10-Q 1 f10q702.txt FORM 10Q 7/31/02 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 JULY 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 Section l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 23,159,119 Class A Common Shares and 7,444,430 Class B Common Shares were outstanding as of September 3, 2002 HOVNANIAN ENTERPRISES, INC. FORM 10Q INDEX PAGE NUMBER PART I. Financial Information Item l. Consolidated Financial Statements: Consolidated Balance Sheets at July 31, 2002 (unaudited) and October 31, 2001 3 Consolidated Statements of Income for the three and nine months ended July 31, 2002 and 2001 (unaudited) 5 Consolidated Statements of Stockholders' Equity for the nine months ended July 31, 2002 (unaudited) 6 Consolidated Statements of Cash Flows for the nine months ended July 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 17 PART II. Other Information Item 6(a). Exhibits (i) Exhibit 10(a) Amended and Restated Credit Agreement dated June 21, 2002. (ii) Exhibit 10(b) $110,000,000 K. Hovnanian Mortgage, Inc. Revolving Credit Agreement dated June 7, 2002. (iii) Exhibit 10(c) First Amendment to K. Hovnanian Mortgage, Inc. Revolving Credit Agreement dated July 25, 2002. (iv) Exhibit 99(a) Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. (v) Exhibit 99(b) Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. Item 6(b). No reports on Form 8K have been filed during the quarter for which this report is filed. Signatures 31 Certifications 32 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands)
July 31, October 31, ASSETS 2002 2001 ----------- ----------- (unaudited) Homebuilding: Cash and cash equivalents....................... $ 97,366 $ 10,173 ----------- ----------- Inventories - At the lower of cost or fair value: Sold and unsold homes and lots under development.................................. 890,942 593,149 Land and land options held for future development or sale......................... 173,900 146,965 ----------- ----------- Total Inventories........................... 1,064,842 740,114 ----------- ----------- Receivables, deposits, and notes................ 56,675 75,802 ----------- ----------- Property, plant, and equipment - net............ 17,634 30,756 ----------- ----------- Senior residential rental properties - net....... 9,600 9,890 ----------- ----------- Prepaid expenses and other assets............... 79,953 46,178 ----------- ----------- Goodwill........................................ 82,441 32,618 ----------- ----------- Total Homebuilding.......................... 1,408,511 945,531 ----------- ----------- Financial Services: Cash and cash equivalents....................... 6,271 5,976 Mortgage loans held for sale.................... 62,572 105,567 Other assets.................................... 10,162 6,465 ----------- ----------- Total Financial Services.................... 79,005 118,008 ----------- ----------- Income Taxes Receivable - Including deferred tax benefits.................................. 2,327 719 ----------- ----------- Total Assets...................................... $1,489,843 $1,064,258 =========== =========== See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands)
July 31, October 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001 ----------- ----------- (unaudited) Homebuilding: Nonrecourse land mortgages........................ $ 8,950 $ 10,086 Accounts payable and other liabilities............ 187,522 124,125 Customers' deposits............................... 43,542 39,114 Nonrecourse mortgages secured by operating properties...................................... 3,299 3,404 ----------- ----------- Total Homebuilding............................ 243,313 176,729 ----------- ----------- Financial Services: Accounts payable and other liabilities............ 4,998 5,264 Mortgage warehouse line of credit................. 57,238 98,305 ----------- ----------- Total Financial Services...................... 62,236 103,569 ----------- ----------- Notes Payable: Term loan......................................... 115,000 Senior notes...................................... 396,270 296,797 Senior Subordinated notes......................... 150,000 Subordinated notes................................ 99,747 Accrued interest.................................. 15,388 11,770 ----------- ----------- Total Notes Payable........................... 676,658 408,314 ----------- ----------- Total Liabilities............................. 982,207 688,612 ----------- ----------- 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 27,186,408 shares at July 31, 2002 and 24,599,379 shares at October 31, 2001 (including 4,295,621 shares at July 2002 and 4,195,621 in October 2001 held in Treasury).................................... 272 246 Common Stock,Class B,$.01 par value-authorized 13,000,000 shares; issued 7,792,394 shares at July 31, 2002 and 7,818,927 shares at October 31, 2001 (including 345,874 shares at July 2002 and October 2001 held in Treasury).... 78 78 Paid in Capital................................... 150,666 100,957 Retained Earnings................................. 393,364 310,106 Deferred Compensation............................. (41) (127) Treasury Stock - at cost.......................... (36,703) (35,614) ----------- ----------- Total Stockholders' Equity.................... 507,636 375,646 ----------- ----------- Total Liabilities and Stockholders' Equity.......... $1,489,843 $1,064,258 =========== =========== See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Per Share Data) (Unaudited)
Three Months Ended Nine Months Ended July 31, July 31, -------------------- ---------------------- 2002 2001 2002 2001 --------- --------- ---------- ---------- Revenues: Homebuilding: Sale of homes......................$ 681,329 $ 497,291 $1,656,813 $1,173,997 Land sales and other revenues...... 12,651 2,477 34,564 9,012 --------- --------- ---------- ---------- Total Homebuilding............... 693,980 499,768 1,691,377 1,183,009 Financial Services................... 10,656 9,482 28,319 21,769 --------- --------- ---------- ---------- Total Revenues................... 704,636 509,250 1,719,696 1,204,778 --------- --------- ---------- ---------- Expenses: Homebuilding: Cost of sales...................... 539,676 398,601 1,327,685 938,498 Selling, general and administrative 52,882 38,808 138,177 101,908 Inventory impairment loss.......... 426 412 2,755 1,350 --------- --------- ---------- ---------- Total Homebuilding............... 592,984 437,821 1,468,617 1,041,756 Financial Services................... 5,694 6,050 16,156 14,546 Corporate General and Administrative. 12,195 10,647 33,700 29,926 Interest............................. 15,849 13,485 42,353 36,939 Other Operations..................... 3,953 4,358 12,644 6,488 Restructuring Charges/Asset Writeoff. 12,000 500 12,000 2,980 Goodwill Amortization................ 1,104 2,731 --------- --------- ---------- ---------- Total Expenses................... 642,675 473,965 1,585,470 1,135,366 --------- --------- ---------- ---------- Income Before Income Taxes and Extraordinary Loss................... 61,961 35,285 134,226 69,412 --------- --------- ---------- ---------- State and Federal Income Taxes: State................................ 1,679 2,246 5,086 3,673 Federal.............................. 21,095 12,027 45,300 23,744 --------- --------- ---------- ---------- Total Taxes........................ 22,774 14,273 50,386 27,417 --------- --------- ---------- ---------- Extraordinary Loss from Extinguishment Of Debt, Net of Income Taxes......... (582) --------- --------- ---------- ---------- Net Income.............................$ 39,187 $ 21,012 $ 83,258 $ 41,995 ========= ========= ========== ========== Per Share Data: Basic: Income per common share before Extraordinary loss.................$ 1.27 $ 0.74 $ 2.78 $ 1.60 Extraordinary loss................... (.02) --------- --------- ---------- ---------- Net Income...........................$ 1.27 $ 0.74 $ 2.76 $ 1.60 ========= ========= ========== ========== Weighted average number of common shares outstanding................. 30,877 28,375 30,188 26,312 Assuming dilution: Income per common share before Extraordinary loss.................$ 1.20 $ 0.71 $ 2.63 $ 1.54 Extraordinary loss................... (.02) --------- --------- ---------- ---------- Net Income...........................$ 1.20 $ 0.71 $ 2.61 $ 1.54 ========= ========= ========== ========== Weighted average number of common shares outstanding................ 32,703 29,623 31,902 27,309 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 45,691 45,713 Sale of common stock under Employee stock option plan.................... 288,550 3 3,036 3,039 Stock bonus plan.......... 63,208 1 982 983 Conversion of Class B to Class A Common Stock.... 26,533 (26,533) Deferred compensation..... 86 86 Treasury stock purchases.. (100,000) (1,089) (1,089) Net Income................ 83,258 83,258 ----------- ------ ----------- ------ ------- -------- -------- -------- -------- Balance, July 31, 2002.... 22,890,787 $ 272 7,446,520 $ 78 $150,666 $393,364 $ (41) $(36,703) $507,636 (Unaudited) =========== ====== =========== ====== ======= ======== ======== ======== ======== See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
Nine Months Ended July 31, --------------------- 2002 2001 ---------- ---------- Cash Flows From Operating Activities: Net Income.......................................... $ 83,258 $ 41,995 Adjustments to reconcile net income to net cash Provided by (used in) operating activities: Depreciation.................................... 5,003 5,901 Amortization of goodwill........................ - 2,731 Loss (gain) on sale and retirement of property and assets.................................... 11,858 (248) Extraordinary loss from extinguishment of debt net of income taxes........................... 582 Deferred income taxes........................... (5,742) (597) Impairment losses............................... 2,755 1,350 Decrease (increase) in assets: Mortgage notes receivable..................... 43,162 (44,163) Receivables, prepaids and other assets........ 8,617 (7,602) Inventories................................... (80,489) (26,482) Increase (decrease) in liabilities: State and Federal income taxes................ 5,521 2,932 Tax effect from exercise of stock options..... (1,074) (566) Customers' deposits........................... 4,102 7,462 Interest and other accrued liabilities........ 17,960 2,915 Post development completion costs............. (901) 4,440 Accounts payable.............................. 7,769 7,639 ---------- ---------- Net cash provided by (used in) operating activities................................ 102,381 (2,293) ---------- ---------- Cash Flows From Investing Activities: Net Proceeds from sale of property and assets....... 611 3,127 Purchase of property,equipment and other fixed assets............................................ (2,730) (3,439) Acquisition of homebuilding companies............... (140,130) (37,741) Investment in and advances to unconsolidated affiliates........................................ (8,679) (462) ---------- ---------- Net cash (used in) investing activities..... (150,928) (38,515) ---------- ---------- Cash Flows From Financing Activities: Proceeds from mortgages and notes................... 1,587,017 1,153,357 Proceeds from senior debt........................... 99,152 Proceeds from senior subordinated debt.............. 150,000 Principal payments on mortgages and notes...........(1,603,320)(1,095,433) Principal payments on subordinated debt............. (99,747) Purchase of treasury stock.......................... (1,089) (2,267) Proceeds from sale of stock and employee stock plan. 4,022 3,210 ---------- ---------- Net cash provided by financing activities... 136,035 58,867 ---------- ---------- Net Increase In Cash and Cash Equivalents............. 87,488 18,059 Cash and Cash Equivalents Balance, Beginning Of Period................................. 16,149 43,253 ---------- ---------- Cash and Cash Equivalents Balance, End Of Period...... $ 103,637 $ 61,312 ========== ========== 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 accounting principles generally accepted in the United States for interim financial information and with the instructions to form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments for interim periods presented have been made, which include only normal recurring accruals and deferrals necessary for a fair presentation of 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 Nine Months Ended July 31, July 31, ------------------- ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (Dollars in Thousands) Interest Capitalized at Beginning of Period.........$ 24,876 $ 29,749 $ 25,124 $ 25,694 Plus Acquired Entity Interest. 3,604 Plus Interest Incurred(1)(2).. 15,746 11,903 42,002 35,808 Less Interest Expensed(2)..... 15,849 13,485 42,353 36,939 -------- -------- -------- -------- Interest Capitalized at End of Period (2).......... $ 24,773 $ 28,167 $ 24,773 $ 28,167 ======== ======== ======== ======== (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 July 31, 2002 and October 31, 2001 amounted to $17,278,000 and $18,367,000, respectively. Rental property accumulated depreciation at July 31, 2002 and October 31, 2001 amounted to $2,952,000 and $2,688,000, respectively. 4. In accordance with Financial Accounting Standards No. 144 ("SFAS 144") "Accounting for the Impairment of or Disposal of Long Lived Assets", we record impairment losses on inventories related to communities under development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. During the three months ended July 31, 2001 we recorded a $131,000 impairment loss on land in North Carolina. 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. During the three and nine months ended July 31, 2002 we wrote off costs in New Jersey, North Carolina, Metro D. C., and Poland amounting to $426,000 and $2,755,000, respectively. Costs in the amount of $281,000 and $1,219,000 were written off during the three and nine months ended July 31, 2001, respectively, in New Jersey, North Carolina, Metro D. C., and California. Residential inventory SFAS 144 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 July 31, 2002 and October 31, 2001, respectively, we are obligated under various performance letters of credit amounting to $81,071,000 and $51,647,000. 6. Our credit facility has been amended as of June 21, 2002. Pursuant to the amendment, our credit line was extended through July 2005. Interest is payable monthly and at various rates of either the prime rate plus .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 July 31, 2002 and October 31, 2001, there was no outstanding balance. Our mortgage warehouse line of credit has been amended as of June 7, 2002. Pursuant to the amendment, our credit line was extended through June 2003 and we have the option to borrow up to $150,000,000. Interest is payable monthly at the Federal Funds Rate plus 1.375%. As of July 31, 2002 and October 31, 2001 borrowings were $57,238,000 and $98,305,000, respectively. 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 11 below. On March 27, 2002 we paid down the Term Loan by $50,000,000. 9. Per Share Calculations - Statement of Financial Accounting Standards (FSAS) No. 128 "Earnings Per Share" requires the presentation of basic earnings per share and diluted earnings per share. Basic earnings per share is computed using the weighted average number of shares outstanding. Diluted earnings per common share is computed using the basic weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock. 10. Recent Accounting Pronouncements - In May 2002, the Financial Accounting Standards Board issued (SFAS) No. 145, "Reporting Gains and Losses from Extinguishment of Debt", which rescinded SFAS No. 4, No. 44, and No. 64 and amended SFAS No. 13. The new standard addresses the income statement classification of gains or losses from the extinguishment of debt and criteria for classification as extraordinary items. We will adopt SFAS No. 145 effective for our fiscal year beginning November 1, 2002. We do not anticipate that the adoption of the new statement will have a material effect on the financial position or results of operations of our Company. 11. 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 The Forecast Group, LP ("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, but reviewed for impairment.The following unaudited pro forma financial data for the three and nine months ended July 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 Nine Months Ended July 31, July 31, ------------------------------------------ 2002 2001 2002 2001 -------- -------- ---------- ---------- Revenues.........................$704,636 $636,958 $1,784,045 $1,606,745 Expenses......................... 642,675 585,109 1,644,455 1,502,298 Income Taxes..................... 22,774 20,915 52,484 40,722 Extraordinary Loss from Extinguishment Of Debt, Net of Taxes...................... (582) -------- -------- --------- -------- Net Income.......................$ 39,187 $ 30,934 $ 86,524 $ 63,725 ======== ======== ========= ======== Diluted Net Income Per Common Share $ 1.20 $ 0.97 $ 2.66 $ 2.03 ======== ======== ========= ======== 12. 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. $94,000 and $671,000 was charged against the reserve during the three and nine months ended July 31, 2002. At July 31, 2002 $1.8 million has been charged against termination costs relating to the termination of 63 associates and $0.9 million has been charged against closing and relocation costs. 13. Asset Write Off - We wrote off costs during the three months ended July 31, 2002 associated with SAP, our enterprise-wide operating software, totaling $12.0 million pretax included in Restructuring Charges/Asset Write Off in the accompanying Consolidated Statements of Income or $7.6 million after taxes equal to $0.23 per fully diluted share. These unamortized costs are those associated with the development of the SAP system. We were not successful implementing SAP, due to the complexities and limitations in the software program. We have $2.5 million initiative costs remaining, all of which will be amortized over the remaining life of the communities using SAP software, which are scheduled to be substantially complete by the end of 2003. 14. Intangible Assets - As reported on the balance sheet we have goodwill totaling $82.4 million. We have no other intangible assets. During the nine months ended July 31, 2002 we added $49.8 million of goodwill as a result of the Forecast acquisition. Goodwill amortization deductible for income tax purposes is approximately $1,426,000 and $3,383,000 for the three and nine months ended July 31, 2002, respectively. After income taxes the goodwill amortization for the three and nine months ended July 31, 2001, amounted to approximately $679,000 and $1,680,000, which if eliminated from net income would have increased earnings per share approximately $0.02 and $0.06, 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 July 31, 2002. 15. 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 July 31, 2002 had issued and outstanding $400,000,000 face value 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 JULY 31, 2002 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ----- ----- ---------- ASSETS Homebuilding......................$ 13 $ 124,067 $1,276,891 $ 7,540 $ $1,408,511 Financial Services................ (583) 79,588 79,005 Income Taxes (Payables)Receivables (6,613) 3,494 7,666 (2,220) 2,327 Investments in and amounts due to and from consolidated subsidiaries.................... 514,236 563,917 (784,438) 866 (294,581) -------- ---------- ---------- ------------ ---- ------ ---------- Total Assets...................... $507,636 $ 691,478 $ 499,536 $ 85,774 $(294,581) $1,489,843 ======== ========== ========== ============ ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Homebuilding...................... $ $ 30,991 $ 212,266 $ 56 $ $ 243,313 Financial Services................ 62,236 62,236 Notes Payable..................... 661,270 15,388 676,658 Income Taxes Payable.............. Stockholders' Equity.............. 507,636 (783) 271,882 23,482 (294,581) 507,636 -------- ---------- ---------- ------------ ---- ------ ---------- Total Liabilities and Stockholders' Equity.......................... $507,636 $ 691,478 $ 499,536 $ 85,774 $(294,581) $1,489,843 ======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED BALANCE SHEET OCTOBER 31, 2001 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---- ------ ---------- Assets Homebuilding.......................$ 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) $1,064,258 ======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS THREE MONTHS ENDED JULY 31, 2002 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ----- ----- ---------- Revenues: Homebuilding.....................$ $ 295 $ 693,357 $ 7,807 $ (7,479) $ 693,980 Financial Services............... 2,270 8,386 10,656 Intercompany Charges............. 54,869 (10,326) (44,543) Equity In Pretax Income of Consolidated Subsidiaries...... 61,961 (61,961) ------- ---------- ---------- ------------ ----- ----- ---------- Total Revenues................ $61,961 $ 55,164 $ 685,301 $ 16,193 $(113,983) $ 704,646 ------- ---------- ---------- ------------ ----- ----- ---------- Expenses: Homebuilding..................... 55,164 644,464 322 (62,969) 636,981 Financial Services............... 683 5,266 (255) 5,694 ------- ---------- ---------- ------------ ----- ----- ---------- Total Expenses................. 55,164 645,147 5,588 (63,224) 642,675 ------- ---------- ---------- ------------ ----- ----- ---------- Income Before Income Taxes......... 61,961 - 40,154 10,605 (50,759) 61,961 State and Federal Income Taxes..... 22,774 (26) 14,971 3,908 (18,853) 22,774 Extraordinary Loss from Extinguishment of Debt, Net of Income Taxes.................... ------- ---------- ---------- ------------ ----- ----- ---------- Net Income ....................... $39,187 $ 26 $ 25,183 $ 6,697 $ (31,906) $ 39,187 ======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS THREE MONTHS ENDED JULY 31, 2001 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ----- ----- ---------- Revenues: Homebuilding.....................$ $ 17 $ 498,857 $ 9,837 $ (8,943) $ 499,768 Financial Services............... 4,175 5,307 9,482 Intercompany Charges............. 31,456 2,665 (34,121) Equity In Pretax Income of Consolidated Subsidiaries...... 35,285 (35,285) ------- ---------- ---------- ------------ ----- ----- ---------- Total Revenues................ $35,285 $ 31,473 $ 505,697 $ 15,144 $ (78,349) $ 509,250 ------- ---------- ---------- ------------ ----- ----- ---------- Expenses: Homebuilding.................... 30,857 476,021 1,033 (39,996) 467,915 Financial Services............... 2,574 4,280 (804) 6,050 ------- ---------- ---------- ------------ ----- ----- ---------- Total Expenses................. 30,857 478,595 5,313 (40,800) 473,965 ------- ---------- ---------- ------------ ----- ----- ---------- Income Before Income Taxes......... 35,285 616 27,102 9,831 (37,549) 35,285 State and Federal Income Taxes..... 14,273 257 11,139 3,699 (15,095) 14,273 ------- ---------- ---------- ------------ ----- ----- ---------- Net Income ....................... $21,012 $ 359 $ 15,963 $ 6,132 $ (22,454) $ 21,012 ======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS NINE MONTHS ENDED JULY 31, 2002 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ----- ----- ---------- Revenues: Homebuilding....................$ $ 565 $1,689,257 $ 20,475 $ (18,920) $1,691,377 Financial Services............... 4,956 23,363 28,319 Intercompany Charges............. 119,275 (3,663) (115,612) Equity In Pretax Income of Consolidated Subsidiaries......134,226 (134,226) ------- ---------- ---------- ------------ ----- ----- ---------- Total Revenues................$134,226 $119,840 $1,690,550 $ 43,838 $(268,758) $1,719,696 ------- ---------- ---------- ------------ ----- ----- ---------- Expenses: Homebuilding..................... 119,840 1,587,610 1,981 (140,117) 1,569,314 Financial Services............... 1,768 15,437 (1,049) 16,156 ------- ---------- ---------- ------------ ----- ----- ---------- Total Expenses................. 119,840 1,589,378 17,418 (141,166) 1,585,470 ------- ---------- ---------- ------------ ----- ----- ---------- Income Before Income Taxes.........134,226 101,172 26,420 (127,592) 134,226 State and Federal Income Taxes..... 50,386 (180) 37,982 10,058 (47,860) 50,386 Extraordinary Loss From Extinguishment of Debt, Net of Income Taxes..................... (582) (582) 582 (582) ------- ---------- ---------- ------------ ----- ----- ---------- Net Income.........................$83,258 $ (402) $ 63,190 $ 16,362 $ (79,150) $ 83,258 ======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS NINE MONTHS ENDED JULY 31, 2001 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ----- ----- ---------- Revenues: Homebuilding.....................$ $ 446 $1,178,977 $ 20,369 $ (16,783) $1,183,009 Financial Services................ 9,410 12,359 21,769 Intercompany Charges............. 91,675 3,098 (94,773) Equity In Pretax Income of Consolidated Subsidiaries...... 69,412 (69,412) ------- ---------- ---------- ------------ ----- ----- ---------- Total Revenues................ $69,412 $ 92,121 $1,191,485 $ 32,728 $(180,968) $1,204,778 ------- ---------- ---------- ------------ ----- ----- ---------- Expenses: Homebuilding..................... 90,354 1,135,160 3,422 (108,116) 1,120,820 Financial Services............... 5,962 9,582 (998) 14,546 ------- ---------- ---------- ------------ ----- ----- ---------- Total Expenses................. 90,354 1,141,122 13,004 (109,114) 1,135,366 ------- ---------- ---------- ------------ ----- ----- ---------- Income Before Income Taxes......... 69,412 1,767 50,363 19,724 (71,854) 69,412 State and Federal Income Taxes..... 27,417 774 20,020 7,510 (28,304) 27,417 ------- ---------- ---------- ------------ ----- ----- ---------- Net Income.........................$41,995 $ 993 $ 30,343 $ 12,214 $ (43,550) $ 41,995 ======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS NINE MONTHS ENDED JULY 31, 2002 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ --- ------- ---------- Cash Flows From Operating Activities: Net Income.........................$ 83,258 $ (402) $ 63,190 $ 16,362 $ (79,150) $ 83,258 Adjustments to reconcile net income to net cash (Used In) Provided By operating activities.......... 99,463 11,817 (182,793) 11,486 79,150 19,123 -------- --------- ---------- ------------ --- ------- ---------- Net Cash (Used In) Provided By Operating Activities........... 182,721 11,415 (119,603) 27,848 102,381 Net Cash (Used In) Investing Activities............... (46,087) (1,929) (103,096) 184 (150,928) Net Cash (Used In) Provided By Financing Activities............... (1,089) 264,726 (85,867) (41,735) 136,035 Intercompany Investing and Financing Activities - Net...................(135,545) (188,403) 310,301 13,647 -------- --------- ---------- ------------ --- ------- ---------- Net Increase (Decrease) In Cash and Cash Equivalents................... 85,809 1,735 (56) 87,488 Cash and Cash Equivalents Balance, Beginning of Period................ 10 (5,840) 15,616 6,363 16,149 -------- --------- ---------- ------------ --- ------- ---------- Cash and Cash Equivalents Balance, End of Period......................$ 10 $ 79,969 $ 17,351 $ 6,307 $ $ 103,637 ======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS NINE MONTHS ENDED JULY 31, 2001 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ --- ------- ---------- Cash Flows From Operating Activities: Net Income.........................$ 41,995 $ 993 $ 30,343 $ 12,214 $ (43,550) $ 41,995 Adjustments to reconcile net income to net cash (Used In) Provided By operating activities.......... 95,870 88,304 (224,079) (47,933) 43,550 (44,288) -------- --------- ---------- ------------ --- ------- ---------- Net Cash (Used In) Provided By Operating Activities........... 137,865 89,297 (193,736) (35,719) (2,293) Net Cash (Used In) Investing Activities............... (48,453) (2,657) 11,697 898 (38,515) Net Cash Provided By(Used In) Financing Activities............... (1,667) 78,943 (59,409) 41,000 58,867 Intercompany Investing and Financing Activities - Net................... (87,672) (190,125) 278,852 (1,055) -------- --------- ---------- ------------ --- ------- ---------- Net Increase (Decrease) In Cash and Cash Equivalents................... 73 (24,542) 37,404 5,124 18,059 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......................$ 10 $ (6,913) $ 59,910 $ 8,305 $ $ 61,312 ======== ========= ========== ============ ========== ==========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES Use of Estimates - 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. Business Combinations - When we make an acquisition of another company, we use the purchase method of accounting in accordance with Financial Accounting Standards No. 141 ("SFAS 141") "Business Combinations". Under SFAS No. 141 we record as our cost the acquired assets less liabilities assumed. Any difference between the cost of an acquired company and the sum of the fair values of tangible and identified intangible assets less liabilities is recorded as goodwill. The reported income of an acquired company includes the operations of the acquired company after acquisition, based on the acquisition costs. Income Recognition from Home Sales - Income from home sales is recorded when each home is closed, title is conveyed to the buyer, and the sales price has been paid. Income Recognition from Mortgage Loans - Profits and losses relating to the sale of mortgage loans are recognized when all indications of legal control pass to the buyer and the sales price is collected. Inventories - For inventories of communities under development, a loss is recorded when events and circumstances indicate impairment and the undiscounted future cash flows generated are less than the related carrying amounts. The impairment loss is based on expected revenue, cost to complete including interest, and selling costs. Inventories and long-lived assets held for sale are recorded at the lower of cost or fair value less selling costs. Fair value is defined in Statement of Financial Accounting Standard (SFAS)No. 144 "Accounting for the Impairment of or Disposal of Long-Lived Assets" as the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. SFAS No. 144 provides accounting guidance for financial accounting and reporting for impairment or disposal of long-lived assets. Construction costs are accumulated during the period of construction and charged to cost of sales under specific identification methods. Land, land development, and common facility costs are allocated based on buildable acres to product types within each community, then amortized equally based upon the number of homes to be constructed in the community. Interest costs related to properties under development are capitalized during the land development and home construction period and expensed along with the associated cost of sales as the related inventories are sold. The cost of land options is capitalized when incurred and either included as part of the purchase price when the land is acquired or charged to operations when we determine we will not exercise the option. Intangible Assets - The intangible asset recorded on our balance sheet is goodwill resulting from company acquisitions. In accordance with the Financial Accounting Standards No. 142 ("SFAS No. 142") " Goodwill and Other Intangible Assets", we no longer amortize goodwill, but instead review goodwill for impairment. The impairment test uses a fair value approach rather than the undiscounted cash flows approach. Post Development Completion Costs - In those instances where a development is substantially completed and sold and we have additional construction work to be incurred, an estimated liability is provided to cover the cost of such work. CAPITAL RESOURCES AND LIQUIDITY Our cash uses during the nine months ended July 31, 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. At July 31, 2002 we had approximately $90.0 million of excess cash. Management anticipates using the excess cash to pay down long term debt, grow existing operations, and fund future acquisitions. 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 July 31, 2002, 558,700 have been purchased under this program of which 100,000 were repurchased during the nine months ended July 31, 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 2005. 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 2005 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 July 31, 2002, there were no borrowings under the Agreement. 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 July 31, 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 July 31, 2002 borrowings under the Term Loan were $115,000,000. Our mortgage banking subsidiary borrows up to $150,000,000 under a bank warehousing arrangement that 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. As of July 31, 2002 borrowings under the greement were $57,238,000. Total inventory increased $324,728,000 during the nine months ended July 31, 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 July 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, subordinated indebtedness, and cash flow generated from operations. The following table summarizes housing lots included in our total residential real estate. The July 31, 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 ----------- ------- ---------- --------- ----------- ----------- July 31, 2002: Northeast Region.. 28 5,972 1,548 4,424 12,196 18,168 North Carolina.... 64 5,785 564 5,221 1,943 7,728 Metro D.C......... 28 3,301 920 2,381 6,915 10,216 California........ 41 5,660 1,007 4,653 2,798 8,458 Texas............. 37 2,415 295 2,120 734 3,149 Mid South......... 1 393 39 354 -- 393 ----------- ------- ---------- ---------- ---------- ----------- 199 23,526 4,373 19,153 24,586 48,112 =========== ======= ========== ========== ========== =========== Owned.......... 11,308 3,512 7,796 2,504 13,812 Optioned....... 12,218 861 11,357 22,082 34,300 ------- ---------- ---------- ---------- ----------- Total........ 23,526 4,373 19,153 24,586 48,112 ======= ========== ========== ========== =========== 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: July 31, October 31, 2002 2001 ----------------------- ----------------------- Unsold Unsold Homes Models Total Homes Models Total ------ ------ ----- ------ ------ ----- Northeast Region.... 39 48 87 69 48 117 North Carolina...... 173 20 193 205 41 246 Metro D.C........... 32 25 57 27 27 54 California.......... 181 54 235 60 11 71 Texas............... 252 10 262 215 15 230 Mid South........... 21 2 23 54 22 76 Other............... -- -- -- 7 -- 7 ------ ------ ----- ------ ------ ----- Total 698 159 857 637 164 801 ====== ====== ===== ====== ====== ===== Financial Services - Mortgage loans held for sale consist of residential mortgages receivable of which $62,457,000 and $105,174,000 at July 31, 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 NINE MONTHS ENDED JULY 31, 2002 COMPARED TO THE THREE AND NINE MONTHS ENDED JULY 31, 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 as follows: Three Months Ended ------------------------------------------ July 31, July 31, Dollar Percentage 2002 2001 Change Change ------------------------------------------ (Dollars In Thousands) Homebuilding: Sale of homes........ $ 681,329 $ 497,291 $184,038 37.0% Land sales and other revenues........... 12,651 2,477 10,174 410.7% Financial Services... 10,656 9,482 1,174 12.4% ---------- ---------- -------- -------- Total Revenues... $ 704,636 $ 509,250 $195,386 38.4% ========== ========== ======== ======== Nine Months Ended ------------------------------------------ July 31, July 31, Dollar Percentage 2002 2001 Change Change ------------------------------------------ (Dollars In Thousands) Homebuilding: Sale of homes........ $1,656,813 $1,173,997 $482,816 41.1% Land sales and other revenues........... 34,564 9,012 25,552 283.5% Financial Services... 28,319 21,769 6,550 30.1% ---------- --------- -------- -------- Total Revenues... $1,719,696 $1,204,778 $514,918 42.7% ========== ========= ======== ======== Homebuilding: Revenues from the sale of homes increased $184.0 million or 37.0% during the three months ended July 31, 2002, and increased $482.8 million or 41.1% during the nine months ended July 31, 2002 compared to the same periods last year. Revenues from the sale 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 Nine Months Ended July 31, July 31, ------------------- --------------------- 2002 2001 2002 2001 --------- -------- ---------- -------- (Dollars in Thousands) Northeast Region: Housing Revenues..... $177,153 $156,366 $ 455,171 $ 406,692 Homes Delivered...... 570 499 1,469 1,346 North Carolina(2): Housing Revenues..... $ 72,437 $ 85,887 $ 193,902 $ 178,142 Homes Delivered...... 393 487 1,044 1,022 Metro D. C.(2): Housing Revenues..... $110,030 $109,535 $ 258,755 $ 221,343 Homes Delivered...... 386 439 944 938 California(1): Housing Revenues..... $242,631 $ 61,830 $ 535,961 $ 171,483 Homes Delivered...... 926 168 2,094 460 Texas: Housing Revenues..... $ 65,432 $ 62,360 $ 172,778 $ 146,604 Homes Delivered...... 286 286 746 691 Mid South(2): Housing Revenues..... $ 13,646 $ 18,774 $ 39,793 $ 33,697 Homes Delivered...... 86 123 252 226 Other: Housing Revenues..... $ -- $ 2,539 $ 453 $ 16,036 Homes Delivered...... -- 19 6 112 Totals: Housing Revenues..... $681,329 $497,291 $1,656,813 $1,173,997 Homes Delivered...... 2,647 2,021 6,555 4,795 (1) July 31, 2002 includes Forecast deliveries beginning on January 10, 2002. (2) July 31, 2001 includes Washington Homes deliveries beginning on January 24, 2001. The increase in housing revenues was primarily due to the acquisition of Forecast for the third quarter 2002 and the acquisition of Forecast and a full nine months of operations from Washington Homes for the nine months ended July 31, 2002. In addition, these increases were due to increased deliveries in the Northeast Region resulting from a land portfolio acquisition in late March 2002 and increased average sales prices in all our markets except California. California's average sales price is down due to the Forecast Group product being mostly lower priced, first time buyer homes. Important indicators of our future results are recently signed contracts and home contract backlog for future deliveries. Our sales contracts and homes in contract (using base sales prices) by market area is set forth below: Sales Contracts for the Nine Months Ended Contract Backlog July 31, as of July 31, ------------------------- --------------------- 2002 2001 2002 2001 ----------- --------- --------- --------- (Dollars in Thousands) Northeast Region: Dollars.............$ 423,227 $ 400,199 $ 442,037 $354,132 Homes............... 1,478 1,483 1,578 1,286 North Carolina: Dollars.............$ 198,848 $ 211,007 $ 108,502 $125,823 Homes............... 1,074 1,174 564 669 Metro D.C.: Dollars.............$ 341,919 $ 248,219 $ 292,044 $224,171 Homes............... 1,085 984 920 866 California: Dollars.............$ 634,009 $ 220,961 $ 286,876 $118,981 Homes............... 2,394 658 1,007 349 Texas: Dollars.............$ 171,409 $ 165,160 $ 69,556 $ 85,693 Homes............... 778 781 295 372 Mid South: Dollars.............$ 26,521 $ 36,499 $ 6,456 $ 18,725 Homes............... 169 239 39 112 Other: Dollars.............$ 340 $ 1,578 $ -- $ 1,009 Homes............... 3 46 -- 18 Totals: Dollars.............$1,796,273 $1,283,623 $1,205,471 $928,534 Homes............... 6,981 5,365 4,403 3,672 The following pro forma information for the nine months ended July 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. Total sales contracts were $1,882,706 and $1,688,912 and total homes were 7,379 and 7,303 for the nine months ended July 31, 2002 and 2001, respectively. Total contract backlog was $1,205,471 and $1,050,432 and total homes in backlog were 4,403 and 4,215 as of July 31, 2002 and 2001, respectively. During August 2002 we signed an additional 782 contracts compared to 414 in the same month last year. Cost of sales includes expenses for housing and land and lot sales. A breakout of such expenses for housing sales and housing gross margin is set forth below: Three Months Ended Nine Months Ended July 31, July 31, ------------------- --------------------- 2002 2001 2002 2001 -------- -------- ---------- --------- (Dollars in Thousands) Sale of Homes................ $681,329 $497,291 $1,656,813 $1,173,997 Cost of Sales................ 530,154 397,622 1,303,637 933,690 -------- -------- ---------- --------- Housing Gross Margin......... $151,175 $ 99,669 $ 353,176 $ 240,307 ======== ======== ========== ========== Gross Margin Percentage...... 22.2% 20.0% 21.3% 20.5% Cost of Sales expenses as a percentage of home sales revenues are presented below: Three Months Ended Nine Months Ended July 31, July 31, ------------------- ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Sale of Homes................ 100.0% 100.0% 100.0% 100.0% -------- -------- -------- -------- Cost of Sales: Housing, land & development costs.... 70.7% 72.3% 71.0% 71.6% Commissions............ 2.2% 2.3% 2.2% 2.3% Financing concessions.. 0.9% 1.1% 1.0% 0.9% Overheads.............. 4.0% 4.3% 4.5% 4.7% -------- -------- -------- -------- Total Cost of Sales.......... 77.8% 80.0% 78.7% 79.5% -------- -------- -------- -------- Gross Margin................. 22.2% 20.0% 21.3% 20.5% ======== ======== ======== ======== We sell a variety of home types in various local communities, each yielding a different gross margin. As a result, depending on the mix of both communities and of home types delivered, consolidated quarterly gross margin will fluctuate up or down and may not be representative of the consolidated gross margin for the year. We achieved higher gross margins during the three and nine months ended July 31, 2002 compared to the same period last year. The consolidated gross margin increased 2.2% and 0.8% for the three and nine months ended July 31, 2002. Gross margins increased in our Metro D. C. market, California markets (excluding Forecast communities), and in our highest margin market, the Northeast Region. These increased margins are primarily the result of higher sales prices and increased national contract rebates, while housing costs remained relatively stable. Selling, general, and administrative costs as a percentage of total homebuilding revenues decreased to 7.6% for the three months ended July 31, 2002 from 7.8% for the prior year's three months, and decreased to 8.2% for the nine months ended July 31, 2002 from 8.6% for the prior year's nine months. Such expenses increased during the three and nine months ended July 31, 2002 by $14.1 million and $36.3 million, repsectively, compared to the same periods last year. The percentage decline for the three and nine months ended July 31, 2002 was due to the increased deliveries. The dollar increase in selling, general, and administrataive was primarily due to a full nine months of expenses from Washington Homes, Inc., increased administrataive staff in the Northeast Region, 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 Nine Months Ended July 31, July 31, ------------------ ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Land and Lot Sales................ $ 10,587 $ 1,160 $29,127 $ 5,398 Cost of Sales..................... 9,522 979 24,048 4,808 -------- -------- -------- -------- Land and Lot Sales Gross Margin... 1,065 181 5,079 590 Interest Expense.................. 112 58 760 347 -------- -------- -------- -------- Land and Lot Sales Profit Before Tax...................... $ 953 $ 123 $ 4,319 $ 243 ======== ======== ======== ======== 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 nine months ended July 31, 2002 financial services provided a $5.0 million and $12.2 million profit before income taxes compared to a profit of $3.4 million and $7.2 million for the same period 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 for a full nine months 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. 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 1.7% for the three months ended July 31, 2002 from 2.1% for the prior year's three months and decreased to 2.0% for the nine months ended July 31, 2002 from 2.5% for the prior year's nine months. Corporate general and administrative expenses increased $1.5 million and $3.8 million during the three and nine months ended July 31, 2002, respectively, 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 a higher return on equity. Interest Interest expense includes housing and land and lot interest. Interest expense is broken down as follows: Three Months Ended Nine Months Ended July 31, July 31, ------------------ ------------------ 2002 2001 2002 2001 -------- -------- -------- -------- Sale of Homes.............. $ 15,737 $13,427 $41,593 $36,592 Land and Lot Sales......... 112 58 760 347 -------- -------- -------- -------- Total...................... $ 15,849 $13,485 $42,353 $36,939 ======== ======== ======== ======== Housing interest as a percentage of sale of homes revenues decreased to 2.3% and 2.5% for the three and nine months ended July 31, 2002, respectively, compared to 2.7% and 3.1% for the three and nine months ended July 31, 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, earnout payments from homebuilding company acquisitions, employee stock bonus program, amortization of the Forecast consultant's agreements and the right of first refusal agreement, expenses related to exiting our Mid South market, and corporate owned life insurance loan interest. For the nine months ended July 31, 2002, other operations increased primarily due to the amortization of the Forecast consulting and right of first refusal agreements (starting in 2002), increased amortization of senior and subordinated note issuance expenses, and increased expenses from the employee stock bonus program. 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. $94,000 and $671,000 was charged against the reserve during the three and nine months ended July 31, 2002, respectively. At July 31, 2002 $1.8 million has been charged against termination costs relating to the termination of 63 associates and $0.9 million has been charged against closing and relocation costs. Asset Write Off We wrote off costs during the three months ended July 31, 2002 associated with SAP, our enterprise-wide operating software, totaling $12.0 million pretax included in Restructuring Charges/Asset Write Off in the accompanying Consolidated Statements of Income or $7.6 million after taxes equal to $0.23 per fully diluted share. These unamortized costs are those associated with the development of the SAP system. We were not successful in implementing SAP, due to the complexities and limitations in the software program. We have $2.5 million initiative costs remaining, all of which will be amortized over the remaining life of the communities using SAP software, which are scheduled to be substantially complete by the end of 2003. We have recently identified an alternative software package that will offer us the information system functionality we need. We are planning to have our first pilot community on line by the end of this calendar year, which will utilize this alternative software package. Recent Accounting Pronouncements 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 $1,104,000 and $2,731,000 which was incurred in the three and nine months ended July 31, 2001, respectively, is no longer incurred in fiscal 2002. In May 2002, the Financial Accounting Standards Board issued (SFAS) No. 145, "Reporting Gains and Losses from Extinguishment of Debt", which rescinded SFAS No. 4, No. 44, and No. 64 and amended SFAS No. 13. The new standard addresses the income statement classification of gains or losses from the extinguishment of debt and criteria for classification as extraordinary items. We will adopt SFAS No. 145 effective for our fiscal year beginning November 1, 2002. We do not anticipate that the adoption of the new standard will have a material effect on the financial position or results of operations of our Company. Total Taxes Total taxes as a percentage of income before taxes amounted to approximately 37.6% and 39.5% for the nine months ended July 31, 2002 and 2001, respectively. The decrease in this percentage from 2001 to 2002 is primarily attributed to a lower state income tax percentage and a decrease in the effective federal income tax rate. The decrease in the state tax percentage was primarily the result of reduced taxes in New Jersey and Maryland which were partially offset by increases in California and Virginia. The decreased federal effective rate is due primarily to a reserve set up in 2001 for potential adjustments. Deferred federal and state income tax assets primarily represent the deferred tax benefits arising from temporary differences between book and tax income which will be recognized in future years as an offset against future taxable income. If for some reason the combination of future years income (or loss) combined with the reversal of the timing differences results in a loss, such losses can be carried back to prior years to recover the deferred tax assets. As a result, management is confident such deferred tax assets are recoverable regardless of future income. Inflation Inflation has a long-term effect on us because increasing costs of land, materials, and labor result in increasing sale prices of our homes. In general, these price increases have been commensurate with the general rate of inflation in our housing markets and have not had a significant adverse effect on the sale of our homes. A significant risk faced by the housing industry generally is that rising house costs, including land and interest costs, will substantially outpace increases in the income of potential purchasers. In recent years, in the price ranges in which our homes sell, we have not found this risk to be a significant problem. Inflation has a lesser short-term effect on us because we generally negotiate fixed price contracts with our subcontractors and material suppliers for the construction of our homes. These prices usually are applicable for a specified number of residential buildings or for a time period of between four to twelve months. Construction costs for residential buildings represent approximately 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 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 All statements in this Form 10-Q that are not historical facts should be considered as "Forward-Looking Statements" within the meaning of the Private Securities Litigation Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements expressed or implied by the forward looking statements. Such risks, uncertainties and other factors include, but are not limited to: . Changes in general and local economic and business conditions . Weather conditions . Changes in market conditions . Changes in home prices and sales activity in the markets where the Company builds homes . Government regulation, including regulations concerning development of land, the homebuilding process, and the environment . Fluctuations in interest rates and the availability of mortgage financing . Increases in raw materials and labor costs . The availability and cost of suitable land and improved lots . Levels of competition . Availability of financing to the Company . Terrorist acts and other acts of war These risks, uncertainties, and other factors are described in detail in Item 1 and 2 Business and Properties in our Form 10-K for the year ended October 31, 2001. Quantitative and Qualitative Disclosures About Market Risk. The primary market risk facing us is interest rate risk on our long term debt. In connection with our mortgage operations, mortgage loans held for sale and the associated mortgage warehouse line of credit are subject to interest rate risk; however, such obligations reprice frequently and are short-term in duration. In addition, we hedge the interest rate risk on mortgage loans by obtaining forward commitments from FNMA, FHLMC, GNMA securities and private investors. Accordingly the risk from mortgage loans is not material. We do not hedge interest rate risk other than on mortgage loans using financial instruments. We are also subject to foreign currency risk but this risk is not material. The following table sets forth as of July 31, 2002, our long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value ("FMV").
As of July 31, 2002 for the Nine Months Ended July 31, -------------------------------------- FMV @ 2003 2004 2005 2006 2007 Thereafter Total 7/31/02 ------- ------ ------ ------ ------ ---------- -------- -- ----- (Dollars in Thousands) Long Term Debt(1): Fixed Rate...... $11,549 $ 75 $ 81 $ 88 $ 96 $ 550,360 $562,249 $552,749 Average interest rate.......... 6.71% 8.38% 8.38% 8.38% 8.38% 9.23% 9.17% -- Variable rate... -- -- -- -- $115,000 -- $115,000 $115,000 Average interest rate.......... -- -- -- -- (2) -- -- -- (1) Does not include bonds collateralized by mortgages receivable. (2) Libor plus 2.5%
Part II. Other Information Item 6(a). Exhibits (i) Exhibit 10(a) Amended and Restated Credit Agreement dated June 21, 2002. (ii) Exhibit 10(b) $110,000,000 K. Hovnanian Mortgage, Inc. Revolving Credit Agreement dated June 7, 2002. (iii) Exhibit 10(c) First Amendment to K. Hovnanian Mortgage Inc. Revolving Credit Agreement dated July 25, 2002. (iv) Exhibit 99(a) Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. (v) Exhibit 99(b) Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. Item 6(b). No reports on Form 8K have been filed during the quarter for which this report is filed. 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: September 13, 2002 /S/J. LARRY SORSBY J. Larry Sorsby, Executive Vice President and Chief Financial Officer DATE: September 13, 2002 /S/PAUL W. BUCHANAN Paul W. Buchanan, Senior Vice President Corporate Controller CERTIFICATION I, Ara K. Hovnanian, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hovnanian Enterprises, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. /S/ARA K. HOVNANIAN Ara K. Hovnanian President and Chief Executive Officer Date: September 13, 2002 CERTIFICATION I, J. Larry Sorsby, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hovnanian Enterprises, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. /S/J. LARRY SORSBY J. Larry Sorsby Executive Vice-President And Chief Financial Officer Date: September 13, 2002