10-Q 1 docf10q102.txt FORM 10Q 1/31/02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10Q [ X ] Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For quarterly period ended JANUARY 31, 2002 or [ ] Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 Commission file number 1-8551 Hovnanian Enterprises, Inc. (Exact name of registrant as specified in its charter) Delaware 22-1851059 (State or other jurisdiction or (I.R.S. Employer incorporation or organization) Identification No.) l0 Highway 35, P.O. Box 500, Red Bank, N. J. 07701 (Address of principal executive offices) 732-747-7800 (Registrant's telephone number, including area code) Same (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Sections l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 22,880,508 Class A Common Shares and 7,463,792 Class B Common Shares were outstanding as of February 28, 2002. HOVNANIAN ENTERPRISES, INC. FORM 10Q INDEX PAGE NUMBER PART I. Financial Information Item l. Financial Statement: Consolidated Balance Sheets at January 31, 2002 (unaudited) and October 31, 2001 3 Consolidated Statements of Income for the three months ended January 31, 2002 and 2001 (unaudited) 5 Consolidated Statements of Stockholders' Equity for the three months ended January 31, 2002 (unaudited) 6 Consolidated Statements of Cash Flows for the three months ended January 31, 2002 and 2001 (unaudited) 7 Notes to Consolidated Financial Statements (unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 PART II. Other Information Item 2c. Changes in Securities and Use of Proceeds 28 Item 6. Exhibits and reports on Form 8K filed during the quarter for which this report is filed 28 Signatures 29 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands)

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands)

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Per Share Data) (unaudited)

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars In Thousands)

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (unaudited)

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments for interim periods presented have been made, which include only normal recurring accruals and deferrals necessary for a fair presentation of consolidated financial position, results of operations, and changes in cash flows. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and these differences could have a significant impact on the financial statements. Results for the interim periods are not necessarily indicative of the results which might be expected for a full year. The balance sheet at October 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 2. Interest costs incurred, expensed and capitalized were: Three Months Ended January 31, ------------------- 2002 2001 -------- -------- (Dollars in Thousands) Interest Capitalized at Beginning of Period......... $ 25,124 $ 25,694 Plus Acquired Entity Interest. 3,604 Plus Interest Incurred(1)(2).. 11,477 11,572 Less Interest Expensed(2)..... 13,702 9,505 -------- -------- Interest Capitalized at End of Period(2)............ $ 22,899 $ 31,365 ======== ======== (1) Data does not include interest incurred by our mortgage and finance subsidiaries. (2) Represents acquisition interest for construction, land and development costs which is charged to interest expense when homes are delivered and when land is not under active development. 3. Homebuilding accumulated depreciation at January 31, 2002 and October 31, 2001 amounted to $18,612,000 and $18,367,000, respectively. Senior residential rental property accumulated depreciation at January 31, 2002 and October 31, 2001 amounted to $2,757,000 and $2,688,000, respectively. 4. We record impairment losses on inventories related to communities under development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. In addition, from time to time, we will write off certain residential land options including approval, engineering and capitalized interest costs for land management decided not to purchase. We wrote off such costs in the amount of $801,000 in the Mid South, $20,000 in the Northeast Region, and $84,000 in North Carolina during the three months ended January 31, 2002. We also wrote off such costs in the amount of $63,000 in the Northeast Region and $111,000 in Metro D. C. during the three months ended January 31, 2001. Residential inventory impairment losses and option write offs are reported in the Consolidated Statements of Income as "Homebuilding-Inventory Impairment Loss." 5. We are involved from time to time in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on us. As of January 31, 2002 and October 31, 2001, respectively, we are obligated under various performance letters of credit amounting to $10,573,000 and $10,223,000. 6. We have an unsecured Revolving Credit Agreement ("Agreement") with a group of banks which provides up to $440,000,000 through July 2004. Interest is payable monthly and at various rates of either the prime rate plus 0.40% or LIBOR plus 1.85%. In addition, we pay a fee equal to 0.375% per annum on the weighted average unused portion of the line. As of January 31, 2002 and October 31, 2001, there was an outstanding balance of $35,600,000 and zero, respectively. 7. On January 22, 2002 we issued a $165,000,000 Term Loan to a group of banks which is due January 22, 2007. Interest is payable monthly at either the prime rate plus 1.25% or LIBOR plus 2.5%. The proceeds from the issuance of the Term Loan were primarily used to partially fund the acquisition of the California operations of The Forecast Group, L.P. ("Forecast"). See Note 8 below. 8. On January 23, 2001 we merged with Washington Homes, Inc. for a total purchase price of $87.4 million, of which $38.5 million was paid in cash and 6,352,900 shares of our Class A Common Stock were issued. At the date of acquisition we loaned Washington Homes, Inc. approximately $57.0 million to pay off their third party debt. On January 10, 2002 we acquired the California homebuilding operations of Forecast for an estimated total purchase price of $196.5 million, of which $151.0 million will be paid in cash (including an estimated adjustment based on Forecast's earnings through January 31, 2002) and 2,208,738 shares of Class A Common Stock were issued. We acquired Forecast to expand our California homebuilding operations. In addition, we have an option to purchase additional land parcels owned by Forecast for a price of $49.0 million. At the date of the acquisition we also paid off approximately $88.0 million of Forecast's third party debt. The total purchase price amounted to $90.4 million over Forecast's book value, of which $22.8 million was added to inventory to reflect fair value, $18.5 million was paid for two option agreements, a two year consultant's agreement, and a three year right of first refusal agreement, and the balance recorded as goodwill. A Forecast condensed balance sheet (including the effects of purchase accounting adjustments) as of the acquisition date is as follows (in thousands): January 10, 2002 ----------- Cash and cash equivalents........ $ 10,209 Inventories...................... 220,110 Goodwill......................... 49,107 Prepaids and other assets........ 20,676 ----------- Total Assets $ 300,102 =========== Accounts payable and other liabilities.................... $ 35,028 Revolving credit agreement....... 219,574 Stockholders' equity............. 45,500 ----------- Total Liabilities and Stockholders' Equity...... $ 300,102 =========== The merger with Washington Homes, Inc. and acquisition of Forecast were accounted for as purchases with the results of operations of these entities included in our consolidated financial statements as of the date of the merger and acquisition. The purchase price was allocated based on estimated fair value at the date of the merger and acquisition. An intangible asset equal to the excess purchase price over the fair value of the net assets of $12.8 million and $49.1 million for Washington Homes and Forecast, respectively, were recorded as goodwill on the consolidated balance sheet. The Washington Homes amount was being amortized on a straight line basis over a period of ten years during fiscal 2001. On November 1, 2001 we adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). As a result of adopting SFAS No. 142, goodwill is no longer amortized. The following unaudited pro forma financial data for the three months ended January 31, 2002 and 2001 has been prepared as if the merger with Washington Homes, Inc. on January 23, 2001 and the acquisition of Forecast on January 10, 2002 had occurred on November 1, 2000. Unaudited pro forma financial data is presented for information purposes only and may not be indicative of the actual amounts had the events occurred on the dates listed above, nor does it purport to represent future periods (in thousands). Three Months Ended January 31, ------------------------------ 2002 2001 ----------- ----------- Revenues............................. $ 518,601 $ 447,823 Expenses............................. 483,440 430,089 Income Taxes......................... 13,734 6,369 ----------- ----------- Net Income........................... $ 21,427 $ 11,365 =========== =========== Diluted Net Income Per Common Share.. $ 0.67 $ 0.37 =========== =========== 9. Restructuring Charges - Restructuring charges are estimated expenses associated with the merger of our operations with those of Washington Homes, Inc. as a result of the merger on January 23, 2001. Under our merger plan, administration offices in Maryland, Virginia, and North Carolina were either closed, relocated, or combined. The merger of administration offices was completed by July 31, 2001. At January 31, 2001, expenses were accrued for salaries, severance and outplacement costs for the involuntary termination of associates, costs to close and/or relocate existing administrative offices, and lost rent and leasehold improvements. During the year ended October 31, 2001 our estimate for restructuring charges was increased to a total of $3.2 million. We have provided for the termination of 65 associates. We accrued approximately $2.0 million to cover termination and related costs. Associates being terminated were primarily administrative. In addition, we accrued approximately $1.2 million to cover closing and/or relocation of various administrative offices in these three states. Such amounts are included in accounts payable and other liabilities in the accompanying financial statements. $305,000 was charged against the reserve during the three months ended January 31, 2002. At January 31, 2002 $1.7 million has been charged against termination costs relating to the termination of 62 associates and $0.7 million has been charged against office closings and relocation costs. 10. Intangible Assets - As reported on the balance sheet we have goodwill totaling $81.7 million. We have no other intangible assets. During the three months ended January 31, 2002 we added $49.1 million of goodwill as a result of the Forecast acquisition. Goodwill deductible for income tax purposes is approximately $550,000 for the three months ended January 31, 2002. Amortization of good will in the amount of $669,000 was recorded for the three month period ended January 31, 2001 and is also included in other operations in the accompanying financial statements. After tax the goodwill amortization for the three months ended January 31, 2001 amounted to approximately $450,000, which if eliminated from net income would have increased earnings per share approximately $0.02. In accordance with SFAS No. 142 the Company no longer amortizes goodwill but instead reviews goodwill quarterly for impairment. The impairment test uses a fair value approach rather than the undiscounted cash flows approach. The Company has determined that goodwill was not impaired as of January 31, 2002. 11. Hovnanian Enterprises, Inc., the parent company (the "Parent") is the issuer of publicly traded common stock. One of its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc., (the "Subsidiary Issuer") was the issuer of certain Senior Notes on May 4, 1999 and October 2, 2000. The Subsidiary Issuer acts as a finance and management entity that as of January 31, 2002 had issued and outstanding approximately $99,747,000 subordinated notes, $300,000,000 senior notes, a revolving credit agreement with an outstanding balance of $35,600,000, and a term loan with an outstanding balance of $165,000,000. The subordinated notes, senior notes, the revolving credit agreement, and term loan are fully and unconditionally guaranteed by the Parent. Each of the wholly owned subsidiaries of the Parent (collectively the "Guarantor Subsidiaries"), with the exception of various subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, a mortgage lending subsidiary, a subsidiary holding and licensing the "K. Hovnanian" trade name, a subsidiary engaged in homebuilding activity in Poland, our title subsidiaries, and joint ventures (collectively the "Non- guarantor Subsidiaries"), have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under the senior notes and the revolving credit agreement of the Subsidiary Issuer. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries we have included the accompanying consolidated condensed financial statements. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. The following consolidating condensed financial information present the results of operations, financial position, and cash flows of (i) the Parent, (ii) the Subsidiary Issuer, (iii) the Guarantor Subsidiaries of the Parent, (iv) the Non-guarantor Subsidiaries of the Parent, and (v) the eliminations to arrive at the information for Hovnanian Enterprises, Inc. on a consolidated basis. HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED BALANCE SHEET JANUARY 31, 2002 (Thousands of Dollars)

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED BALANCE SHEET OCTOBER 31, 2001 (Thousands of Dollars)

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS THREE MONTHS ENDED JANUARY 31, 2002 (Thousands of Dollars)

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS THREE MONTHS ENDED JANUARY 31, 2002 (Thousands of Dollars)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY Our cash uses during the three months ended January 31, 2002 were for operating expenses, seasonal increases in housing inventories, construction, income taxes, interest, the repurchase of common stock, and the acquisition of the California operations of The Forecast Group, L.P. ("Forecast"). We provided for our cash requirements from housing and land sales, the revolving credit facility, the issuance of a term loan, 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 January 31, 2002, 558,700 have been purchased under this program. Our homebuilding bank borrowings are made pursuant to a revolving credit agreement (the "Agreement") that provides a revolving credit line and letter of credit line of up to $440,000,000 through July 2004. Interest is payable monthly and at various rates of either the prime rate plus .40% or Libor plus 1.85%. We believe that we will be able either to extend the Agreement beyond July 2004 or negotiate a replacement facility, but there can be no assurance of such extension or replacement facility. We currently are in compliance and intend to maintain compliance with the covenants under the Agreement. As of January 31, 2002, borrowings under the Agreement were $35,600,000. The subordinated indebtedness issued by us and outstanding as of January 31, 2002 was $99,747,000 9 3/4% Subordinated Notes due June 2005. The senior indebtedness issued by us and outstanding as of January 31, 2002 was $150,000,000 10 1/2% Senior Notes due October 2007 and $150,000,000 9 1/8% Senior Notes due May 2009. On January 22, 2002 we issued a $165,000,000 Term Loan to a group of banks which is due January 22, 2007. Interest is payable monthly at either the prime rate plus 1.25% or LIBOR plus 2.5%. The proceeds from the issuance of the Term Loan were primarily used to partially fund the acquisition of the California operations of Forecast. Our mortgage banking subsidiary borrows under a $110,000,000 bank warehousing arrangement which expires in July 2002. Interest is payable monthly at the Federal Funds Rate plus 1.125%. We believe that we will be able either to extend this agreement beyond July 2002 or negotiate a replacement facility, but there can be no assurance of such extension or replacement facility. Other finance subsidiaries formerly borrowed from a multi-builder owned financial corporation and a builder owned financial corporation to finance mortgage backed securities, but in fiscal 1988 decided to cease further borrowing from multi-builder and builder owned financial corporations. These non-recourse borrowings have been generally secured by mortgage loans originated by one of our subsidiaries. As of January 31, 2002, the aggregate principal amount of all such borrowings was $70,728,000. Total inventory increased $199,716,000 during the three months ended January 31, 2002. The increase in inventory was primarily due to the acquisition of Forecast. In addition inventory levels increased slightly in most of our other housing markets. Substantially all homes under construction or completed and included in inventory at January 31, 2002 are expected to be closed during the next twelve months. Most inventory completed or under development is financed through our line of credit, term loan, and senior and subordinated indebtedness. We usually option property for development prior to acquisition. By optioning property, we are only subject to the loss of a small 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 residential real estate. The January 31, 2002 numbers exclude lots owned and options in locations that we have ceased development.