SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 20, 2000
Washington Homes, Inc.
------------------------------------------------
(Exact Name of registrant specified in its charter)
Maryland 1-7643 52-0818872
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(State or other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
1802 Brightseat Road
Landover, Maryland 20785-4235
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(Address of principal executive offices)
Registrant's telephone number: (301) 772-8900
Item 9. Regulation FD Disclosure.
As previously announced on August 28, 2000, Washington Homes, Inc. (the
"Registrant") entered into a merger agreement with Hovnanian Enterprises Inc.
("Hovnanian") and WHI Holding Company, Inc., a wholly-owned subsidiary of
Hovnanian.
At the request of Hovnanian, on September 20, 2000, the Registrant
released its audited consolidated financial statements at and for the year ended
July 31, 2000 (the "Registrant Consolidated Financial Statements"). Hovnanian
has advised the Registrant that it will utilize certain information contained in
the Registrant Consolidated Financial Statements in connection with an offering
of $150,000,000 of _% Senior Notes, issued by its wholly-owned subsidiary, K.
Hovnanian Enterprises, Inc., and guaranteed by Hovnanian (i) to qualified
institutional buyers (as defined in Rule 144A under the Securities Act of 1993)
and (ii) outside the United States in compliance with Regulation S under the
Securities Act of 1933. The Registrant is filing this 8-K Report to furnish the
financial information it is providing to Hovnanian in order to comply with
Regulation FD recently promulgated by the Securities and Exchange Commission.
The following consolidated financial statements of Registrant and
subsidiaries have been furnished as part of this report:
Independent Auditors' Report
Consolidated Balance Sheets at July 31, 2000 and 1999
Consolidated Statements of Operations for each of the years in
the three-year period ended July 31, 2000
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended July 31, 2000
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended July 31, 2000
Notes to Consolidated Financial Statements for each of the years
in the three- year period ended July 31, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WASHINGTON HOMES, INC.
-----------------------------------
(Registrant)
By: /s/ Christopher Spendley
------------------------------
Christopher Spendley
Chief Financial Officer,
Senior Vice President
and Secretary
Date: September 20, 2000
Independent Auditors' Report
To the Shareholders and Board of Directors of Washington Homes, Inc.:
We have audited the accompanying consolidated balance sheets of Washington
Homes, Inc. and subsidiaries (the Company) as of July 31, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended July 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Washington Homes, Inc. and
subsidiaries as of July 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
2000 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 14, on August 28, 2000, the Company entered into a
definitive merger agreement with Hovnanian Enterprises, Inc. (Hovnanian). Upon
consummation of the merger, the Company's shareholders will receive either
shares of Hovnanian common stock, or cash, for each share of the Company's
common stock.
Deloitte & Touche LLP
McLean, VA
September 6, 2000
Consolidated Balance Sheets
July 31,
---------------------
(dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------
Assets
Cash and cash equivalents ......................... $ 14,317 $ 12,734
Residential inventories ........................... 130,573 130,502
Excess of cost over net assets
acquired, net .................................... 8,331 8,731
Investment in joint ventures ...................... 3,370 3,876
Other ............................................. 11,967 11,612
- --------------------------------------------------------------------------------
Total Assets ......................................... $168,558 $167,455
================================================================================
Liabilities and Shareholders' Equity
Liabilities
Notes and loans payable ........................... $ 36,323 $ 59,526
Trade accounts payable ............................ 32,558 24,568
Income taxes payable .............................. 2,011 2,770
Deferred income taxes ............................. 966 1,216
Other ............................................. 13,745 10,426
- --------------------------------------------------------------------------------
Total liabilities .............................. 85,603 98,506
- --------------------------------------------------------------------------------
Commitments and Contingent Liabilities
Shareholders' equity
Common stock $.01 par value; 15,000,000
shares authorized; 7,780,961 and
7,949,013 shares issued and outstanding, ......... 78 79
Non-voting common stock $.01 par value,
1,100,000 shares authorized; 0 shares
issued and outstanding, ......................... -- --
Additional paid-in capital ........................ 34,610 35,178
Retained earnings ................................. 48,311 33,692
Common stock held in Grantor Trust, 63,752 shares
at cost ......................................... (349) --
Deferred compensation obligation .................. 305 --
- --------------------------------------------------------------------------------
Total shareholders' equity ..................... 82,955 68,949
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ........... $168,558 $167,455
================================================================================
See Accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Operations
Year Ended July 31,
--------------------------------
(in thousands except share amounts) 2000 1999 1998
- --------------------------------------------------------------------------------
Revenues:
Homebuilding ............................ $459,278 $353,729 $233,111
Land sales .............................. 3,541 4,922 4,483
Other income ............................ 6,932 4,082 3,109
- --------------------------------------------------------------------------------
Total revenues ....................... 469,751 362,733 240,703
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Expenses:
Cost of sales - homebuilding ............ 371,495 286,221 191,381
Cost of sales - land sales .............. 3,519 4,713 3,674
Selling, general, and administrative .... 62,752 46,671 33,206
Interest expense ........................ 6,376 6,334 5,172
Financing fees .......................... 848 1,022 621
Amortization and depreciation ........... 751 418 641
- --------------------------------------------------------------------------------
Total expenses ....................... 445,741 345,379 234,695
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Earnings Before Income Taxes ............... 24,010 17,354 6,008
Income tax expense ...................... 9,391 6,706 2,218
- --------------------------------------------------------------------------------
Net Earnings ............................... $ 14,619 $ 10,648 $ 3,790
================================================================================
Earnings Per Share:
Basic Earnings Per Share ................... $ 1.85 $ 1.34 $ 0.48
================================================================================
Diluted Earnings Per Share ................. $ 1.80 $ 1.30 $ 0.48
================================================================================
See Accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Shareholders' Equity
Years Ended July 31, 2000, 1999, and 1998
------------------------------------------------------------------------------------------------------
Common Stock Additional Common Stock Deferred Total
------------------------------- Paid-in Retained Held by Grantor Compensation Shareholders'
(in thousands) Shares Voting Non-voting Capital Earnings Trust Obligation Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 1997 ...... 7,943 $ 70 $ 9 $ 35,147 $ 19,254 $ -- $ -- $ 54,480
Conversion of non-voting
to voting............... -- 9 (9) -- -- -- -- --
Net earnings ............. -- -- -- -- 3,790 -- -- 3,790
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 1998 ...... 7,943 79 -- 35,147 23,044 -- -- 58,270
Exercise of stock options. 6 -- -- 31 -- -- -- 31
Net earnings ............. -- -- -- -- 10,648 -- -- 10,648
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 1999 ...... 7,949 79 -- 35,178 33,692 -- -- 68,949
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase of Company stock. (168) (1) -- (568) -- (349) -- (918)
Deferred compensation
obligation ............. -- -- -- -- -- -- 305 305
Net earnings ............. -- -- -- -- 14,619 -- -- 14,619
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 2000 ...... 7,781 $ 78 $ 0 $ 34,610 $ 48,311 $(349) $305 $ 82,955
====================================================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
Year Ended July 31,
------------------------------------
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net earnings .......................... $ 14,619 $ 10,648 $ 3,790
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Amortization and depreciation........ 751 418 641
Deferred income taxes ............... (250) (822) 119
Deferred compensation obligation..... 305 -- --
Changes in assets and liabilities, net
of effects from acquisition:
Residential inventories ............. (71) (5,971) (1,021)
Other assets ........................ (337) 2,639 (2,151)
Trade accounts payable .............. 7,990 1,910 5,416
Income taxes payable ................ (759) 1,591 1,042
Other liabilities ................... 3,319 5,257 117
- --------------------------------------------------------------------------------
Net cash provided by operating
activities ......................... 25,567 15,670 7,953
- --------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Purchases of property and equipment ... (369) (327) (90)
Purchase of Breland Homes' net
assets ............................... -- (5,272) --
Investment in joint venture ........... 506 (1,600) --
- --------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities ............... 137 (7,199) (90)
- --------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from notes and loans payable . 324,227 221,771 111,967
Repayments of notes and loans payable . (347,430) (227,863) (119,841)
Purchase of Company stock ............. (918) -- --
Exercise of stock options ............. -- 31 --
- --------------------------------------------------------------------------------
Net cash used in financing
activities ......................... (24,121) (6,061) (7,874)
- --------------------------------------------------------------------------------
Net Increase (Decrease) In Cash and
Cash Equivalents ....................... 1,583 2,410 (11)
Cash and Cash Equivalents, Beginning
of Year ................................ 12,734 10,324 10,335
- --------------------------------------------------------------------------------
Cash and Cash Equivalents, End
of Year ................................ $ 14,317 $ 12,734 $ 10,324
================================================================================
See Accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 2000, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. The Company is principally engaged in the business of the
construction and sale of quality residential housing in the states of Maryland,
North Carolina, Virginia, Pennsylvania, Tennessee, Alabama and Mississippi.
Basis of Presentation. The consolidated financial statements include the
accounts of Washington Homes, Inc. and its wholly-owned subsidiaries
(collectively, the "Company"). Intercompany balances and transactions have been
eliminated in consolidation. The Company's investment in joint ventures is
accounted for using the equity method.
Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. One
such significant estimate relates to the recoverability of residential
inventory. Management's estimates and assumptions are reflective of, among other
things, prevailing market conditions, current operating strategies and the
availability of capital which are all subject to change. Changes to the
aforementioned or other conditions could in turn cause changes to such estimates
and assumptions and, as a result, actual results could differ from the original
estimates.
Cash and Cash Equivalents. For purposes of the Statements of Cash Flows, the
Company considers its cash, including temporary investments with original
maturities of three months or less, to be cash equivalents. Included in these
amounts at July 31, 2000 and 1999 were $520,000 and $607,000, respectively, that
are restricted to collateralize certain obligations of the Company.
Excess of Cost Over Net Assets Acquired, Net. Excess of cost over net assets
acquired (goodwill) represents the excess of purchase price over the fair value
of assets acquired less any write down to fair value and is being amortized from
15 to 31 years. The Company periodically reviews its goodwill recoverability by
assessing historical profitability and expectations as to future nondiscounted
cash flows and net income. Based upon its most recent analysis, the Company
believes that no material impairment of goodwill exists at July 31, 2000.
Accumulated amortization was $985,000 and $585,000 at July 31, 2000 and 1999,
respectively.
Warranties. The Company records an accrual at the date of closing for future
warranty costs based upon the historical experience of actual warranty costs on
a per house basis.
Income Taxes. The Company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Deferred income taxes are provided for temporary
differences in the recognition of certain income and expenses for financial and
tax reporting purposes.
Revenue Recognition. Homebuilding, land sales and financial services revenues
are recorded at the date of closing with the purchaser.
Earnings Per Common Share. Basic earnings per common share are computed based on
the weighted average number of common shares outstanding during each period.
Diluted earnings per common share are computed based on the weighted average
number of shares of common stock outstanding plus equivalent shares relating to
stock options outstanding and unvested shares that are associated with the
Company's deferred compensation plan.
Hedging Contracts. From time to time, the Company may utilize interest rate swap
agreements to reduce its exposure resulting from fluctuations in interest rates.
The Company designates interest rate swaps as hedges of specific debt
instruments and recognizes interest rate differentials as adjustments to
interest paid or accrued as the differentials occur. During the fiscal years
ended July 31, 2000, 1999, and 1998, amounts paid or accrued on these hedges
have not been significant to the Company's cash flows or results of operations.
Counter parties to these agreements are major financial institutions.
Stock-Based Compensation. SFAS No. 123, "Accounting for Stock-Based
Compensation," requires expanded disclosures of stock-based compensation
arrangements with employees. The Company has chosen to continue to account for
employee stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation costs for
stock options are measured as the excess, if any, of the quoted market price of
the Company's stock at the measurement date (typically the date of the grant)
over the amount the employee must pay to acquire the stock (see Note 7).
Impairment of Long-Lived Assets. In accordance with SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," assets are generally evaluated on a market-by-market basis in making a
determination as to whether such assets are impaired. Periodically, the Company
reviews its long-lived assets (including goodwill) for impairment based on
estimated future nondiscounted cash flows attributable to the assets. In the
event such cash flows are not expected to be sufficient to recover the recorded
value of the assets, the assets are written down to their estimated fair values.
Based on the Company's review, no assets were deemed to be impaired during the
three years ended July 31, 2000.
Recent Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, and for hedging activities by requiring that all
derivatives be recognized in the balance sheet and measured at fair value. The
Company has determined that the adoption of SFAS No. 133 will not have a
significant effect on its financial statement presentation or disclosures, or on
its earnings and financial position. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements," which provides
quidance on the recognition, presentation and disclosure of revenue in financial
statements. The quidelines in SAB 101 must be adopted by the fourth quarter of
2000. The Company is evaluating the impact of adopting SAB 101 and currently
believes it will not have a significant impact on its financial position and
results of operations or the presentation and disclosures in its financial
statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 "Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25," which clarifies the
application of APB Opinion No. 25, "Accounting for Stock Issued to Employees"
for certain issues ("Opinion No. 25"). The Interpretation clarifies (a) the
definition of "employee" for purposes of applying Opinion 25, (b) the criteria
for determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The Interpretation was effective
July 1, 2000, but certain conclusions cover specific events occurring after
December 15, 1998 or January 12, 2000, for which the effects are recognized on a
prospective basis from July 1, 2000. The adoption of this Interpretation had no
impact on the Company's financial position or results of operations.
2. RESIDENTIAL INVENTORIES
The Company's inventory consists of the following:
July 31,
---------------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Homes in process ......................... $ 65,337 $ 55,226
Finished lots ............................ 49,149 55,836
Land under development ................... 16,087 19,440
- --------------------------------------------------------------------------------
$130,573 $130,502
================================================================================
Homes in process are stated at cost (determined by accumulating actual costs,
including construction, interest and related direct overhead costs), which is
not in excess of market. Finished building lots represents the cost, which is
not in excess of market, of finished lots developed by the Company or acquired
from other developers. Upon delivery, the costs of the homes and related lots
are expensed on a specific identification basis. Land under development consists
of land being developed into finished building lots. Certain costs, including
interest, are capitalized as incurred during the development process.
3. INVESTMENT IN JOINT VENTURES
The Company participates in various joint ventures formed to develop residential
land into finished building lots for sale to the Company and other homebuilders
utilizing non-recourse acquisition and development loans. The Company also
participates in a joint venture formed to develop and market an active adult
community in the Raleigh, North Carolina market. Assets consist primarily of
homes under construction, land under development and fixed assets. The Company's
interest in the joint ventures' operating results has not been significant to
date.
Condensed combined financial information of the joint ventures as of July 31,
2000 and 1999 are as follows:
July 31,
---------------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Assets ................................. $15,535 $ 9,183
Liabilities ............................ 11,128 4,273
- --------------------------------------------------------------------------------
Equity ................................. $ 4,407 $ 4,910
================================================================================
4. NOTES AND LOANS PAYABLE
Notes and loans payable consist of the following:
July 31,
-----------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Senior notes ................................... $14,333 $28,667
Revolving credit facilities .................... 18,628 27,639
Land acquisition and development ............... 3,274 3,042
Mortgages and other notes payable .............. 88 178
- --------------------------------------------------------------------------------
$36,323 $59,526
================================================================================
Senior Notes. In April 1994, the Company issued $43,000,000 principal amount of
unsecured Senior Notes due October 2000. Two series of Senior Notes were issued:
$30,000,000 with a fixed rate of 8.61% per annum, with interest payable
semi-annually beginning in October 1994 and $13,000,000 with a floating rate of
LIBOR plus 2.4%, (9.0% at July 31, 2000), with interest payable July 1994 and
either quarterly or semi-annually thereafter at the option of the Company.
Beginning April 1998 interest became payable on a quarterly basis for both
series of Senior Notes. Principal repayments became due in three equal annual
installments which commenced October 1998 and will continue to October 2000.
Revolving Credit Facilities. At July 31, 2000, the Company had two secured
revolving credit facilities totaling $133,000,000 to fund land acquisition and
home construction, letters of credit, and principal repayments on its Senior
Notes. In September 1999, the Company increased the credit availability under
one of the facilities to $120,000,000 from $70,000,000. The new credit facility
is comprised of a $100,000,000 revolving loan with a maturity date (which may be
extended) of October 30, 2001, and a $20,000,000 term loan with an initial
maturity of 2 years plus three one-year extension options. $14,333,000 of the
term loan was used in October 1999 for a principal repayment of the Company's
Senior Notes. The remaining $5,667,000 may be used to repay a portion of the
Senior Notes repayment due in October 2000. Principal repayments of $2,000,000
are due semi-annually beginning in April 2000. The first scheduled principal
repayment of $2,000,000 was made in April 2000. The other credit facility
consists of a $15,000,000 revolving loan with a maturity date (which may be
extended) of April 19, 2001. Borrowings under the facilities bear interest at
thirty-day LIBOR (6.6% at July 31, 2000) plus 1.75% for the revolving credit
facilities and 2.85% for the term loan.
The Senior Notes and revolving credit facility require the Company, among other
things, to meet certain net worth, leverage and cash flow coverage tests and
place limitations on dividends, the securing of additional loans, investments,
and finished lot purchases. These provisions do not significantly restrict the
Company's operations.
Land Acquisition and Development Loans. The Company has loans with various
lenders for the acquisition and development of land amounting to $3,274,000 and
$3,042,000 at July 31, 2000 and 1999, respectively. These loans bear interest at
a fixed rate of 8% or variable rates of prime plus 0.5% to prime plus 1% and are
collateralized by the related inventory.
Mortgages and Other Notes Payable. Mortgages and other notes payable, amounting
to $88,000 and $178,000 at July 31, 2000 and 1999 respectively, bear interest at
rates ranging from 4.8% to 10% and mature in varying periods of up to 5 years.
Aggregate maturities of notes and loans payable are as follows:
For the year ending July 31, (in thousands)
----------------------------------------------------------------
2001 $33,987
2002 2,306
2003 --
2004 --
2005 30
----------------------------------------------------------------
$36,323
================================================================
Capitalized Interest. A summary of capitalized interest follows:
Year Ended July 31,
------------------------------
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Interest capitalized at beginning of year ..... $ 5,652 $ 8,140 $ 9,108
Interest incurred ............................. 7,067 6,329 6,164
Interest expense .............................. (6,376) (6,334) (5,172)
Interest in cost of sales ..................... (2,241) (2,483) (1,960)
- --------------------------------------------------------------------------------
Interest capitalized at end of year ........... $ 4,102 $ 5,652 $ 8,140
================================================================================
Interest paid ................................. $ 7,073 $ 6,141 $ 6,705
================================================================================
Interest capitalized during the land development period is charged to cost of
sales as the related inventory is sold. Interest capitalized during the home
construction period is charged to interest expense when the related inventory is
sold.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of each class of
financial instrument are as follows:
Cash and cash equivalents, receivables, notes payable and accounts payable
The carrying amounts approximate fair value because of the short maturity of
these amounts.
Long-term debt
The carrying amounts of the Company's bank borrowings under its short-term bank
lines and revolving credit agreements are based on floating rates identified by
reference to market rates. The fair value of the Company's other long-term debt
approximate carrying value based on quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the same
remaining maturities.
Interest rate swaps
At July 31, 2000, the Company, in connection with managing interest costs, had
an interest rate hedge agreement outstanding with a notional amount of
$20,000,000. The agreement expires on February 14, 2004 although the counter
party to the agreement may terminate it in 2002. The agreement includes a cap
rate of 8.0% and a floor rate of 5.8%. The fair value of the agreement at July
31, 2000 was $(156,000). The fair value is based on the estimated termination
value and represents the amount the Company would have to pay to terminate the
agreement as of July 31, 2000.
At July 31, 1999, the Company had an interest rate swap agreement outstanding
with a notional amount of $15,000,000 expiring in January 2002. In January 2000,
the counter party exercised its option to cancel this swap agreement.
6. ACQUISITIONS
During the fiscal year ended July 31, 1999, the Company purchased certain
homebuilding assets and assumed the related liabilities of Breland Homes, Inc.;
Breland Homes of Mississippi, LLC; and Breland Properties, Inc. (collectively
"Breland Homes"). Breland Homes was a privately-owned homebuilder with
operations in Huntsville, Alabama and the Mississippi Gulf Coast. The
transaction was effective as of March 1, 1999. Included in the purchase were 82
homes in backlog.
The allocation of the purchase price is as follows:
Residential inventories ..................................... $ 11,471,000
Excess of cost over net assets acquired ..................... 3,000,000
Other assets ................................................ 476,000
Less: liabilities assumed ................................... (9,675,000)
- --------------------------------------------------------------------------------
Net cash paid ............................................... $ 5,272,000
================================================================================
7. SHAREHOLDERS' EQUITY
Common Stock. The Company has 7,780,961 shares of common stock outstanding at
July 31, 2000, all of which are voting shares. During the fiscal year ended July
31, 1999, 6,250 shares of common stock were issued upon the exercise of options
under the Company's Employee Stock Option Plan. During fiscal 1998, all of the
remaining 28,330 shares of non-voting common stock were exchanged with the
Company for newly-issued shares of voting common stock on a share for share
basis. Except for voting rights, the non-voting common stock was substantially
the same as the Company's voting stock.
Deferred Compensation Incentive Plan. Effective as of July 31, 1999, the Company
adopted a Deferred Compensation Incentive Plan ( the "Plan") for certain key
employees and Board of Directors who may elect to defer a portion of their
future compensation. The Company will match the lesser of 20% of the amount
deferred or $20,000, with the match subject to a five-year vesting schedule. A
"Rabbi Trust" (Grantor Trust) was established to purchase and hold the Company's
common stock to fund the Plan. The Company retires any Company stock acquired by
the Plan and the future issuance of the same number of shares is from
newly-issued shares. During the fiscal year ended July 31, 2000, 63,752 shares
were acquired by the Plan and held by the Grantor Trust. As a result of this
transaction, shareholders' equity was reduced as follows (in thousands):
Stock purchase price ........................................... $ 349
Decrease in deferred compensation liability .................... (305)
- --------------------------------------------------------------------------------
Net decrease ................................................... $ 44
================================================================================
Stock Repurchase Program. In November 1999, the Board of Directors adopted a
stock repurchase program for up to 800,000 shares of the Company's common stock.
The shares will be repurchased in the open market or in block trades and
purchases will be dependent on market conditions. Shares repurchased will be
retired or used to meet the Company's current employee benefit plan obligations.
During the fiscal year ended July 31, 2000, 104,300 shares were repurchased for
$569,000. As a result of this transaction, Shareholders' Equity was reduced as
follows (in thousands):
Common stock ................................................... $ 1
Additional paid-in capital ..................................... 568
- --------------------------------------------------------------------------------
Net decrease in Shareholders' Equity ........................... $569
================================================================================
Stock Options. The Company has adopted two plans for the issuance of stock
options to its employees and members of its Board of Directors.
On September 17, 1992, the Company adopted the Washington Homes Employee Stock
Option Plan ("Employee Option Plan") pursuant to which options for up to 500,000
shares of common stock could be granted to officers and other key employees of
the Company. In July 1997 and September 1999, the Board of Directors voted to
increase the number of shares for which options could be granted to 1,000,000
and 1,500,000 respectively. The amendments to the plan were subsequently
approved by the shareholders in November 1997 and November 1999. Options granted
under the Employee Option Plan can be either incentive stock options ("Incentive
Stock Options") or non-qualified options ("Non-Qualified Options") as determined
by a committee of the independent directors of the Board of Directors. Options
granted under the Employee Option Plan will have an exercise price not less than
fair market value at date of grant. Options will become exercisable, in part,
after 12 months from the date of grant and will generally remain exercisable for
ten years from the date of grant. Certain options were not exercisable until
fiscal 2000.
On September 15, 1994 the Company adopted the Washington Homes Non-Employee
Directors' Stock Option Plan pursuant to which options for up to 30,000 shares
of common stock could be granted to directors who are not employees of the
Company or its subsidiaries. In November 1997 and November 1999, the
shareholders approved an amendment to increase the number of shares available
for options to 100,000 and 200,000 respectively. Options that are Non-Qualified
Options, generally become exercisable in part after one year from date of grant
and generally remain exercisable for ten years from the date of grant.
In July 2000, non-qualified options for 50,000 shares exercisable at $6.00 were
granted to the Chief Executive Officer of the Company. These options vest over
three years and are not part of the Employee Option Plan.
Option activity for the Company is summarized below:
Employees Non-Employees
-------------------- -------------------
Weighted Weighted
Number of Average Number of Average
shares Price shares Price
- --------------------------------------------------------------------------------
Outstanding - July 31, 1997 .... 432,000 $ 5.23 29,000 $ 4.74
Granted ...................... 592,000 4.46 40,000 4.00
Canceled ..................... 43,000 4.76 -- --
Exercised .................... -- -- -- --
- --------------------------------------------------------------------------------
Outstanding - July 31, 1998 .... 981,000 4.53 69,000 4.31
Granted ...................... 39,000 5.87 -- --
Canceled ..................... 54,750 4.83 -- --
Exercised .................... 6,250 5.04 -- --
- --------------------------------------------------------------------------------
Outstanding - July 31, 1999 .... 959,000 4.57 69,000 4.31
Granted ...................... 270,000 5.96 40,000 6.50
Canceled ..................... 135,000 6.09 -- --
Exercised .................... -- -- -- --
- --------------------------------------------------------------------------------
Outstanding - July 31, 2000 .... 1,094,000 4.73 109,000 5.11
Exercisable at July 31, 2000 ... 801,750 4.54 49,000 4.44
- --------------------------------------------------------------------------------
At July 31, 2000, there were 557,000 shares reserved for future grants under
both plans.
The following summarizes information about the Company's stock options
outstanding at July 31, 2000:
Options Outstanding Options Exercisable
-------------------------------------- --------------------------------
Weighted Average
-------------------------
Shares Remaining Term Exercise Shares Weighted Average
Exercise Price Range Outstanding in Years Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------
$ 3.63 - $ 4.06 318,500 7.09 $3.92 296,000 $3.91
4.25 - 4.69 239,000 7.04 4.49 142,500 4.49
4.75 - 4.95 304,000 6.57 4.80 282,500 4.79
5.13 - 7.15 341,500 6.83 5.70 129,750 5.42
- -----------------------------------------------------------------------------------------------------
$ 3.63 - $ 7.15 1,203,000 6.88 $4.76 850,750 $4.53
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
issued in October 1995. In accordance with the provisions of SFAS No. 123, the
Company applies APB Opinion No. 25 and related interpretations in accounting for
its stock option plans and, accordingly, does not recognize compensation cost
based on the fair value of the options granted at grant date as prescribed by
SFAS No. 123. Had compensation been recorded consistent with SFAS No. 123, net
earnings and earnings per share would have been reduced to the pro forma amounts
indicated in the table below:
Year Ended July 31,
---------------------------------------
(in thousands except per share amounts) 2000 1999 1998
- --------------------------------------------------------------------------------
Net earnings - as reported ......... $ 14,619 $ 10,648 $ 3,790
Net earnings - pro forma ........... 14,419 10,465 3,621
Basic earnings per share -
as reported ....................... 1.85 1.34 0.48
Basic earnings per share -
pro forma ......................... 1.82 1.32 0.46
Diluted earnings per share -
as reported ....................... 1.80 1.30 0.48
Diluted earnings per share -
pro forma ......................... 1.78 1.28 0.46
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
Year Ended July 31,
--------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Expected dividend yield ....................... -- -- --
Expected stock price volatility ............... 37% 40% 46%
Risk-free interest rate ....................... 6.1% 5.0% 5.2%
Expected life of options ...................... 7 8 8
- --------------------------------------------------------------------------------
The weighted average fair value of options granted during 2000, 1999 and 1998
were $2.91, $3.18, and $2.62 per option, respectively.
8. EARNINGS PER SHARE
Earnings per share are presented in accordance with SFAS No. 128, "Earnings Per
Share." This statement requires dual presentation of basic and diluted earnings
per share on the face of the statement of operations. Basic earnings per share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average number of shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. Options to purchase 1,203,000 shares of common
stock at $4.76 were outstanding at July 31, 2000. Options to purchase 1,028,000
shares of common stock at $4.55 were outstanding at July 31, 1999. Options to
purchase 1,050,000 shares of common stock at $4.52 were outstanding at July 31,
1998.
The following is a reconciliation of the amounts used in calculating basic and
diluted earnings per common share:
Per Share
(dollars in thousands) Earnings Shares Amount
- --------------------------------------------------------------------------------
Basic earnings per common share for
the year ended July 31, 2000 .............. $ 14,619 7,909,151 $1.85
Effect of dilutive stock options ........... -- 203,878 (.05)
- --------------------------------------------------------------------------------
Diluted earnings per common share for
the year ended July 31, 2000 .............. $ 14,619 8,113,029 $1.80
================================================================================
Basic earnings per common share for
the year ended July 31, 1999 .............. $ 10,648 7,943,996 $1.34
Effect of dilutive stock options ........... -- 257,503 (.04)
- --------------------------------------------------------------------------------
Diluted earnings per common share for
the year ended July 31, 1999 .............. $ 10,648 8,201,499 $1.30
================================================================================
Basic earnings per common share for
the year ended July 31, 1998 .............. $ 3,790 7,942,763 $ .48
Effect of dilutive stock options ........... -- 22,430 --
- --------------------------------------------------------------------------------
Diluted earnings per common share for
the year ended July 31, 1998 .............. $ 3,790 7,965,193 $ .48
================================================================================
9. SEGMENT REPORTING
The Company's reportable segments are strategic business units that offer
different products and services. The business segments of the Company are
defined as homebuilding and financial services. The homebuilding operations
include the construction and sale of homes and the development and sale of land
and comprise approximately 97% or more of consolidated revenues for years ended
July 31, 2000, 1999, and 1998. The financial services operations include the
origination of mortgage loans primarily to the Company's home purchasers. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Intersegment revenue represents the
elimination of revenue included in financial services revenue for amounts paid
by the homebuilding operations for financing costs of the home purchasers. The
information below is presented in conformity with SFAS No. 131 "Disclosure About
Segments of an Enterprise and Related Information" for all periods presented.
Year Ended July 31,
------------------------------------
(dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Revenues
Homebuilding ........................ $ 462,819 $ 358,651 $ 237,594
Financial services .................. 7,550 4,756 2,852
Intersegment ........................ (2,611) (1,647) (994)
Other ............................... 1,993 973 1,251
- --------------------------------------------------------------------------------
Revenues ........................... $ 469,751 $ 362,733 $ 240,703
================================================================================
Selling, General and Administrative
Homebuilding ........................ $ 57,781 $ 43,499 $ 30,912
Financial services .................. 4,971 3,172 2,294
Other ............................... -- -- --
- --------------------------------------------------------------------------------
Selling, General and Administrative $ 62,752 $ 46,671 $ 33,206
================================================================================
Interest and Financing Expenses
Homebuilding ........................ $ 7,216 $ 7,337 $ 5,752
Financial services .................. 8 19 41
Other ............................... -- -- --
- --------------------------------------------------------------------------------
Interest and Financing Expenses ... $ 7,224 $ 7,356 $ 5,793
================================================================================
Amortization and Depreciation
Homebuilding ........................ $ 737 $ 406 $ 627
Financial services .................. 14 12 14
Other ............................... -- -- --
- --------------------------------------------------------------------------------
Amortization and Depreciation ...... $ 751 $ 418 $ 641
================================================================================
Earnings before Income Taxes
Homebuilding ........................ $ 19,461 $ 14,829 $ 4,255
Financial services .................. 2,556 1,552 502
Other ............................... 1,993 973 1,251
================================================================================
Earnings before Income Taxes ...... $ 24,010 $ 17,354 $ 6,008
================================================================================
Income Taxes
Homebuilding ........................ $ 7,592 $ 5,760 $ 1,501
Financial services .................. 1,002 557 217
Other ............................... 797 389 500
- --------------------------------------------------------------------------------
Income Taxes ...................... $ 9,391 $ 6,706 $ 2,218
================================================================================
Assets
Homebuilding ........................ $ 166,639 $ 166,034 $ 146,018
Financial services .................. 1,919 1,421 1,337
Other ............................... -- -- --
- --------------------------------------------------------------------------------
Assets ............................ $ 168,558 $ 167,455 $ 147,355
================================================================================
10. INCOME TAXES
As discussed in Note 1, the Company follows the provisions of SFAS No. 109. The
provision for income taxes includes the following:
Year Ended July 31,
-----------------------------------------
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Current:
Federal ................ $ 8,002 $ 6,552 $ 1,982
State .................. 1,639 976 117
- --------------------------------------------------------------------------------
9,641 7,528 2,099
- --------------------------------------------------------------------------------
Deferred:
Federal ................ (207) (663) 112
State .................. (43) (159) 7
- --------------------------------------------------------------------------------
(250) (822) 119
- --------------------------------------------------------------------------------
Total Provision .............. $ 9,391 $ 6,706 $ 2,218
================================================================================
The difference between the effective tax rate and the expected statutory tax
rate computed on earnings before taxes is attributable to the following:
Year Ended July 31,
--------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Taxes computed at statutory rate ............. 35.0% 35.0% 34.0%
Increases (Decreases):
State income taxes ........................... 4.3 3.1 1.4
Excess of cost over net assets acquired ...... .3 .4 1.1
Other ........................................ (.5) .1 .4
- --------------------------------------------------------------------------------
Effective tax rate ........................... 39.1% 38.6% 36.9%
================================================================================
The deferred income tax at July 31, 2000 and 1999 represents the tax effect of
temporary differences as follows:
July 31,
-------------------------
2000 1999
- --------------------------------------------------------------------------------
Land step up in basis ........................ $ 412 $ 289
Capitalized interest ......................... 1,033 1,325
Uniform capitalized costs .................... 810 572
Investment in joint ventures ................. (390) (388)
Warranty reserve ............................. (323) (293)
Accrued compensation cost .................... (645) (297)
Other ........................................ 69 8
- --------------------------------------------------------------------------------
$ 966 $ 1,216
================================================================================
During the years ended July 31, 2000, 1999 and 1998, income taxes in the amount
of $10,399,000, $5,994,000, and $922,000, respectively, were paid.
11. EMPLOYEE RETIREMENT PLAN
The Company has a 401(k) Plan which allows eligible employees to defer a portion
of their total compensation subject to limitations of the Internal Revenue Code.
The Company matches 50% of participant contributions, up to a maximum of the
greater of $1,000 or 1.5% of compensation for each participant. The Company's
total matching contributions under the Plan for the years ended July 31, 2000,
1999 and 1998 were approximately $196,300, $163,700, and $124,600, respectively.
Under this plan, the Company elected to make a $250,000 profit sharing
contribution in January 2000 to all eligible non-highly compensated personnel
employed as of December 31, 1999.
12. RELATED PARTY TRANSACTIONS
The Company leases certain office space from an affiliated entity. During the
years ended July 31, 2000, 1999 and 1998, $554,000, $396,000 and $435,000 were
paid, respectively.
13. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases its headquarters offices and offices for certain divisions
from an affiliate and certain other facilities from unrelated parties, all under
non-cancelable operating leases with terms ending through January 2008. Future
minimum rental payments required under operating lease commitments that have
initial or remaining non-cancelable lease terms in excess of one year subsequent
to July 31, 2000, are as follows:
----------------------------------------------------------
For the year ending July 31, (in thousands)
----------------------------------------------------------
2001 $1,770
2002 1,143
2003 856
2004 714
2005 522
Thereafter 1,074
----------------------------------------------------------
Total future rental payments $6,079
==========================================================
Rental expense was $3,532,000, $3,053,000, and $2,857,000 for the years ended
July 31, 2000, 1999 and 1998, respectively.
At July 31, 2000 the Company was contingently liable to banks and other
financial institutions for outstanding letters of credit and surety bonds
relating to building lot acquisition contracts and municipal bonding for land
development activities. In addition, the Company has an employment agreement
with a key executive which expires on June 30, 2003, subject to certain
extension provisions. Under certain conditions stated in the agreement,
severance payments are due to the executive upon termination. The maximum
contingent liability for the outstanding letters of credit, surety bonds, and
employment agreement is approximately $24 million.
The Company is involved in various claims and legal actions arising in the
normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
14. SUBSEQUENT EVENT
On August 28, 2000, Washington Homes, Inc. and Hovnanian Enterprises, Inc.
announced the signing of a definitive merger agreement.
Under the terms of the agreement, Washington Homes shareholders will receive the
equivalent of 1.39 Hovnanian class A common shares or $10.08 in cash for each
share of Washington Homes, subject to certain adjustments. Up to 50% of the
consideration will be paid in cash, with the balance, not to exceed 60%, paid in
Hovnanian common shares. The transaction is expected to close in January 2001
following regulatory and shareholder approvals and customary closing conditions.