UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10Q
(Mark One)
[ X ] Quarterly report underpursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For quarterly period ended APRIL 30,JULY 31, 2003 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, N. J. 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 registrantregistrant: (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 an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [
]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 22,509,27722,596,588
Class A Common Shares and 7,434,8447,426,051 Class B Common Shares were
outstanding as of May 30, 2003.September 5, 2003
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE
NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at April 30,July 31,
2003 (unaudited) and October 31, 2002 54
Consolidated Statements of Income for the three
and sixnine months ended April 30,July 31, 2003 and 2002
(unaudited) 6
Consolidated Statements of Stockholders' Equity
for the sixnine months ended April 30,July 31, 2003
(unaudited) 7
Consolidated Statements of Cash Flows for
the sixnine months ended April 30,July 31, 2003
and 2002 (unaudited) 8
Notes to Consolidated Financial
Statements (unaudited) 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 3536
Item 4. Controls and Procedures 3637
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security
Holders 36
Item 6. Exhibits and Reports on Form 8-K. 37
(a)
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) Restated Bylaws of the Registrant. (2)(3)
Exhibit 10(a) Third Amended and Restated Credit
Agreement dated February 20,June 19, 2003. (3)(2)
Exhibit 10(b) First Amendment to First Restated $142 million
K. Hovnanian Mortgage, Inc. Revolving Credit
Agreement dated March 7,July 31, 2003.
(3)
Exhibit 99(a)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) Certification of Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of theThe Sarbanes-
Oxley Act of 2002.
Exhibit 99(b)32(b) Certification of Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of theThe Sarbanes-
Oxley Act of 2002.
(1) Incorporated by reference to Exhibits to
Registration Statement (No. 2-85198) on
Form S-1 of the Registrant.
(2) Incorporated by reference to Exhibits to Annual
Report on Form 10-K for the year ended
February 28, 1994 of the Registrant.
(3) Incorporated by reference to Exhibits to Quarterly ReportRegistration
Statement (No. 333-106761) on Form 10-Q for the quarter
Ended January 31, 2003S-3 of the
Registrant.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during
Thethe quarter for which this report is filed. The
following
report on Form 8-K has been furnished during the quarter
for which this report is filed:
On May 23, 2003, the Company furnished a report
on Form 8-K, Item 9 (pursuant to Item 12 in accordance
with SEC Release 33-8216; 34-47583; IC-25983; March 27,
2003), relating to the Company's press release dated
May 28, 2003 relating to its preliminary financial
results for the second quarter ended April 30, 2003.
Signatures 38
Certifications 39
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
April 30,July 31, October 31,
ASSETS 2003 2002
----------- -----------
(unaudited)
Homebuilding:
Cash and cash equivalents.......................equivalents..................... $ 18,565110,820 $ 262,675
----------- -----------
Inventories - At the lower of cost or fair
value:
Sold and unsold homes and lots under
development................................. 1,013,294development............................... 1,090,908 803,829
----------- -----------
Land and land options held for future
development or sale......................... 240,268sale....................... 280,706 171,081
----------- -----------
Consolidated Inventory Not Owned:
Specific performance options................ 59,523options.............. 72,436 67,183
Variable interest entities.................. 40,923entities................ 93,252
Other options............................... 61,110options............................. 54,377 39,489
----------- -----------
Total Inventories........................... 1,415,118Consolidated Inventory Not Owned.. 220,065 106,672
----------- -----------
Total Inventories..................... 1,591,679 1,081,582
----------- -----------
Receivables, deposits, and notes ............... 37,577............. 45,742 26,276
----------- -----------
Property, plant, and equipment - net............ 26,191net.......... 27,110 19,242
----------- -----------
Senior residential rental properties - net...... 9,311net.... 9,215 9,504
----------- -----------
Prepaid expenses and other assets............... 83,340assets............. 93,695 86,582
----------- -----------
Goodwill and indefinite life intangibles........ 82,275intangibles...... 82,283 82,275
----------- -----------
Definite life intangibles....................... 63,503intangibles..................... 59,244
----------- -----------
Total Homebuilding.......................... 1,735,880Homebuilding.................... 2,019,788 1,568,136
----------- -----------
Financial Services:
Cash and cash equivalents....................... 4,961equivalents..................... 8,819 7,315
Mortgage loans held for sale.................... 82,916sale.................. 152,211 91,451
Other assets.................................... 3,708assets.................................. 3,119 11,226
----------- -----------
Total Financial Services.................... 91,585Services.............. 164,149 109,992
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits........................................ 34,800benefits...................................... 11,717
----------- -----------
Total Assets...................................... $1,862,265Assets.................................... $2,195,654 $1,678,128
=========== ===========
See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Per Share Data)
April 30,July 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
----------- -----------
(unaudited)
Homebuilding:
Nonrecourse land mortgages........................mortgages..................... $ 29,50629,173 $ 11,593
Accounts payable and other liabilities............ 189,391liabilities......... 211,054 198,290
Customers' deposits............................... 52,868deposits............................ 61,263 40,422
Nonrecourse mortgages secured by operating
properties...................................... 3,210properties................................... 3,177 3,274
Liabilities from inventory not owned.............. 108,471owned........... 116,597 97,983
----------- -----------
Total Homebuilding............................ 383,446Homebuilding......................... 421,264 351,562
----------- ---------------------
Financial Services:
Accounts payable and other liabilities............ 4,835liabilities......... 6,641 4,857
Mortgage warehouse line of credit................. 78,823credit.............. 137,039 85,498
----------- -----------
Total Financial Services...................... 83,658Services................... 143,680 90,355
----------- -----------
Notes Payable:
Revolving and term credit agreements.............. 144,800Term loan...................................... 115,000 115,000
Senior notes...................................... 396,647notes................................... 387,029 396,390
Senior subordinated notes......................... 150,000notes...................... 300,000 150,000
Accrued interest.................................. 10,127interest............................... 17,738 9,555
----------- -----------
Total Notes Payable........................... 701,574Payable........................ 819,767 670,945
----------- -----------
Income Taxes Payable - Net of deferred tax benefits. 777
----------- -----------
Total Liabilities............................. 1,168,678Liabilities.......................... 1,384,711 1,113,639
----------- -----------
Minority interest................................... 37,799interest from inventory not owned....... 80,137
----------- -----------
Minority interest from consolidated joint ventures.. 1,860 1,940
----------- -----------
Stockholders' Equity:
Preferred Stock,$.01 par value-authorized 100,000
shares; none issued.............................issued..........................
Common Stock,Class A,$.01 par value-authorized
87,000,000 shares; issued 27,797,05527,875,001 shares at
April 30,July 31, 2003 and 27,453,99427,452,481 shares at October 31,
2002 (including 5,342,599 shares at April 30,July 31, 2003
and 4,343,240 shares at October 31, 2002 held
in Treasury).................................... 278................................. 279 275
Common Stock,Class B,$.01 par value (convertible to
Class A at time of sale) authorized 13,000,000
shares; issued 7,781,0187,772,342 shares at April 30,July 31, 2003
and 7,788,061 shares at October 31, 2002
(including 345,874 shares at April 30,July 31, 2003 and
October 31, 2002 held in Treasury)......................... 78 78
Paid in Capital................................... 156,124Capital................................ 160,479 152,977
Retained Earnings................................. 545,131Earnings.............................. 613,933 447,802
Deferred Compensation.............................Compensation.......................... (21)
Treasury Stock - at cost..........................cost....................... (45,823) (38,562)
----------- -----------
Total Stockholders' Equity.................... 655,788Equity................. 728,946 562,549
----------- -----------
Total Liabilities and Stockholders' Equity.......... $1,862,265Equity....... $2,195,654 $1,678,128
=========== ===========
See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Ended SixNine Months Ended
April 30, April 30,
------------------- -----------------------July 31, July 31,
-------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------------------- ----------
Revenues:
Homebuilding:
Sale of homes...................... $666,553 $532,386 $1,274,054 $ 975,484830,734 $ 681,329 $2,104,788 $1,656,813
Land sales and other revenues...... 2,365 19,936 12,004 21,9134,441 12,651 16,445 34,564
--------- --------- --------------------- ----------
Total Homebuilding............... 668,918 552,322 1,286,058 997,397835,175 693,980 2,121,233 1,691,377
Financial Services................... 10,899 8,676 21,394 17,66313,642 10,656 35,036 28,319
--------- --------- --------------------- ----------
Total Revenues................... 679,817 560,998 1,307,452 1,015,060848,817 704,636 2,156,269 1,719,696
--------- --------- --------------------- ----------
Expenses:
Homebuilding:
Cost of sales...................... 497,219 436,526 960,397 788,009621,897 539,676 1,582,294 1,327,685
Selling, general and administrative 59,598 47,646 113,899 85,29566,136 52,882 180,035 138,177
Inventory impairment loss.......... 1,326 1,424 1,484 2,329149 426 1,633 2,755
--------- --------- --------------------- ----------
Total Homebuilding............... 558,143 485,596 1,075,780 875,633688,182 592,984 1,763,962 1,468,617
Financial Services................... 6,173 5,103 11,994 10,4627,635 5,694 19,629 16,156
Corporate General and Administration. 13,464 10,629 28,048 21,505Administrative. 16,978 12,195 45,026 33,700
Interest............................. 13,425 12,802 27,104 26,50417,204 15,849 44,308 42,353
Other Operations..................... 4,184 5,295 8,962 9,5869,010 3,953 17,972 13,539
Restructuring Charges/Asset Writeoff. 12,000 12,000
--------- --------- --------------------- ----------
Total Expenses................... 595,389 519,425 1,151,888 943,690739,009 642,675 1,890,897 1,586,365
--------- --------- --------------------- ----------
Income Before Income Taxes............. 84,428 41,573 155,564 71,370109,808 61,961 265,372 133,331
--------- --------- --------------------- ----------
State and Federal Income Taxes:
State................................ 3,335 1,534 6,435 3,4075,439 1,679 11,874 5,086
Federal.............................. 28,525 14,129 51,800 23,89235,567 21,095 87,367 44,987
--------- --------- --------------------- ----------
Total Taxes........................ 31,860 15,663 58,235 27,29941,006 22,774 99,241 50,073
--------- --------- ----------- ------------------- ----------
Net Income.............................$ 52,56868,802 $ 25,91039,187 $ 97,329166,131 $ 44,07183,258
========= ========= ===================== ==========
Per Share Data:
Basic:
Income per common share..............$ 1.692.25 $ 0.841.27 $ 3.115.35 $ 1.482.76
========= ========= ========== ==========
Weighted average number of common
shares outstanding................. 31,143 30,736 31,256 29,83630,630 30,877 31,044 30,188
Assuming dilution:
Income per common share..............$ 1.602.11 $ 0.801.20 $ 2.955.06 $ 1.402.61
========= ========= ========== ==========
Weighted average number of common
shares outstanding................ 32,761 32,570 32,944 31,51132,543 32,730 32,806 31,922
See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars In Thousands)
A Common Stock B Common Stock
------------------- -------------------
Shares Shares
Issued and Issued and Paid-In Retained Deferred Treasury
Outstanding Amount Outstanding Amount Capital Earnings Comp Stock
Total
----------- ------ ----------- ------ ------- -------- -------- -------- ---------------
- ---
Balance, October 31, 2002 23,110,80223,109,241 $275 7,442,187 $78 $152,977 $447,802 $ (21) $(38,562) $ 562,549
Shares returned in
connectionconnnection with prior
year acquisition .......acquisition........ (749,359)
Sale of common stock under
employeeEmployee stock option
plan.................... 249,361 2 3,067 3,069318,660 3 7,421 7,424
Stock bonus plan.......... 86,60988,141 1 80 81 82
Conversion of Class B to
Class A Common Stock.... 7,043 (7,043)15,719 (15,719)
Deferred compensation..... 21 21
Treasury stock purchase...purchases.. (250,000) (7,261) (7,261)
Net Income................ 97,329 97,329166,131 166,131
----------- ------ ----------- ------ ------- -------- -------- -------- ---------
Balance, April 30, 2003
(unaudited)............... 22,454,456 $278 7,435,144July 31, 2003.... 22,532,402 $279 7,426,468 $78 $156,124 $545,131$160,479 $613,933 $ -- $(45,823) $ 655,788728,946
(Unaudited) =========== ====== =========== ====== ======= ======== ======== ======== =========
See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands - unaudited)Unaudited)
SixNine Months Ended
April 30,July 31,
---------------------
2003 2002
---------- ----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 97,329166,131 $ 44,07183,258
Adjustments to reconcile net income to net cash
(used in) provided by (used in) operating activities:
Depreciation.................................... 3,225 3,3424,946 5,003
Amortization of indefinitedefinite life intangibles..... 2,296
(Gain)intangibles....... 5,465 -
Loss on sale and retirement of property
and assets.................................... (28) (7)44 11,858
Deferred income taxes........................... (2,727) (745)(6,123) (5,742)
Impairment losses............................... 1,484 2,3291,633 2,755
Decrease (increase) in assets:
Mortgage notes receivable..................... 9,516 47,023(59,049) 43,162
Receivables, prepaids and other assets........ (3,190) 14,188(14,444) 9,512
Inventories................................... (214,148) (69,318)
(Decrease) increase(338,374) (80,489)
Increase (decrease) in liabilities:
State and Federal income taxes................ (30,020) (3,761)403 5,208
Tax effect from exercise of stock options..... (2,830) (152)(6,774) (1,074)
Customers' deposits........................... 12,551 1,68421,352 4,102
Interest and other accrued liabilities........ (8,485) (7,265)14,719 17,960
Post development completion costs............. 2,676 (811)1,952 (901)
Accounts payable.............................. (19,547) 4,455(11,373) 7,769
---------- ----------
Net cash (used in) provided by operating
activities................................ (151,898) 35,033(219,492) 102,381
---------- ----------
Cash Flows From Investing Activities:
Net proceedsProceeds from sale of property and assets....... 180 335482 611
Purchase of property,equipment and other fixed
assets and acquisitions of homebuilding companies......................................... (138,836) (142,186)
Distributionscompanies. (141,796) (142,860)
Distribution from (investment in and advancesadvance to)
unconsolidated affiliates......................... 7,431 (1,095)1,150 (8,679)
---------- ----------
Net cash (used in) investing activities.......(131,225) (142,946)activities..... (140,164) (150,928)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 583,835 1,045,306notes...................1,090,816 1,587,017
Proceeds from senior debt........................... 99,152
Proceeds from senior subordinated debt.............. 150,000 150,000
Principal payments on mortgages and notes........... (543,062)(1,066,455)notes..........(1,022,006)(1,603,320)
Principal payments on subordinated debt.............senior debt................... (9,750) (99,747)
Purchase of treasury stock.......................... (7,261) (1,089)
Proceeds from sale of stock and employee stock plan. 3,147 2,2567,506 4,022
---------- ----------
Net cash provided by financing activities.... 36,659 129,423activities... 209,305 136,035
---------- ----------
Net (Decrease) Increase In Cash and Cash Equivalents.. (246,464) 21,510(150,351) 87,488
Cash and Cash Equivalents Balance,
Beginning Of Period...........................................Period................................. 269,990 16,149
---------- ----------
Cash and Cash Equivalents Balance, End Of Period...... Period.....$ 23,526119,639 $ 37,659103,637
========== ==========
Supplemental Disclosures of Cash Flow
Cash paid during the yearperiod for:
Interest......................................... Interest..........................................$ 26,43641,198 $ 27,14839,450
========== ==========
Income taxes..................................... taxes......................................$ 90,981104,962 $ 31,80552,777
========== ==========
Supplemental disclosures of noncash operating
activities:
Consolidated Inventory Not Owned:
Specific performance options..................... options......................$ 51,15564,743 $ 58,49424,710
Variable interest entities....................... 35,811entities........................ 81,537
Other options.................................... 57,316 39,489options..................................... 50,486
---------- ----------
Total Inventory Not Owned.......................... Owned...........................$ 144,282196,766 $ 97,98324,710
========== ==========
See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information
and with the instructions to formForm 10-Q and Article 10 of Regulation S-X.
In the opinion of management, all adjustments for interim periods
presented have been made, which include only normal recurring accruals
and deferrals necessary for a fair presentation of consolidated financial
position, results of operations, and changes in cash flows. The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates and these differences could have a significant
impact on the financial statements. Results for the interim periods are
not necessarily indicative of the results which might be expected for a
full year. The balance sheet at October 31, 2002 has been derived from
the audited financial statements at that date but does not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
2. Stock Option Plan - We adopted Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25")
and related Interpretations in Accounting for our employee stock options.
Under APB No. 25, no compensation expense is recognized because the
exercise price of our Company's employee stock options equals the market
price of the underlying stock on the date of the grant.
Pro forma information regarding net income and earnings per share
is to be calculated as if we had accounted for our stock options under
the fair value method of Financial Accounting Standards (SFAS) No. 123
"Accounting for Stock-Based Compensation". The fair value for those
options is established at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 2003
and 2002 respectively: risk-free interest rate of 4.3% and 4.3%,
respectively; dividend yield of zero; volatility factor of the expected
market price of our common stock of 0.43 and 0.43, respectively; and a
weighted-average expected life of the option of 5.1 and 5.5 years,
respectively.
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 those of our 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.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.
Our pro forma information follows (dollars in thousands except for
earnings per share information):
SixThree Months Ended ----------------------
April April
30,Nine Months Ended
------------------- -------------------
July July July July
31, 2003 30,31, 2002 ---------- ----------31, 2003 31, 2002
--------- -------- -------- --------
Net income to common shareholders;
as reported............................ 97,329 44,071reported.........................$ 68,802 $ 39,187 $166,131 $ 83,258
Deduct: total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of minority interest............... 976 280interest 539 140 1,515 420
Pro forma net income.....................income..................$ 96,35368,263 $ 43,791
========== ==========39,047 $164,616 $ 82,838
========= ======== ======== ========
Pro forma basic earnings per share.......share....$ 3.082.23 $ 1.47
========== ==========1.26 $ 5.30 $ 2.74
========= ======== ======== ========
Basic earnings per share as reported.....reported..$ 3.112.25 $ 1.48
========== ==========1.27 $ 5.35 $ 2.76
========= ======== ======== ========
Pro forma diluted earnings per share.....share..$ 2.922.10 $ 1.39
========== ==========1.19 $ 5.02 $ 2.60
========= ======== ======== ========
Diluted earnings per share as
reported...Reported............................$ 2.952.11 $ 1.40
========== ==========1.20 $ 5.06 $ 2.61
========= ======== ======== ========
3. Interest costs incurred, expensed and capitalized were:
Three Months Ended SixNine Months Ended
April 30, April 30,July 31, July 31,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(Dollars in Thousands)
Interest Capitalized at
Beginning of Period......... $23,600 $22,899 $22,159$ 25,480 $ 24,876 $ 22,159 $ 25,124
Plus Interest Incurred(1)(2).. 15,305 14,779 30,425 26,25617,807 15,746 48,232 42,002
Less Interest Expensed(2)..... 13,425 12,802 27,104 26,50417,204 15,849 44,308 42,353
-------- -------- -------- --------
Interest Capitalized at
End of Period (2)......... $25,480 $24,876.......... $ 25,48026,083 $ 24,87624,773 $ 26,083 $ 24,773
======== ======== ======== ========
(1) Data does not include interest incurred by our mortgage and finance
subsidiaries.
(2) Represents interest on borrowings for construction, land and
development costs which are charged to interest expense when
homes are delivered or when land is not under active development.
4. Homebuilding accumulated depreciation at April 30,July 31, 2003 and
October 31, 2002 amounted to $20.5$22.0 million and $18.5 million,milion,
respectively. Senior residential rental property accumulated
depreciation at April 30,July 31, 2003 and October 31, 2002 amounted to $3.3$3.4
million and $3.1 million, respectively.
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, engineering and capitalized interest costs
for land management decided not to purchase. We wrote off such costs
in the amount of $1.3amounting to $1.6 million and $0.2 million primarily in the Northeast Region during the threenine months ended April 30, 2003 and JanuaryJuly 31, 2003, respectively.2003.
During the threenine months ended April 30,July 31, 2002 we wrote off such costs in the
amount of $1.4$1.6 million primarily in Poland, and $0.9$0.8 million during the three months
ended January 31, 2002, primarily due to the exit of our
Mid-South operations.operations, and $0.4 million in other geographical areas.
Residential inventory impairment losses and option write-offs are
reported in the Consolidated Statements of Income as "Homebuilding-
Inventory Impairment Loss."
6. We are involved in litigation arising in the ordinary course of
business, none of which is expected to have a material adverse effect on
us.
7. As of April 30,July 31, 2003 and October 31, 2002, respectively, we are
obligated under various performance letters of credit amounting to $125.9$132.9
million and $100.0 million, respectively.
7.million.
8. We have an unsecured Revolving Credit Agreement ("Agreement"(the
"Agreement") with a group of banks which was amended February 20,and restated on June
19, 2003. Pursuant to the amendment,agreement, our credit line increased to $513.0 million and we have the
ability to seek additional lenders to increase the total facility amount to $590.0
million. The Agreement bears an expiration date of July 20052006 and
interest is payable monthly and at various rates of either the prime rate
plus 0.275% or LIBOR plus 1.75%. In addition, we pay a fee equal to
0.350% per annum on the weighted average unused portion of the line. As
of April
30,July 31, 2003 and October 31, 2002, there were no borrowings were $29.8 million and zero,
respectively.under the
Agreement.
Our mortgage warehouse line of credit was modifiedamended and restated on
March 7,July 31, 2003. Pursuant to the agreement, our credit line matures in
July 20032004 and we have the option to borrow up to $142.0$200.0 million.
Interest is payable monthly at the Federal Funds Rate plus 1.375%. As of
April 30,July 31, 2003 and October 31, 2002 borrowings were $78.8$137.0 million and
$85.5 million, respectively.
As is
customary with mortgage warehouse lines, the maturity9. On May 9, 2003, we issued $150 million 7 3/4% Senior
Subordinated Notes due 2013. The net proceeds of the facility is
set at 364 daysnote offering were
used to repay the current outstanding indebtedness under the Agreement
and is renewable annually at the discretionremainder for general corporate purposes. During the third
quarter ended July 31, 2003 we paid down $9.8 million of the lenders.
We have requested such extention throughour $150 million
10 1/2% Senior Notes due 2007.
At July 2004 and expect to receive a
commitment for such an extension from our lenders prior to June 30, but
there can be no assurance of such extension
8. At April 30,31, 2003, our long termlong-term debt consisted of $150of: $140.3 million
10 1/2% Senior Notes due 2007, $150 million 9 1/8% Senior Notes due 2009,
$100 million 8% Senior Notes due 2012 (aggregating $387 million, net of
discount), $150 million 8 7/8% Senior Subordinated Notes due 2012, $150
million 7 3/4% Senior Subordinated Notes due 2013 and a $165 million Term
Loan due 2007 which bears interest at either the prime rate plus 1.25% or
LIBOR plus 2.5%. As of April 30,July 31, 2003 borrowings under the Term Loan were
$115 million.
On May 9, 2003, we issued $150 million 7 3/4% Senior Subordinated
Notes due 2013. The net proceeds of the issuance will be used to repay the
current outstanding indebtedness under our Revolving Credit Facility and
the remainder for general corporate purposes.
9.10. Per Share Calculations - Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings Per Share" requires the presentation
of basic earnings per share and diluted earnings per share. Basic
earnings per share is computed using the weighted average number of
shares outstanding. Diluted earnings per common share is computed using
the basic weighted average number of shares outstanding adjusted for the
incremental shares attributed to outstanding options to purchase common
stock.
10.11. Recent Accounting Pronouncements - In April 2002, the
Financial Accounting Standards Board issued (SFAS) No. 145, "Reporting"Reported
Gains and Losses from Extinguishment of Debt", which rescinded SFAS No.
4, No. 44, and No. 64 and amended SFAS No. 13. The new standard
addresses the income statement classification of gains or losses from the
extinguishment of debt and criteria for classification as extraordinary
items. We adopted SFAS No. 145 on November 1, 2002. We reclassified a
$0.9 million extraordinary loss from extinguishment of debt to other
operations and ($0.3)a $0.3 million reduction to State and Federal Income Taxes
on our Consolidated Statements of Income to conform to the new
presentation.
In June 2002, the Financial Accounting Standards Board issued
(SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including certain costs incurred in a restructuring)".
SFAS No. 146 requires recognition of a liability for a cost associated
with an exit or disposal activity when the liability is incurred as
opposed to when the entity commits to an exit plan as prescribed under
EITF No. 94-3. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. We adopted SFAS No. 146 on January 1,
2003. The initial adoption of SFAS No. 146 did not have ana material effect on
the financial position or results of operations of our Company. However,
SFAS No. 146 could impact the amount or timing of liabilities to be
recognized in the event that we engage in exit or disposal activities in
the future.
In November 2002, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a
company issues a guarantee, the company must recognize an initial
liability for the fair value, or market value, of the obligations it
assumes under the guarantee and must disclose that information in its
interim and annual financial statements. The provisions related to
recognizing a liability at inception of the guarantee for the fair value
of the guarantor's obligations does not apply to product warranties. The
initial recognition and initial measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31,
2002. The adoption of the initial recognition and initial measurement
provisions of FIN 45 did not have a material effect on our financial
position or results of operations. Our disclosure of guarantees is
included in Note 1314 to the consolidated financial statements.statements - unaudited.
In December 2002, the Financial Accounting Standards Board issued
(SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure", which amends (SFAS) No. 123. The new standard provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
It also requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the affect of the method used on reported
results. We have not elected to change to the fair value based method of
accounting for stock-based employee compensation. We adopted the
disclosure provisions of SFAS No. 148 in our second fiscal quarter ending
April 30, 2003. Our disclosure of accounting for stock-based
compensation is included in Note 2 to the consolidated financial
statements.statements - unaudited.
In January 2003, the Financial Accounting Standards Board issued
FASB Interpretation No. 46 "Consolidation of Variable Interest Entities"
an interpretation of ARB No. 51 ("FIN 46"). A Variable Interest Entity
("VIE") is created when (i) the equity investment at risk is not
sufficient to permit the entity from financing 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. FIN 46 is effective immediately for VIE's
created after January 31, 2003. For VIE's created before January 31,
2003, FIN 46 must be applied at the beginning of the first interim or
annual reporting period beginning after June 15, 2003.
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 have been 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 we will 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 will consolidate it on our
balance sheet. The fair value of the VIE's inventory will be 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 it's total assets consolidated on the balance
sheet. In certain cases we will have to place inventory on our balance
sheet the VIE has optioned to other developers. In addition, if the VIE
has creditors, it's debt will be placed on our balance sheet even though
the creditors have no recourse against our Company. Based on these
observations we believe consolidating VIE's based on land and lot option
deposits does not reflect the economic realities or risks of owning and
developing land.
At April 30,July 31, 2003 we consolidated threenine VIE's created from February
1, 2003 to April 30,July 31, 2003 as a result of our option to purchase land or
lots from the selling entities. We paid cash or issued letters of credit
deposits to these threenine VIE's totaling $6.7$11.7 million. Our option deposits
represent our maximum exposure to loss. The fair value of the property
owned by the VIE's was $40.9$93.2 million of which $6.2 million was not
optioned to our Company. We were able to ascertain that one VIE had
third party debt amounting to $1.4 million. Since we could not get the
remainder of the selling entities to provide us with any financial
information, the fair value of the optioned property less our cash
deposits and liabilities from inventory not owned, which totaled $35.8$80.1
million, was reported on the balance sheet as Minority Interest.
Creditors, if any, of these VIE's have no recourse against our Company.
We will continue to secure land and lots using options. Including
the deposits with the threenine VIE's above, at April 30,July 31, 2003 we have total
cash and letters of credit deposits amounting to approximately $175.7$180.2
million to purchase land and lots with a total purchase price of $2.2$2.4
billion. Not all our deposits are with VIE's. 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. We are in
the process of evaluating all option purchase agreements in effect as of
January 31, 2003. Options with VIE's where we are the primary
beneficiary will be consolidated by our fiscal year end October 31, 2003.
11.12. On November 1, 2002 and December 31, 2002 we acquired Parkside
Homes and Brighton Homes, two
Houston homebuilding companies, for an approximate aggregate purchase
price of $100 million. On April 9, 2003 we acquired Summit Homes, a build-on-your-own-lotbuild-on-your-own-
lot homebuilder based in Canton, Ohio. On August 8, 2003, we acquired a
homebuilder in Phoenix, Arizona. All three of these acquisitions were
accounted for as a purchase, with the results of operations of these
entities included in our consolidated financial statements as of the date
of acquisition. The purchase price will bewas allocated based on estimated fair
value at the date of acquisition. As a result, estimated definite life
intangible assets of $63.5 million were recorded on the consolidated
balance sheet. We expect to amortize the definite life intangibles over
their estimated lives.
We
are in the process of completing appraisals of the intangible assets and do
not expect to record any goodwill. Therefore, the purchase price
allocation is preliminary and subject to change. (See Note 12).
12.13. Intangible Assets - As reported on the balance sheet we have
goodwill and indefinite life intangibles amounting to $82.3 million and
definite life intangibles amounting to $63.5$59.2 million. Our intangible
assets consist of goodwill, tradenames, architectural designs, and
contractual agreements. In accordance with the Financial Accounting
Standards No. 142 ("SFAS No. 142") "Goodwill and Other Intangible
Assets"; 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. The
amortization expense of $1.8$3.2 million and $2.3$5.5 million is reported in
other operations on our Consolidated Statement of Income for the three
and sixnine months ended April
30,July 31, 2003, respectively. 13.No amortization
expense was recorded during the three and nine months ended July 31,
2002, respectively.
14. Hovnanian Enterprises, Inc., the parent company (the
"Parent"), is the issuer of publicly traded common stock. One of its
wholly owned subsidiaries, K. Hovnanian Enterprises, Inc. (the
"Subsidiary Issuer"), acts as a finance and management entity that as of April 30,July 31, 2003
had issued and outstanding approximately $150$300 million senior subordinated
notes, $400$390 million face value senior notes, a term loan with an
outstanding balance of $115 million, and a revolving credit agreement
with anno outstanding balance of $29.8 million.balance. The senior subordinated notes, senior
notes, the revolving credit agreement, and term loan are fully and
unconditionally guaranteed by the Parent.
In addition to the parent,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, a
mortgage lending subsidiary, a subsidiary engaged in homebuilding
activity in Poland, our title subsidiaries, and joint ventures
(collectively the "Non-guarantor"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, the term loan and the revolving
credit agreement of the Subsidiary Issuer.Agreement.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries we have included the accompanying consolidating
condensed financial statements. Management does not believe that
separate financial statements of the Guarantor Subsidiaries are material
to investors. Therefore, separate financial statements and other
disclosures concerning the Guarantor Subsidiaries are not presented.
The following consolidating condensed financial information present
the results of operations, financial position, and cash flows of (i) the
Parent, (ii) the Subsidiary Issuer, (iii) the Guarantor Subsidiaries of
the Parent, (iv) the Non-guarantorNon-Guarantor Subsidiaries, and (v) the eliminations
to arrive at the information for the Parent on a consolidated basis.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED BALANCE SHEET
APRIL 30,JULY 31, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
ASSETS
Homebuilding.......................Homebuilding......................$ 3026 $ 13,564 $1,705,14692,122 $1,904,126 $ 17,14023,514 $ $1,735,880$2,019,788
Financial Services................. 110 91,475 91,585Services................ 109 164,040 164,149
Income Taxes Receivables(Payables). 5,898 9,926 19,301 (325) 34,800(Payable) Receivable. (12,316) (1,240) 26,068 (795) 11,717
Investments in and amounts due to
and from consolidated
subsidiaries..................... 649,860 720,707 (913,460) (12,304) (444,803)subsidiaries.................... 741,236 741,658 (1,009,648) (24,151) (449,095)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................Assets......................$655,788728,946 $ 744,197832,540 $ 811,097920,655 $ 95,986 $ (444,803)$1,862,265162,608 $(449,095) $2,195,654
======== ========== ========== ============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding.......................Homebuilding......................$ $ 32,194 $ 351,188421,200 $ 64 $ $ 383,446421,264
Financial Services................. 83,658 83,658Services................ 143,680 143,680
Notes Payable...................... 701,436 138 701,574Payable..................... 819,055 712 819,767
Income Taxes Payable(Receivables)
Minority Interest.................. 35,811 1,988 37,799Interest................. 80,137 1,860 81,997
Stockholders' Equity............... 655,788 10,567 423,960 10,276 (444,803) 655,788Equity.............. 728,946 13,485 418,606 17,004 (449,095) 728,946
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................Equity..........................$655,788728,946 $ 744,197832,540 $ 811,097920,655 $ 95,986 $ (444,803)$1,862,265162,608 $(449,095) $2,195,654
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ 1,501 $ 261,107 $1,269,514 $ 36,014 $ $1,568,136
Financial Services................. 111 109,881 109,992
Income Taxes (Payable) Receivable..
Investments in and amounts due to
and from consolidated
subsidiaries..................... 584,103 432,130 (630,186) (32,376) (353,671)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$585,604 $ 693,237 $ 639,439 $ 113,519 $ (353,671)$1,678,128
======== ========== ========== ============ ========== ==========
Liabilities
Homebuilding.......................$ $ 35,736 $ 312,231 $ 3,595 $ $ 351,562
Financial Services................. 90,355 90,355
Notes Payable...................... 661,390 2,345 7,210 670,945
Income Taxes Payable (Receivables).(Receivable).. 23,055 (3,147) (18,184) (947) 777
Minority Interest.................. 1,940 1,940
Stockholders' Equity............... 562,549 (742) 343,047 11,366 (353,671) 562,549
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$585,604 $ 693,237 $ 639,439 $ 113,519 $ (353,671)$1,678,128
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED APRIL 30,JULY 31, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
--------------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 166 (45)$ 668,756835,191 $ 14 $ (5)25 $ 668,918835,175
Financial Services............... 1,853 9,046 10,8992,033 11,609 13,642
Intercompany Charges............. 41,833 8,083 (49,916)(61,982) 51,085 10,897
Equity In Pretax Income of
Consolidatedconsolidated Subsidiaries...... 84,428 (84,428)
-------109,808 (109,808)
-------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 84,428 41,999 678,692 9,047 (134,349) 679,817
-------$109,808 $ (62,027)$ 888,309 $ 11,613 $ (98,886)$ 848,817
-------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 41,999 590,202 144 (43,129) 589,216(84,286) 820,362 142 (4,844) 731,374
Financial Services............... 593 5,937 (357) 6,173
-------772 7,254 (391) 7,635
-------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 41,999 590,795 6,081 (43,486) 595,389
-------(84,286) 821,134 7,396 (5,235) 739,009
-------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 84,428 87,897 2,966 (90,863) 84,428109,808 22,259 67,175 4,217 (93,651) 109,808
State and Federal Income Taxes..... 31,860 (424) 33,236 1,299 (34,111) 31,860
-------41,006 8,420 25,121 1,812 (35,353) 41,006
-------- ---------- ---------- ------------ ---------- ----------
Net Income ........................$52,568....................... $ 42468,802 $ 54,66113,839$ 42,054 $ 1,6672,405 $ (56,752)(58,298)$ 52,568
=======68,802
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED APRIL 30,JULY 31, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 125295 $ 551,454693,357 $ 7,1357,807 $ (6,392)(7,479) $ 552,322693,980
Financial Services............... 1,324 7,352 8,6762,270 8,386 10,656
Intercompany Charges............. 34,147 4,180 (38,327)54,869 (10,326) (44,543)
Equity In Pretax Income of
Consolidated Subsidiaries...... 41,573 (41,573)61,961 (61,961)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 41,573 34,272 556,958 14,487 (86,292) 560,998$61,961 $ 55,164 $ 685,301 $ 16,193 $(113,983) $ 704,636
------- ---------- ---------- ------------ ------------------ ----------
Expenses:
Homebuilding..................... 34,272 520,297 1,084 (41,331) 514,32255,164 644,464 322 (62,969) 636,981
Financial Services............... 527 4,925 (349) 5,103683 5,266 (255) 5,694
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 34,272 520,824 6,009 (41,680) 519,42555,164 645,147 5,588 (63,224) 642,675
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 41,573 36,134 8,478 (44,612) 41,57361,961 40,154 10,605 (50,759) 61,961
State and Federal Income Taxes..... 15,663 (181) 13,662 3,355 (16,836) 15,66322,774 (26) 14,971 3,908 (18,853) 22,774
------- ---------- ---------- ------------ ---------- ----------
Net Income ........................$25,910....................... $39,187 $ 18126 $ 22,47225,183 $ 5,1236,697 $ (27,776)(31,906) $ 25,91039,187
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
SIXNINE MONTHS ENDED APRIL 30,JULY 31, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 593 $2,120,611 $ 14 $ 15 $2,121,233
Financial Services................ 5,496 29,540 35,036
Intercompany Charges............. 23,389 62,544 (85,933)
Equity In Pretax Income of
Consolidated Subsidiaries...... 265,372 (265,372)
-------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ $265,372 $ 23,982 $2,188,651 $ 29,554 $ (351,290)$2,156,269
-------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 1,723 1,961,389 361 (92,205) 1,871,268
Financial Services............... 1,907 18,971 (1,249) 19,629
-------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 1,723 1,963,296 19,332 (93,454) 1,890,897
-------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 265,372 22,259 225,355 10,222 (257,836) 265,372
State and Federal Income Taxes..... 99,241 7,791 84,552 4,261 (96,604) 99,241
-------- ---------- ---------- ------------ ---------- ----------
Net Income.........................$166,131 $ 14,468 $ 140,803 $ 5,961 $ (161,232)$ 166,131
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 638 $1,285,420565 $1,689,257 $ 1020,475 $ (10)$1,286,058(18,920) $1,691,377
Financial Services............... 3,463 17,931 21,3944,956 23,363 28,319
Intercompany Charges............. 85,371 11,459 (96,830)119,275 (3,663) (115,612)
Equity In Pretax Income of
Consolidated Subsidiaries......155,564 (155,564)Subsidiaries......133,331 (133,331)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 155,564 86,009 1,300,342 17,941 (252,404) 1,307,452$133,331 $119,840 $1,690,550 $ 43,838 $(267,863) $1,719,696
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 86,009 1,141,027 219 (87,361) 1,139,894119,840 1,588,505 1,981 (140,117) 1,570,209
Financial Services............... 1,135 11,717 (858) 11,9941,768 15,437 (1,049) 16,156
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 86,009 1,142,162 11,936 (88,219) 1,151,888119,840 1,590,273 17,418 (141,166) 1,586,365
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes.........155,564 158,180 6,005 (164,185) 155,564Taxes.........133,331 100,277 26,420 (126,697) 133,331
State and Federal Income Taxes..... 58,235 (629) 59,431 2,449 (61,251) 58,235
------- ---------- ---------- ------------ ---------- ----------
Net Income ........................$97,329 $ 629 $ 98,749 $ 3,556 $ (102,934)$ 97,329
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.................... $ $ 270 $ 995,900 $ 12,668 $ (11,441)$ 997,397
Financial Services............... 2,686 14,977 17,663
Intercompany Charges............. 64,406 6,663 (71,069)
Equity In Pretax Income of
Consolidated Subsidiaries...... 71,370 (71,370)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 71,370 64,676 1,005,249 27,645 (153,880) 1,015,060
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 64,676 944,041 1,659 (77,148) 933,228
Financial Services............... 1,085 10,171 (794) 10,462
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 64,676 945,126 11,830 (77,942) 943,690
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 71,370 60,123 15,815 (75,938) 71,370
State and Federal Income Taxes..... 27,299 (154) 23,011 6,150 (29,007) 27,29950,073 (180) 37,982 10,058 (47,860) 50,073
------- ---------- ---------- ------------ ---------- ----------
Net Income.........................$44,07183,258 $ 154180 $ 37,11262,295 $ 9,66516,362 $ (46,931)(78,837) $ 44,07183,258
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIXNINE MONTHS ENDED APRIL 30,JULY 31, 2003
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 97,329 629 98,749 3,556 (102,934) 97,329166,131 $ 14,468 $ 140,803 $ 5,961 $ (161,232)$ 166,131
Adjustments to reconcile net income
to net cash provided by
(used in)(Used In) Provided
By operating activities... (29,463) 3,420 (347,348) 21,230 102,934 (249,227)activities.......... (2,534) 10,709 (510,053) (44,977) 161,232 (385,623)
-------- --------- ---------- ------------ ---------- ----------
Net Cash (Used In) Provided By
Operating Activities........... 163,597 25,177 (369,250) (39,016) (219,492)
Net Cash (Used In) Operating Activities........... 67,866 4,049 (248,599) 24,786 - (151,898)Provided By
Investing Activities............... (7,588) (132,321) (255) (140,164)
Net Cash Provided By (Used In) Investing Activities............... (3,233) 2,866 (130,704) (154) (131,225)
Net Cash Provided By (Used In)
Financing Activities............... (7,261) 30,057 20,937 (7,074) 36,659140,639 24,990 50,937 209,305
Intercompany Investing and Financing
Activities - Net................... (57,367) (288,577) 365,968 (20,024) -(148,743) (309,555) 468,463 (10,165)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash and
Cash Equivalents...............Equivalents................... 5 (251,605) 7,602 (2,466) - (246,464)(143,739) (8,118) 1,501 (150,351)
Cash and Cash Equivalents Balance,
Beginning of Period................ 10 218,844 43,689 7,447 269,990
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 15 (32,761) 51,291 4,981 - 23,526$ 75,105 $ 35,571 $ 8,948 $ $ 119,639
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIXNINE MONTHS ENDED APRIL 30,JULY 31, 2002
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 44,07183,258 $ (428)(402) $ 38,00763,190 $ 9,66516,362 $ (47,244)(79,150) $ 44,07183,258
Adjustments to reconcile net income
to net cash provided by
(used in)(Used In) Provided
By operating activities... 87,095 52,923 (236,818) 40,518 47,244 (9,038)activities.......... 99,463 11,817 (182,793) 11,486 79,150 19,123
-------- --------- ---------- ------------ ---------- ----------
Net Cash (Used In) Provided By
Operating Activities........... 182,721 11,415 (119,603) 27,848 102,381
Net Cash (Used In) Operating Activities........... 131,166 52,495 (198,811) 50,183 35,033Provided By
Investing Activities............... (46,087) (1,929) (103,096) 184 (150,928)
Net Cash Provided By (Used In) Investing Activities............... (44,323) (1,445) (97,332) 154 (142,946)
Net Cash Provided By (Used In)
Financing Activities............... (1,089) 264,608 (88,267) (45,829) 129,423264,726 (85,867) (41,735) 136,035
Intercompany Investing and Financing
Activities - Net................... (85,754) (295,948) 389,016 (7,314)(135,545) (188,403) 310,301 13,647
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash and
Cash Equivalents............... 19,710 4,606 (2,806) 21,510Equivalents................... 85,809 1,735 (56) 87,488
Cash and Cash Equivalents Balance,
Beginning of Period................ 10 (5,840) 15,616 6,363 16,149
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 10 $ 13,87079,969 $ 20,22217,351 $ 3,5576,307 $ $ 37,659103,637
======== ========= ========== ============ ========== ==========
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 (for acquisitions subsequent to June
30, 2001) and APB 16 (for acquisitions prior to June 30, 2001) 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 identified intangible assets less
liabilities is recorded as goodwill, indefinite or definite life
intangibles. 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 are recorded when title is conveyed to the buyer, adequate
cash payment has been received and there is no continued involvement.
Income Recognition from Mortgage Loans - Profits and losses
relating to the sale of mortgage loans are recognized when legal control
passes to the buyer and the sales price is collected.
Inventories - For inventories of communities under development, a
loss is recorded when events and circumstances indicate impairment and
the undiscounted future cash flows generated are less than the related
carrying amounts. The impairment loss is based on discounted future cash
flows generated from expected revenue, cost to complete including
interest, and selling costs. Inventories and long-lived assets held for
sale are recorded at the lower of cost or fair value less selling costs.
Fair value is defined in the Statement of Financial Accounting Standards
(SFAS) No. 144 "Accounting for the Impairment of or Disposal of Long-LivedLong-
Lived Assets" as the amount at which an asset could be bought or sold in
a current transaction between willing parties, that is, other than in a
forced or liquidation sale. Construction costs are accumulated during
the period of construction and charged to cost of sales under specific
identification methods. Land, land development, and common facility
costs are allocated based on buildable acres to product types within each
community, then amortized equally based upon the number of homes to be
constructed in the community.
Insurance Deductible Reserves - Our deductible is $150,000 per
occurrence for our worker's compensation and general liability insurance.
Reserves have been established based upon actuarial analysis of estimated
future losses.
Interest - Costs related to properties under development are
capitalized during the land development and home construction period and
expensed along with the associated cost of sales as the related
inventories are sold. Costs related to properties not under development
are charged to interest expense.
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 FIN 46, SFAS 49, SFAS 98, and EITF 97-10 we record
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 and Minority interest from inventory
not owned on our Consolidated Balance Sheets.
Intangible Assets - The intangible assets recorded on our balance
sheet consist of goodwill, tradenames, architectural designs and
contractual agreements with both definite and indefinite lives resulting
from company acquisitions. In accordance with the Financial Accounting
Standards No. 142 ("SFAS No. 142") " Goodwill and Other Intangible
Assets", we no longer amortize goodwill or indefinite life intangibles,
but instead assess them periodically for impairment. We are amortizing
the definite life intangibles over their expected useful life.
Post Development Completion Costs - In those instances where a
development is substantially completed and sold and we have additional
construction work to be incurred, an estimated liability is provided to
cover the cost of such work and is recorded in accounts payableAccounts Payable and other
liabilities in the consolidated balance sheets.Consolidated Balance Sheets.
CAPITAL RESOURCES AND LIQUIDITY
Our cash uses during the sixnine months ended April 30,July 31, 2003 were for
operating expenses, increases in housing inventories, construction,
income taxes, interest, the repurchase of common stock, and the
acquisition of three homebuilders. We provided for our cash requirements
from housing and land sales, the revolving credit facility, the issuance
of $150 million Senior Subordinated Notes, financial service revenues,
and other revenues. We believe that these sources of cash are sufficient
to finance our working capital requirements and other needs.
On December 31, 2000, our stock repurchase program to purchase up
to 4 million shares of Class A Common Stock expired. As of December 31,
2000, 3,391,047 shares had been purchased under this program. On July 3,
2001, our Board of Directors authorized a revision to our stock
repurchase program to purchase up to 2 million shares of Class A Common
Stock. As of April 30,2003,July 31, 2003, 856,319 shares have been purchased under
this program of which 250,000 were repurchased during the sixnine months
ended April 30,July 31, 2003.
Our homebuilding bank borrowings are made pursuant to an amended
and restated revolving credit agreement (the "Agreement") that provides a
revolving credit line and letter of credit line of up to $590 million through
July 2005. As of April 30, 2003 our lenders have committed $513.0
million.2006. Interest is payable monthly and at various rates of either
the prime rate plus 0.275% or Libor plus 1.75%. In addition, we pay a
fee equal to 0.350% per annum on the weighted average unused portion of
the line. We believe that we will be able either to extend the Agreement
beyond July 20052006 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. Each of our significant subsidiaries except for our financial
services subsidiaries is a guarantor under the revolving credit
agreement. As of April 30,July 31, 2003, there were no borrowings under the
Agreement were $29.8
million.Agreement.
At April 30,July 31, 2003 we had $400$390.3 million of outstanding senior debt
($396.6387 million, net of discount), comprised of $150$140.3 million 10 1/2%
Senior Notes due 2007, $150 million 9 1/8% Senior Notes due 2009, and
$100 million 8% Senior Notes due 2012. At April 30,July 31, 2003, we had $300
million outstanding senior subordinated debt comprised of $150 million 8
7/8% Senior Subordinated Notes due 2012. On May 9, 2003, we issued2012, and $150 million 7 3/4% Senior
Subordinated Notes due 2013. Each of our significant subsidiaries except
for our financial services subsidiaries is a guarantor under the Senior
Notes and Senior Subordinated Notes.
On January 22, 2002 we issued a $165 million five-year Term Loan.
The term loan matures in January 2007, and bears interest at either the
prime rate plus 1.25% or Libor plus 2.5%. Each of our significant
subsidiaries except for our financial services subsidiaries is a
guarantor under the Term Loan. At April 30,July 31, 2003, borrowings under the
Term Loan were $115 million.
Our mortgage banking subsidiary's warehousing agreement was modifiedamended
and restated on March 7,July 31, 2003. Pursuant to the modification,agreement, we may borrow
up to $142$200 million. The agreement bears an expiration date of July 20032004
and interest is payable monthly at the Federal Funds Rate plus 1.375%.
We believe that we will be able either to extend this agreement beyond
July 20032004 or negotiate a replacement facility, but there can be no
assurance of such extension or replacement facility. As of April 30,July 31,
2003, the aggregate principal amount of all such borrowings was $78.8$137
million.
Total inventory increased $278.7$396.7 million during the sixnine months
ended April 30,July 31, 2003. This increase excluded the change in Consolidated
Inventory Not Owned of $54.9$113.4 million consisting of specific performance
options and other options that were added to our balance sheet in
accordance with SFAS 49, SFAS 98, and EITF 97-10 and Variable Interest
entitiesEntities in accordance with FIN 46. The $278.7$396.7 million increase in
inventory was due to increases in inventory levels in all of our housing
markets as well as our acquisitions. Excluding the impact from
acquisitions of acquisitions,
this$90.3 million, our Northeast Region increased $117.9
million and California increased $111.9 million, with the balance spread
out in our other markets. The increase in our existing markets was
primarily the result of seasonality factors and planned future organic
growth in our existing markets.growth. Substantially all homes under construction or completed and
included in inventory at April 30,July 31, 2003 are expected to be closed during
the next twelve months. Most inventory completed or under development is
financed through our line of credit, term loan, 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
a
smallan option fee 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 housing lots included in our total
residential real estate. The April 30,July 31, 2003 numbers excluded lots owned
and options in locations wherethat we have ceased development.
Active Proposed
Grand
Active Selling Developable Grand Total
Communities Lots Lots Lots
----------- --------- ------------ ------------
April 30,------- ----------- -----------
July 31, 2003:
Northeast Region.. 27 6,979 13,740 20,71930 7,091 14,960 22,051
North Carolina.... 69 6,858 739 7,59771 6,489 799 7,288
Metro D.C......... 33 4,035 9,320 13,35536 4,393 10,685 15,078
California........ 40 5,624 5,253 10,87737 5,025 10,981 16,006
Texas............. 75 5,589 3,234 8,82371 5,587 3,613 9,200
----------- --------- ------------ ------------
244 29,085 32,286 61,371------- ---------- -----------
245 28,585 41,038 69,623
=========== ======= ========== ===========
Owned.......... 12,841 4,302 17,143
Optioned....... 15,744 36,736 52,480
------ ---------- -----------
Total........ 28,585 41,038 69,623
======= ========= ============ ============
Owned.......... 12,359 3,273 15,632
Optioned....... 16,726 29,013 45,739
--------- ------------ ------------
Total........ 29,085 32,286 61,371
========= ============ =======================
Active Proposed
Grand
Active Selling Developable Grand Total
Communities Lots Lots Lots
----------- --------- ------------ ------------------- ----------- -----------
October 31, 2002:
Northeast Region.. 28 5,699 15,700 21,399
North Carolina.... 64 5,186 2,283 7,469
Metro D.C......... 27 3,182 7,394 10,576
California........ 42 5,974 4,457 10,431
Texas............. 35 2,566 1,518 4,084
Other............. -- 29 -- 29
----------- --------- ------------ ------------------- ---------- -----------
196 22,636 31,352 53,988
=========== ========= ============ =================== ========== ===========
Owned.......... 11,088 2,274 13,362
Optioned....... 11,548 29,078 40,626
--------- ------------ ------------------- ---------- -----------
Total........ 22,636 31,352 53,988
========= ============ =================== ========== ===========
Active selling lots under contract at July 31, 2003 and October 31, 2002
were 5,033 and 3,831, respectively. Such amounts do not include our
build on your own lot contracts.
The following table summarizes our started or completed unsold
homes and models:
April 30,July 31, October 31,
2003 2002
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----------- ------ ------ -----
Northeast Region.... 59 51 11090 56 146 73 46 119
North Carolina...... 150 18 168148 19 167 191 32 223
Metro D. C.......... 21 21 42D.C........... 32 20 52 34 31 65
California.......... 217 82 299153 91 244 193 65 258
Texas.............. 539 65 604Texas............... 577 72 649 261 31 292
Other............... - - - 2 -- 2
------ ------ ----------- ------ ------ -----
Total 986 237 1,2231,000 258 1,258 754 205 959
====== ====== =========== ====== ====== =====
Financial Services - Mortgage loans held for sale consist of
residential mortgages receivable of which $82.8$152.1 million and $91.3
million at April 30,July 31, 2003 and October 31, 2002, respectively, are being
temporarily warehoused and awaiting sale in the secondary mortgage
market. The balance of such mortgages is being held as an investment by
us. We may incur risk with respect to mortgages that are delinquent, but
only to the extent the losses are not covered by mortgage insurance or
resale value of the house. Historically, we have incurred minimal credit
losses.
RESULTS OF OPERATIONS FOR THE THREE AND SIXNINE MONTHS ENDED APRIL 30,JULY 31, 2003
COMPARED TO THE THREE AND SIXNINE MONTHS ENDED APRIL 30,JULY 31, 2002
Our operations consist primarily of residential housing development
and sales in our Northeast Region (New Jersey, southern New York State,
eastern Pennsylvania, and Ohio), North Carolina, Metro D. C. (northern
Virginia, eastern West Virginia, and Maryland), California, and Texas.
In addition, we provide financial services to our homebuilding customers.
Total Revenues:
Compared to the same prior period, revenues increased (decreased)
as follows:
Three Months Ended
------------------------------------------
April 30, April 30,July 31, July 31, Dollar Percentage
2003 2002 Change Change
------------------------------------------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $ 666,553830,734 $ 532,386 $ 134,167 25.2%681,329 $149,405 21.9%
Land sales and other
revenues........... 2,365 19,936 (17,571) (88.1%4,441 12,651 (8,210) (64.9%)
Financial Services... 10,899 8,676 2,223 25.6%13,642 10,656 2,986 28.0%
---------- ---------- -------- --------
Total Revenues... $ 679,817848,817 $ 560,998 $ 118,819 21.2%704,636 $144,181 20.5%
========== ========== ======== ========
SixNine Months Ended
------------------------------------------
April 30, April 30,July 31, July 31, Dollar Percentage
2003 2002 Change Change
------------------------------------------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $1,274,054 $ 975,484 $298,570 30.6%$2,104,788 $1,656,813 $447,975 27.0%
Land sales and other
revenues........... 12,004 21,913 (9,909) (45.2%16,445 34,564 (18,119) (52.4%)
Financial Services... 21,394 17,663 3,731 21.2%35,036 28,319 6,717 23.7%
---------- --------- -------- --------
Total Revenues... $1,307,452 $1,015,060 $292,392 28.8%$2,156,269 $1,719,696 $436,573 25.4%
========== ========= ======== ========
Homebuilding:
Revenues from the sale of homes increased $134.2$149.4 million or 25.2%21.9%
during the three months ended April 30,July 31, 2003, and increased $298.6$448 million
or 30.6%27% during the sixnine months ended April 30,July 31, 2003 compared to the same
periodperiods last year. Revenues from the salessale of homes are recorded at the
time each home is delivered and title and possession have been
transferred to the buyer.
Information on homes delivered by market area is set forth below:
Three Months Ended SixNine Months Ended
April 30, April 30,July 31, July 31,
------------------- ---------------------------------------
2003 2002 2003 2002
--------- -------- -------- ------------------- ---------
(Dollars in Thousands)
Northeast Region: (1)Region(1):
Housing Revenues..... $148,155 $145,249$210,039 $177,153 $ 284,918 $278,018494,957 $ 455,171
Homes Delivered...... 462 478 893 899647 570 1,540 1,469
North Carolina:
Housing Revenues..... $ 54,07065,399 $ 64,78472,437 $ 108,539 $121,465173,938 $ 193,902
Homes Delivered...... 301 353 600 651365 393 965 1,044
Metro D.C.D. C.:
Housing Revenues..... $102,092$100,184 $110,030 $ 78,333305,927 $ 205,743 $148,725258,755
Homes Delivered...... 320 295 644 558
California:(2)324 386 968 944
California(2):
Housing Revenues..... $255,469 $178,688$325,205 $242,631 $ 494,164 $293,330819,369 $ 535,961
Homes Delivered...... 893 728 1,756 1,168
Texas: (1)1,090 926 2,846 2,094
Texas(1):
Housing Revenues..... $106,767$129,907 $ 52,82065,432 $ 179,429 $107,346309,336 $ 172,778
Homes Delivered...... 520 223 879 460640 286 1,519 746
Other:
Housing Revenues..... $ -- $ 12,51213,646 $ 1,261 $ 26,60040,246
Homes Delivered...... -- 8186 9 172258
Totals:
Housing Revenues..... $666,553 $532,386 $1,274,054 $975,484$830,734 $681,329 $2,104,788 $1,656,813
Homes Delivered...... 2,496 2,158 4,781 3,9083,066 2,647 7,847 6,555
(1) April 30,July 31, 2003 includes Parkside Homes (Texas), Brighton Homes
(Texas)deliveries from our Houston, Texas and
Summit Homes (Ohio) deliveriesOhio acquisitions beginning on November 1, 2002, January 1,
2003, and April 1, 2003, respectively.
(2) April 30,July 31, 2002 includes Forecast Homes (California)
deliveries from our California acquisition
beginning on January 10, 2002.
The increase in housing revenues was primarilypartially due to the
acquisition of Parkside Homes and Brighton Homestwo homebuilders in Houston, Texas and an Ohio homebuilder
for the second
quarterthree and nine months ended July 31, 2003 and the acquisition of Parkside Homes and Brighton Homes and a full sixnine months
of deliveries from Forecast Homesour acquisition in California for the sixnine months
ended April 30,July 31, 2003. In addition, these increases were the result of
organic growth in Metro D. C. and California (excluding Forecast)our California
acquisition) and increased average sales prices in most of our markets.
Important indicators of theour future results are recently signed
contracts and home contract backlog for future deliveries. Our sales
contracts and homes in contract (using base sales prices) by market area
areis set forth below:
Sales Contracts for the
SixNine Months Ended Contract Backlog
April 30,July 31, as of April 30,July 31,
------------------------- ---------------------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -------------------- --------- ---------
(Dollars in Thousands)
Northeast Region:(2)Region(2)(4):
Dollars.............$ 320,391582,015 $ 274,837423,227 $ 538,742613,884 $ 452,910442,037
Homes............... 1,007 944 2,024 1,6141,896 1,478 2,266 1,578
North Carolina:
Dollars.............$ 142,379214,700 $ 143,188198,848 $ 122,091128,997 $ 125,292108,502
Homes............... 7751,171 1,074 672 564
Metro D.C.(4):
Dollars.............$ 422,477 $ 341,919 $ 368,910 $ 292,044
Homes............... 1,229 1,085 1,035 920
California(3):
Dollars.............$ 882,976 $ 634,009 $ 359,821 $ 286,876
Homes............... 2,994 2,394 1,103 1,007
Texas(1)(4):
Dollars.............$ 338,197 $ 171,409 $ 127,636 $ 69,556
Homes............... 1,722 778 641 661
Metro D. C.:(4)
Dollars.............$ 254,981 $ 243,091 $ 301,523 $ 303,252
Homes............... 760 781 890 1,002
California:(3)
Dollars.............$ 546,086 $ 345,124 $ 336,741 $ 231,803
Homes............... 1,901 1,273 1,100 812
Texas:(1)(4)
Dollars.............$ 212,905 $ 116,972 $ 128,786 $ 78,334
Homes............... 1,085 521 645 324642 295
Other:
Dollars.............$ 313 $ 20,41826,861 $ -- $ 13,6606,456
Homes............... 2 135172 -- 8839
Totals:
Dollars.............$1,477,055 $1,143,630 $1,427,883 $1,205,2512,440,678 $1,796,273 1,599,248 $1,205,471
Homes............... 5,530 4,432 5,300 4,5019,014 6,981 5,718 4,403
(1) April 30,July 31, 2003 includes Parkside Homes and Brighton Homes sales contracts signed from our Houston,
Texas and Ohio acquisitions beginning November 1, 2002 and
January 1, 2003, respectively.
(2) April 30,July 31, 2003 includes Summit Homessales contracts signed from our Ohio
acquisition beginning April 1, 2003.
(3) April 30,July 31, 2002 includes Forecast sales contracts signed from our California
acquisition beginning January 10, 2002.
(4) We acquired contract backlog during the sixnine months ended
April 30,July 31, 2003 and 2002 of 694 homes valued at $93.8 million.million
and 535 homes valued at $117 million, respectively.
During MayAugust 2003, we signed an additional 1,2151,085 contracts compared to
764782 in the same month last year.
Cost of sales includes expenses for housing and land and lot sales.
A breakout of such expenses for housing sales and housing gross margin is
set forth below:
Three Months Ended SixNine Months Ended
April 30, April 30,July 31, July 31,
------------------- ----------------------------------------
2003 2002 2003 2002
-------- -------- ---------- --------- --------
(Dollars in Thousands)
Sale of Homes................ $666,553 $532,386 $1,274,054 $975,484$830,734 $681,329 $2,104,788 $1,656,813
Cost of Sales................ 496,130 422,256 953,656 773,457618,650 530,154 1,572,306 1,303,637
-------- -------- -------- ------------------ ---------
Housing Gross Margin......... $170,423 $110,130$212,084 $151,175 $ 320,398 $202,027532,482 $ 353,176
======== ======== ======== ================== ==========
Gross Margin Percentage...... 25.6% 20.7% 25.1% 20.7%25.5% 22.2% 25.3% 21.3%
Cost of Sales expenses as a percentage of home sales revenues are
presented below:
Three Months Ended SixNine Months Ended
April 30, April 30,July 31, July 31,
------------------- -------- ---------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Sale of Homes................ 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of Sales:
Housing, land &
development costs.... 66.7% 71.2%67.1% 70.7% 67.2% 71.2%71.0%
Commissions............ 2.0% 2.2% 2.1% 2.2%
2.1% 2.3%
Financing concessions.. 1.0% 1.0% 1.0%0.9% 0.9% 0.9% 1.0%
Overheads.............. 4.6% 4.9% 4.6% 4.8%4.5% 4.0% 4.5% 4.5%
-------- -------- -------- --------
Total Cost of Sales.......... 74.4% 79.3% 74.9% 79.3%74.5% 77.8% 74.7% 78.7%
-------- -------- -------- --------
Gross Margin................. 25.6% 20.7% 25.1% 20.7%25.5% 22.2% 25.3% 21.3%
======== ======== ======== ========
We sell a variety of home types in various local communities, each
yielding a different gross margin. As a result, depending on the mix of
both communities and of home types delivered, consolidated quarterly
gross margin will fluctuate up or down and may not be representative of
the consolidated gross margin for the year. We achieved higher gross
margins during the three and sixnine months ended April 30,July 31, 2003 compared to
the same period last year. The consolidated gross margin increased 4.9%3.3%
and 4.4%4.0% for the three and sixnine months ended April 30,July 31, 2003, respectively. Ignoring
the effect of our acquisitions, we achieved higher gross margins on a
market-by-market basis during the three and six months ended April 30,
2003.
These increased margins are the result of higher sales prices and increased national contract rebates, which slightly loweredlower
costs resulting from our housing
costs.improvement initiatives.
Selling, general, and administrative expenses as a percentage of
total homebuilding revenues increased to 8.9%7.9% for the three and six months ended
April 30,July 31, 2003 from 8.6%7.6% for the prior year's three months, and sixincreased
to 8.5% for the nine months ended April 30, 2002.July 31, 2003 from 8.2% for the prior
year's nine months. Such expenses increased during the three and sixnine
months ended April 30,July 31, 2003 by $12.0$13.3 million and $28.6$41.9 million,
respectively,repsectively, compared to the same periods last year. The percentage
increase for the three and nine months ended April 30,July 31, 2003 was due to a full
quarterthe
modification of selling, general and administrative costs from our Houston
acquisitions andsales associate compensation plan, an increase in
administrative costs in North Carolina and
the Northeast Region associated with opening additional communities. The
percentage increase for the six months ended April 30, 2003 was due to
selling, general, and administrative costs from our Houston acquisitions, a
full six months of costs from Forecast Homes and increased administrataive costs in North Carolina and the Northeast Region associated with opening additional communities, and
the implementation of a new compensation program
for their sales associates.higher bonus incentives due to higher returns. The dollar increase in
selling, general and administrative is primarily due to our 2003
acquisitions as well as a full sixnine months of expenses from Forecast and the addition of Parkside Homes and Brighton Homes.our 2002
California acquisition.
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 SixNine Months Ended
April 30, April 30,July 31, July 31,
------------------ -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Land and Lot Sales................Sales.............. $ 1,298 $18,1183,314 $ 9,750 $18,53910,587 $ 13,064 $29,127
Cost of Sales..................... 1,089 14,270 6,741 14,552Sales................... 3,247 9,522 9,988 24,048
-------- -------- -------- --------
Land and Lot Sales Gross Margin... 209 3,848 3,009 3,987Margin.. 67 1,065 3,076 5,079
Interest Expense.................. 11 584 355 648Expense................ 153 112 508 760
-------- -------- -------- --------
Land and Lot Sales Profit (Loss)
Before Tax......................Tax.................... $ 198(86) $ 3,264953 $ 2,6542,568 $ 3,3394,319
======== ======== ======== ========
Land and lot sales are incidental to our residential housing
operations and are expected to continue in the future but may
significantly fluctuate up or down.
Financial Services
Financial services consist primarily of originating mortgages from
our homebuyers, selling such mortgages in the secondary market, and title
insurance activities. For the three and sixnine months ended April 30,July 31, 2003
financial services provided a $4.7$6.0 million and $9.4$15.4 million profit
before income taxes compared to a profit of $3.6$5.0 million and $7.2$12.2
million for the same periodsperiod in 2002. These increases are primarily due
to reduced costs, increased mortgage loan amounts, and the addition of a
mortgage joint venture from theour California acquisition of Forecast for a full sixnine
months.
Corporate General and Administrative
Corporate general and administrative expenses include the
operations at our headquarters in Red Bank, New Jersey. Such expenses
include our executive offices, information services, human resources,
corporate accounting, training, treasury, process redesign, internal
audit, construction services, and administration of insurance, quality,
and safety. As a percentage of total revenues, such expenses increased
to 2.0% for the three months ended April 30,July 31, 2003 from 1.9%1.7% for the prior
year's three months but remained flatand increased to 2.1% for the sixnine months ended April 30, 2003.July
31, 2003 from 2.0% for the prior year's nine months. Corporate general
and administrative expenses increased $2.8$4.8 million and $6.5$11.3 million
during the three and sixnine months ended April 30,July 31, 2003, respectively,
compared to the same periods last year. Increases in corporate general
and administrative dollar expenses are primarily attributed to higher
employee incentives due to a higher return on equity.
Interest
Interest expense includes housing and land and lot interest.
Interest expense is broken down as follows:
Three Months Ended SixNine Months Ended
April 30, April 30,July 31, July 31,
------------------ -------------------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Sale of Homes.............. $ 13,41417,051 $ 12,218 26,749 $ 25,85615,737 $43,800 $41,593
Land and Lot Sales......... 11 584 355 648153 112 508 760
-------- -------- -------- --------
Total...................... $ 13,42517,204 $ 12,802 $ 27,104 $ 26,50415,849 $44,308 $42,353
======== ======== ======== ========
Housing interest as a percentage of sale of homes revenues
decreased to 2.0% and 2.1% for the three and sixnine months ended April 30,July 31, 2003,
respectively, compared to 2.3% and 2.7%2.5% for the three and sixnine months
ended April 30,July 31, 2002, respectively. These percentage declinesdecreases are
primarily attributed to a decrease in debt leverage of our Company due to
the growth in equity from earnings, and lower interest rates on our debt.rates.
Other Operations
Other operations consist primarily of miscellaneous residential
housing operations expenses, senior residential property operations,
amortization of senior and senior subordinated note issuance expenses,
earnout payments from homebuilding company acquisitions, amortization of
the Forecast consultant's agreement and the right of first refusal agreement from our
California acquisition, amortization of a definite life intangibles forfrom
our acquisitions, minority interest relating to joint ventures, and
corporate
ownedcorporate-owned life insurance loan interest.
Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board issued
(SFAS) No. 145, "Reporting Gains and Losses from Extinguishment of Debt",
which rescinded SFAS No. 4, No. 44, and No. 64 and amended SFAS No. 13.
The new standard addresses the income statement classification of gains
or losses from the extinguishment of debt and criteria for classification
as extraordinary items. We adopted SFAS No. 145 on November 1, 2002. We
reclassified $0.9 million extraordinary loss from extinguishment of debt
to other operations and ($0.3) million to state and Federal Income Taxes
on our Consolidated Statements of Income to conform to the new
presentation.
In June 2002, the Financial Accounting Standards Board issued
(SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including certain costs incurred in a restructuring)".
SFAS No. 146 requires recognition of a liability for a cost associated
with an exit or disposal activity when the liability is incurred as
opposed to when the entity commits to an exit plan as prescribed under
EITF No. 94-3. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. We adopted SFAS No. 146 January 1,
2003. The initial adoption of SFAS No. 146 did not have an effect on the
financial position or results of operations of our Company. However,
SFAS No. 146 could impact the amount or timing of liabilities to be
recognized in the event that we engage in exit or disposal activities in
the future.
In November 2002, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a
company issues a guarantee, the company must recognize an initial
liability for the fair value, or market value, of the obligations it
assumes under the guarantee and must disclose that information in its
interim and annual financial statements. The provisions related to
recognizing a liability at inception of the guarantee for the fair value
of the guarantor's obligations does not apply to product warranties. The
initial recognition and initial measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31,
2002. The adoption of the initial recognition and initial measurement
provisions of FIN 45 did not have a material effect on our financial
position or results of operations. Our disclosure of guarantees is
included in Note 1314 to the consolidated financial statements.statements - unaudited.
In December 2002, the Financial Accounting Standards Board issued
(SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure", which amends (SFAS) No. 123. The new standard provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
It also requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the affect of the method used on reported
results. We have not elected to change to the fair value based method of
accounting for stock-based employee compensation. We adopted the
disclosure provisions of SFAS No. 148 in our second fiscal quarter ending
April 30, 2003. Our disclosure of accounting for stock-based
compensation is included in Note 2 to the consolidated financial
statements.statements - unaudited.
In January 2003, the Financial Accounting Standards Board issued
FASB Interpretation No. 46 "Consolidation of Variable Interest Entities"
an interpretation of ARB No. 51 ("FIN 46"). A Variable Interest Entity
("VIE") is created when (i) the equity investment at risk is not
sufficient to permit the entity from financing 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. FIN 46 is effective immediately for VIE's
created after January 31, 2003. For VIE's created before January 31,
2003, FIN 46 must be applied at the beginning of the first interim or
annual reporting period beginning after June 15, 2003.
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 have been 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 we will 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 will consolidate it on our
balance sheet. The fair value of the VIE's inventory will be 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 it's total assets consolidated on the balance
sheet. In certain cases we will have to place inventory on our balance
sheet the VIE has optioned to other developers. In addition, if the VIE
has creditors, it's debt will be placed on our balance sheet even though
the creditors have no recourse against our Company. Based on these
observations we believe consolidating VIE's based on land and lot option
deposits does not reflect the economic realities or risks of owning and
developing land.
At April 30,July 31, 2003, we consolidated threenine VIE's created from February
1, 2003 to April 30,July 31, 2003 as a result of our option to purchase land or
lots from the selling entities. We paid cash or issued letters of credit
deposits to these three VIE's totaling $6.7$11.7 million. Our option
deposits represent our maximum exposure to loss. The fair value of the
property owned by the VIE's was $40.9$93.2 million of which $6.2 million was
not optioned to our Company. We were able to ascertain that one VIE had
third party debt amounting to $1.4 million. Since we could not get the
remainder of the selling entities to provide us with any financial
information, the fair value of the optioned property less our cash
deposits and liabilities from inventory not owned, which totaled $35.8$80.1
million, was reported on the balance sheet as Minority interest.
Creditors of these VIE's have no recourse against our company.
We will continue to secure land and lots using options. Including
the deposits with the threenine VIE's above, at April 30,July 31, 2003 we have total
cash and letters of credit deposits amounting to approximately $175.7$180.2
million to purchase land and lots with a total purchase price of $2.2$2.4
billion. Not all our deposits are with VIE's. 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. We are in
the process of evaluating all option purchase agreements in effect as of
January 31, 2003. Options with VIE's where we are the primary
beneficiary will be consolidated by our fiscal year end October 31, 2003.
Total Taxes
Total taxes as a percentage of income before taxes amounted to
approximately 37.4%37.3% and 38.3%36.8% for the sixthree months ended April 30,July 31, 2003
and 2002, respectively. The decrease in this percentage fromrespectively, and 37.4% and 37.6% for the nine months ended
July 31, 2003 and 2002, to 2003 is
primarily attributed to a reduction in state income taxes.respectively. Deferred federal and state income
tax assets primarily represent the deferred tax benefits arising from
temporary differences between book and tax income which will be
recognized in future years as an offset against future taxable income.
If for some reason the combination of future years income (or loss)
combined with the reversal of the timing differences results in a loss,
such losses can be carried back to prior years to recover the deferred
tax assets. As a result, management is confident such deferred tax
assets are recoverable regardless of future income.
Inflation
Inflation has a long-term effect on us because increasing costs of
land, materials, and labor result in increasing sale prices of our homes.
In general, these price increases have been commensurate with the general
rate of inflation in our housing markets and have not had a significant
adverse effect on the sale of our homes. A significant risk faced by the
housing industry generally is that rising house costs, including land and
interest costs, will substantially outpace increases in the income of
potential purchasers. In recent years, in the price ranges in which our
homes sell, we have not found this risk to be a significant problem.
Inflation has a lesser short-term effect on us because we generally
negotiate fixed price contracts with our subcontractors and material
suppliers for the construction of our homes. These prices usually are
applicable for a specified number of residential buildings or for a time
period of between four to twelve months. Construction costs for
residential buildings represent approximately 57% of our homebuilding
cost of sales.
Mergers and Acquisitions
On January 10, 2002, we acquired The Forecast Group, L.P.a California homebuilder for a
total purchase price of $196.5 million, of which $151.6 million was paid
in cash and 2,208,738 shares of our Class A Common Stock were issued. At
the date of acquisition we also paid off approximately $88.0 million of
Forecast'stheir third party debt. During the second quarter ended April 30, 2003
we exercised the right to retire at no cost 750,000 Class A Common Stock
shares that were held by the selling principal of Forecast Homes, under the terms of the
acquisition. On November 1, 2002 and December 31, 2002 we acquired two
Houston homebuilding companies for an approximate aggregate purchase
price of $100.0 million. On April 9, 2003 we acquired a build-on-
your-ownbuild-on-your-
own lot homebuilder in Ohio.Ohio, and on August 8, 2003 we acquired a
homebuilder in Phoenix, Arizona.
Safe Harbor Statement
All statements in this Form 10-Q that are not historical facts
should be considered as "Forward-Looking Statements" within the meaning
of the Private Securities Litigation Act of 1995. Such statements
involve known and unknown risks, uncertainties and other factors that may
cause actual results, performance or achievements 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.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
. Weather conditions
. Changes in market conditions
. Changes in home prices and sales activity in the California, New
Jersey, Texas, North Carolina, Virginia, and Maryland markets where the
Company builds homes
. Government regulation, including regulations concerning
development of land, the homebuilding process, and the
environment
. Fluctuations in interest rates and the availability of mortgage
financing
. IncreasesShortages in and price fluctuations of raw materials and labor costs
. The availability and cost of suitable land and improved lots
. Levels of competition
. Availability of financing to the Company
. TerroristUtility shortages and outages or rate fluctuations
. Geopolitical risks, terrorist acts and other acts of war
These risks, uncertainties, and other factors are described in
detail in Item 1 and 2 Business and Properties in our Form 10-K for the
year ended October 31, 2002.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOUSRES ABOUT MARKET RISK.Quantitative and Qualitative Disclosures About Market Risk.
The primary market risk facing us is interest rate risk on our long-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 April 30,July 31, 2003, our long term debt obligations, principal cash
flows by scheduled maturity, weighted average interest rates and
estimated fair market value ("FMV").
Six Months Ended April 30,
----------------------------------------------As of July 31, 2003
-------------------------------------------------------------
Expected Maturity Rate
----------------------
FMV @
2003 2004 2005 2006 2007 2008 Thereafter Total 4/30/7/31/03
------- ------- ------ ------ -------- -------- ---------- -------- --------
(Dollars in Thousands)
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate...... $29,575$ 29,241 $ 75 $ 81 $ 88 $150,096$140,346 $ 104 $ 400,217 $580,236 $629,216550,200 $720,135 $755,935
Average interest
rate.......... 6.69%6.75% 8.38% 8.38% 8.38% 10.50% 8.38% 8.75% 9.00%8.48% 8.80% --
Variable rate... -- -- -- -- $115,000 -- $115,000 -- $115,000 $115,000
Average interest
rate.......... -- -- -- -- (2) -- (2) -- -- --
(1) Does not include bonds collateralized by mortgages receivable.
(2) LIBOR plus 2.5%
Item 4. CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer evaluated the
effectiveness of ourThe company maintains disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended) within 90 days of the filing date of this report (the "Evaluation
Date") and, based on that evaluation, concludedare
designed to ensure that as of the Evaluation
Date, we had sufficient controls and procedures for recording, processing,
summarizing and reporting information that is required to be disclosed in ourthe
company's reports under the Securities Exchange Act of 1934 as amended,is recorded,
processed, summarized and reported within the time periods specified in
the SEC'sSecurities and Exchange Commission's rules and forms.
Since the Evaulation Date, there have not been any significant
changes to our internal controls or in other factorsforms, and that could
significantly affect these controls subsequentsuch
information is accumulated and communicated to the Evaluation Date,company's management,
including any corrective actionsits 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 regardthe 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 July 31, 2003. Based upon that
evaluation and subject to significant deficienciesthe foregoing, the company's chief executive
officer and material weaknesses.
Partchief financial officer concluded that the design and
operation of the company's disclosure controls and procedures provided
reasonable assurance that the 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 July 31,
2003 that has materially affected, or is reasonably likely to materially
affect, the company's internal control over financial reporting.
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual stockholders meeting on March 7, 2003 at 10:30
a.m. at the offices of Simpson Thacher & Bartlett LLP, 425 Lexington
Avenue, New York, New York. The following matters were voted at the
meeting:
. Election of all Directors to hold office until the next Annual
Meeting of Stockholders. There wre no broker non-votes. The elected
Directors were:
Class A Class B
Votes For Votes Withheld Votes For Votes Withheld
---------- -------------- ---------- --------------
Kevork S. Hovnanian 12,501,054 2,642,043 70,425,570 1,337,750
Ara K. Hovnanian 12,508,464 2,634,633 70,424,070 1,339,250
Geaton A. DeCesaris,Jr. 12,576,244 2,566,853 70,424,570 1,338,750
Arthur M. Greenbaum 14,555,941 587,156 70,436,070 1,327,250
Edward A. Kangas 14,559,611 583,486 70,436,070 1,327,250
Desmond P. McDonald 14,543,968 599,129 70,436,070 1,327,250
John J. Robbins 14,559,581 583,516 70,436,070 1,327,250
J. Larry Sorsby 12,561,544 2,581,553 70,424,570 1,338,750
Stephen D. Weinroth 14,558,381 584,716 70,436,070 1,327,250
. Ratification of selection of Ernst & Young, LLP as certified
independent accountants for fiscal year ending October 31, 2003. There
were no broker non-votes.
Class A Class B
------------ ------------
.. Votes For 14,608,940 71,151,350
.. Votes Against 521,691 10,750
.. Abstain 12,466 1,220
.. Approval of the Company's amended Senior Executive Short-Term
Incentive Plan.
Class A Class B
------------ ------------
.. Votes For 9,204,288 70,200,940
.. Votes Against 2,740,902 1,402,350
.. Abstain 79,745 3,940
.. Broker Non-Votes 3,118,162 156,090
.. Approval of the Company's amended 1999 Stock Incentive Plan.
Class A Class B
------------ ------------
.. Votes For 9,008,337 70,204,040
.. Votes Against 2,941,789 1,396,550
.. Abstain 75,029 3,940
.. Broker Non-Votes 3,117,942 158,790
Item 6. Exhibits and Reports on Form 8-K.
(a)
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) Restated Bylaws of the Registrant. (2)(3)
Exhibit 10(a) Third Amended and Restated Credit
Agreement dated February 20,June 19, 2003. (3)(2)
Exhibit 10(b) First Amendment to First Restated $142 million
K. Hovnanian Mortgage, Inc. Revolving Credit
Agreement dated March 7,July 31, 2003.
(3)
Exhibit 99(a)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) Certification of Chief Executive
Officer defined in the Exchange Act Rules
13a-14(a) and 15d-14(a)Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302906 of the Sarbanes-OxleySarbanes-
Oxley Act of 2002.
Exhibit 99(b)32(b) Certification of Chief Financial
Officer defined in the Exchange Act Rules
13a-14(a) and 15d-14(a)Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302906 of the Sarbanes-OxleySarbanes-
Oxley Act of 2002.
(1) Incorporated by reference to Exhibits to
Registration Statement (No. 2-85198) on
Form S-1 of the Registrant.
(2) Incorporated by reference to Exhibits to Annual
Report on Form 10-K for the year ended
February 28, 1994 of the Registrant.
(3) Incorporated by reference to Exhibits to Quarterly
ReportRegistration
Statement (No. 333-106761) on Form 10-Q for the quarter ended January 31,
2003S-3 of the
Registrant.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during
the quarter for which this report is filed. The
following report on Form 8-K has been furnished
during the quarter for which this report is filed:
On May 23, 2003, the Company furnished a report
on Form 8-K, Item 9 (pursuant to Item 12 in accordance
with SEC Release 33-8216; 34-47583; IC-25983; March 27,
2003), relating to the Company's press release dated
May 28, 2003 relating to its preliminary financial
results for the second quarter ended April 30, 2003.
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: JuneSeptember 12, 2003 /S/J. LARRY SORSBY
J. Larry Sorsby,
Executive Vice President and
Chief Financial Officer
DATE: JuneSeptember 12, 2003 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31(a)
CERTIFICATIONS
I, Mr. Ara K. Hovnanian, President & Chief Executive Officer of Hovnanian
Enterprises, Inc.,
certify that:
1)1. I have reviewed this quarterly report on Form 10-Q of Hovnanian
Enterprises, Inc.;
2)2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3)3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly report;
4)4. The registrant's other certifying officersofficer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-1413a-15(e) and 15d-14)15d-15(e)) for the registrant
and we have:
a)(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly
report is being prepared;
b)(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and c) Presentedpresented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and
procedures, based on our
evaluation as of the Evaluation Date;
5)end of the period covered by this report
based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the cast of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officersofficer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
function)functions):
a)(a) All significant deficiencies and material weaknesses in the design or
operation of internal controlscontrol over financial reporting which couldare
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial datainformation; and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b)(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By,control over financial reporting.
Date: September 12, 2003
/S/ARA K. HOVNANIANHOVNNAIAN
Ara K. Hovnanian
President and Chief Executive Officer
Date: June 9, 2003
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31(b)
CERTIFICATIONS
I, Mr. J. Larry Sorsby, Executive Vice President & Chief Financial Officer of
Hovnanian Enterprises, Inc., certify that:
1)1. I have reviewed this quarterly report on Form 10-Q of Hovnanian
Enterprises, Inc.;
2)2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3)3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly report;
4)4. The registrant's other certifying officersofficer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-1413a-15(e) and 15d-14)15d-15(e)) for the registrant
and we have:
a)(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly
report is being prepared;
b)(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and c) Presentedpresented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and
procedures, based on our
evaluation as of the Evaluation Date;
5)end of the period covered by this report
based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officersofficer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
function)functions):
a)(a) All significant deficiencies and material weaknesses in the design or
operation of internal controlscontrol over financial reporting which couldare
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial datainformation; and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b)(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By,control over financial reporting.
Date: September 12, 2003
/S/J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President and Chief Financial Officer
Exhibit 32(a)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hovnanian Enterprises, Inc.
(the "Company") on Form 10-Q for the period ended July 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Ara K. Hovnanian, President and Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Date: June 9,September 12, 2003
/S/ARA K. HOVNANIAN
Ara K. Hovnanian
President and Chief Executive Officer
Exhibit 32(b)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hovnanian Enterprises, Inc.
(the "Company") on Form 10-Q for the period ended July 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, J. Larry Sorsby, Executive Vice President and Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Date: September 12, 2003
/S/J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President and Chief Financial Officer