate would have an approximate
$0.3 million increase in interest expense for the three months ended
January 31, 2006, assuming an average of $113.1 million of variable rate debt
outstanding from November 1, 2005 to January 31, 2006.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the
Company's reports under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosures. Any
controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control
objectives. The Company's management, with the participation of the
Company's chief executive officer and chief financial officer, has
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of January 31, 2006. Based upon that
evaluation and subject to the foregoing, the Company's chief executive
officer and chief financial officer concluded that the design and
operation of the Company's disclosure controls and procedures are
effective to accomplish their objectives.
In addition, there was no change in the Company's internal control over
financial reporting that occurred during the quarter ended January 31,
2006 that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
We are involved in litigation arising in the ordinary course of
business, none of which is expected to have a material adverse effect on
our financial position or results of operations and we are subject to
extensive and complex regulations that affect the development and home
building, sales and customer financing processes, including zoning,
density, building standards and mortgage financing. These regulations
often provide broad discretion to the administering governmental
authorities. This can delay or increase the cost of development or
homebuilding.
We also are subject to a variety of local, state, federal and
foreign laws and regulations concerning protection of health and the
environment. The particular environmental laws which apply to any given
community vary greatly according to the community site, the site's
environmental conditions and the present and former uses of the site.
These environmental laws may result in delays, may cause us to incur
substantial compliance, remediation, and/or other costs, and can prohibit
or severely restrict development and homebuilding activity in certain
environmentally sensitive regions or areas.
In March 2005, we received two requests for information pursuant
to Section 308 of the Clean Water Act from Region 3 of the Environmental
Protection Agency (the "EPA"). These requests sought information
concerning storm water discharge practices in connection with completed,
ongoing and planned homebuilding projects by subsidiaries in the states
and district that comprise EPA Region 3. We also received a notice of
violations for one project in Pennsylvania and requests for sampling
plan implementation in two projects in Pennsylvania. The amount
requested by the EPA to settle the asserted violations at the one
project was not material. We provided the EPA with information in
response to its requests. We have since been advised by the Department
of Justice ("DOJ") that it will be involved in the review of our storm
water discharge practices. We cannot predict the outcome of the review
of these practices or estimate the costs that may be involved in
resolving the matter. To the extent that the EPA or the DOJ asserts
violations of regulatory requirements and request injunctive relief
or penalties, we will defend and attempt to resolve such asserted
violations.
In addition, in November 2005, we received two notices from the
California Regional Water Quality Control Board alleging violations of
certain storm water discharge rules and assessing an administrative civil
liability of $0.2 million and $0.3 million. We do not consider these
assessments to be material and are considering our response to the
notices.
It can be anticipated that increasingly stringent requirements will
be imposed on developers and homebuilders in the future. Although we
cannot predict the effect of these requirements, they could result in
time-consuming and expensive compliance programs and in substantial
expenditures, which could cause delays and increase our cost of
operations. In addition, the continued effectiveness of permits already
granted or approvals already obtained is dependent upon many factors, some
of which are beyond our control, such as changes in policies, rules and
regulations and their interpretations and application.
Our sales and customer financing processes are subject to the
jurisdiction of the U. S. Department of Housing and Urban Development
("HUD"). In connection with the Real Estate Settlement Procedures Act,
HUD recently inquired about our process of referring business to our
affiliated mortgage company and has separately requested documents related
to customer financing. We have responded to HUD's inquiries. In
connection with these inquiries, the Inspector General of HUD has
recommended to the Secretary of HUD that we indemnify HUD for any losses
that it may sustain in connection with nine loans that it alleges were
improperly underwritten. We cannot predict the outcome of HUD's inquiry
or estimate the costs that may be involved in resolving the matter. We do
not expect the ultimate cost to be material.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
This table provides information with respect to purchases of shares
of our Class A Common Stock made by or on behalf of Hovnanian Enterprises
or any affiliated purchaser during the fiscal first quarter of 2006.
Issuer Purchases of Equity Securities (1)
Total Number
Of Shares Maximum Number of
Purchased as Shares That May
Part of Publicly Yet Be Purchased
Total Number of Average Price Announced Plans Under The Plans
Period Shares Purchased Paid Per Share or Programs or Programs
- ---------------- ---------------- -------------- ---------------- -----------------
November 1, 2005
Through
November 30, 2005 1,487,668
- -------------------------------------------------------------------------------------
December 1, 2005
Through
December 31, 2005 150,000 $48.64 150,000 1,337,668
- -------------------------------------------------------------------------------------
January 1, 2006
Through
January 31, 2006 1,337,668
- -------------------------------------------------------------------------------------
Total 150,000 $48.64 150,000
================ ============== ================
(1) In July 2001, our Board of Directors authorized a stock repurchase
program to purchase up to 4 million shares of Class A Common Stock.
No shares of our Class B Common Stock or of our 7.625% Series A
Preferred Stock were purchased by or on behalf of Hovnanian Enterprises
or any affiliated purchaser during the fiscal first quarter of 2006.
Item 6. Exhibits
Exhibit 3(a) Certificate of Incorporation of
the Registrant. (1)
Exhibit 3(b) Certificate of Amendment of
Certificate of Incorporation of the
Registrant. (2)
Exhibit 3(c) Certificate of Amendment of
Certificate of Incorporation of the Registrant. (3)
Exhibit 3(d) Restated Bylaws of the Registrant. (4)
Exhibit 4(a) Indenture, dated as of November 3, 2003,
among K. Hovnanian Enterprises, Inc., Hovnanian
Enterprises, Inc. and Wachovia Bank, National
Association, as Trustee. (5)
Exhibit 4(b) First Supplemental Indenture, dated
as of November 3, 2003, among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc., the
other Guarantors named therein and Wachovia Bank,
National Association, as Trustee. (6)
Exhibit 4(c) Second Supplemental Indenture, dated
as of March 18, 2004, among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc., the
other Guarantors named therein and Wachovia Bank,
National Association, as Trustee. (7)
Exhibit 4(d) Third Supplemental Indenture, dated
as of July 15, 2004, among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc., the
other Guarantors named therein and Wachovia Bank,
National Association, as Trustee. (7)
Exhibit 4(e) Fourth Supplemental Indenture, dated
as of April 19, 2005, among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc., the
other Guarantors named therein and Wachovia Bank,
National Association, as Trustee. (7)
Exhibit 4(f) Fifth Supplemental Indenture, dated
as of September 6, 2005, among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc., the
other Guarantors named therein and Wachovia Bank,
National Association, as Trustee. (7)
Exhibit 4(g) Sixth Supplemental Indenture, dated
as of February 27, 2006, among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc., the
other Guarantors named therein and Wachovia Bank,
National Association, as Trustee, relating to the
7 1/2% Senior Notes due 2016 (including form of 7 1/2%
Senior Notes due 2016). (8)
Exhibit 4(h) Certificate of Designations, Powers,
Preferences and Rights of the 7.625% Series A Preferred
Stock of Hovnanian Enterprises, Inc., dated
July 12, 2005.(9)
Exhibit 10(a) Fifth Amended and Restated Credit Agreement
dated June 14, 2005. (10)
Exhibit 10(b) Amended and Restated Guaranty and
Suretyship Agreement, dated June 14, 2005. (10)
Exhibit 10(c) Death and Disability Agreement between
the Registrant and Ara K. Hovnanian.
Exhibit 10(d) Form of Hovnanian Deferred Share Policy
for Senior Executives.
Exhibit 10(e) Form of Hovnanian Deferred Share Policy.
Exhibit 10(f) Form of Non-Qualified Stock Option
Agreement.
Exhibit 10(g) Form of Incentive Stock Option
Agreement.
Exhibit 10(h) Form of Stock Option Agreement for
Directors.
Exhibit 10(i) Form of Restricted Share Unit
Agreement.
Exhibit 31(a) Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer.
Exhibit 31(b) Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer.
Exhibit 32(a) Section 1350 Certification of Chief
Executive Officer.
Exhibit 32(b) Section 1350 Certification of Chief
Financial Officer.
(1) Incorporated by reference to Exhibits to
Registration Statement (No. 2-85198) on
Form S-1 of the Registrant.
(2) Incorporated by reference to Exhibit 4.2 to Registration
Statement (No. 333-106761) on Form S-3
of the Registrant.
(3) Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q of the Registrant for
the quarter ended January 31, 2004.
(4) Incorporated by reference to Exhibit 3.2 to
Registration Statement (No. 1-08551) on
Form 8-A of the Registrant.
(5) Incorporated by reference to Exhibits to
Registration Statement (No. 333-125738) on Form S-3
of the Registrant.
(6) Incorporated by reference to Exhibits to
Current Report of the Registrant on Form 8-K on
November 7, 2003.
(7) Incorporated by reference to Exhibits to Registration
Statement (No. 333-131982) on Form S-3 of the
Registrant.
(8) Incorporated by reference to Exhibits to Current
Report of the Registrant on Form 8-K filed on
February 27, 2006.
(9) Incorporated by reference to Exhibits to Current
Report on Form 8-K of the Registrant, filed on July 13,
2005.
(10) Incorporated by reference to Exhibits to Registration
Statement (No. 333-127806) on Form S-4 of the Registrant.
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: March 10, 2006 /S/J. LARRY SORSBY
J. Larry Sorsby,
Executive Vice President and
Chief Financial Officer
DATE: March 10, 2006 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller