10-Q 1 f10q402.txt FORM 10Q 4/30/02 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 APRIL 30, 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. 23,046,915 Class A Common Shares and 7,450,288 Class B Common Shares were outstanding as of May 31, 2002. HOVNANIAN ENTERPRISES, INC. FORM 10Q INDEX PAGE NUMBER PART I. Financial Information Item l. Consolidated Financial Statements: Consolidated Balance Sheets at April 30, 2002 (unaudited) and October 31, 2001 3 Consolidated Statements of Income for the three and six months ended April 30, 2002 and 2001 (unaudited) 5 Consolidated Statements of Stockholders' Equity for the six months ended April 30, 2002 (unaudited) 6 Consolidated Statements of Cash Flows for the six months ended April 30, 2002 and 2001 (unaudited) 7 Notes to Consolidated Financial Statements (unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 4. Submission of Matters to a Vote of Security Holders 29 PART II. Other Information Item 6(a). Exhibit 10 - $165 Million Term Loan Credit Agreement Item 6(b). Reports on Form 8K filed during the quarter for which this report is filed 29 Signatures 30 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands)
April 30, October 31, ASSETS 2002 2001 ----------- ----------- (unaudited) Homebuilding: Cash and cash equivalents....................... $ 34,177 $ 10,173 ----------- ----------- Inventories - At the lower of cost or fair value: Sold and unsold homes and lots under development................................. 848,882 593,149 Land and land options held for future development or sale......................... 178,331 146,965 ----------- ----------- Total Inventories........................... 1,027,213 740,114 ----------- ----------- Receivables, deposits, and notes ............... 45,610 75,802 ----------- ----------- Property, plant, and equipment - net............ 29,932 30,756 ----------- ----------- Senior residential rental properties - net...... 9,697 9,890 ----------- ----------- Prepaid expenses and other assets............... 79,625 46,178 Goodwill........................................ 82,385 32,618 ----------- ----------- Total Homebuilding.......................... 1,308,639 945,531 ----------- ----------- Financial Services: Cash and cash equivalents....................... 3,482 5,976 Mortgage loans held for sale.................... 58,298 105,567 Other assets.................................... 10,476 6,465 ----------- ----------- Total Financial Services.................... 72,256 118,008 ----------- ----------- Income Taxes Receivable - Including deferred tax benefits........................................ 5,377 719 ----------- ----------- Total Assets...................................... $1,386,272 $1,064,258 =========== =========== See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands Except Per Share Data)
April 30, October 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001 ----------- ----------- (unaudited) Homebuilding: Nonrecourse land mortgages........................ $ 8,280 $ 10,086 Accounts payable and other liabilities............ 138,414 124,125 Customers' deposits............................... 41,135 39,114 Nonrecourse mortgages secured by operating properties...................................... 3,335 3,404 ----------- ----------- Total Homebuilding............................ 191,164 176,729 ----------- ----------- Financial Services: Accounts payable and other liabilities............ 4,688 5,264 Mortgage warehouse line of credit................. 52,784 98,305 ----------- ----------- Total Financial Services...................... 57,472 103,569 ----------- ----------- Notes Payable: Term loan......................................... 115,000 Senior notes...................................... 396,152 296,797 Senior subordinated notes......................... 150,000 Subordinated notes................................ 99,747 Accrued interest.................................. 9,822 11,770 ----------- ----------- Total Notes Payable........................... 670,974 408,314 ----------- ----------- Total Liabilities............................. 919,610 688,612 ----------- ----------- Stockholders' Equity: Preferred Stock,$.01 par value-authorized 100,000 shares; none issued............................. Common Stock,Class A,$.01 par value-authorized 87,000,000 shares; issued 27,082,863 shares at April 2002 and 24,599,379 shares at October 2001 (including 4,295,621 shares at April 2002 and 4,195,621 at October 2001 held in Treasury)..... 271 246 Common Stock,Class B,$.01 par value-authorized 13,000,000 shares; issued 7,799,400 at April 2002 and 7,818,927 shares at October 2001 including 345,874 shares at April 2002 and October 2001 held in Treasury).................. 78 78 Paid in Capital................................... 148,902 100,957 Retained Earnings................................. 354,177 310,106 Deferred Compensation............................. (63) (127) Treasury Stock - at cost.......................... (36,703) (35,614) ----------- ----------- Total Stockholders' Equity.................... 466,662 375,646 ----------- ----------- Total Liabilities and Stockholders' Equity.......... $1,386,272 $1,064,258 =========== =========== See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Per Share Data) (Unaudited)
Three Months Ended Six Months Ended April 30, April 30, ------------------- -------------------- 2002 2001 2002 2001 --------- --------- ---------- --------- Revenues: Homebuilding: Sale of homes...................... $532,386 $393,301 $ 975,484 $676,706 Land sales and other revenues...... 20,416 2,290 22,583 6,535 --------- --------- ---------- --------- Total Homebuilding............... 552,802 395,591 998,067 683,241 Financial Services................... 8,676 6,749 17,663 12,287 --------- --------- ---------- --------- Total Revenues................... 561,478 402,340 1,015,730 695,528 --------- --------- ---------- --------- Expenses: Homebuilding: Cost of sales...................... 437,006 314,162 788,679 539,897 Selling, general and administrative 47,646 34,875 85,295 63,100 Inventory impairment loss.......... 1,424 764 2,329 938 --------- --------- ---------- --------- Total Homebuilding............... 486,076 349,801 876,303 603,935 Financial Services................... 5,103 4,716 10,462 8,496 Corporate General and Administration. 10,629 9,401 21,505 19,279 Interest............................. 12,802 13,949 26,504 23,454 Other Operations..................... 4,400 1,906 8,691 3,757 Restructuring Charges................ 2,480 --------- --------- ---------- --------- Total Expenses................... 519,010 379,773 943,465 661,401 --------- --------- ---------- --------- Income Before Income Taxes and Extraordinary Loss................... 42,468 22,567 72,265 34,127 --------- --------- ---------- --------- State and Federal Income Taxes: State................................ 1,534 1,028 3,407 1,427 Federal.............................. 14,442 7,479 24,205 11,717 --------- --------- ---------- --------- Total Taxes........................ 15,976 8,507 27,612 13,144 -------- -------- --------- -------- Extraordinary Loss from Extinguishment Of Debt, Net of Income Taxes......... (582) (582) --------- --------- ---------- --------- Net Income............................. $ 25,910 $ 14,060 $ 44,071 $ 20,983 ========= ========= ========== ========= Per Share Data: Basic: Income per common share before Extraordinary loss................. $ 0.86 $ 0.50 $ 1.50 $ 0.83 Extraordinary loss................... (.02) (.02) --------- --------- ---------- --------- Income............................... $ 0.84 $ 0.50 $ 1.48 $ 0.83 ========= ========= ========== ========= Weighted average number of common shares outstanding................. 30,670 28,176 29,836 25,262 Assuming dilution: Income per common share before Extraordinary loss................. $ 0.82 $ 0.48 $ 1.42 $ 0.80 Extraordinary loss................... (.02) (.02) --------- --------- ---------- --------- Income............................... $ 0.80 $ 0.48 $ 1.40 $ 0.80 ========= ========= ========== ========= Weighted average number of common shares outstanding................ 32,402 29,472 31,447 26,116 See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars In Thousands)
A Common Stock B Common Stock ------------------- ------------------- Shares Shares Issued and Issued and Paid-In Retained Deferred Treasury Outstanding Amount Outstanding Amount Capital Earnings Comp Stock Total ----------- ------ ----------- ------ ------- -------- -------- -------- --------- Balance, October 31, 2001 20,403,758 $ 246 7,473,053 $ 78 $100,957 $310,106 $ (127) $(35,614) $ 375,646 Shares issued in connection with acquisitions....... 2,208,738 22 45,692 45,714 Sale of common stock under employee stock option plan.................... 193,055 2 1,297 1,299 Stock bonus plan.......... 62,164 1 956 957 Conversion of Class B to Class A Common Stock.... 19,527 (19,527) Deferred compensation..... 64 64 Treasury stock purchase... (100,000) (1,089) (1,089) Net Income................ 44,071 44,071 ----------- ------ ----------- ------ ------- -------- -------- -------- --------- Balance, April 30, 2002 (unaudited)............... 22,787,242 $ 271 7,453,526 $ 78 $148,902 $354,177 $ (63) $(36,703) $ 466,662 =========== ====== =========== ====== ======= ======== ======== ======== ========= See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (unaudited)
Six Months Ended April 30, --------------------- 2002 2001 ---------- ---------- Cash Flows From Operating Activities: Net Income.......................................... $ 44,071 $ 20,983 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation.................................... 3,342 4,018 Amortization of goodwill........................ 1,627 (Gain) on sale and retirement of property and assets.................................... (7) (36) Extraordinary loss from extinguishment of debt net of income taxes........................... 582 Deferred income taxes........................... (745) 1,033 Impairment losses............................... 2,329 938 Decrease (increase) in assets: Mortgage notes receivable..................... 47,023 (10,615) Receivables, prepaids and other assets........ 13,606 (22,324) Inventories................................... (69,318) (9,087) (Decrease) increase in liabilities: State and Federal income taxes................ (3,761) (2,643) Tax effect from exercise of stock options..... (152) (398) Customers' deposits........................... 1,684 4,593 Interest and other accrued liabilities........ (7,265) (4,109) Post development completion costs............. (811) 834 Accounts payable.............................. 4,455 (10,612) ---------- ---------- Net cash provided by (used in) operating activities................................ 35,033 (25,798) ---------- ---------- Cash Flows From Investing Activities: Net proceeds from sale of property and assets....... 335 1,002 Purchase of property, equipment and other fixed assets............................................ (2,091) (2,253) Acquisition of homebuilding companies............... (140,095) (37,190) Investment in and advances to unconsolidated affiliates........................................ (1,095) (181) ---------- ---------- Net cash used in investing activities....... (142,946) (38,622) ---------- ---------- Cash Flows From Financing Activities: Proceeds from mortgages and notes................... 1,045,306 813,780 Proceeds from senior debt........................... 99,152 Proceeds from senior subordinated debt.............. 150,000 Principal payments on mortgages and notes...........(1,066,455) (756,487) Principal payments on subordinated debt............. (99,747) Purchase of treasury stock.......................... (1,089) 67 Proceeds from sale of stock and employee stock plan. 2,256 2,239 ---------- ---------- Net cash provided by financing activities... 129,423 59,599 ---------- ---------- Net Increase (decrease) In Cash and Cash Equivalents.. 21,510 (4,821) Cash and Cash Equivalents Balance, Beginning Of Period........................................... 16,149 43,253 ---------- ---------- Cash and Cash Equivalents Balance, End Of Period...... $ 37,659 $ 38,432 ========== ========== See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with 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 accounting principles generally accepted in the United States for complete financial statements. 2. Interest costs incurred, expensed and capitalized were: Three Months Ended Six Months Ended April 30, April 30, ------------------- ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (Dollars in Thousands) Interest Capitalized at Beginning of Period......... $22,899 $31,365 $ 25,124 $25,694 Plus Acquired Entity Interest. 3,604 Plus Interest Incurred(1)(2).. 14,779 12,333 26,256 23,905 Less Interest Expensed(2)..... 12,802 13,949 26,504 23,454 -------- -------- -------- -------- Interest Capitalized at End of Period (2)......... $24,876 $29,749 $ 24,876 $29,749 ======== ======== ======== ======== (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 April 30, 2002 and October 31, 2001 amounted to $20,534,000 and $18,367,000, respectively. Senior residential rental property accumulated depreciation at April 30, 2002 and October 31, 2001 amounted to $2,853,000 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 $1,338,000 in Poland, $63,000 in the Northeast Region, $18,000 in Metro D.C., and $5,000 in North Carolina during the three months ended April 30, 2002 and we wrote off $801,000 in the Mid South, $84,000 in North Carolina, and $20,000 in the Northeast Region during the three months ended January 31, 2002. We also wrote off such costs in the amount of $735,000 in California, $18,000 in Metro D. C., and $11,000 in the Northeast Region during the three months ended April 30, 2001 and wrote off $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 April 30, 2002 and October 31, 2001, we are obligated under various performance letters of credit amounting to $89,954,000 and $51,647,000, respectively. 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 April 30, 2002 and October 31, 2001, there was an outstanding balance of zero. 7. On March 26, 2002, we issued $100,000,000 8% Senior Notes due 2012 and $150,000,000 8 7/8% Senior Subordinated Notes due 2012. On April 29, 2002, we redeemed our 9 3/4% Subordinated Notes due 2005. The early retirement of these notes resulted in an extraordinary loss of $582,000 net of income taxes of $313,000. The remaining proceeds were used to repay a portion of our Term Loan Facility, repay the current outstanding indebtedness under our Revolving Credit Facility, and the remainder for general corporate purposes. 8. On January 22, 2002 we entered into a $165,000,000 Term Loan with a group of banks which is due January 22, 2007. Interest is payable monthly at either the prime rate plus 1.25% or LIBOR plus 2.5%. The proceeds from the issuance of the Term Loan were primarily used to partially fund the acquisition of the California operations of The Forecast Group, L.P. ("Forecast"). See Note 8 below. On March 27, 2002 we paid down the Term Loan by $50,000,000. 9. 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 $151.6 million was paid in cash and 2,208,738 shares of Class A Common Stock were issued. We acquired Forecast to expand our California homebuilding operations. In addition, we have an option to purchase additional land parcels owned by Forecast for a price of $49.0 million. At the date of the acquisition we also paid off approximately $88.0 million of Forecast's third party debt. The total purchase price amounted to $90.4 million over Forecast's book value, of which $22.8 million was added to inventory to reflect fair value, $18.5 million was paid for two option agreements, a two year consultant's agreement, and a three year right of first refusal agreement, and the balance recorded as goodwill. A Forecast condensed balance sheet (including the effects of purchase accounting adjustments) as of the acquisition date is as follows (in thousands): January 10, 2002 ----------- Cash and cash equivalents........ $ 10,209 Inventories...................... 220,110 Goodwill......................... 49,107 Prepaids and other assets........ 20,676 ----------- Total Assets $ 300,102 =========== Accounts payable and other liabilities.................... $ 35,028 Revolving credit agreement....... 219,574 Stockholders' equity............. 45,500 ----------- Total Liabilities and Stockholders' Equity...... $ 300,102 =========== The merger with Washington Homes, Inc. and acquisition of Forecast were accounted for as purchases with the results of operations of these entities included in our consolidated financial statements as of the date of the merger and acquisition. The purchase price was allocated based on estimated fair value at the date of the merger and acquisition. An intangible asset equal to the excess purchase price over the fair value of the net assets of $12.8 million and $49.8 for Washington Homes and Forecast, respectively, were recorded as goodwill on the consolidated balance sheet. The Washington Homes amount was being amortized on a straight line basis over a period of ten years during fiscal 2001. On November 1, 2001 we adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). As a result of adopting SFAS No. 142, goodwill is no longer amortized. The following unaudited pro forma financial data for the three and six months ended April 30, 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 Six Months Ended April 30, April 30, ---------------------------------------- 2002 2001 2002 2001 -------- -------- --------- -------- Revenues.............................$561,478 $521,964 $1,080,079 $969,787 Expenses............................. 519,010 487,100 1,002,450 917,189 Income Taxes......................... 15,976 13,438 29,710 19,807 Extraordinary Loss from Extinguishment Of Debt, Net of Taxes.............. (582) (582) -------- -------- --------- -------- Net Income...........................$ 25,910 $ 21,426 $ 47,337 $ 32,791 ======== ======== ========= ======== Diluted Net Income Per Common Share..$ 0.80 $ 0.68 $ 1.47 $ 1.05 ======== ======== ========= ======== 10. 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. $272,000 and $577,000 was charged against the reserve during the three and six months ended April 30, 2002. At April 30, 2002 $1.8 million has been charged against termination costs relating to the termination of 63 associates and $0.8 million has been charged against closing and relocation costs. 11. Intangible Assets - As reported on the balance sheet we have goodwill totaling $82.4 million. We have no other intangible assets. During the six months ended April 30, 2002 we added $49.8 million of goodwill as a result of the Forecast acquisition. Goodwill deductible for income tax purposes is approximately $1,243,000 and $1,895,000 for the three and six months ended April 30, 2002, respectively. Amortization of goodwill in the amount of $958,000 and $1,627,000 was recorded for the three and six months ended April 30, 2001, respectively, and is also included in other operations in the accompanying consolidated financial statements. After income taxes the goodwill amortization for the three and six months ended April 30, 2001, amounted to approximately $551,000 and $1,001,000, which if eliminated from net income would have increased earnings per share approximately $0.02 and $0.04, respectively. In accordance with SFAS No. 142 we no longer amortize goodwill but instead we review goodwill for impairment. The impairment test uses a fair value approach rather than the undiscounted cash flows approach. We have determined that goodwill was not impaired as of April 30, 2002. 12. Hovnanian Enterprises, Inc., the parent company (the "Parent") is the issuer of publicly traded common stock. One of its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc., (the "Subsidiary Issuer") was the issuer of certain Senior Notes on May 4, 1999, October 2, 2000, and March 26, 2002 and Senior Subordinated Notes on March 26, 2002. The Subsidiary Issuer acts as a finance and management entity that as of April 30, 2002 had issued and outstanding approximately $400,000,000 senior notes, $150,000,000 senior subordinated notes, a revolving credit agreement with an outstanding balance of zero, and a term loan with an outstanding balance of $115,000,000. The senior subordinated notes, senior notes, the revolving credit agreement, and term loan are fully and unconditionally guaranteed by the Parent. Each of the wholly owned subsidiaries of the Parent (collectively the "Guarantor Subsidiaries"), with the exception of various subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, a mortgage lending subsidiary, a subsidiary holding and licensing the "K. Hovnanian" trade name, a subsidiary engaged in homebuilding activity in Poland, our title subsidiaries, and joint ventures (collectively the "Non-guarantor Subsidiaries"), have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under the senior notes, the senior subordinated notes, the term loan, and the revolving credit agreement of the Subsidiary Issuer. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries we have included the accompanying consolidating condensed financial statements. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. The following consolidating condensed financial information present the results of operations, financial position, and cash flows of (i) the Parent, (ii) the Subsidiary Issuer, (iii) the Guarantor Subsidiaries of the Parent, (iv) the Non-guarantor Subsidiaries of the Parent, and (v) the eliminations to arrive at the information for Hovnanian Enterprises, Inc. on a consolidated basis. HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED BALANCE SHEET APRIL 30, 2002 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---------- ---------- ASSETS Homebuilding.......................$ (367) $ 77,114 $1,224,484 $ 7,408 $ $1,308,639 Financial Services................. 202 72,054 72,256 Income Taxes (Payables)Receivables. 2,584 (2,643) 7,662 (2,226) 5,377 Investments in and amounts due to and from consolidated subsidiaries..................... 464,445 607,056 (948,199) 21,827 (145,129) -------- ---------- ---------- ------------ ---------- ---------- Total Assets.......................$466,662 $ 681,527 $ 284,149 $ 99,063 $ (145,129)$1,386,272 ======== ========== ========== ============ ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Homebuilding.......................$ $ 11,388 $ 179,739 $ 37 $ $ 191,164 Financial Services................. 57,472 57,472 Notes Payable...................... 670,922 52 670,974 Stockholders' Equity............... 466,662 (783) 104,358 41,554 (145,129) 466,662 -------- ---------- ---------- ------------ ---------- ---------- Total Liabilities and Stockholders' Equity...........................$466,662 $ 681,527 $ 284,149 $ 99,063 $ (145,129)$1,386,272 ======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED BALANCE SHEET OCTOBER 31, 2001 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---------- ---------- Assets Homebuilding.......................$ 2,022 $ 50,565 $ 882,715 $ 10,229 $ $ 945,531 Financial Services................. 205 117,803 118,008 Income Taxes (Payables)Receivables. (5,067) (3,658) 11,893 (2,449) 719 Investments in and amounts due to and from consolidated subsidiaries..................... 378,691 375,514 (668,285) 14,513 (100,433) -------- ---------- ---------- ------------ ---------- ---------- Total Assets.......................$375,646 $ 422,421 $ 226,528 $ 140,096 $(100,433) $1,064,258 ======== ========== ========== ============ ========== ========== Liabilities Homebuilding.......................$ $ 14,679 $ 161,759 $ 291 $ $ 176,729 Financial Services................. 103,569 103,569 Notes Payable...................... 408,206 108 408,314 Stockholders' Equity............... 375,646 (464) 64,661 36,236 (100,433) 375,646 -------- ---------- ---------- ------------ ---------- ---------- Total Liabilities and Stockholders' Equity...........................$375,646 $ 422,421 $ 226,528 $ 140,096 $(100,433) $1,064,258 ======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS THREE MONTHS ENDED APRIL 30, 2002 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- Revenues: Homebuilding and Other Operations$ $ 125 $ 551,934 $ 7,135 $ (6,392) $ 552,802 Financial Services............... 1,324 7,352 8,676 Intercompany Charges............. 34,147 4,180 (38,327) Equity In Pretax Income of Consolidated Subsidiaries...... 42,468 (42,468) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ 42,468 34,272 557,438 14,487 (87,187) 561,478 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding and Other Operations 34,272 519,882 1,084 (41,331) 513,907 Financial Services............... 527 4,925 (349) 5,103 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 34,272 520,409 6,009 (41,680) 519,010 ------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes......... 42,468 37,029 8,478 (45,507) 42,468 State and Federal Income Taxes..... 15,976 (181) 13,662 3,355 (16,836) 15,976 ------- ---------- ---------- ------------ ---------- ---------- Extraordinary Loss From Extinguishment of Debt, Net of Income Taxes..................... (582) (582) 582 (582) ------- ---------- ---------- ------------ ---------- ---------- Net Income ........................$25,910 $ (401) $ 23,367 $ 5,123 $ (28,089) $ 25,910 ======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS THREE MONTHS ENDED APRIL 30, 2001 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- Revenues: Homebuilding and Other Operations$ $ 364 $ 393,839 $ 3,016 $ (1,628) $ 395,591 Financial Services............... 3,217 3,532 6,749 Intercompany Charges............. 29,809 2,387 (32,196) Equity In Pretax Income of Consolidated Subsidiaries...... 22,567 (22,567) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ 22,567 30,173 399,443 6,548 (56,391) 402,340 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding and Other Operations 29,584 376,054 1,135 (31,716) 375,057 Financial Services............... 2,100 2,713 (97) 4,716 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 29,584 378,154 3,848 (31,813) 379,773 ------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes......... 22,567 589 21,289 2,700 (24,578) 22,567 State and Federal Income Taxes..... 8,507 165 8,811 997 (9,973) 8,507 ------- ---------- ---------- ------------ ---------- ---------- Net Income ........................$14,060 $ 424 $ 12,478 $ 1,703 $ (14,605) $ 14,060 ======= ========== ========== ============ ========== ==========
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 and other operations$ $ 270 $ 996,570 $ 12,668 $ (11,441)$ 998,067 Financial Services............... 2,686 14,977 17,663 Intercompany Charges............. 64,406 6,663 (71,069) Equity In Pretax Income of Consolidated Subsidiaries...... 72,265 (72,265) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ 72,265 64,676 1,005,919 27,645 (154,775) 1,015,730 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding and other operations 64,676 943,816 1,659 (77,148) 933,003 Financial Services............... 1,085 10,171 (794) 10,462 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 64,676 944,901 11,830 (77,942) 943,465 ------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes......... 72,265 61,018 15,815 (76,833) 72,265 State and Federal Income Taxes..... 27,612 (154) 23,011 6,150 (29,007) 27,612 ------- ---------- ---------- ------------ ---------- ---------- Extraordinary Loss From Extinguishment of Debt, Net of Income Taxes..................... (582) (582) 582 (582) ------- ---------- ---------- ------------ ---------- ---------- Net Income.........................$44,071 $ (428) $ 38,007 $ 9,665 $ (47,244)$ 44,071 ======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS SIX MONTHS ENDED APRIL 30, 2001 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- Revenues: Homebuilding and other operations$ $ 429 $ 680,120 $ 10,532 $ (7,840) $ 683,241 Financial Services............... 5,235 7,052 12,287 Intercompany Charges............. 60,219 433 (60,652) Equity In Pretax Income of Consolidated Subsidiaries...... 34,127 (34,127) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ 34,127 60,648 685,788 17,584 (102,619) 695,528 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 59,497 659,139 2,389 (68,120) 652,905 Financial Services............... 3,388 5,302 (194) 8,496 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 59,497 662,527 7,691 (68,314) 661,401 ------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes......... 34,127 1,151 23,261 9,893 (34,305) 34,127 State and Federal Income Taxes..... 13,144 517 8,881 3,811 (13,209) 13,144 ------- ---------- ---------- ------------ ---------- ---------- Net Income ........................$20,983 $ 634 $ 14,380 $ 6,082 $ (21,096) $ 20,983 ======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS SIX MONTHS ENDED APRIL 30, 2002 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ ---------- ---------- Cash Flows From Operating Activities: Net Income.........................$ 44,071 $ (428) $ 38,007 $ 9,665 $ (47,244) $ 44,071 Adjustments to reconcile net income to net cash provided by (used in) operating activities... 87,095 52,923 (225,305) 40,518 47,244 2,475 -------- --------- ---------- ------------ ---------- ---------- Net Cash Provided By (Used In) Operating Activities........... 131,166 52,495 (187,298) 50,183 46,546 Net Cash (Used In) Provided By Investing Activities............... (44,323) (1,445) (108,845) 154 (154,459) Net Cash Provided By (Used In) Financing Activities............... (1,089) 264,608 (88,267) (45,829) 129,423 Intercompany Investing and Financing Activities - Net................... (85,754) (295,948) 389,016 (7,314) -------- --------- ---------- ------------ ---------- ---------- Net Increase (Decrease) In Cash and Cash Equivalents............... 19,710 4,606 (2,806) 21,510 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 $ 13,870 $ 20,222 $ 3,557 $ $ 37,659 ======== ========= ========== ============ ========== ==========
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ ---------- ---------- Cash Flows From Operating Activities: Net Income.........................$ 20,983 $ 634 $ 14,380 $ 6,082 $ (21,096) $ 20,983 Adjustments to reconcile net income to net cash provided by (used in) operating activities... 93,186 70,155 (232,718) 1,500 21,096 (46,781) -------- --------- ---------- ------------ ---------- ---------- Net Cash Provided By (Used In) Operating Activities........... 114,169 70,789 (218,338) 7,582 (25,798) Net Cash (Used In) Provided By Investing Activities............... (46,972) (18,093) 26,542 (99) (38,622) Net Cash Provided By (Used In) Financing Activities............... 67 120,525 (58,043) (2,950) 59,599 Intercompany Investing and Financing Activities - Net................... (67,198) (198,444) 271,307 (5,665) -------- --------- ---------- ------------ ---------- ---------- Net Increase (Decrease) In Cash and Cash Equivalents............... 66 (25,223) 21,468 (1,132) (4,821) Cash and Cash Equivalents Balance, Beginning of Period................ (63) 17,629 22,506 3,181 43,253 -------- --------- ---------- ------------ ---------- ---------- Cash and Cash Equivalents Balance, End of Period......................$ 3 $ (7,594) $ 43,974 $ 2,049 $ $ 38,432 ======== ========= ========== ============ ========== ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY Our cash uses during the six months ended April 30, 2002 were for operating expenses, seasonal increases in housing inventories, construction, income taxes, interest, the repurchase of common stock, the acquisition of the California operations of the Forecast Group, L.P. ("Forecast"), and the acquisition of a land portfolio from another building company. We provided for our cash requirements from housing and land sales, the revolving credit facility, the issuance of a term loan, the issuance of $150,000,000 Senior Subordinated Notes, the issuance of $100,000,000 Senior Notes, financial service revenues, and other revenues. We believe that these sources of cash are sufficient to finance our working capital requirements and other needs. On December 31, 2000, our stock repurchase program to purchase up to 4 million shares of Class A Common Stock expired. As of December 31, 2000, 3,391,047 shares had been purchased under this program. On July 3, 2001, our Board of Directors authorized a revision to our stock repurchase program to purchase up to an additional 2 million shares of Class A Common Stock. As of April 30, 2002, 558,700 have been purchased under this program of which 100,000 were repurchased during the six months ended April 30, 2002. Our homebuilding bank borrowings are made pursuant to a revolving credit agreement (the "Agreement") that provides a revolving credit line and letter of credit line of up to $440,000,000 through July 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 April 30, 2002, borrowings under the Agreement were zero. On March 26, 2002, we issued $100,000,000 8% Senior Notes due 2012 and $150,000,000 8 7/8% Senior Subordinated Notes due 2012. On April 29, 2002, we redeemed our 9 3/4% Subordinated Notes due 2005. The early retirement of these notes resulted in an extraordinary loss of $582,000 net of income taxes of $313,000. The remaining proceeds were used to repay a portion of our Term Loan Facility, repay the current outstanding indebtedness under our Revolving Credit Facility, and the remainder for general corporate purposes. Other senior indebtedness issued by us and outstanding as of April 30, 2002 was $150,000,000 10 1/2% Senior Notes due 2007 and $150,000,000 9 1/8% Senior Notes due 2009. On January 22, 2002 we issued a $165,000,000 Term Loan to a group of banks which is due January 22, 2007. Interest is payable monthly at either the prime rate plus 1.25% or LIBOR plus 2.5%. The proceeds from the issuance of the Term Loan were primarily used to partially fund the acquisition of the California operations of Forecast. As of April 30, 2002 borrowings under the Term Loan were $115,000,000. Our mortgage banking subsidiary borrows under a $110,000,000 bank warehousing arrangement which expires in June 2003. Interest is payable monthly at the Federal Funds Rate plus 1.375%. We believe that we will be able either to extend this agreement beyond June 2003 or negotiate a replacement facility, but there can be no assurance of such extension or replacement facility. 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 April 30, 2002, the aggregate principal amount of all such borrowings was $54,876,000. Total inventory increased $287,099,000 during the six months ended April 30, 2002. The increase in inventory was primarily due to the acquisition of Forecast and the purchase of a land portfolio from a builder in our Northeast Region. In addition, inventory levels increased slightly in most of our housing markets except in the Mid-South where we are liquidating our operations. Substantially all homes under construction or completed and included in inventory at April 30, 2002 are expected to be closed during the next twelve months. Most inventory completed or under development is financed through our line of credit and subordinated indebtedness. The following table summarizes housing lots included in our total residential real estate. The April 30, 2002 numbers excluded lots owned and options in locations that we have ceased development.
Active Contracted Active Proposed Total Active Selling Not Lots Developable Lots Communities Lots Delivered Available Lots Controlled ----------- ------- ---------- --------- ----------- ----------- April 30, 2002: Northeast Region.. 31 6,532 1,585 4,947 11,646 18,178 North Carolina.... 61 4,950 661 4,289 3,236 8,186 Metro D.C......... 33 3,497 1,002 2,495 6,795 10,292 California........ 35 4,784 812 3,972 2,748 7,532 Texas............. 39 1,834 324 1,510 689 2,523 Mid South......... 6 534 88 446 -- 534 ----------- ------- ---------- ---------- ---------- ----------- 205 22,131 4,472 17,659 25,114 47,245 =========== ======= ========== ========== ========== =========== Owned.......... 11,251 3,788 7,463 3,278 14,529 Optioned....... 10,880 684 10,196 21,836 32,716 ------- ---------- ---------- ---------- ----------- Total........ 22,131 4,472 17,659 25,114 47,245 ======= ========== ========== ========== =========== Active Contracted Active Proposed Total Active Selling Not Lots Developable Lots Communities Lots Delivered Available Lots Controlled ----------- ------- ---------- --------- ----------- ----------- October 31, 2001: Northeast Region.. 23 5,561 1,136 4,425 10,314 15,875 North Carolina.... 54 4,264 534 3,730 2,312 6,576 Metro D.C......... 34 2,622 779 1,843 4,946 7,568 California........ 8 1,499 172 1,327 171 1,670 Texas............. 35 1,788 263 1,525 1,040 2,828 Mid South......... 18 1,279 122 1,157 -- 1,279 Other............. -- 17 3 14 992 1,009 ----------- ------- ---------- ---------- ---------- ----------- 172 17,030 3,009 14,021 19,775 36,805 =========== ======= ========== ========== ========== =========== Owned.......... 6,918 2,525 4,393 4,035 10,953 Optioned....... 10,112 484 9,628 15,740 25,852 ------- ---------- ---------- ---------- ----------- Total........ 17,030 3,009 14,021 19,775 36,805 ======= ========== ========== ========== ===========
The following table summarizes our started or completed unsold homes and models: April 30, October 31, 2002 2001 ----------------------- ----------------------- Unsold Unsold Homes Models Total Homes Models Total ------ ------ ----- ------ ------ ----- Northeast Region.... 46 52 98 69 48 117 North Carolina...... 130 30 160 205 41 246 Metro D. C.......... 29 25 54 27 27 54 California.......... 225 37 262 60 11 71 Texas.............. 261 12 273 215 15 230 Mid South.......... 42 10 52 54 22 76 Other............... - - - 7 - 7 ------ ------ ----- ------ ------ ----- Total 733 166 899 637 164 801 ====== ====== ===== ====== ====== ===== Financial Services - Mortgage loans held for sale consist of residential mortgages receivable of which $58,093,000 and $105,174,000 at April 30, 2002 and October 31, 2001, respectively, are being temporarily warehoused and awaiting sale in the secondary mortgage market. The balance of such mortgages is being held as an investment by us. We may incur risk with respect to mortgages that are delinquent, but only to the extent the losses are not covered by mortgage insurance or resale value of the house. Historically, we have incurred minimal credit losses. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 2002 COMPARED TO THE THREE AND SIX MONTHS ENDED APRIL 30, 2001 Our operations consist primarily of residential housing development and sales in our Northeast Region (New Jersey, southern New York State and eastern Pennsylvania), North Carolina, Metro D. C. (northern Virginia and Maryland), California, Texas, and the Mid South (Tennessee, Alabama, and Mississippi). Currently we are liquidating our operations in the Mid South and will be substantially out of this market by fiscal year end. In addition, we provide financial services to our homebuilding customers. Total Revenues: Compared to the same prior period, revenues increased (decreased) as follows: Three Months Ended ------------------------------------------ April 30, April 30, Dollar Percentage 2002 2001 Change Change ------------------------------------------ (Dollars In Thousands) Homebuilding: Sale of homes........ $ 532,386 $ 393,301 $139,085 35.4% Land sales and other revenues........... 20,416 2,290 18,126 791.5% Financial Services... 8,676 6,749 1,927 28.6% ---------- ---------- -------- -------- Total Revenues... $ 561,478 $ 402,340 $159,138 39.6% ========== ========== ======== ======== Six Months Ended ------------------------------------------ April 30, April 30, Dollar Percentage 2002 2001 Change Change ------------------------------------------ (Dollars In Thousands) Homebuilding: Sale of homes........ $ 975,484 $ 676,706 $298,778 44.2% Land sales and other revenues........... 22,583 6,535 16,048 245.6% Financial Services... 17,663 12,287 5,376 43.8% ---------- --------- -------- -------- Total Revenues... $1,015,730 $ 695,528 $320,202 46.0% ========== ========= ======== ======== Homebuilding: Revenues from the sale of homes increased $139.1 million or 35.4% during the three months ended April 30, 2002, and increased $298.8 million or 44.2% during the six months ended April 30, 2002, compared to the same period last year. Revenues from the sales 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 Six Months Ended April 30, April 30, ------------------- ------------------ 2002 2001 2002 2001 --------- -------- -------- -------- (Dollars in Thousands) Northeast Region: Housing Revenues..... $145,249 $126,700 $278,018 $250,326 Homes Delivered...... 478 420 899 847 North Carolina:(2) Housing Revenues..... $ 64,784 $ 60,457 $121,465 $ 92,255 Homes Delivered...... 353 355 651 535 Metro D.C.:(2) Housing Revenues..... $ 78,333 $ 74,263 $148,725 $110,954 Homes Delivered...... 295 333 558 495 California:(1) Housing Revenues..... $178,688 $ 65,339 $293,330 $109,653 Homes Delivered...... 728 186 1,168 292 Texas: Housing Revenues..... $ 52,820 $ 46,434 $107,346 $ 84,244 Homes Delivered...... 223 228 460 405 Mid South:(2) Housing Revenues..... $ 12,512 $ 11,846 $ 26,147 $ 14,923 Homes Delivered...... 81 81 166 103 Other: Housing Revenues..... $ -- $ 8,262 $ 453 $ 14,351 Homes Delivered...... -- 49 6 97 Totals: Housing Revenues..... $532,386 $393,301 $975,484 $676,706 Homes Delivered...... 2,158 1,652 3,908 2,774 (1) April 30, 2002 includes Forecast deliveries beginning on January 10, 2002. (2) April 30, 2001 includes Washington Homes deliveries beginning on January 24, 2001. The increase in housing revenues was primarily due to the acquisition of the Forecast Group for the second quarter 2002 and the acquisition of the Forecast Group and Washington Homes for the six months ended April 30, 2002. In addition, these increases were due to increased deliveries in the Northeast Region resulting from a land portfolio acquisition in late March 2002 and increased average sales prices in all our markets except California. California average sales prices are down due to the Forecast Group product being mostly lower priced, first time buyer homes. Important indicators of the future results are recently signed contracts and home contract backlog for future deliveries. Our sales contracts and homes in contract (using base sales prices) by market area are set forth below: Sales Contracts for the Six Months Ended Contract Backlog April 30, as of April 30, ------------------------- ------------------------ 2002 2001 2002 2001 ----------- ----------- ----------- ----------- (Dollars in Thousands) Northeast Region: Dollars.............$ 274,837 $281,126 $ 452,910 $ 371,745 Homes............... 944 1,036 1,614 1,338 North Carolina: Dollars.............$ 143,188 $151,134 $ 125,292 $ 151,840 Homes............... 778 851 661 833 Metro D. C.: Dollars.............$ 243,091 $170,966 $ 303,252 $ 257,958 Homes............... 781 696 1,002 1,019 California: Dollars.............$ 345,124 $154,167 $ 231,803 $ 109,315 Homes............... 1,273 448 812 307 Texas: Dollars.............$ 116,972 $101,520 $ 78,334 $ 82,057 Homes............... 521 495 324 372 Mid South: Dollars.............$ 20,078 $ 24,105 $ 13,660 $ 25,331 Homes............... 132 160 88 156 Other: Dollars.............$ 340 $ 1,299 $ -- $ 2,640 Homes............... 3 31 -- 20 Totals: Dollars.............$1,143,630 $884,317 $1,205,251 $1,000,886 Homes............... 4,432 3,717 4,501 4,045 During May 2002 we signed an additional 764 contracts compared to 579 in the same month last year. The May 2002 contracts along with our contract backlog at April 30, 2002 and deliveries for the six months ended April 30, 2002 amount to approximately 90% of our planned deliveries for fiscal 2002. 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 Six Months Ended April 30, April 30, ------------------- ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (Dollars in Thousands) Sale of Homes................ $532,386 $393,301 $975,484 $676,706 Cost of Sales................ 421,209 313,234 772,600 536,068 -------- -------- -------- -------- Housing Gross Margin......... $111,177 $ 80,067 $202,884 $140,638 ======== ======== ======== ======== Gross Margin Percentage...... 20.9% 20.4% 20.8% 20.8% Cost of Sales expenses as a percentage of home sales revenues are presented below: Three Months Ended Six Months Ended April 30, April 30, ------------------- -------- -------- 2002 2001 2002 2001 -------- -------- -------- -------- Sale of Homes................ 100.0% 100.0% 100.0% 100.0% -------- -------- -------- -------- Cost of Sales: Housing, land & development costs.... 71.0% 71.5% 71.1% 71.0% Commissions............ 2.2% 2.4% 2.3% 2.4% Financing concessions.. 1.0% 0.8% 1.0% 0.8% Overheads.............. 4.9% 4.9% 4.8% 5.0% -------- -------- -------- -------- Total Cost of Sales.......... 79.1% 79.6% 79.2% 79.2% -------- -------- -------- -------- Gross Margin................. 20.9% 20.4% 20.8% 20.8% ======== ======== ======== ======== 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. Ignoring the effect of the Forecast acquisition, we achieved substantially higher gross margins on a market-by-market basis during the three and six months ended April 30, 2002 compared to the same period last year. These increased margins are a result of higher sales prices, lower costs, and certain changes in product mix. The consolidated gross margin increased 0.5% for the three months ended April 30, 2002, but remained flat for the six months ended April 30, 2002. The acquisition of Forecast and the merger with Washington Homes significantly increased the number of deliveries with lower average gross margins. This factor was offset by increased margins in our Metro D. C. market and California markets (excluding Forecast communities), and increased deliveries in our highest margin market, the Northeast Region. As anticipated at the time of the Washington Homes merger, the effect of these lower margins caused a decline in aggregate gross margin in each of the Company's past four fiscal quarters, including the last three quarters of fiscal 2001, when compared with the equivalent prior year periods. Beginning April 30, 2002, there will no longer be any year-over-year effect on quarterly gross margins from the Washington Homes merger, but the year to date effect can either be flat or slightly lower than the gross margin for the prior year 2001. Forecast's operations have substantially lower gross margins than our average gross margin due to the purchase accounting stepped-up basis we applied to the Forecast inventory. The gross margin achieved on Forecast's deliveries during the three and six months ended April 30, 2002 was 2.5% and 3.0% lower as a result of the stepped-up basis. Forecast contributed a significant number of home deliveries during the three and six months ended April 30, 2002, which had an impact on our consolidated gross margin. Selling, general, and administrative expenses as a percentage of total homebuilding revenues decreased to 8.6% for the three months ended April 30, 2002 from 8.8% for the prior year's three months and decreased to 8.5% for the six months ended April 30, 2002 from 9.2% for the prior year's six months. Such expenses increased during the three and six months ended April 30, 2002 by $12.8 million and $22.2 million, respectively, compared to the same periods last year. The percentage decline for the three and six months ended April 30, 2002 was due to the increased deliveries. The dollar increase in selling, general, and administrative is primarily due to a full six months of expenses from Washington Homes, Inc. and the addition of Forecast Homes. Land Sales and Other Revenues: Land sales and other revenues consist primarily of land and lot sales. A breakout of land and lot sales is set forth below: Three Months Ended Six Months Ended April 30, April 30, ------------------ ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Land and Lot Sales................ $18,118 $ 1,072 $18,539 $ 4,238 Cost of Sales..................... 15,797 928 16,079 3,829 -------- -------- -------- -------- Land and Lot Sales Gross Margin... 2,321 144 2,460 409 Interest Expense.................. 584 56 648 289 -------- -------- -------- -------- Land and Lot Sales Profit Before Tax...................... $ 1,737 $ 88 $ 1,812 $ 120 ======== ======== ======== ======== 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 six months ended April 30, 2002 financial services provided a $3.6 million and $7.2 million profit before income taxes compared to a profit of $2.0 million and $3.8 million for the same periods in 2001. These increases are primarily due to reduced costs, increased mortgage loan amounts, and the addition of mortgage operations from the merger with Washington Homes and the acquisition of Forecast Homes. In addition to our wholly-owned mortgage subsidiaries, customers obtained mortgages from our mortgage joint ventures in our Texas division in 2001 and our Forecast division in 2002. In 2002 our Texas homebuyers obtained mortgages from our wholly-owned mortgage originator. Corporate General and Administrative Corporate general and administrative expenses include the operations at our headquarters in Red Bank, New Jersey. Such expenses include our executive offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, construction services, and administration of insurance, quality, and safety. As a percentage of total revenues such expenses decreased to 1.9% for the three months ended April 30, 2002 from 2.3% for the prior year's three months and decreased to 2.1% for the six months ended April 30, 2002 from 2.8% for the prior year's six months. Corporate general and administrative expenses increased $1.2 million and $2.2 million during the three and six months ended April 30, 2002 compared to the same periods last year. The percentage decline is primarily attributed to the increase in housing operations. Increases in corporate general and administrative dollar expenses are primarily attributed to higher employee incentives due to higher return on equity. Interest Interest expense includes housing and land and lot interest. Interest expense is broken down as follows: Three Months Ended Six Months Ended April 30, April 30, ------------------ ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Sale of Homes.............. $ 12,218 $ 13,893 $ 25,856 $ 23,165 Land and Lot Sales......... 584 56 648 289 -------- -------- -------- -------- Total...................... $ 12,802 $ 13,949 $ 26,504 $ 23,454 ======== ======== ======== ======== Housing interest as a percentage of sale of homes revenues decreased to 2.3% and 2.7% for the three and six months ended April 30, 2002, respectively, compared to 3.5% and 3.4% for the three and six months ended April 30, 2001, respectively. These decreases are primarily the result of quicker inventory turnover. Inventory turnover is up as a result of the acquisition of Forecast and the merger with Washington Homes where a larger portion of their purchases are finished lots requiring shorter holding periods until homes are delivered. Other Operations Other operations consist primarily of miscellaneous residential housing operations expenses, senior residential property operations, amortization of senior and senior subordinated note issuance expenses, amortization of goodwill (in 2001) earnout payments from homebuilding company acquisitions, employee stock bonus program, amortization of the Forecast consultant's agreements and right of first refusal agreement, expenses related to exiting our Mid South market, and corporate owned life insurance loan interest. 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. $272,000 and $577,000 was charged against the reserve during the three and six months ended April 30, 2002. At April 30, 2002 $1.8 million has been charged against termination costs relating to the termination of 63 associates and $0.8 million has been charged against closing and relocation costs. Recent Accounting Pronouncement In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach. We adopted SFAS 142 on November 1, 2001. As a result, goodwill amortization of $958,000 and $1,627,000 which was incurred in the three and six months ended April 30, 2001 will no longer be incurred in fiscal 2002. Total Taxes Total taxes as a percentage of income before taxes amounted to approximately 39.1% and 38.5% for the six months ended April 30, 2002 and 2001, respectively. The increase in this percentage from 2001 to 2002 is primarily attributed to an increase in the effective federal income tax rate. The increased effective rate is due primarily to higher amounts of expenses in 2002 not deductible for federal taxes and a reduced effect of our senior rental tax credits. Although the credits are the same in 2002 and 2001, they reduce our effective tax rate less when pretax profits are higher. 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 many of the components used to construct our homes. These prices usually are applicable for a specified number of residential buildings or for a time period of between four to twelve months. Construction costs for residential buildings represent approximately 58% of our homebuilding cost of sales. Mergers and Acquisitions On January 23, 2001 we merged with Washington Homes, Inc. for a total purchase price of $87.4 million, of which $38.5 million was paid in cash and 6,352,900 shares of our Class A common stock were issued. On January 10, 2002 we acquired The Forecast Group, L.P. for an estimated purchase price of $196.5 million, of which $151.6 million was paid in cash and 2,208,738 shares of our Class A common stock were issued. The addition of Forecast operations for slightly more than three full quarters is expected to increase revenues approximately 30% in fiscal 2002 from fiscal 2001. Safe Harbor Statement Certain statements contained 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 to differ materially. Such risks, uncertainties and other factors include, but are not limited to: . Changes in general economic and market conditions . Changes in interest rates and the availability of mortgage financing . Changes in costs and availability of material, supplies and labor . General competitive conditions . The availability of capital . The ability to successfully effect acquisitions These risks, uncertainties, and other factors are described in detail in Item 1 and 2 Business and Properties in our Form 10-K for the year ended October 31, 2001. Item 4. Submission of Matters to a Vote of Security Holders We held our annual stockholders meeting on March 8, 2002 at 10:30 a.m. at the offices of Simpson Thacher & Bartlett, 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. The elected Directors were: .. Kevork S. Hovnanian .. Ara K. Hovnanian .. Paul W. Buchanan .. Geaton A. DeCesaris, Jr. .. Arthur Greenbaum .. Desmond P. McDonald .. Peter S. Reinhart .. John J. Robbins .. J. Larry Sorsby .. Stephen D. Weinroth . Ratification of selection of Ernst & Young, LLP as certified independent accountants for fiscal year ending October 31, 2002. .. Votes For Class A 16,725,359 Class B 72,544,760 .. Votes Against Class A 198,509 Class B 6,000 .. Abstain Class A 4,342 Class B 9,970 Part II. Other Information Item 6b. Reports on Form 8-K. (i) 8-K/A filed on February 18, 2002 amended the 8-K filed on January 24, 2002. This amendment sets forth the information required by Items 7(a) and 7(b) omitted from the Form 8-K. (ii) 8-K filed on March 21, 2002 to report the offering of $100,000,000 Senior Notes due 2012 and $150,000,000 Senior Subordinated Notes due 2012. 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: June 13, 2002 /S/J. LARRY SORSBY J. Larry Sorsby, Executive Vice President and Chief Financial Officer DATE: June 13, 2002 /S/PAUL W. BUCHANAN Paul W. Buchanan, Senior Vice President Corporate Controller