10-Q 1 f10q13103.txt FORM 10Q QUARTER ENDED 1/31/03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10Q (Mark One) [ X ] Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For quarterly period ended JANUARY 31, 2003 or [ ] Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 Commission file number 1-8551 Hovnanian Enterprises, Inc. (Exact Name of Registrant as Specified in Its Charter) Delaware 22-1851059 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) l0 Highway 35, P.O. Box 500, Red Bank, N. J. 07701 (Address of Principal Executive Offices) 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ( X ) No ( ) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 23,805,110 Class A Common Shares and 7,436,034 Class B Common Shares were outstanding as of February 28, 2003. HOVNANIAN ENTERPRISES, INC. FORM 10Q INDEX PAGE NUMBER PART I. Financial Information Item l. Financial Statements: Consolidated Balance Sheets at January 31, 2003 (unaudited) and October 31, 2002 4 Consolidated Statements of Income for the three months ended January 31, 2003 and 2002 (unaudited) 6 Consolidated Statements of Stockholders' Equity for the three months ended January 31, 2003 (unaudited) 7 Consolidated Statements of Cash Flows for the three months ended January 31, 2003 and 2002 (unaudited) 8 Notes to Consolidated Financial Statements (unaudited) 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 29 Item 4. Controls and Procedures 30 PART II. Other Information 30 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit 3(a) Certificate of Incorporation of the Registrant. (1) Exhibit 3(b) Certificate of Amendment of Incorporation of the Registrant. (2) Exhibit 3(c) Bylaws of the Registrant. (2) Exhibit 10(a) Amended and Restated Credit Agreement dated February 20, 2003. Exhibit 10(b) Restated $142 million K. Hovnanian Mortgage, Inc. Revolving Credit Agreement dated March 7, 2003. 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. 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. (1) Incorporated by reference to Exhibits to Registration Statement (No. 2-85198) on Form S-1 of the Registrant. (2) Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended February 28, 1994 of the Registrant. Item 6(b). No reports on Form 8-K 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)
January 31, October 31, ASSETS 2003 2002 ----------- ----------- (unaudited) Homebuilding: Cash and cash equivalents....................... $ 87,830 $ 262,675 ----------- ----------- Inventories - At the lower of cost or fair value: Sold and unsold homes and lots under development.................................. 1,005,325 843,581 Land and land options held for future development or sale......................... 270,998 238,001 ----------- ----------- Total Inventories........................... 1,276,323 1,081,582 ----------- ----------- Receivables, deposits, and notes................ 43,041 26,276 ----------- ----------- Property, plant, and equipment - net............ 18,753 19,242 ----------- ----------- Senior Residential rental properties - net...... 9,408 9,504 ----------- ----------- Prepaid expenses and other assets............... 90,180 86,582 ----------- ----------- Goodwill and indefinite life intangibles........ 82,275 82,275 ----------- ------------ Definite life intangibles....................... 26,777 ----------- ----------- Total Homebuilding.......................... 1,634,587 1,568,136 ----------- ----------- Financial Services: Cash and cash equivalents....................... 7,926 7,315 Mortgage loans held for sale.................... 50,157 91,451 Other assets.................................... 4,418 11,226 ----------- ----------- Total Financial Services.................... 62,501 109,992 ----------- ----------- Income Taxes Receivable - Including deferred tax benefits........................................ 5,391 ----------- ----------- Total Assets...................................... $1,702,479 $1,678,128 =========== =========== See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands Except Per Share Data)
January 31, October 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002 ----------- ----------- (unaudited) Homebuilding: Nonrecourse land mortgages........................ $ 8,039 $ 11,593 Accounts payable and other liabilities............ 310,651 298,213 Customers' deposits............................... 42,425 40,422 Nonrecourse mortgages secured by operating properties...................................... 3,239 3,274 ----------- ----------- Total Homebuilding............................ 364,354 353,502 ----------- ----------- Financial Services: Accounts payable and other liabilities............ 4,370 4,857 Mortgage warehouse line of credit................. 49,029 85,498 ----------- ----------- Total Financial Services...................... 53,399 90,355 ----------- ----------- Notes Payable: Term loan........................................ 115,000 115,000 Senior notes...................................... 396,514 396,390 Senior subordinated notes......................... 150,000 150,000 Accrued interest.................................. 15,924 9,555 ----------- ----------- Total Notes Payable........................... 677,438 670,945 ----------- ----------- Income Taxes Payable - Net of deferred tax benefits. 777 ----------- ----------- Total Liabilities............................. 1,095,191 1,115,579 ----------- ----------- 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 27,537,468 shares at January 31, 2003 and 27,453,994 shares at October 31, 2002 (including 4,343,240 shares at January 31, 2003 and October 31, 2002 held in Treasury).................................... 275 275 Common Stock,Class B,$.01 par value (convertible to Class A at time of sale)-authorized 13,000,000 shares; issued 7,784,372 shares at January 31, 2003 and 7,788,061 shares at October 31, 2002 (including 345,874 shares at January 31, 2003 and October 31, 2002 held in Treasury)....................................... 78 78 Paid in Capital................................... 152,939 152,977 Retained Earnings................................. 492,563 447,802 Deferred Compensation............................. (5) (21) Treasury Stock - at cost.......................... (38,562) (38,562) ----------- ----------- Total Stockholders' Equity.................... 607,288 562,549 ----------- ----------- Total Liabilities and Stockholders' Equity.......... $1,702,479 $1,678,128 =========== =========== See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Per Share Data) (unaudited)
Three Months Ended January 31, ------------------- 2003 2002 --------- --------- Revenues: Homebuilding: Sale of homes...................... $607,501 $443,098 Land sales and other revenues...... 9,639 1,977 --------- --------- Total Homebuilding............... 617,140 445,075 Financial Services................... 10,495 8,987 --------- --------- Total Revenues................... 627,635 454,062 --------- --------- Expenses: Homebuilding: Cost of sales...................... 463,178 351,483 Selling, general and administrative 54,301 37,649 Inventory impairment loss.......... 158 905 --------- --------- Total Homebuilding............... 517,637 390,037 Financial Services................... 5,821 5,359 Corporate General and Administration. 14,584 10,876 Interest............................. 13,679 13,702 Other Operations..................... 4,778 4,291 --------- --------- Total Expenses................... 556,499 424,265 --------- --------- Income Before Income Taxes............. 71,136 29,797 --------- --------- State and Federal Income Taxes: State................................ 3,100 1,873 Federal.............................. 23,275 9,763 --------- --------- Total Taxes........................ 26,375 11,636 --------- --------- Net Income............................. $ 44,761 $ 18,161 ========= ========= Per Share Data: Basic: Income per common share.............. $ 1.43 $ 0.63 Weighted average number of common shares outstanding................. 31,371 28,965 Assuming dilution: Income per common share.............. $ 1.35 $ 0.60 Weighted average number of common shares and common share equivalents outstanding........................ 33,080 30,456 See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars In Thousands)
A Common Stock B Common Stock ------------------- ------------------- Shares Shares Issued and Issued and Paid-In Retained Deferred Treasury Outstanding Amount Outstanding Amount Capital Earnings Comp Stock Total ----------- ------ ----------- ------ -------- -------- -------- -------- -------- Balance, October 31, 2002. 23,110,754 $275 7,442,187 $78 $152,977 $447,802 $ (21) $(38,562) $562,549 Sale of common stock under employee stock option plan............ 16,117 143 143 Stock bonus plan......... 63,668 (181) (181) Conversion of Class B to Class A Common Stock.... 3,689 (3,689) Deferred compensation..... 16 16 Net Income................ 44,761 44,761 ----------- ------ ----------- ------ -------- -------- -------- -------- -------- Balance, January 31, 2003 23,194,228 $275 7,438,498 $78 $152,939 $492,563 $ (5) $(38,562) $607,288 (unaudited) =========== ====== =========== ====== ======== ======== ======== ======== ======== See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (unaudited)
Three Months Ended January 31, --------------------- 2003 2002 ---------- ---------- Cash Flows From Operating Activities: Net Income.......................................... $ 44,761 $ 18,161 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation.................................... 1,569 1,658 Loss (gain) on sale and retirement of property and assets.................................... 9 (3) Deferred income taxes........................... (2,362) (71) Impairment losses............................... 158 905 Decrease (increase) in assets: Mortgage notes receivable..................... 41,878 26,334 Receivables, prepaids and other assets........ (26,455) 3,637 Inventories................................... (69,723) 19,489 Increase (decrease) in liabilities: State and Federal income taxes................ (3,787) 2,307 Tax effect from exercise of stock options..... (19) Customers' deposits........................... 1,692 3,594 Interest and other accrued liabilities........ (12,165) (15,288) Post development completion costs............. 2,748 (832) Accounts payable.............................. (15,324) 5,488 ---------- ---------- Net cash (used in) provided by operating activities................................ (37,020) 65,379 ---------- ---------- Cash Flows From Investing Activities: Net proceeds from sale of property and assets....... 35 136 Purchase of property, equipment and other fixed assets...................................... (755) (1,353) Acquisition of homebuilding companies............... (91,273) (120,462) Investment in and advances to unconsolidated affiliates........................................ 3,296 (1,948) ---------- ---------- Net cash (used in) investing activities..... (88,697) (123,627) ---------- ---------- Cash Flows From Financing Activities: Proceeds from mortgages and notes................... 166,609 706,120 Principal payments on mortgages and notes........... (215,088) (622,315) Purchase of treasury stock.......................... (1,089) Proceeds from sale of stock and employee stock plans (38) 1,272 ---------- ---------- Net cash (used in) provided by financing activities................................ (48,517) 83,988 ---------- ---------- Net (Decrease) Increase In Cash and Cash Equivalents.. (174,234) 25,740 Cash and Cash Equivalents Balance, Beginning Of Period........................................... 269,990 16,149 ---------- ---------- Cash and Cash Equivalent Balance, End Of Period....... $ 95,756 $ 41,889 ========== ========== Supplemental Disclosures of Cash Flow Cash paid during the year for: Interest......................................... 7,310 14,346 ========== ========== Income taxes..................................... 32,544 5,151 ========== ========== Supplemental disclosures of noncash operating activities: Inventory capitalized and accrued for specific performance...................................... 130,307 ========== See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to 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, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. 2. Interest costs incurred, expensed and capitalized were: Three Months Ended January 31, ------------------- 2003 2002 -------- -------- (Dollars in Thousands) Interest Capitalized at Beginning of Period......... $ 22,159 $ 25,124 Plus Interest Incurred(1)(2).. 15,120 11,477 Less Interest Expensed(2)..... 13,679 13,702 -------- -------- Interest Capitalized at End of Period(2)............ $ 23,600 $ 22,899 ======== ======== (1) Data does not include interest incurred by our mortgage and finance subsidiaries. (2) Represents interest for construction, and land and development costs which are charged to interest expense when homes are delivered or when land is not under active development. 3. Homebuilding accumulated depreciation at January 31, 2003 and October 31, 2002 amounted to $19.7 million and $18.5 million, respectively. Senior residential rental property accumulated depreciation at January 31, 2003 and October 31, 2002 amounted to $3.2 million and $3.1 million, 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. 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 $0.2 million during the three months ended January 31, 2003. We also wrote off such costs in the amount of $0.9 million during the three months ended January 31, 2002, primarily due to the exit of our Mid-South operations. Residential inventory impairment losses and option write offs are reported in the Consolidated Statements of Income as "Homebuilding-Inventory Impairment Loss." 5. We are involved from time to time in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on us. As of January 31, 2003 and October 31, 2002, respectively, we are obligated under various performance letters of credit amounting to $107.6 million and $100.0 million. 6. We have an unsecured Revolving Credit Agreement ("Agreement") with a group of banks which was amended on February 20, 2003. Pursuant to the amendment, our credit line increased to $505.0 million and we have the ability to seek additional lenders to increase the total facility amount to $590.0 million. The agreement bears an expiration date of July 2005 and interest is payable monthly and at various rates of either the prime rate plus 0.40% or LIBOR plus 1.85%. In addition, we pay a fee equal to 0.375% per annum on the weighted average unused portion of the line. As of January 31, 2003 and October 31, 2002, there was no outstanding balance under the Agreement. Our mortgage warehouse line of credit was modified on March 7, 2003. Pursuant to the agreement, our credit line matures in July 2003 and we have the option to borrow up to $142.0 million. Interest is payable monthly at the Federal Funds Rate plus 1.375%. As of January 31, 2003 and October 31, 2002 borrowings were $49.0 million and $85.5 million, respectively. 7. At January 31, 2003, our long term debt consisted of $150 million 10 1/2% Senior Notes due 2007, $150 million 9 1/8% Senior Notes due 2009, $100 million 8% Senior Notes due 2012, $150 million 8 7/8% Senior Subordinated Notes due 2012, and a $165 million Term Loan due 2007 which bears interest at either the prime rate plus 1.25% or LIBOR plus 2.5%. As of January 31, 2003 borrowings under the Term Loan were $115 million. 8. Per Share Calculations - Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share" requires the presentation of basic earnings per share and diluted earnings per share. Basic earnings per share is computed using the weighted average number of shares outstanding. Diluted earnings per common share is computed using the basic weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock. 9. Recent Accounting Pronouncements - In April 2002, the Financial Accounting Standards Board issued (SFAS) No. 145, "Reporting Gains and Losses from Extinguishment of Debt", which rescinded SFAS No. 4, No. 44, and No. 64 and amended SFAS No. 13. The new standard addresses the income statement classification of gains or losses from the extinguishment of debt and criteria for classification as extraordinary items. We adopted SFAS No. 145 on November 1, 2002 and certain amounts in our prior year financial statements will be reclassified to conform to the new presentation. In June 2002, the Financial Accounting Standards Board issued (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring)". SFAS No. 146 requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred as opposed to when the entity commits to an exit plan as prescribed under EITF No. 94-3. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We do not anticipate that the adoption of SFAS 146 will have a material effect on the financial position or results of operations of our Company. However, SFAS No. 146 could impact the amount or timing of liabilities to be recognized in the event that we engage in exit or disposal activities in the future. In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor's obligations does not apply to product warranties. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of the initial recognition and initial measurement provisions of FIN 45 did not have a material effect on our financial position or results of operations. Our disclosure of guarantees is included in Note 12 to the financial statements. In December 2002, the Financial Accounting Standards Board issued (SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which amends (SFAS) No. 123. The new standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the affect of the method used on reported results. We have not elected to change to the fair value based method of accounting for stock-based employee compensation. We will adopt the disclosure provisions of SFAS No. 148 in our second fiscal quarter ending April 30, 2003. In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 ("FIN 46"). A Variable Interest Entity ("VIE") is a entity with insufficient equity investment or in which the equity investors lack some of the characteristics of a controlling financial interest. Pursuant to FIN 46, an enterprise that absorbs a majority of the expected losses of the VIE must consolidate the VIE. FIN 46 is effective immediately for VIE's created after January 31, 2003. For VIE's created before January 31, 2003, FIN 46 must be applied at the beginning of the first interim or annual reporting period beginning after June 15, 2003 (our quarter ending October 31, 2003). FIN 46 may apply to certain option contracts to acquire land. We are in the process of evaluating the applicability of FIN 46 to such option contracts and cannot currently estimate the potential impact of FIN 46 to our consolidated balance sheet. 10. On November 1, 2002 and December 31, 2002 we acquired Parkside Homes and Brighton Homes, two Houston homebuilding companies for an approximate aggregate purchase price of $100 million. These acquisitions were accounted for as a purchase, with the results of operations of these entities included in our consolidated financial statements as of the date of acquisition. The purchase price will be allocated based on estimated fair value at the date of acquisition. As a result, estimated definite life intangible assets of $26.8 million were recorded on the consolidated balance sheet. We expect to amortize the definite life intangibles over a 2 to 5 year period. We are in the process of completing an appraisal of the intangible assets and do not expect to record any goodwill. Therefore, the purchase price allocation is preliminary and subject to change. (See Note 11). 11. Intangible Assets - As reported on the balance sheet we have goodwill and indefinite life intangibles amounting to $82.3 million and definite life intangibles amounting to $26.8 million. Our intangible assets consist of goodwill, tradenames, architectural designs, and contractual agreements. During the three months ended January 31, 2003 we added the $26.8 million (See Note 10) of definite life intangibles due to the Houston acquisitions. In accordance with the Financial Accounting Standards No. 142 ("SFAS No. 142") "Goodwill and Other Intangible Assets; we no longer amortize goodwill or indefinite life intangibles, but instead assess them periodically for impairment. We are amortizing the definite life intangibles over their expected useful life. The amortization expense of $0.5 million is reported in other operations on our Consolidated Statement of Income for the three months ended January 31, 2003. 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"), acts as a finance and management entity that as of January 31, 2003 had issued and outstanding approximately $150 million senior subordinated notes, $400 million face value senior notes, a term loan with an outstanding balance of $115 million, and a revolving credit agreement with an outstanding balance of zero. 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 other than the Subsidiary Issuer (collectively, the "Guarantor Subsidiaries"), with the exception of various subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, a mortgage lending subsidiary, a subsidiary engaged in homebuilding activity in Poland, our title subsidiaries, and joint ventures (collectively the "Non-guarantor Subsidiaries"), have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under the senior notes, 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 consolidated condensed financial statements. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. The following consolidating condensed financial information present the results of operations, financial position, and cash flows of (i) the Parent, (ii) the Subsidiary Issuer, (iii) the Guarantor Subsidiaries of the Parent, (iv) the Non-guarantor Subsidiaries of the Parent, and (v) the eliminations to arrive at the information for the Parent on a consolidated basis. HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED BALANCE SHEET JANUARY 31, 2003 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---------- ---------- ASSETS Homebuilding.......................$ 14 $ 100,961 $1,512,194 $ 21,418 $ $1,634,587 Financial Services................. 111 62,390 62,501 Income Taxes Receivables (Payables) (31,152) 6,687 30,332 (476) 5,391 Investments in and amounts due to and from consolidated subsidiaries..................... 638,426 604,415 (817,792) (21,077) (403,972) -------- ---------- ---------- ------------ ---------- ---------- Total Assets.......................$607,288 $ 712,063 $ 724,845 $ 62,255 $(403,972) $1,702,479 ======== ========== ========== ============ ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Homebuilding.......................$ $ 24,110 $ 340,181 $ 63 $ $ 364,354 Financial Services................. 53,399 53,399 Notes Payable...................... 677,386 52 677,438 Stockholders' Equity............... 607,288 10,567 384,612 8,793 (403,972) 607,288 -------- ----------- ---------- ------------ ---------- ---------- Total Liabilities and Stockholders' Equity...........................$607,288 $ 712,063 $ 724,845 $ 62,255 $(403,972) $1,702,479 ======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED BALANCE SHEET OCTOBER 31, 2002 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---------- ---------- Assets Homebuilding.......................$ 1,501 $ 261,107 $1,269,514 $ 36,014 $ $1,568,136 Financial Services................. 111 109,881 109,992 Investments in and amounts due to and from consolidated subsidiaries..................... 584,103 432,130 (628,246) (34,316) (353,671) -------- ---------- ---------- ------------ ---------- ---------- Total Assets.......................$585,604 $ 693,237 $ 641,379 $ 111,579 $ (353,671)$1,678,128 ======== ========== ========== ============ ========== ========== Liabilities Homebuilding.......................$ $ 35,736 $ 314,171 $ 3,595 $ $ 353,502 Financial Services................. 90,355 90,355 Notes Payable...................... 661,390 2,345 7,210 670,945 Income Taxes Payable (Receivables). 23,055 (3,147) (18,184) (947) 777 Stockholders' Equity............... 562,549 (742) 343,047 11,366 (353,671) 562,549 -------- ---------- ---------- ------------ ---------- ---------- Total Liabilities and Stockholders' Equity...........................$585,604 $ 693,237 $ 641,379 $ 111,579 $ (353,671)$1,678,128 ======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS THREE MONTHS ENDED JANUARY 31, 2003 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- Revenues: Homebuilding.....................$ $ 472 $ 613,679 $ 2,994 $ (5) $ 617,140 Financial Services .............. 1,610 8,885 10,495 Intercompany Charges............. 43,538 3,376 (46,914) Equity In Pretax Income of Consolidated Subsidiaries...... 71,136 (71,136) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................. 71,136 44,010 618,665 11,879 (118,055) 627,635 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 44,010 547,661 3,239 (44,232) 550,678 Financial Services............... 542 5,780 (501) 5,821 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 44,010 548,203 9,019 (44,733) 556,499 ------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes......... 71,136 70,462 2,860 (73,322) 71,136 State and Federal Income Taxes..... 26,375 (205) 26,195 1,150 (27,140) 26,375 ------- ---------- ---------- ------------ ---------- ---------- Net Income.........................$44,761 $ 205 $ 44,267 $ 1,710 $ (46,182) $ 44,761 ======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS THREE MONTHS ENDED JANUARY 31, 2002 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- Revenues: Homebuilding.....................$ $ 145 $ 444,446 $ 5,533 $ (5,049) $ 445,075 Financial Services .............. 1,362 7,625 8,987 Intercompany Charges............. 30,259 2,483 (32,742) Equity In Pretax Income of Consolidated Subsidiaries...... 29,797 (29,797) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................. 29,797 30,404 448,291 13,158 (67,588) 454,062 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 30,404 423,744 575 (35,817) 418,906 Financial Services............... 558 5,246 (445) 5,359 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 30,404 424,302 5,821 (36,262) 424,265 ------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes......... 29,797 23,989 7,337 (31,326) 29,797 State and Federal Income Taxes..... 11,636 27 9,349 2,795 (12,171) 11,636 ------- ---------- ---------- ------------ ---------- ---------- Net Income.........................$18,161 $ (27) $ 14,640 $ 4,542 $ (19,155) $ 18,161 ======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS THREE MONTHS ENDED JANUARY 31, 2003 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ ---------- ---------- Cash Flows From Operating Activities: Net Income.........................$ 44,761 $ 205 $ 44,267 $ 1,710 $ (46,182) $ 44,761 Adjustments to reconcile net income to net cash provided by (used in) operating activities... 1,216 7,665 (185,915) 49,071 46,182 (81,781) -------- --------- ---------- ------------ ---------- ---------- Net Cash Provided By (Used In) Operating Activities........... 45,977 7,870 (141,648) 50,781 (37,020) Net Cash Provided by (Used In) Investing Activities............... (48) 85 (88,732) (2) (88,697) Net Cash Provided By(Used In) Financing Activities............... 124 (11,755) (36,886) (48,517) Intercompany Investing and Financing Activities - Net................... (45,933) (172,285) 231,457 (13,239) -------- --------- ---------- ------------ ---------- ---------- Net Increase (Decrease) In Cash and Cash Equivalents................... (4) (164,206) (10,678) 654 (174,234) Cash and Cash Equivalents Balance, Beginning of Period................ 10 218,844 43,689 7,447 269,990 -------- --------- ---------- ------------ ---------- ---------- Cash and Cash Equivalents Balance, End of Period......................$ 6 $ 54,638 $ 33,011 $ 8,101 $ $ 95,756 ======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS THREE MONTHS ENDED JANUARY 31, 2002 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ ---------- ---------- Cash Flows From Operating Activities: Net Income.........................$ 18,161 $ (27) $ 14,640 $ 4,542 $ (19,155) $ 18,161 Adjustments to reconcile net income to net cash provided by (used in) operating activities... 92,738 9,132 (100,389) 26,582 19,155 47,218 -------- --------- ---------- ------------ ---------- ---------- Net Cash Provided By (Used In) Operating Activities........... 110,899 9,105 (85,749) 31,124 65,379 Net Cash Provided by (Used In) Investing Activities............... (43,340) (1,033) (79,180) (74) (123,627) Net Cash Provided By(Used In) Financing Activities............... (1,089) 200,698 (85,643) (29,978) 83,988 Intercompany Investing and Financing Activities - Net..................... (66,470) (188,816) 258,293 (3,007) -------- --------- ---------- ------------ ---------- ---------- Net Increase (Decrease) In Cash and Cash Equivalents................... 19,954 7,721 (1,935) 25,740 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 $ 14,114 $ 23,337 $ 4,428 $ $ 41,889 ======== ========= ========== ============ ========== ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES Management believes that the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: Business Combinations - When we make an acquisition of another company, we use the purchase method of accounting in accordance with the Statement of Financial Accounting Standards (SFAS) No. 141 "Business Combinations". Under SFAS No. 141 (for acquisitions subsequent to June 30, 2001) and APB 16 (for acquisitions prior to June 30, 2001) we record as our cost the estimated fair value of the acquired assets less liabilities assumed. Any difference between the cost of an acquired company and the sum of the fair values of tangible and identified intangible assets less liabilities is recorded as goodwill, indefinite or definite life intangibles. The reported income of an acquired company includes the operations of the acquired company from the date of acquisition. Income Recognition from Home and Land Sales - Income from home and land sales are recorded when title is conveyed to the buyer, adequate cash payment has been received and there is no continued involvement. Income Recognition from Mortgage Loans - Profits and losses relating to the sale of mortgage loans are recognized when legal control passes to the buyer and the sales price is collected. Inventories - For inventories of communities under development, a loss is recorded when events and circumstances indicate impairment and the undiscounted future cash flows generated are less than the related carrying amounts. The impairment loss is based on discounted future cash flows generated from expected revenue, cost to complete including interest, and selling costs. Inventories and long-lived assets held for sale are recorded at the lower of cost or fair value less selling costs. Fair value is defined in the Statement of Financial Accounting Standards (SFAS) No. 144 "Accounting for the Impairment of or Disposal of Long- Lived Assets" as the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Construction costs are accumulated during the period of construction and charged to cost of sales under specific identification methods. Land, land development, and common facility costs are allocated based on buildable acres to product types within each community, then amortized equally based upon the number of homes to be constructed in the community. Insurance Deductible Reserves - Our deductible is $150,000 per occurrence for our worker's compensation and general liability insurance. Reserves have been established based upon actuarial analysis of estimated future losses. Interest - Costs related to properties under development are capitalized during the land development and home construction period and expensed along with the associated cost of sales as the related inventories are sold. Land Options - Costs are capitalized when incurred and either included as part of the purchase price when the land is acquired or charged to operations when we determine we will not exercise the option. Options that include specific performance terms, which have been triggered, are recorded on the balance sheet as inventory and other liabilities. Intangible Assets - The intangible assets recorded on our balance sheet consist of goodwill, tradenames, architectural designs and contractual agreements with both definite and indefinite lives resulting from company acquisitions. In accordance with the Financial Accounting Standards No. 142 ("SFAS No. 142") " Goodwill and Other Intangible Assets", we no longer amortize goodwill or indefinite life intangibles, but instead assess them periodically for impairment. We are amortizing the definite life intangibles over their expected useful life. Post Development Completion Costs - In those instances where a development is substantially completed and sold and we have additional construction work to be incurred, an estimated liability is provided to cover the cost of such work and is recorded in accounts payable and other liabilities in the consolidated balance sheets. CAPITAL RESOURCES AND LIQUIDITY Our cash uses during the three months ended January 31, 2003 were for operating expenses, increases in housing inventories, construction, income taxes, interest, and the acquisition of two Houston, Texas homebuilders. We provided for our cash requirements from housing and land sales, the revolving credit facility, 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 January 31, 2003 we had approximately $80.0 million of excess cash. Management anticipates using the excess cash to grow existing operations and fund future acquisitions. On December 31, 2000, our stock repurchase program to purchase up to 4.0 million shares of Class A Common Stock expired. As of December 31, 2000, 3,391,047 shares had been purchased under this program. On July 3, 2001, our Board of Directors authorized a revision to our stock repurchase program to purchase up to 2.0 million shares of Class A Common Stock. As of January 31, 2003, 606,319 shares of Class A Common Stock have been purchased under this program, of which zero were repurchased during the three months ended January 31, 2003. Our homebuilding bank borrowings are made pursuant to an amended and restated revolving credit agreement (the "Agreement") that provides a revolving credit line and letter of credit line of up to $590 million through July 2005. Interest is payable monthly and at various rates of either the prime rate plus 0.40% 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. Each of our significant subsidiaries is a guarantor under the revolving credit agreement. As of January 31, 2003, there were no borrowings under the Agreement. At January 31, 2003 we had $400 million of outstanding senior debt ($396.5 million, net of discount), comprised of $150 million 10 1/2% Senior Notes due 2007, $150 million 9 1/8% Senior Notes due 2009, and $100 million 8% Senior Notes due 2012. At January 31, 2003, we had outstanding senior subordinated debt comprised of $150 million 8 7/8% Senior Subordinated Notes due 2012. Each of our significant subsidiaries is a guarantor under the Senior Notes and Senior Subordinated Notes. On January 22, 2002 we entered into a $165 million five-year Term Loan with a group of banks. The Term Loan matures in January 2007, and bears interest at either the prime rate plus 1.25% or LIBOR plus 2.5%. Each of our significant subsidiaries is a guarantor under the Term Loan. At January 31, 2003 borrowings under the Term Loan were $115 million. Our mortgage banking subsidiary's warehousing agreement was modified on March 7, 2003. Pursuant to the modification, we may borrow up to $142 million. The agreement bears an expiration date of July 2003 and interest is payable monthly at the Federal Funds Rate plus 1.375%. We believe that we will be able either to extend this agreement beyond July 2003 or negotiate a replacement facility, but there can be no assurance of such extension or replacement facility. As of January 31, 2003, the aggregate principal amount of all such borrowings was $49.0 million. Total inventory increased $194.7 million during the three months ended January 31, 2003. Approximately $75.0 million of the increase in inventory was due to the acquisition of two homebuilding companies in Houston, Texas. In addition, inventory levels increased in most of our other housing markets. This was the result of seasonality factors and planned future organic growth in our existing markets. Substantially all homes under construction or completed and included in inventory at January 31, 2003 are expected to be closed during the next twelve months. Most inventory completed or under development is financed through our line of credit, term loan, and senior and subordinated indebtedness. We usually option property for development prior to acquisition. By optioning property, we are only subject to the loss of a small option fee and predevelopment costs if we choose not to exercise the option. As a result, our commitment for major land acquisitions is reduced. The following table summarizes housing lots included in our residential real estate. The January 31, 2003 numbers exclude lots owned and options in locations in which we have ceased development. Active Proposed Active Selling Developable Grand Total Communities Lots Lots Lots ----------- ------- ----------- ----------- January 31, 2003: Northeast Region.. 23 5,484 15,246 20,730 North Carolina.... 68 4,893 2,333 7,226 Metro D.C......... 31 3,508 7,776 11,284 California........ 39 5,621 5,031 10,652 Texas............. 72 5,139 2,901 8,040 ----------- ------- ---------- ----------- 233 24,645 33,287 57,932 =========== ======= ========== =========== Owned.......... 11,971 3,661 15,632 Optioned....... 12,674 29,626 42,300 ------- ---------- ----------- Total........ 24,645 33,287 57,932 ======= ========== =========== Active Proposed Active Selling Developable Grand Total Communities Lots Lots Lots ----------- ------- ----------- ----------- October 31, 2002: Northeast Region.. 28 5,699 15,700 21,399 North Carolina.... 64 5,186 2,283 7,469 Metro D.C......... 27 3,182 7,394 10,576 California........ 42 5,974 4,457 10,431 Texas............. 35 2,566 1,518 4,084 Other............. -- 29 -- 29 ----------- ------- ---------- ----------- 196 22,636 31,352 53,988 =========== ======= ========== =========== Owned.......... 11,088 2,274 13,362 Optioned....... 11,548 29,078 40,626 ------- ---------- ----------- Total........ 22,636 31,352 53,988 ======= ========== =========== The following table summarizes our started or completed unsold homes and models: January 31, October 31, 2003 2002 ----------------------- ----------------------- Unsold Unsold Homes Models Total Homes Models Total ------ ------ ----- ------ ------ ----- Northeast Region.... 84 49 133 73 46 119 North Carolina...... 180 18 198 191 32 223 Metro D.C........... 38 19 57 34 31 65 California.......... 171 73 244 193 65 258 Texas............... 570 69 639 261 31 292 Other............... -- -- -- 2 -- 2 ------ ------ ----- ------ ------ ----- Total 1,043 228 1,271 754 205 959 ====== ====== ===== ====== ====== ===== Financial Services - Mortgage loans held for sale consist of residential mortgages receivable of which $50.0 million and $91.3 million at January 31, 2003 and October 31, 2002, respectively, are being temporarily warehoused and awaiting sale in the secondary mortgage market. The balance of mortgage loans held for sale are being held as an investment. 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 MONTHS ENDED JANUARY 31, 2003 COMPARED TO THE THREE MONTHS ENDED JANUARY 31, 2002 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, and Texas. 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 ------------------------------------------ January January Dollar Percentage 31, 2003 31, 2002 Change Change -------- -------- -------- ---------- (Dollars in Thousands) Homebuilding: Sale of homes............... $607,501 $443,098 $164,403 37.1% Land sales and other revenues................... 9,639 1,977 7,662 387.6% Financial services............ 10,495 8,987 1,508 16.8% -------- -------- -------- --------- Total Revenues........... $627,635 $454,062 $173,573 38.2% ======== ======== ======== ========= Homebuilding: Revenues from the sale of homes increased $164.4 million or 37.1% during the three months ended January 31, 2003, compared to the same period last year. Revenues from 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 January 31, ------------------- 2003 2002 --------- -------- (Dollars in Thousands) Northeast Region: Housing Revenues..... $136,763 $132,769 Homes Delivered...... 431 421 North Carolina: Housing Revenues..... $ 54,469 $ 56,681 Homes Delivered...... 299 298 Metro D.C.: Housing Revenues..... $103,651 $ 70,392 Homes Delivered...... 324 263 California:(2) Housing Revenues..... $238,695 $114,642 Homes Delivered...... 863 440 Texas: (1) Housing Revenues..... $ 72,662 $ 54,526 Homes Delivered...... 359 237 Other: Housing Revenues..... $ 1,261 $ 14,088 Homes Delivered...... 9 91 Totals: Housing Revenues..... $607,501 $443,098 Homes Delivered...... 2,285 1,750 (1) January 31, 2003 includes Parkside Homes and Brighton Homes deliveries beginning on November 1, 2002 and January 1, 2003, respectively. (2) January 31, 2002 includes Forecast deliveries beginning on January 10, 2002. The increase in housing revenues was primarily due to the acquisition of Parkside Homes and Brighton Homes in Houston, and a full quarter of deliveries from Forecast. In addition, these increases were the result of organic growth in Metro D. C. and California (excluding Forecast) and increased average sales prices in most of our markets. Important indicators of the future results are recently signed contracts and home contract backlog for future deliveries. Our sales contracts and homes in contract backlog (using base sales prices) by market area are set forth below: Sales Contracts for the Three Months Ended Contract Backlog January 31, as of January 31, ----------------------- -------------------- 2003 2002 2003 2002 --------- --------- --------- --------- (Dollars in Thousands) Northeast Region: Dollars............. $115,447 $109,689 $ 410,793 $317,189 Homes............... 368 393 1,334 1,132 North Carolina: Dollars............. $ 54,679 $ 53,794 $ 88,496 $100,708 Homes............... 300 286 467 522 Metro D.C.: Dollars............. $ 94,358 $ 78,993 $ 234,082 $217,487 Homes............... 286 263 717 779 California: (2) Dollars............. $233,616 $ 84,122 $ 270,835 $144,061 Homes............... 832 301 924 568 Texas: (1)(3) Dollars............. $ 68,927 $ 43,827 $ 89,888 $ 56,471 Homes............... 353 193 433 219 Other: Dollars............. $ 313 $ 11,365 $ -- $ 17,120 Homes............... 2 74 -- 108 Totals: Dollars............. $567,340 $381,790 $1,094,094 $853,036 Homes............... 2,141 1,510 3,875 3,328 (1) January 31, 2003 includes Parkside Homes and Brighton Homes sales contracts signed from November 1, 2002 and January 1, 2003, respectively. (2) January 31, 2002 includes Forecast sales contracts signed from January 10, 2002 and Forecast's entire contract backlog. (3) Contract backlog includes 162 homes with a value of $31.1 million from the acquisition of Parkside Homes and Brighton Homes during the quarter ended January 31, 2003. During February 2003 we signed an additional 1,061 contracts compared to 931 in the same month last year. The February 2003 contracts along with our contract backlog at January 31, 2003 and deliveries for the three months ended January 31, 2003 amount to approximately 64% of our planned deliveries for fiscal 2003. 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 January 31, ------------------- 2003 2002 -------- -------- (Dollars in Thousands) Sale of Homes................ $607,501 $443,098 Cost of Sales................ 457,526 351,201 -------- -------- Housing Gross Margin......... $149,975 $ 91,897 ======== ======== Gross Margin Percentage...... 24.7% 20.7% Cost of Sales expenses as a percentage of home sales revenues are presented below: Three Months Ended January 31, ------------------- 2003 2002 -------- -------- Sale of Homes................ 100.0% 100.0% -------- -------- Cost of Sales: Housing, land & development costs.... 67.8% 71.2% Commissions............ 2.1% 2.2% Financing concessions.. 0.9% 1.1% Overheads.............. 4.5% 4.8% -------- -------- Total Cost of Sales.......... 75.3% 79.3% -------- -------- Gross Margin................. 24.7% 20.7% ======== ======== 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 months ended January 31, 2003 compared to the same period last year. The consolidated gross margin increased 4.0% for the three months ended January 31, 2003. Ignoring the effect of the two Houston acquisitions, we achieved higher gross margins on a market-by- market basis during the three months ended January 31, 2003 compared to the same period last year. These increased margins are the result of higher sales prices and increased national contract rebates, which slightly lowered our housing costs. Selling, general, and administrative expenses as a percentage of total homebuilding revenues, increased to 8.8% for the three months ended January 31, 2003 from 8.5% for the prior year's three months. Such expenses increased $16.7 million during the three months ended January 31, 2003 compared to the same period last year. The percentage increase was partially due to a full quarter of selling, general and administrative costs from Forecast and partially due to our Coastal California and Northeast Region operations gearing up to open a number of communities later this year. The dollar increase in selling, general and administrative was due to a full quarter of expenses from Forecast and the addition of Parkside Homes and Brighton 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 January 31, ------------------ 2003 2002 -------- -------- Land and Lot Sales................ $8,452 $ 421 Cost of Sales..................... 5,652 282 -------- -------- Land and Lot Sales Gross Margin... 2,800 139 Interest Expense.................. 344 65 -------- -------- Land and Lot Sales Profit Before Tax...................... $2,456 $ 74 ======== ======== 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 months ended January 31, 2003 financial services provided a $4.7 million profit before taxes compared to a profit of $3.6 million in 2002. This increase is primarily due to reduced costs, increased mortgage loan amounts, and the addition of a mortgage joint venture from the acquisition of Forecast for a full quarter. 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 2.3% for the three months ended January 31, 2003 from 2.4% for the corresponding prior year three months. Corporate general and administrative expenses increased $3.7 million during the three months ended January 31, 2003 compared to the same period 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 January 31, ------------------ 2003 2002 -------- -------- Sale of Homes.............. $13,335 $13,637 Land and Lot Sales......... 344 65 -------- -------- Total...................... $13,679 $13,702 ======== ======== Housing interest as a percentage of sale of homes revenues decreased to 2.2% for the three months ended January 31, 2003 compared to 3.1% for the three months ended January 31, 2002. This percentage decline is primarily attributed to the increase in home revenues and a decrease in debt leverage of our company. Other Operations: Other operations consist primarily of miscellaneous residential housing operations expenses, senior residential property operations, amortization of senior and senior subordinated note issuance expenses, earnout payments from homebuilding company acquisitions, amortization of the Forecast consultant's agreement and the right of first refusal agreement, amortization of a definite life intangible for our Houston acquisitions, minority interest relating to joint ventures, and corporate owned life insurance loan interest. Recent Accounting Pronouncements: In April 2002, the Financial Accounting Standards Board issued (SFAS) No. 145, "Reporting Gains and Losses from Extinguishment of Debt", which rescinded SFAS No. 4, No. 44, and No. 64 and amended SFAS No. 13. The new standard addresses the income statement classification of gains or losses from the extinguishment of debt and criteria for classification as extraordinary items. We adopted SFAS No. 145 on November 1, 2002 and certain amounts in our prior year financial statements will be reclassified to conform to the new presentation. In June 2002, the Financial Accounting Standards Board issued (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring)". SFAS No. 146 requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred as opposed to when the entity commits to an exit plan as prescribed under EITF No. 94-3. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We do not anticipate that the adoption of SFAS 146 will have a material effect on the financial position or results of operations of our Company. However, SFAS No. 146 could impact the amount or timing of liabilities to be recognized in the event that we engage in exit or disposal activities in the future. In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor's obligations does not apply to product warranties. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of the initial recognition and initial measurement provisions of FIN 45 did not have a material effect on our financial position or results of operations. Our disclosure of guarantees is included in Note 12 to the financial statements. In December 2002, the Financial Accounting Standards Board issued (SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which amends (SFAS) No. 123. The new standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the affect of the method used on reported results. We have not elected to change to the fair value based method of accounting for stock-based employee compensation. We will adopt the disclosure provisions of SFAS No. 148 in our second fiscal quarter ending April 30, 2003. In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 ("FIN 46"). A Variable Interest Entity ("VIE") is a entity with insufficient equity investment or in which the equity investors lack some of the characteristics of a controlling financial interest. Pursuant to FIN 46, an enterprise that absorbs a majority of the expected losses of a VIE must consolidate the VIE. FIN 46 is effective immediately for VIE's created after January 31, 2003. For VIE's created before January 31, 2003, FIN 46 must be applied at the beginning of the first interim or annual reporting period beginning after June 15, 2003 (our quarter ending October 31, 2003). FIN 46 may apply to certain option contracts to acquire land. We are in the process of evaluating the applicability of FIN 46 to such option contracts and cannot currently estimate the potential impact of FIN 46 to our consolidated balance sheet. Total Taxes: Total taxes as a percentage of income before taxes amounted to approximately 37.1% and 39.1% for the three months ended January 31, 2003 and 2002, respectively. The decreased effective rate is due primarily to a reduction in 2003 in state income taxes. Deferred federal and state income tax assets primarily represent the deferred tax benefits arising from temporary differences between book and tax income which will be recognized in future years as an offset against future taxable income. If for some reason the combination of future years income (or loss) combined with the reversal of the timing differences results in a loss, such losses can be carried back to prior years to recover the deferred tax assets. As a result, management is confident such deferred tax assets are recoverable regardless of future income. Inflation: Inflation has a long-term effect on us because increasing costs of land, materials, and labor result in increasing sale prices of our homes. In general, these price increases have been commensurate with the general rate of inflation in our housing markets and have not had a significant adverse effect on the sale of our homes. A significant risk faced by the housing industry generally is that rising house costs, including land and interest costs, will substantially outpace increases in the income of potential purchasers. In recent years, in the price ranges in which our homes sell, we have not found this risk to be a significant problem. Inflation has a lesser short-term effect on us because we generally negotiate fixed price contracts with our subcontractors and material suppliers for the construction of our homes. These prices usually are applicable for a specified number of residential buildings or for a time period of between four to twelve months. Construction costs for residential buildings represent approximately 57% of our homebuilding cost of sales. Mergers and Acquisitions: On January 10, 2002 we acquired The Forecast Group, L.P. for a total purchase price of $196.5 million, of which $151.6 million was paid in cash and 2,208,738 shares of our Class A Common Stock were issued. At the date of acquisition we also paid off approximately $88.0 million of Forecast's third party debt. On November 1, 2002 and December 31, 2002 we acquired two Houston homebuilding companies for an approximate aggregate purchase price of $100.0 million. Safe Harbor Statement All statements in this Form 10-Q that are not historical facts should be considered as "Forward-Looking Statements" within the meaning of the Private Securities Litigation Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. 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, 2002. Item 3. 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 January 31, 2003, our long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value ("FMV").
As of January 31, 2003 for the Three Months Ended January 31, -------------------------------------- FMV @ 2004 2005 2006 2007 2008 Thereafter Total 1/31/03 ------- ------ ------ ------ ------ ---------- -------- ------- (Dollars in Thousands) Long Term Debt(1): Fixed Rate...... $ 8,114 $ 81 $ 88 $150,096 $ 104 $ 400,298 $558,781 $581,028 Average interest rate.......... 4.96% 8.38% 8.38% 10.50% 8.38% 8.75% 9.16% -- 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%
Item 4. CONTROLS AND PROCEDURES Our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) within 90 days of the filing date of this report (the "Evaluation Date") and, based on that evaluation, concluded that, as of the Evaluation Date, we had sufficient controls and procedures for recording, processing, summarizing and reporting information that is required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, within the time periods specified in the SEC's rules and forms. Since the Evaulation Date, there have not been any significant changes to our internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II. Other Information Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit 3(a) Certificate of Incorporation of the Registrant. (1) Exhibit 3(b) Certificate of Amendment of Incorporation of the Registrant. (2) Exhibit 3(c) Bylaws of the Registrant. (2) Exhibit 10(a) Amended and Restated Credit Agreement dated February 20, 2003. Exhibit 10(b) Restated $142 million K. Hovnanian Mortgage, Inc. Revolving Credit Agreement dated March 7, 2003. 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. 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. (1) Incorporated by reference to Exhibits to Registration Statement (No. 2-85198) on Form S-1 of the Registrant. (2) Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended February 28, 1994 of the Registrant. Item 6(b). No reports on Form 8-K 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: March 17, 2003 /S/J. LARRY SORSBY J. Larry Sorsby, Executive Vice President and Chief Financial Officer DATE: March 17, 2003 /S/PAUL W. BUCHANAN Paul W. Buchanan, Senior Vice President Corporate Controller Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Mr. 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; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By, /S/ARA K. HOVNANIAN Ara K. Hovnanian Chief Executive Officer Date: March 12, 2003 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Mr. 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; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By, /S/J. LARRY SORSBY J. Larry Sorsby Chief Financial Officer Date: March 12, 2003