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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For quarterly period ended JULY 31, 2005 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, NJ 07701
(Address of Principal Executive Offices) (Zip Code)
732-747-7800
(Registrant's Telephone Number, Including Area Code)
Same
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the 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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 47,054,474
shares of Class A Common Stock and 14,680,163 shares of Class B Common
Stock were outstanding as of August 31, 2005.
HOVNANIAN ENTERPRISES, INC.
FORM 10-Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Financial Statements:
Condensed Consolidated Balance Sheets as of July 31,
2005 (unaudited) and October 31, 2004 3
Condensed Consolidated Statements of Income for the
three and nine months ended July 31, 2005 and
2004 (unaudited) 5
Condensed Consolidated Statement of Stockholders'
Equity for the nine months ended
July 31, 2005 (unaudited) 6
Condensed Consolidated Statements of Cash Flows for
the nine months ended July 31, 2005
and 2004 (unaudited) 7
Notes to Condensed Consolidated Financial
Statements (unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 24
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 43
Item 4. Controls and Procedures 44
PART II. Other Information
Item 1. Legal Proceedings 45
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 46
Item 6. Exhibits 47
Signatures 49
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
July 31, October 31,
ASSETS 2005 2004
----------- -----------
(unaudited)
Homebuilding:
Cash and cash equivalents.................... $ 43,985 $ 65,013
----------- -----------
Inventories - At the lower of cost or fair
value:
Sold and unsold homes and lots under
development.............................. 2,278,418 1,785,706
----------- -----------
Land and land options held for future
development or sale...................... 448,296 436,184
----------- -----------
Consolidated Inventory Not Owned:
Specific performance options............. 5,705 11,926
Variable interest entities............... 134,196 201,669
Other options............................ 120,920 31,824
----------- -----------
Total Consolidated Inventory Not Owned.. 260,821 245,419
----------- -----------
Total Inventories........................ 2,987,535 2,467,309
----------- -----------
Investments in and advances to unconsolidated
joint ventures............................. 160,655 42,441
----------- -----------
Receivables, deposits, and notes ............ 63,670 55,152
----------- -----------
Property, plant, and equipment - net......... 77,837 44,137
----------- -----------
Prepaid expenses and other assets............ 121,594 93,616
----------- -----------
Goodwill..................................... 32,658 32,658
----------- -----------
Definite life intangibles.................... 120,136 125,492
----------- -----------
Total Homebuilding....................... 3,608,070 2,925,818
----------- -----------
Financial Services:
Cash and cash equivalents.................... 11,514 13,011
Mortgage loans held for sale................. 182,084 209,193
Other assets................................. 4,714 8,245
----------- -----------
Total Financial Services................. 198,312 230,449
----------- -----------
Income Taxes Receivable - Including Deferred
Tax Benefits................................. 47,701 -
----------- -----------
Total Assets................................... $ 3,854,083 $ 3,156,267
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
July 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004
----------- -----------
(unaudited)
Homebuilding:
Nonrecourse land mortgages....................... $ 31,221 $ 25,687
Accounts payable and other liabilities........... 380,920 329,621
Customers' deposits.............................. 112,893 80,131
Nonrecourse mortgages secured by operating
Properties..................................... 24,495 24,951
Liabilities from inventory not owned............. 132,309 68,160
----------- -----------
Total Homebuilding........................... 681,838 528,550
----------- -----------
Financial Services:
Accounts payable and other liabilities........... 6,868 6,080
Mortgage warehouse line of credit................ 167,174 188,417
----------- -----------
Total Financial Services..................... 174,042 194,497
----------- -----------
Notes Payable:
Revolving credit agreement....................... 43,050 115,000
Senior notes..................................... 803,207 602,737
Senior subordinated notes........................ 400,000 300,000
Accrued interest................................. 12,841 15,522
----------- -----------
Total Notes Payable.......................... 1,259,098 1,033,259
----------- -----------
Income Taxes Payable............................... - 48,999
----------- -----------
Total Liabilities............................ 2,114,978 1,805,305
----------- -----------
Minority interest from inventory not owned......... 109,125 155,096
----------- -----------
Minority interest from consolidated joint ventures. 1,206 3,472
----------- -----------
Stockholders' Equity:
Preferred Stock,$.01 par value-authorized 100,000
shares; liquidation preference of $25,000
per share, issued 5,600 shares at July 31, 2005
and zero shares at October 31, 2004............ - -
Common Stock,Class A,$.01 par value-authorized
200,000,000 shares; issued 57,906,182 shares at
July 31, 2005 and 56,797,313 shares at
October 31, 2004 (including 10,795,656 shares
at July 31, 2005 and 10,395,656 shares at
October 31, 2004 held in Treasury).............. 579 568
Common Stock,Class B,$.01 par value (convertible
to Class A at time of sale) authorized
30,000,000 shares; issued 15,372,561 shares at
July 31, 2005 and 15,376,972 shares at
October 31, 2004 (including 691,748 shares at
July 31, 2005 and October 31, 2004 held in
Treasury)....................................... 154 154
Paid in Capital................................... 350,085 199,643
Retained Earnings................................. 1,357,575 1,053,863
Deferred Compensation............................. (7,474) (11,784)
Treasury Stock - at cost.......................... (72,145) (50,050)
----------- -----------
Total Stockholders' Equity.................... 1,628,774 1,192,394
----------- -----------
Total Liabilities and Stockholders' Equity..........$ 3,854,083 $ 3,156,267
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
----------------------- -----------------------
2005 2004 2005 2004
----------- ---------- ----------- ----------
Revenues:
Homebuilding:
Sale of homes...................... $ 1,289,373 $1,044,610 $ 3,495,014 $2,702,826
Land sales and other revenues...... 4,820 2,756 32,747 8,549
----------- ---------- ----------- ----------
Total Homebuilding............... 1,294,193 1,047,366 3,527,761 2,711,375
Financial Services................... 18,533 13,683 48,995 41,926
----------- ---------- ----------- ----------
Total Revenues................... 1,312,726 1,061,049 3,576,756 2,753,301
----------- ---------- ----------- ----------
Expenses:
Homebuilding:
Cost of sales, excluding interest.. 940,202 778,216 2,588,285 2,016,257
Cost of sales interest............. 19,257 13,369 47,089 39,159
----------- ---------- ----------- ----------
Total Cost of Sales.............. 959,459 791,585 2,635,374 2,055,416
----------- ---------- ----------- ----------
Selling, general and administrative 116,388 82,548 319,680 234,853
Inventory impairment loss.......... 1,354 1,438 3,352 2,230
----------- ---------- ----------- ----------
Total Homebuilding............... 1,077,201 875,571 2,958,406 2,292,499
Financial Services................... 12,296 8,637 33,683 25,334
Corporate General and Administrative. 18,884 13,011 49,678 42,229
Other Interest....................... 4,224 4,356 13,317 14,605
Expenses Related To Extinguishment
Of Debt............................ - 8,663 - 9,597
Other Operations..................... 7,356 3,361 10,575 9,107
Intangible Amortization.............. 11,781 9,716 32,255 19,115
----------- ---------- ----------- ----------
Total Expenses................... 1,131,742 923,315 3,097,914 2,412,486
----------- ---------- ----------- ----------
Income from unconsolidated joint
ventures........................... 13,907 2,282 22,482 4,053
----------- ---------- ----------- ----------
Income Before Income Taxes............. 194,891 140,016 501,324 344,868
----------- ---------- ----------- ----------
State and Federal Income Taxes:
State................................ 10,535 7,761 26,299 20,417
Federal.............................. 68,262 45,517 171,313 109,530
----------- ---------- ----------- ----------
Total Taxes........................ 78,797 53,278 197,612 129,947
----------- ---------- ----------- ----------
Net Income............................. $ 116,094 $ 86,738 $ 303,712 $ 214,921
=========== ========== =========== ==========
Per Share Data:
Basic:
Income per common share.............. $ 1.85 $ 1.40 $ 4.87 $ 3.47
Weighted average number of common
shares outstanding................. 62,754 62,001 62,412 61,887
Assuming dilution:
Income per common share.............. $ 1.76 $ 1.33 $ 4.63 $ 3.30
Weighted average number of common
shares outstanding................ 65,796 65,115 65,574 65,158
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars In Thousands)
(Unaudited)
A Common Stock B Common Stock Preferred Stock
------------------- ------------------- ------------------------
Shares Shares Shares
Issued and Issued and Issued and Paid-In Retained Deferred Treasury
Outstanding Amount Outstanding Amount Outstanding Amount Capital Earnings Comp. Stock Total
----------- ------ ----------- ------ ----------- -------- -------- ---------- -------- --------- ----------
Balance, October 31,
2004.......... 46,401,657 $ 568 14,685,224 $ 154 $199,643 $1,053,863 $(11,784)$(50,050) $1,192,394
Issuance of Preferred
Stock........... 5,600 135,720 135,720
Sale of common
stock under employee
stock option plan 880,628 9 17,884 17,893
Net Stock Bonus
issuances........ 223,830 2 (2,469) 899 (1,568)
Net Restricted Stock
granted.......... (693) 659 (34)
Amortization of
Restricted Stock.. 2,752 2,752
Conversion of
Class B to
Class A
common stock...... 4,411 (4,411)
Treasury Stock
Purchases......... (400,000) (22,095) (22,095)
Net Income.......... 303,712 303,712
----------- ------ ----------- ------ ----------- -------- -------- ---------- -------- --------- ----------
Balance, July 31,
, 2005............ 47,110,526 $ 579 14,680,813 $ 154 5,600 $ - $350,085 $1,357,575 $ (7,474)$(72,145) $1,628,774
=========== ====== =========== ====== =========== ======== ======== ========== ======== ========= ==========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands - unaudited)
Nine Months Ended
July 31,
------------------------
2005 2004
----------- -----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 303,712 $ 214,921
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation.................................... 5,912 4,606
Intangible amortization......................... 32,255 19,115
Amortization of deferred compensation........... 1,150 506
Gain on sale and retirement of property
and assets.................................... (3,479) (238)
Income from unconsolidated joint ventures....... 22,482 4,053
Expenses related to extinguishment of debt...... - 9,597
Deferred income taxes........................... (14,287) (14,426)
Impairment losses............................... 3,352 2,230
Decrease (increase) in assets:
Mortgage notes receivable..................... 27,357 73,548
Receivables, prepaids and other assets........ (19,572) (27,232)
Inventories................................... (434,634) (658,351)
(Decrease) increase in liabilities:
State and Federal income taxes................ (67,204) (5,817)
Customers' deposits........................... 25,252 29,215
Interest and other accrued liabilities........ 8,124 12,602
Post development completion costs............. 1,017 (2,929)
Accounts payable.............................. 12,312 32,575
----------- -----------
Net cash (used in) operating activities..... (96,251) (306,025)
----------- -----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets....... 8,040 721
Purchase of property, equipment and other fixed
assets and acquisitions of homebuilding
companies......................................... (131,872) (56,634)
Net investments of capital in unconsolidated
affiliates........................................ (140,619) (27,871)
----------- -----------
Net cash (used in) investing activities..... (264,451) (83,784)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 1,379,997 2,674,035
Proceeds from senior debt........................... 200,000 365,000
Proceeds from senior subordinated debt.............. 100,000
Principal payments on mortgages and notes........... (1,458,129) (2,599,739)
Principal payments on senior debt................... - (156,844)
Purchase of treasury stock.......................... (22,095) (3,022)
Proceeds from sale of stock and employee stock plan. 138,404 1,142
----------- -----------
Net cash provided by financing activities.... 338,177 280,572
----------- -----------
Net (Decrease) In Cash........... ....................... (22,525) (109,237)
Cash and Cash Equivalents Balance, Beginning
Of Period........................................... 78,024 128,221
----------- -----------
Cash and Cash Equivalents Balance, End Of Period...... $ 55,499 $ 18,984
=========== ===========
Supplemental Disclosures of Cash Flow
Cash paid during the year for:
Interest......................................... $ 63,975 $ 56,795
=========== ===========
Income taxes..................................... $ 279,686 $ 150,016
=========== ===========
Supplemental disclosures of noncash operating
activities:
Consolidated Inventory Not Owned:
Specific performance options..................... $ 5,415 $ 21,798
Variable interest entities....................... 121,989 181,265
Other options.................................... 118,405 29,382
----------- -----------
Total Inventory Not Owned.......................... $ 245,809 $ 232,445
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 our 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 interim periods are not necessarily
indicative of the results which might be expected for a full year. The
balance sheet at October 31, 2004 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.
In March 2004, our Board of Directors authorized a 2-for-1 stock
split in the form of a 100% stock dividend of Class A and Class B Common
Stock payable to stockholders of record on March 19, 2004. The additional
shares were distributed on March 26, 2004. All share and per share
amounts (except par value) have been retroactively adjusted to reflect the
stock split. There was no net effect on total stockholders' equity as a
result of the stock split.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. Stock-Based Compensation Plans - SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123") established a fair value based
method of accounting for stock-based compensation plans, including stock
options and non-vested stock. Under SFAS 123, registrants may elect to
continue accounting for stock-based compensation plans under APB Opinion
No. 25 "Accounting for Stock Issued to Employees" ("APB 25"), but are
required to provide pro forma net income and earnings per share
information "as if" the fair value approach had been adopted. We continue
to account for our stock-based compensation plans under APB 25. Under APB
25, no compensation expense is recognized when the exercise price of our
employee stock options equals the market price of the underlying stock on
the date of grant. However, for non-vested stock awards, compensation
expense equal to the market price of the stock on the date of grant is
recognized ratably over the vesting period.
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS 123 to provide
alternative methods of transition for an entity that voluntarily adopts
the fair value recognition method of recording stock-based compensation
expense. SFAS 148 also amends the disclosure provisions of SFAS 123 and
APB Opinion No. 28, "Interim Financial Reporting", to require disclosure
in the summary of significant accounting policies of the effects of an
entity's accounting policy with respect to stock-based compensation on
reported net income and earnings per share in annual and interim financial
statements.
For purposes of pro forma disclosures, the estimated fair value of
the options using Black-Scholes is amortized to expense over the options'
vesting period. Our pro forma information follows (dollars in thousands
except for earnings per share information):
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ ------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net income as reported.......... $116,094 $ 86,738 $303,712 $214,921
Deduct: total stock-based employee
compensation expense determined
using Black-Scholes fair value
based method for all awards... 1,689 1,244 4,531 3,175
-------- -------- -------- --------
Pro forma net income............ $114,405 $ 85,494 $299,181 $211,746
======== ======== ======== ========
Pro forma basic earnings per share $ 1.82 $ 1.38 $ 4.79 $ 3.42
======== ======== ======== ========
Basic earnings per share as
reported...................... $ 1.85 $ 1.40 $ 4.87 $ 3.47
======== ======== ======== ========
Pro forma diluted earnings per
share......................... $ 1.74 $ 1.31 $ 4.56 $ 3.25
======== ======== ======== ========
Diluted earnings per share as
reported...................... $ 1.76 $ 1.33 $ 4.63 $ 3.30
======== ======== ======== ========
Pro forma information regarding net income and earnings per share is
calculated as if we had accounted for our stock-based compensation under
the fair value method of SFAS 123. The fair value for options is
established at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions for July 31, 2005
and 2004: risk-free interest rate of 4.2% for both periods; dividend
yield of zero; volatility factor of the expected market price of our
common stock of 0.47 and 0.43, respectively; and a weighted average
expected life of the option of 4.9 and 5.2 years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because our employee stock options have
characteristics significantly different from traded options, and changes
in the subjective input assumptions can materially affect the fair value
estimate, management believes the existing models do not necessarily
provide a reliable measure of the fair value of its employee stock
options.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share
Based Payment" ("SFAS 123R"), which is a revision of SFAS 123 and
supersedes APB 25 and SFAS 148. This statement requires that the cost
resulting from all share-based payment transactions be recognized in an
entity's financial statements. This statement establishes fair value as
the measurement objective in accounting for share-based payment
arrangements and requires all entities to apply a fair value based
measurement method in accounting for share-based payment transactions with
employees except for equity instruments held by employee share ownership
plans.
SFAS 123R applies to all awards granted after the required effective
date (the beginning of the first annual reporting period that begins after
June 15, 2005) and to awards modified, repurchased, or cancelled after
that date. As of the required effective date, all public entities that
used the fair value based method for either recognition or disclosure
under Statement 123 will apply SFAS 123R using a modified version of
prospective application. Under that transition method, compensation cost
is recognized on or after the required effective date for the portion of
outstanding awards for which the requisite service has not yet been
rendered, based on the grant-date fair value of those awards calculated
under Statement 123 for either recognition or pro forma disclosures. For
periods before the required effective date, those entities may elect to
apply a modified version of the retrospective application under which
financial statements for prior periods are adjusted on a basis consistent
with the pro forma disclosures required for those periods by Statement
123. As a result, beginning in our fiscal first quarter of 2006, we will
adopt SFAS 123R and begin reflecting the stock option expense determined
under fair value based methods in our income statement rather than as pro
forma disclosure in the notes to the financial statements. We expect the
impact of the adoption of SFAS 123R to be a reduction of first quarter
fiscal 2006 net income of approximately $1.7 million assuming modified
prospective application.
3. Interest costs incurred, expensed and capitalized were:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ ------------------
2005 2004 2005 2004
-------- -------- -------- --------
(Dollars in Thousands)
Interest Capitalized at
Beginning of Period........ $ 44,488 $ 32,585 $ 37,465 $ 24,833
Interest Incurred(1)(2)...... 27,991 21,426 71,939 65,217
Cost of Sales Interest
Expensed (2)............... (19,257) (13,369) (47,089) (39,159)
Other Interest Expensed...... (4,224) (4,356) (13,317) (14,605)
-------- -------- -------- --------
Interest Capitalized at
End of Period.............. $ 48,998 $ 36,286 $ 48,998 $ 36,286
======== ======== ======== ========
(1) Data does not include interest incurred by our mortgage and finance
subsidiaries.
(2) Includes interest on borrowings for construction, land and land
development costs which are charged to interest expense when
homes are delivered or when land is not under active development.
4. Accumulated depreciation at July 31, 2005 and October 31, 2004
amounted to $34.6 million and $31.7 million, respectively, for our
homebuilding and senior rental residential assets.
5. In accordance with Financial Accounting Standards No. 144 ("SFAS
144") "Accounting for the Impairment of or Disposal of Long Lived Assets",
we record impairment losses on inventories related to communities under
development when events and circumstances indicate that they may be
impaired and the undiscounted cash flows estimated to be generated by
those assets are less than their carrying amounts. In addition, from time
to time, we will write off certain residential land options including
approval and engineering costs for land management decided not to
purchase. We wrote off such costs in the amount of $1.4 million during
both the three months ended July 31, 2005 and 2004, respectively, and $3.4
million and $2.2 million during the nine months ended July 31, 2005 and
2004, respectively. Residential inventory impairment losses and option
write-offs are reported in the Condensed Consolidated Statements of Income
as "Homebuilding-Inventory impairment loss".
6. We provide a warranty accrual for repair costs over $1,000 to
homes, community amenities, and land development infrastructure. We
accrue for warranty costs as part of cost of sales at the time each home
is closed and title and possession have been transferred to the homebuyer.
In addition, we accrue warranty costs under our $5 million per occurrence
general liability insurance deductible for 2005 (deductible was $150
thousand per occurrence for homes built between fiscal 2001 and fiscal
2004) as part of selling, general and administrative costs. Warranty
accruals are based upon historical experience. Additions and charges
incurred in the warranty accrual and general liability accrual for the
three and nine months ended July 31, 2005 and 2004 are as follows:
Three Months Ended Nine Months Ended
July 31, July 31,
-------- -------- -------- --------
2005 2004 2005 2004
-------- -------- -------- --------
(Dollars in Thousands)
Balance, beginning of period..... $81,122 $47,186 $64,922 $39,532
Additions........................ 15,329 10,869 41,246 27,476
Charges incurred................. (8,841) (4,697) (18,558) (13,650)
-------- -------- -------- --------
Balance, end of period.......... $87,610 $53,358 $87,610 $53,358
======== ======== ======== ========
7. We are subject to extensive and complex regulations that affect
the development and home building, sales and customer financing processes,
including zoning, density, building standards and mortgage financing; and
we are involved in litigation arising in the ordinary course of business,
none of which is expected to have a material adverse effect on our
financial position or results of operations. In addition, in March 2005,
we received two requests for information pursuant to Section 308 of the
Clean Water Act from Region 3 of the Environmental Protection Agency
("EPA") requesting information about storm water discharge practices in
connection with completed, ongoing and planned homebuilding projects by
subsidiaries in the states and district that comprise EPA Region 3. We
also received a notice of violations for one project in Pennsylvania and
requests for sampling plan implementation in two projects in Pennsylvania.
The amount requested by the EPA to settle the asserted violations at the
one project was not material. We have provided the information requested.
To the extent that the information provided were to lead the EPA to assert
violations of state and/or federal regulatory requirements and request
injunctive relief and/or civil penalties, we will defend and attempt to
resolve such asserted violations.
Our sales and customer financing processes are subject to the
jurisdiction of the U. S. Department of Housing and Urban Development
("HUD"). In connection with the Real Estate Settlement Procedures Act,
HUD has recently inquired about our process of referring business to our
affiliated mortgage company and has separately requested documents related
to customer financing. We have responded to HUD's inquiries.
At this time, we cannot predict the outcome of the EPA's or HUD's
reviews or estimate the costs that may be involved in resolving such
matters.
8. As of July 31, 2005 and October 31, 2004, respectively, we are
obligated under various performance letters of credit amounting to $305.4
million and $180.6 million.
9. Our amended and restated unsecured Revolving Credit Agreement
("Agreement") with a group of banks provides a revolving credit line of
$1.2 billion through July 2009. The facility contains an accordion
feature under which the aggregate commitment can be increased to $1.3
billion subject to the availability of additional commitments. Interest
is payable monthly at various rates based on a margin ranging from 1.00%
to 1.95% per annum, depending on our Consolidated Leverage Ratio, as
defined in the Agreement, plus, at the Company's option, either (1) a base
rate determined by reference to the higher of (a) PNC Bank, National
Association's prime rate and (b) the federal funds rate plus 1/2% or (2) a
LIBOR-based rate for a one, two, three, or six month interest period as
selected by the Company. In addition, we pay a fee ranging from 0.20% to
0.30% per annum on the unused portion of the revolving credit line
depending on its Leverage Ratio and the average percentage unused portion
of the revolving credit line. Each of our significant subsidiaries,
except for various subsidiaries formerly engaged in the issuance of
collateralized mortgage obligations, a subsidiary formerly engaged in
homebuilding activity in Poland, our financial services subsidiaries,
joint ventures, and certain other subsidiaries, is a guarantor under the
Agreement. As of July 31, 2005, the outstanding balance under the
Agreement was $43.1 million and as of October 31, 2004, the outstanding
balance under the previous facility was $115.0 million.
Our amended secured mortgage loan warehouse agreement with a group
of banks, which is a short-term borrowing facility, provides up to $250
million through April 2006. Interest is payable monthly at the Eurodollar
Rate plus 1.25%. The loan is repaid when we sell the underlying mortgage
loans to permanent investors. As of July 31, 2005, borrowings under this
agreement were $167.2 million and as of October 31, 2004 the outstanding
balance under the previous facility was $188.4 million.
10. On November 30, 2004, we issued $200 million of 6 1/4% Senior
Notes due 2015 and $100 million of 6% Senior Subordinated Notes due 2010.
The net proceeds of the issuance were used to repay the outstanding
balance on our revolving credit facility as of November 30, 2004 and for
general corporate purposes.
At July 31, 2005, we had $805.3 million of outstanding senior notes
($803.2 million, net of discount), comprised of $140.3 million 10 1/2%
Senior Notes due 2007, $100 million 8% Senior Notes due 2012, $215 million
6 1/2% Senior Notes due 2014, $150 million 6 3/8% Senior Notes due 2014,
and $200 million 6 1/4% Senior Notes due 2015. At July 31, 2005, we had
$400 million of outstanding senior subordinated notes, comprised of $150
million 8 7/8% Senior Subordinated Notes due 2012, $150 million 7 3/4%
Senior Subordinated Notes due 2013, and $100 million 6% Senior
Subordinated Notes due 2010.
As a subsequent event to our July 31, 2005 Consolidated Balance
Sheet, on August 8, 2005, we issued $300 million 6 1/4% Senior Notes due
2016. The notes are redeemable in whole or in part at our option at 100%
of their principal amount plus the payment of a make-whole amount defined
in the offering memorandum. The net proceeds of the issuance were used to
repay the outstanding balance under our revolving credit facility as of
August 8, 2005, and for general corporate purposes, including
acquisitions.
Under the terms of the indentures governing our debt securities, we
have the right to make certain redemptions and depending on market
conditions, may do so from time to time.
11. Per Share Calculations - Basic earnings per common share is
computed using the weighted average number of shares outstanding. Diluted
earnings per common share is computed using the weighted average number of
shares outstanding adjusted for the incremental shares attributed to non-
vested stock and outstanding options to purchase common stock, of
approximately 3.0 million and 3.1 million for the three months ended July
31, 2005 and 2004, respectively, and approximately 3.2 million and 3.3
million for the nine months ended July 31, 2005 and 2004, respectively.
12. On July 12, 2005, we issued 5,600 shares of 7.625% Series A
Preferred Stock, with a liquidation preference of $25,000 per share.
Dividends on the Series A Preferred Stock are not cumulative and will be
paid at an annual rate of 7.625%. The Series A Preferred Stock is not
convertible into the Company's common stock and is redeemable in whole or
in part at our option at the liquidation preference of the shares
beginning on the fifth anniversary of their issuance. The Series A
Preferred Stock is traded as depositary shares, with each depositary share
representing 1/1000th of a share of Series A Preferred Stock. The
depositary shares are listed on the Nasdaq National Market under the
symbol "HOVNP". The net proceeds from the offering of $136 million,
reflected in Paid in Capital in the Condensed Consolidated Balance Sheet,
were used for the partial repayment of the outstanding balance under our
revolving credit facility as of July 12, 2005.
13. Variable Interest Entities - In January 2003, the Financial
Accounting Standards Board ("FASB") issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). A Variable
Interest Entity ("VIE") is created when (i) the equity investment at risk
is not sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties or (ii)
equity holders either (a) lack direct or indirect ability to make
decisions about the entity, (b) are not obligated to absorb expected
losses of the entity or (c) do not have the right to receive expected
residual returns of the entity if they occur. If an entity is deemed to
be a VIE, pursuant to FIN 46, an enterprise that absorbs a majority of the
expected losses of the VIE is considered the primary beneficiary and must
consolidate the VIE. FIN 46 was effective immediately for VIEs created
after January 31, 2003. Pursuant to FASB revision to FIN 46 ("FIN 46R"),
issued in December 2003, we were not required to apply the provisions of
FIN 46 to an interest held in a variable interest entity or potential
variable interest entity until our quarter ended April 30, 2004 for VIEs
created before February 1, 2003. In accordance with FIN 46R, we have
fully implemented FIN 46 as of April 30, 2004.
Based on the provisions of FIN 46, we have concluded that whenever
we option land or lots from an entity and pay a non-refundable deposit, a
VIE is created under condition (ii) (b) and (c) of the previous paragraph.
We are deemed to have provided subordinated financial support, which
refers to variable interests that will absorb some or all of an entity's
expected theoretical losses if they occur. For each VIE created with a
significant nonrefundable option fee, we compute expected losses and
residual returns based on the probability of future cash flows as outlined
in FIN 46. If we are deemed to be the primary beneficiary of the VIE we
consolidate it on our balance sheet. The fair value of the VIEs inventory
is reported as "Consolidated Inventory Not Owned - Variable interest
entities".
Management believes FIN 46 was not clearly thought out for
application in the homebuilding industry for land and lot options. Under
FIN 46, we can have an option and put down a small deposit as a percentage
of the purchase price and still have to consolidate the entity. Our
exposure to loss as a result of our involvement with the VIE is only the
deposit, not it's total assets consolidated on the balance sheet. In
certain cases, we will have to place inventory the VIE has optioned to
other developers on our balance sheet. In addition, if the VIE has
creditors, its debt will be placed on our balance sheet even though the
creditors have no recourse against us. Based on these observations we
believe consolidating VIEs based on land and lot option deposits does not
reflect the economic realities or risks of owning and developing land.
At July 31, 2005, all VIEs we were required to consolidate were a
result of our options to purchase land or lots from the selling entities.
We paid cash or issued letters of credit deposits to these twenty-one VIEs
totaling $19.3 million. Our option deposits represent our maximum
exposure to loss. The fair value of the property owned by these VIEs was
$134.2 million. Because we could not get the remainder of the selling
entities to provide us with any financial information, the fair value of
the optioned property less our cash deposits and liabilities from
inventory not owned, which totaled $109.1 million, was reported on the
balance sheet as "Minority interest from inventory not owned". Creditors
of these VIEs have no recourse against us.
We will continue to control land and lots using options. Not all
our deposits are with VIEs. Including the deposits with the twenty-one
VIEs above, at July 31, 2005, we have total cash and letters of credit
deposits amounting to approximately $330.9 million to purchase land lots
with a total purchase price of $4.5 billion. The maximum exposure to loss
is limited to the deposits although some deposits are refundable at our
request or refundable if certain conditions are not met.
14. Investments in Unconsolidated Homebuilding and Land Development
Joint Ventures - We enter into homebuilding and land development joint
ventures from time to time as a means of accessing lot positions,
expanding our market opportunities, establishing strategic alliances,
managing our risk profile and leveraging our capital base. Our
homebuilding joint ventures are generally entered into with third party
investors to develop land and construct homes that are sold directly to
third party homebuyers. Our land development joint ventures include those
entered into with developers and other homebuilders, as well as financial
investors, to develop finished lots for sale to the joint venture's
members or other third parties. During the nine months ended July 31,
2005, we entered into four new homebuilding joint ventures. As of July
31, 2005, we have investments in seven homebuilding joint ventures and
eight land development joint ventures. The tables set forth below
summarize the combined financial information related to our unconsolidated
homebuilding and land development joint ventures that are accounted for
under the equity method.
July 31, October 31,
2005 2004
----------- -----------
(Dollars in Thousands)
Assets:
Cash $ 25,170 $ 30,519
Inventories 765,409 176,360
Other assets 160,759 5,477
----------- -----------
Total assets $ 951,338 $ 212,356
=========== ===========
Liabilities and Equity:
Accounts payable and other
liabilities $ 174,487 $ 27,938
Notes payable 345,429 82,742
Equity 431,422 101,676
----------- -----------
Total liabilities and equity $ 951,338 $ 212,356
=========== ===========
Our share of equity related to these unconsolidated joint ventures,
shown separately in our Condensed Consolidated Balance Sheets, was
approximately $153.9 million and $40.8 million at July 31, 2005 and
October 31, 2004, respectively. Additionally, as of July 31, 2005 and
October 31, 2004, we had advances outstanding of approximately $6.8
million and $1.6 million to these unconsolidated joint ventures, which
were included in the accounts payable and other liabilities balances in
the table above.
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------- --------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(Dollars in Thousands)
Revenues $ 209,941 $ 15,656 $ 352,831 $ 30,025
Cost of sales and expenses (183,830) (11,214) (309,686) (23,571)
--------- --------- --------- ---------
Net income $ 26,111 $ 4,442 $ 43,145 $ 6,454
========= ========= ========= =========
Net income from unconsolidated joint ventures is shown on the face of
the Condensed Consolidated Statements of Income and reflects our
proportionate share of the income of these unconsolidated homebuilding and
land development joint ventures. Our ownership interests in the joint
ventures range from 20% to 50%.
Typically, our unconsolidated joint ventures obtain separate project
specific mortgage financing for each venture. Generally, the amount of
such financing is limited to no more than 50% of the joint venture's total
assets, and such financing is obtained on a non-recourse basis, with
guarantees from us limited only to performance and environmental
indemnification. In some instances, the joint venture entity is
considered a variable interest entity (VIE) under FIN 46 due to the
returns being limited to the equity holders; however, in these instances,
we are not the primary beneficiary, therefore we do not consolidate these
entities.
15. Recent Accounting Pronouncements - In December 2004, the FASB
issued SFAS No. 123 (Revised 2004) "Share Based Payment" ("SFAS 123R"),
which is a revision of SFAS 123 and supersedes APB 25 and SFAS 148. This
statement requires that the cost resulting from all share-based payment
transactions be recognized in an entity's financial statements. This
statement establishes fair value as the measurement objective in
accounting for share-based payment arrangements and requires all entities
to apply a fair value based measurement method in accounting for share-
based payment transactions with employees except for equity instruments
held by employee share ownership plans. See Note 2 for a further
description of SFAS 123R and its expected impact on our first quarter
fiscal 2006 net income.
In March 2005, the Securities and Exchange Commission released SEC
Staff Accounting Bulletin ("SAB") No. 107, "Share-Based Payment". SAB No.
107 provides the SEC staff position regarding the application of SFAS No.
123R. SAB No. 107 contains interpretive guidance related to the
interaction between SFAS No. 123R and certain SEC rules and regulations,
as well as provides the staff's views regarding the valuation of share-
based payment arrangements for public companies. SAB No. 107 also
highlights the importance of disclosures made related to the accounting
for share-based payment transactions. We are currently evaluating SAB No.
107 and will be incorporating it as part of our adoption of SFAS No. 123R.
In December 2004, the FASB issued Staff Position 109-1 ("FSP 109-
1"), Application of FASB Statement No. 109 ("FASB No. 109"), "Accounting
for Income Taxes", to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004. FSP 109-1 clarifies
guidance that applies to the new deduction for qualified domestic
production activities. When fully phased-in, the deduction will be up to
9% of the lesser of "qualified production activities income" or taxable
income. FSP 109-1 clarifies that the deduction should be accounted for as
a special deduction under FASB No. 109 and will reduce tax expense in the
period or periods that the amounts are deductible on the tax return. Any
tax benefits resulting from the new deduction will be effective for our
fiscal year ending October 31, 2006. We are in the process of assessing
the impact, if any, the new deduction will have on our financial
statements.
In June 2005, the Emerging Issues Task Force ("EITF") released Issue
No. 04-5 "Determining Whether a General Partner, or the General Partners
as a Group, Controls a Limited Partnership or Similar Entity When the
Limited Partners Have Certain Rights" ("EITF 04-5"). EITF 04-5 creates a
framework for evaluating whether a general partner or a group of general
partners controls a limited partnership and therefore should consolidate
the partnership. EITF 04-5 states that the presumption of general partner
control would be overcome only when the limited partners have certain
specific rights as outlined in EITF 04-5. EITF 04-5 is effective
immediately for all newly formed limited partnerships and for existing
limited partnership agreements that are modified. For general partners in
all other limited partnerships, EITF 04-5 is effective no later than the
beginning of the first reporting period in fiscal years beginning after
December 15, 2005. Implementation of EITF 04-5 is not expected to have a
material impact on the Company's results of operations or financial
position.
16. Intangible Assets - Except for goodwill, the intangible assets
recorded on our balance sheet are definite life intangibles, which include
tradenames, architectural designs, distribution processes, and contractual
agreements. We no longer amortize goodwill, but instead assess it
periodically for impairment. We are amortizing the definite life
intangibles over their expected useful life, ranging from three to seven
years.
17. Acquisitions - On March 1, 2005, we acquired for cash the
assets of Cambridge Homes, a privately held Orlando homebuilder and
provider of related financial services, headquartered in Altamonte
Springs, Florida. The acquisition provides us with a presence in the
greater Orlando market, which is the 9th largest housing market in the
U.S., based on 2003 new home starts.
Cambridge Homes designs, markets and sells both single family homes
and attached townhomes and focuses on first-time, move up and luxury
homebuyers. Cambridge Homes also provides mortgage financing, as well as
title and settlement services to its homebuyers.
The Cambridge Homes acquisition was accounted for as a purchase,
with the results of its operations included in our consolidated financial
statements as of the date of the acquisition.
On March 2, 2005, we acquired the operations of Town & Country
Homes, a privately held homebuilder and land developer headquartered in
Lombard, Illinois, which occurred concurrently with our entering into a
joint venture agreement with affiliates of Blackstone Real Estate Advisors
in New York to own and develop Town & Country's existing residential
communities. The joint venture is being accounted for under the equity
method. Town & Country Homes operations beyond the existing owned and
optioned communities, as of the acquisition date, are wholly owned and
included in our consolidated financial statements.
The Town & Country acquisition provides us with a strong initial
position in the greater Chicago market, which is the 6th largest housing
market in the U.S., based on 2003 new home starts. This acquisition also
expands our operations into the Florida markets of West Palm Beach, Boca
Raton and Fort Lauderdale and bolsters our current presence in
Minneapolis/St. Paul, which is the 10th largest housing market in the
U.S., based on 2003 new home starts. Town & Country designs, markets and
sells a diversified product portfolio in each of its markets, including
single family homes and attached townhomes, as well as mid-rise
condominiums in Florida. Town & Country serves a broad customer base
including first-time, move-up and luxury homebuyers.
During August 2005, we acquired substantially all of the assets of
First Home Builders of Florida and Oster Homes. See the subsequent events
note for further information.
18. Hovnanian Enterprises, Inc., the parent company (the "Parent"),
is the issuer of publicly traded common stock and preferred stock. One of
its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc. (the
"Subsidiary Issuer"), acts as a finance entity that as of July 31, 2005
had issued and outstanding approximately $400 million of Senior
Subordinated Notes, $805.3 million face value of Senior Notes, and $43.1
million drawn on a Revolving Credit Agreement. The Senior Subordinated
Notes, Senior Notes and the Revolving Credit Agreement are fully and
unconditionally guaranteed by the Parent.
In addition to 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, our
mortgage lending subsidiaries, a subsidiary formerly engaged in
homebuilding activity in Poland, our title insurance subsidiaries, joint
ventures, and certain other subsidiaries (collectively, the "Non-guarantor
Subsidiaries"), have guaranteed fully and unconditionally, on a joint and
several basis, the obligation of the Subsidiary Issuer to pay principal
and interest under the Senior Notes, Senior Subordinated Notes, and the
Revolving Credit Agreement.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries we have included the accompanying condensed
consolidating 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 condensed consolidating financial information presents
the results of operations, financial position, and cash flows of (i) the
Parent, (ii) the Subsidiary Issuer, (iii) the Guarantor Subsidiaries, (iv)
the Non-guarantor Subsidiaries, and (v) the eliminations to arrive at the
information for Hovnanian Enterprises, Inc. on a consolidated basis.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 31, 2005
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
---------- ---------- ------------ ------------ ----------- ----------
ASSETS
Homebuilding..................... $ 1,347 $ 78,401 $ 3,328,886 $ 199,436 $ $3,608,070
Financial Services................. (314) 198,626 198,312
Income Taxes Receivable (Payable).. 3,420 45,107 (826) 47,701
Investments in and amounts due to
and from consolidated
subsidiaries.................... 1,624,007 1,358,573 (1,576,781) (168,218)(1,237,581)
---------- ---------- ------------ ------------ ----------- ----------
Total Assets..................... $1,628,774 $1,436,974 $ 1,796,898 $ 229,018 $(1,237,581)$3,854,083
========== ========== ============ ============ =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding................... $ $ $ 678,701 $ 3,137 $ $ 681,838
Financial Services............. (138) 174,180 174,042
Notes Payable................... 1,257,880 (23,277) 24,495 1,259,098
Minority Interest................ 109,125 1,206 110,331
Stockholders' Equity............. 1,628,774 179,094 1,032,487 26,000 (1,237,581) 1,628,774
---------- ---------- ------------ ------------ ----------- ----------
Total Liabilities and Stockholders'
Equity......................... $1,628,774 $1,436,974 $ 1,796,898 $ 229,018 $(1,237,581)$3,854,083
========== ========== ============ ============ =========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 2004
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
---------- ---------- ------------ ------------ ---------- ----------
Assets
Homebuilding......................$ (99) $ 51,441 $ 2,804,800 $ 69,676 $ $2,925,818
Financial Services................ 149 230,300 230,449
Investments in and amounts due to
and from consolidated
subsidiaries.................... 1,262,169 1,037,671 (1,319,839) (41,423) (938,578)
---------- ---------- ------------ ------------ ----------- ---------
Total Assets......................$1,262,070 $1,089,112 $ 1,485,110 $ 258,553 $ (938,578) $3,156,267
========== ========== ============ ============ =========== ==========
Liabilities
Homebuilding......................$ $ 149 $ 526,278 $ 2,123 $ $ 528,550
Financial Services................. (1) 194,498 194,497
Notes Payable...................... 1,032,259 (28,324) 29,324 1,033,259
Income Taxes Payable (Receivables). 69,676 1,961 (23,579) 941 48,999
Minority Interest.................. 155,096 3,472 158,568
Stockholders' Equity...............1,192,394 54,743 855,640 28,195 (938,578) 1,192,394
---------- ----------- ------------ ------------ ----------- ----------
Total Liabilities and Stockholders'
Equity......................... $1,262,070 $ 1,089,112 $ 1,485,110 $ 258,553 $ (938,578) $3,156,267
========== =========== ============ ============ =========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2005
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 60 $1,293,968 $ 165 $ $1,294,193
Financial Services............... 1,009 17,524 18,533
Intercompany Charges............. 53,685 54,559 (108,244)
Equity In Pretax Income of
Consolidated Subsidiaries...... 194,891 (194,891)
-------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 194,891 53,745 1,349,536 17,689 (303,135) 1,312,726
-------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... (814) 1,136,550 881 (17,171) 1,119,446
Financial Services............... 315 12,895 (914) 12,296
-------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. (814) 1,136,865 13,776 (18,085) 1,131,742
-------- ---------- ---------- ------------ ---------- ----------
Income from Unconsolidated
Joint Ventures................... 13,907 13,907
Income (Loss) Before Income Taxes. 194,891 54,559 226,578 3,913 (285,050) 194,891
State and Federal Income Taxes..... 78,797 31,571 129,114 3,078 (163,763) 78,797
-------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss).................$ 116,094 $ 22,988 $ 97,464 $ 835 $ (121,287)$ 116,094
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2004
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 21 $1,042,389 $ 4,956 $ $1,047,366
Financial Services............... 1,499 12,184 13,683
Intercompany Charges............. 25,315 31,898 (57,213)
Equity In Pretax Income of
Consolidated Subsidiaries......140,016 (140,016)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 140,016 25,336 1,075,786 17,140 (197,229) 1,061,049
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 8,431 937,908 3,925 (35,586) 914,678
Financial Services............... 788 8,422 (573) 8,637
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 8,431 939,696 12,347 (36,159) 923,315
------- ---------- ---------- ------------ ---------- ----------
Income From Unconsolidated Joint
Ventures......................... 2,282 2,282
Income (Loss) Before Income Taxes. 140,016 16,905 139,372 4,793 (161,070) 140,016
State and Federal Income Taxes..... 53,278 7,112 53,133 403 (60,648) 53,278
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss).................$ 86,738 $ 9,793 $ 86,239 $ 4,390 $ (100,422)$ 86,738
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 2005
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 161 $3,526,539 $ 1,061 $ $3,527,761
Financial Services............... 3,983 45,012 48,995
Intercompany Charges............. 154,345 156,408 (310,753)
Equity In Pretax Income of
Consolidated Subsidiaries......501,324 (501,324)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 501,324 154,506 3,686,930 46,073 (812,077) 3,576,756
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... (1,902) 3,133,308 2,909 (70,084) 3,064,231
Financial Services............... 2,087 34,388 (2,792) 33,683
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. (1,902) 3,135,395 37,297 (72,876) 3,097,914
------- ---------- ---------- ------------ ---------- ----------
Income from Unconsolidated Joint
Ventures........................ 22,482 22,482
Income (Loss) Before Income Taxes. 501,324 156,408 574,017 8,776 (739,201) 501,324
State and Federal Income Taxes.....197,612 54,743 221,741 4,384 (280,868) 197,612
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss).................$303,712 $ 101,665 $ 352,276 $ 4,392 $ (458,333)$ 303,712
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 2004
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 207 $2,690,081 $ 21,170 $ (83)$2,711,375
Financial Services............... 3,615 38,311 41,926
Intercompany Charges............. 60,123 95,338 (155,461)
Equity In Pretax Income of
Consolidated Subsidiaries......344,868 (344,868)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 344,868 60,330 2,789,034 59,481 (500,412) 2,753,301
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 8,859 2,469,407 16,898 (108,012) 2,387,152
Financial Services............... 1,853 25,953 (2,472) 25,334
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 8,859 2,471,260 42,851 (110,484) 2,412,486
------- ---------- ---------- ------------ ---------- ----------
Income From Unconsolidated Joint
Ventures......................... 4,053 4,053
Income (Loss) Before Income Taxes..344,868 51,471 321,827 16,630 (389,928) 344,868
State and Federal Income Taxes.....129,947 17,971 122,666 5,081 (145,718) 129,947
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss).................$214,921 $ 33,500 $ 199,161 $ 11,549 $ (244,210)$ 214,921
======== ========== ========== ============ =========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2005
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income........................$ 303,712 $ 101,665 $ 352,276 $ 4,392 $(458,333) $ 303,712
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... (58,182) 361,828 (1,050,904) (111,038) 458,333 (399,963)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 245,530 463,493 (698,628) (106,646) (96,251)
Net Cash (Used In)
Investing Activities............... (264,369) (82) (264,451)
Net Cash Provided By (Used In)
Financing Activities............... 116,309 228,049 15,304 (21,485) 338,177
Intercompany Investing and Financing
Activities - Net...................(361,838) (667,602) 902,645 126,795
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... 1 23,940 (45,048) (1,418) (22,525)
Balance, Beginning of Period......... 15 29,369 35,441 13,199 78,024
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period.....................$ 16 $ 53,309 $ (9,607) $ 11,781 $ $ 55,499
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2004
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income........................$ 214,921 $ 33,500 $ 199,161 $ 11,549 $ (244,210)$ 214,921
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 46,568 (7,558) (851,671) 47,505 244,210 (520,946)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 261,489 25,942 (652,510) 59,054 (306,025)
Net Cash (Used In)
Investing Activities............... (20,909) (62,600) (275) (83,784)
Net Cash Provided By (Used In)
Financing Activities............... (1,493) 315,000 (10,903) (22,032) 280,572
Intercompany Investing and Financing
Activities - Net...................(239,087) (469,933) 737,895 (28,875)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... (128,991) 11,882 7,872 (109,237)
Balance, Beginning of Period......... 15 135,846 (14,372) 6,732 128,221
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period.....................$ 15 $ 6,855 $ (2,490)$ 14,604 $ $ 18,984
======== ========= ========== ============ ========== ==========
19. Subsequent Events - On August 8, 2005, we issued $300 million
6 1/4% Senior Notes due 2016. The notes are redeemable in whole or in
part at our option at 100% of their principal amount plus the payment of a
make-whole amount defined in the offering memorandum. The net proceeds of
the issuance were used to repay the outstanding balance under our
revolving credit facility as of August 8, 2005, and for general corporate
purposes, including acquisitions.
On August 8, 2005 we acquired substantially all of the assets of
First Home Builders of Florida, a privately held homebuilder and provider
of related financial services headquartered in Cape Coral, Florida. First
Home Builders is a leading builder in Western Florida and ranked 1st in
the greater Fort Myers-Cape Coral market and 51st nationally based on 2004
permit activity as tracked by Builder Magazine. Thus, the acquisition
provides Hovnanian with the number one market position in the high growth
Fort Myers-Cape Coral market, which is the 18th largest housing market in
the U.S. as ranked by Builder Magazine based on 2004 permits.
First Home Builders of Florida designs, markets and sells single
family homes, with a focus on the first-time home buying segment. The
company also provides mortgage financing, title and settlement services to
its homebuyers. In 2004, First Home Builders delivered 1,819 homes with
revenues of $308 million. As of July 31, 2005, First Home Builders had
4,048 homes in contract backlog with a sales value of $888 million.
On August 3, 2005, we acquired substantially all of the homebuilding
assets of Oster Homes, a privately held Ohio homebuilder, headquartered in
Lorain, Ohio. The acquisition provides Hovnanian with a complementary
presence to its Ohio "build-on-your-own-lot" homebuilding operations.
Oster Homes builds in Lorain County in Northeast Ohio, just west of
Cleveland. Lorain is part of the greater Cleveland MSA, which is the 50th
largest housing market in the U. S., based on 2004 new home starts.
Oster Homes designs, markets and sells single family homes, with a
focus on first-time and move up homebuyers. Additionally, Oster Homes
utilizes a design center to market extensive pre-prices options and
upgrades.
In its 2004 fiscal year, Oster Homes delivered 247 homes with
revenue of $56 million. As of August 3, 2005, Oster Homes currently has
approximately 105 homes in contract backlog, with a sales value of $25
million, and owns or controls approximately 3,000 lots throughout the
greater Cleveland area. Oster Homes ranked as the 4th largest builder in
the Cleveland MSA in 2004 by Builder Magazine.
Both of these acquisitions will be accounted for as purchases with
the results of their operations included in our consolidated financial
statements as of the dates of the acquisitions.
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, 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 intangible assets less liabilities is recorded as
goodwill. 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 is 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 of the mortgage and the sales price is collected.
Inventories - 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 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 charged to cost of sales equally based upon the number of
homes to be constructed in each product type. 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,
less cost to complete including interest, and selling costs.
Insurance Deductible Reserves - For fiscal 2005, our deductible is
$500,000 per occurrence for worker's compensation and $5 million per
occurrence for general liability insurance. Reserves have been
established based upon actuarial analysis of estimated losses incurred
during 2005 and 2004.
Interest - Costs related to properties under development are
capitalized during the land development and home construction period and
expensed along with the associated cost of sales as the related
inventories are sold. Costs related to properties not under development
are charged to interest expense.
Land Options - Costs are capitalized when incurred and either
included as part of the purchase price when the land is acquired or
charged to operations when we determine we will not exercise the option.
In accordance with Financial Accounting Standards Board ("FASB")
Interpretation No. 46 ("FIN 46") "Consolidation of Variable Interest
Entities", an interpretation of Accounting Research Bulletin No. 51, SFAS
No. 49 "Accounting for Product Financing Arrangements" ("SFAS 49"), SFAS
No. 98 "Accounting for Leases" ("SFAS 98"), and Emerging Issues Task Force
("EITF") No. 97-10 "The Effects of Lessee Involvement in Asset
Construction" ("EITF 97-10"), we record on the Condensed Consolidated
Balance Sheet specific performance options, options with variable interest
entities, and other options under "Consolidated Inventory Not Owned" with
the offset to "Liabilities from inventory not owned", "Minority interest
from inventory not owned", and "Minority interest from consolidated joint
ventures".
Unconsolidated Homebuilding and Land Development Joint Ventures -
Investments in unconsolidated homebuilding and land development joint
ventures are accounted for under the equity method of accounting. Under
the equity method, we recognize our proportionate share of earnings and
losses earned by the joint venture upon the delivery of lots or homes to
third parties. Our ownership interests in our unconsolidated joint
ventures range from 20% to 50%. In some instances, the joint venture
entity is considered a variable interest entity (VIE) under FIN 46 due to
the returns being limited to the equity holders; however, in these
instances, we are not the primary beneficiary, therefore we do not
consolidate these entities.
Intangible Assets - Except for goodwill, the intangible assets
recorded on our balance sheet are definite life intangibles, which include
tradenames, architectural designs, distribution processes, and contractual
agreements. We no longer amortize goodwill, but instead assess it
periodically for impairment. We are amortizing the definite life
intangibles over their expected useful life, ranging from three to seven
years.
Post Development Completion and Warranty 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. In addition, our warranty
accrual includes estimated costs for construction work that is unforeseen,
but estimable based on past history, at the time of closing. Both of
these liabilities are recorded in "accounts payable and other liabilities"
in the Condensed Consolidated Balance Sheets.
CAPITAL RESOURCES AND LIQUIDITY
Our operations consist primarily of residential housing development
and sales in our Northeast Region (New Jersey, Southern New York State,
Pennsylvania, Ohio, Michigan, Illinois and Minnesota), our Southeast
Region (Washington D. C., Delaware, Maryland, Virginia, West Virginia,
North Carolina, South Carolina, and Florida), our Southwest Region (Texas
and Arizona), and our West Region (California). In addition, we provide
financial services to our homebuilding customers.
Our cash uses during the nine months ended July 31, 2005 were for
operating expenses, increases in housing inventories, construction, income
taxes, interest, acquisitions, and repayments of our revolving credit
facility. We provided for our cash requirements from housing and land
sales, the revolving credit facility, the issuance of $200 million of
Senior Notes and $100 million of Senior Subordinated Notes, financial
service revenues, and other revenues. We believe that these sources of
cash are sufficient to finance our working capital requirements and other
needs.
On July 3, 2001, our Board of Directors authorized a stock
repurchase program to purchase up to 4 million shares of Class A Common
Stock. As of July 31, 2005, 2.3 million shares of Class A Common Stock
have been purchased under this program. In addition in 2003, we retired
at no cost 1.5 million shares that were held by a seller of a previous
acquisition. On March 5, 2004, our Board of Directors authorized a 2-for-
1 stock split in the form of a 100% stock dividend. All share information
reflects this stock dividend.
On July 12, 2005, we issued 5,600 shares of 7.625% Series A
Preferred Stock, with a liquidation preference of $25,000 per share.
Dividends on the Series A Preferred Stock are not cumulative and will be
paid at an annual rate of 7.625%. The Series A Preferred Stock is not
convertible into the Company's common stock and is redeemable in whole or
in part at our option at the liquidation preference of the shares
beginning on the fifth anniversary of their issuance. The Series A
Preferred Stock is traded as depositary shares, with each depositary share
representing 1/1000th of a share of Series A Preferred Stock. The
depositary shares are listed on the Nasdaq National Market under the
symbol "HOVNP". The net proceeds from the offering of $136 million,
reflected in Paid in Capital in the Condensed Consolidated Balance Sheet,
were used for the partial repayment of the outstanding balance under our
revolving credit facility as of July 12, 2005.
Our homebuilding bank borrowings are made pursuant to an amended and
restated unsecured revolving credit agreement (the "Agreement") effective
June 17, 2005, that provides a revolving credit line and letter of credit
line of $1.2 billion through July 2009. The facility contains an
accordion feature under which the aggregate commitment can be increased to
$1.3 billion subject to the availability of additional commitments.
Interest is payable monthly at various rates based on a margin ranging
from 1.00% to 1.95% per annum, depending on our Consolidated Leverage
Ratio, as defined in the Agreement, plus, at the Company's option, either
(1) a base rate determined by reference to the higher of (a) PNC Bank,
National Association's prime rate and (b) the federal funds rate plus 1/2%
or (2) a LIBOR-based rate for a one, two, three or six month interest
period as selected by the Company. In addition, we pay a fee ranging from
0.20% to 0.30% per annum on the unused portion of the revolving credit
line depending on its Leverage Ratio and the average percentage unused
portion of the revolving credit line. At July 31, 2005, there was $43.1
million drawn under this Agreement and we had approximately $44.0 million
of homebuilding cash. At July 31, 2005, we had issued $305.4 million of
letters of credit which reduces cash available under the Agreement. We
believe that we will be able either to extend the Agreement beyond July
2008 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.
We and each of our significant subsidiaries, except for various
subsidiaries formerly engaged in the issuance of collateralized mortgage
obligations, a subsidiary formerly engaged in homebuilding activity in
Poland, our financial services subsidiaries, joint ventures, and certain
other subsidiaries, is a guarantor under the Agreement.
At July 31, 2005, we had $805.3 million of outstanding senior notes
($803.2 million, net of discount), comprised of $140.3 million 10 1/2%
Senior Notes due 2007, $100 million 8% Senior Notes due 2012, $215 million
6 1/2% Senior Notes due 2014, $150 million 6 3/8% Senior Notes due 2014,
and $200 million 6 1/4% Senior Notes due 2015. At July 31, 2005, we had
$400 million of outstanding senior subordinated notes, comprised of $150
million 8 7/8% Senior Subordinated Notes due 2012, $150 million 7 3/4%
Senior Subordinated Notes due 2013, and $100 million 6% Senior
Subordinated Notes due 2010. We and each of our wholly owned
subsidiaries, except for K. Hovnanian Enterprises, Inc., the issuer of the
senior and senior subordinated notes, and various subsidiaries formerly
engaged in the issuance of collateralized mortgage obligations, our
mortgage lending subsidiaries, a subsidiary engaged in homebuilding
activity in Poland, our title insurance subsidiaries, and joint ventures,
is a guarantor of the senior notes and senior subordinated notes.
Our mortgage banking subsidiary's warehouse agreement was amended on
April 26, 2005. Pursuant to the agreement, we may borrow up to $250
million. The agreement expires in April 2006 and interest is payable
monthly at the Eurodollar Rate plus 1.25%. We believe that we will be
able either to extend this agreement beyond April 2006 or negotiate a
replacement facility, but there can be no assurance of such extension or
replacement facility. As of July 31, 2005, the aggregate principal amount
of all borrowings under this agreement was $167.2 million.
Total inventory increased $504.8 million during the nine months
ended July 31, 2005. This increase excluded the increase in consolidated
inventory not owned of $15.4 million consisting of specific performance
options, options with variable interest entities, and other options that
were added to our balance sheet in accordance with SFAS 49, SFAS 98, and
EITF 97-10, and variable interest entities in accordance with FIN 46. See
"Notes to Condensed Consolidated Financial Statements" - Note 13 for
additional information on FIN 46. Excluding the impact of $91.7 million
from our acquisitions, total inventory in our Northeast Region increased
$177.3 million, the Southeast Region increased $180.0 million, the
Southwest Region increased $89.3 million, and our West Region decreased
$33.5 million; however, if you exclude the impact of property that was
owned at October 31, 2004, but is now under option and included in
"Consolidated Inventory Not Owned - Other options", our West Region
increased $50.0 million. The increase in inventory was primarily the
result of future planned organic growth in our existing markets.
Substantially all homes under construction or completed and included in
inventory at July 31, 2005 are expected to be closed during the next
twelve months. Most inventory completed or under development is partially
financed through our line of credit and senior and senior subordinated
indebtedness.
We usually option property for development prior to acquisition. By
optioning property, we are only subject to the loss of the cost of the
option 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 the number of buildable homes
included in our total residential real estate. The July 31, 2005 and
October 31, 2004 numbers exclude real estate owned and options in
locations where we have ceased development.
Active Proposed Grand
Active Communities Developable Total
Communities Homes Homes Homes
----------- --------- ------------ ---------
July 31, 2005:
Northeast Region.. 35 9,085 21,287 30,372
Southeast Region.. 142 13,624 24,821 38,445
Southwest Region.. 97 12,488 7,628 20,116
West Region....... 49 9,330 8,807 18,137
----------- --------- ------------ ---------
323 44,527 62,543 107,070
=========== ========= ============ =========
Owned.......... 22,920 4,665 27,585
Optioned....... 21,607 57,878 79,485
--------- ------------ ---------
Total........ 44,527 62,543 107,070
========= ============ =========
Active Proposed Grand
Active Communities Developable Total
Communities Homes Homes Homes
----------- --------- ------------ ----------
October 31, 2004:
Northeast Region.. 28 7,163 21,160 28,323
Southeast Region.. 113 12,124 19,697 31,821
Southwest Region.. 85 10,859 9,205 20,064
West Region....... 49 11,277 8,455 19,732
----------- ----------- ---------- -----------
275 41,423 58,517 99,940
=========== =========== ========== ===========
Owned.......... 20,713 6,024 26,737
Optioned....... 20,710 52,493 73,203
----------- ---------- -----------
Total........ 41,423 58,517 99,940
=========== ========== ===========
The following table summarizes our started or completed unsold homes
and models. The increase in total started or completed unsold homes
compared to the prior year is due to the increase in mid-rise and high-
rise buildings for which we count all units started when vertical
construction begins.
July 31, October 31,
2005 2004
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 252 23 275 77 39 116
Southeast Region.... 390 53 443 222 35 257
Southwest Region.... 864 68 932 683 78 761
West Region......... 256 161 417 329 160 489
------ ------ ----- ------ ------ -----
Total 1,762 305 2,067 1,311 312 1,623
====== ====== ===== ====== ====== =====
Receivables, deposits, and notes increased $8.5 million to $63.7
million at July 31, 2005. The increase was primarily due to an increase
in refundable deposits with municipalities as we begin development of new
communities and the timing of cash received from homes that closed at the
end of July 2005. Receivables from home sales amounted to $19.1 million
and $17.6 million at July 31, 2005 and October 31, 2004, respectively.
Prepaid expenses and other assets are as follows:
July 31, October 31, Dollar
2005 2004 Change
---------- ----------- ---------
Prepaid insurance.................... $ 4,490 $ - $ 4,490
Prepaid project costs................ 60,134 48,695 11,439
Senior residential rental properties. 8,549 8,830 (281)
Other prepaids....................... 18,983 16,632 2,351
Other assets......................... 29,438 19,459 9,979
----------- ----------- ---------
$ 121,594 $ 93,616 $ 27,978
=========== =========== =========
Prepaid insurance increased due to a payment of a full year of
insurance costs during the first quarter of every year. These costs are
amortized monthly on a straight line basis. Prepaid project costs
increased due to new communities. Prepaid project costs consist of
community specific expenditures that are used over the life of the
community. Such prepaids are expensed as homes are delivered. Other
prepaids mainly increased as a result of prepaid bond fees from our
November 2004 offering of $100 million and $200 million senior notes. The
increase in other assets is attributable to the Executive Deferred
Compensation Plan, due to increased profit sharing contributions for
Senior Management, and GMAC model costs which increased as a result of
final settlements for models in the program.
Investments in joint ventures increased as we entered into four new
homebuilding joint ventures during the nine months ended July 31, 2005.
As of July 31, 2005, we have investments in seven homebuilding joint
ventures and eight land and land development joint ventures. Other than
performance guarantees and environmental indemnifications, no other
guarantees associated with unconsolidated joint ventures have been given.
At July 31, 2005, we had $32.7 million of goodwill. This amount
resulted from company acquisitions prior to fiscal 2003.
Definite life intangibles decreased $5.4 million to $120.1 million
at July 31, 2005. The decrease was the result of amortization during the
nine months of $32.2 million, offset by the Cambridge Homes acquisition
and contingent payments related to past acquisitions. For any
acquisition, professionals are hired to appraise all acquired intangibles.
See "- Critical Accounting Policies - Intangible Assets" above for
additional information on intangibles. For tax purposes all our
intangibles, except those resulting from an acquisition classified as a
tax free exchange, are being amortized over 15 years.
Accounts payable and other liabilities are as follows:
July 31, October 31, Dollar
2005 2004 Change
--------- ----------- --------
Accounts payable.......................$126,832 $ 113,866 $ 12,966
Reserves............................... 95,571 72,289 23,282
Accrued expenses....................... 43,098 28,016 15,082
Accrued compensation................... 62,586 78,283 (15,697)
Property secured by a mortgage......... - 11,750 (11,750)
Other liabilities...................... 52,833 25,417 27,416
--------- ----------- --------
$380,920 $ 329,621 $ 51,299
========= =========== ========
The increase in accounts payable was primarily due to increases in
homes under construction in the third quarter of 2005 compared to the
fourth quarter of 2004 throughout our markets, which results in more
activity and higher payables. Reserves increased for our general
liability insurance deductible, owner controlled insurance program and
bonding. The increase in accrued expenses is due to liabilities
associated with acquisition earnout obligations, as well as the increase
of accruals for uninvoiced payables as our business grows. The decrease
in accrued compensation was due to the payout of our fiscal year 2004
bonuses during the first quarter of 2005.
Property secured by a mortgage decreased as the result of a property
in our Northeast Region that was secured by a mortgage at October 31,
2004, that was paid for in cash in the quarter, thus relieving the
liability. The increase in other liabilities is primarily due to
increased executive incentives from increased contributions, increased
payroll withholding due to timing of insurance claims and a note payable
in our Southeast Region related to an acquisition.
Financial Services - Mortgage loans held for sale consist of
residential mortgages receivable of which $182.1 million and $209.2
million at July 31, 2005 and October 31, 2004, respectively, are being
temporarily warehoused and awaiting sale in the secondary mortgage market.
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, 2005
COMPARED TO THE THREE AND NINE MONTHS ENDED JULY 31, 2004
Total Revenues:
Compared to the same prior period, revenues increased as follows:
Three Months Ended
--------------------------------------------
July 31, July 31, Dollar Percentage
2005 2004 Change Change
----------- ----------- -------- ----------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $1,289,373 $1,044,610 $244,763 23.4%
Land sales and other
revenues........... 4,820 2,756 2,064 74.9%
Financial Services..... 18,533 13,683 4,850 35.4%
----------- ----------- -------- ----------
Total Revenues... $1,312,726 $1,061,049 $251,677 23.7%
=========== =========== ======== ==========
Nine Months Ended
----------------------------------------------
July 31, July 31, Dollar Percentage
2005 2004 Change Change
----------- ----------- ----------- ----------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $3,495,014 $2,702,826 $ 792,188 29.3%
Land sales and other
revenues........... 32,747 8,549 24,198 283.1%
Financial Services... 48,995 41,926 7,069 16.9%
----------- ----------- ----------- ----------
Total Revenues... $3,576,756 $2,753,301 $ 823,455 29.9%
=========== =========== =========== ==========
For further details on land sales and other revenues, see paragraph
titled "Land Sales and Other Revenues" later in this document.
Homebuilding:
Compared to the same prior period, housing revenues increased $244.8
million or 23.4% during the three months ended July 31, 2005 and increased
$792.2 million or 29.3% during the nine months ended July 31, 2005.
Housing revenues are recorded when title is conveyed to the buyer,
adequate cash payment has been received, and there is no continued
involvement. 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.
Information on homes delivered by market area is set forth below:
Three Months Ended Nine Months Ended
July 31, July 31,
--------------------- ----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
(Dollars in Thousands)
Northeast Region:
Dollars............ $ 244,973 $ 261,470 $ 750,679 $ 661,998
Homes.............. 644 792 2,056 2,101
Southeast Region (1):
Dollars............ $ 405,467 $ 272,395 $1,004,201 $ 716,942
Homes.............. 1,212 1,004 3,232 2,778
Southwest Region:
Dollars............ $ 189,766 $ 181,491 $ 489,810 $ 463,869
Homes.............. 1,021 1,045 2,636 2,653
West Region:
Dollars............ $ 449,167 $ 329,254 $1,250,324 $ 860,017
Homes.............. 1,090 897 3,057 2,460
Consolidated Total:
Dollars............ $ 1,289,373 $ 1,044,610 $3,495,014 $2,702,826
Homes.............. 3,967 3,738 10,981 9,992
Unconsolidated Joint
Ventures (2):
Dollars............ $ 195,716 $ 11,611 $ 331,033 $ 22,921
Homes.............. 571 27 944 56
Totals:
Housing Revenues... $ 1,485,089 $ 1,056,221 $3,826,047 $2,725,747
Homes Delivered.... 4,538 3,765 11,925 10,048
(1) The number and dollar amount of deliveries in the Southeast Region
in fiscal 2005 include the effect of the Cambridge Homes
acquisition, which closed in March 2005.
(2) The number and dollar amount of deliveries in the Unconsolidated
Joint Ventures in fiscal 2005 include the effect of the Town
& Country Homes acquisition, which closed in March 2005.
An important indicator of our 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:
Net Contracts(2) for the
Nine Months Ended Contract Backlog
July 31, as of July 31,
------------------------- ------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
(Dollars in Thousands)
Northeast Region (1):
Dollars............ $ 729,637 $ 778,303 $ 798,113 $ 768,066
Homes.............. 1,981 2,405 2,181 2,522
Southeast Region (3):
Dollars............ $1,308,952 $ 886,696 $1,232,152 $ 772,073
Homes.............. 3,630 3,132 3,305 2,558
Southwest Region:
Dollars............ $ 647,975 $ 503,157 $ 333,875 206,540
Homes.............. 3,320 2,871 1,608 1,207
West Region:
Dollars............ $1,272,462 $1,339,917 $ 840,758 $ 777,598
Homes.............. 3,076 3,600 1,936 1,933
Consolidated Total:
Dollars............ $3,959,026 $3,508,073 $3,204,898 $2,524,277
Homes.............. 12,007 12,008 9,030 8,220
Unconsolidated Joint
Ventures (4):
Dollars............ $ 671,277 $ 179,174 $ 993,259 $ 172,130
Homes.............. 1,426 301 2,301 281
Totals:
Dollars............ $ 4,630,303 $3,687,247 $4,198,157 $2,696,407
Homes............... 13,433 12,309 11,331 8,501
(1) During the first quarter of 2005, a community in the Northeast Region
was contributed to a joint venture. As a result, the 56 contracts
in consolidated backlog at October 31, 2004 for that community were
moved to unconsolidated joint ventures backlog.
(2) Net contracts are defined as new contracts signed during the period
for the purchase of homes, less cancellations of prior period
contracts.
(3) The number and the dollar amount of net contracts and backlog in the
Southeast in fiscal 2005 include the effect of the Cambridge Homes
acquisition, which closed in March 2005.
(4) The number and the dollar amount of net contracts and backlog in
Unconsolidated Joint Ventures in fiscal 2005 include the effect
of the Town & Country Homes acquisition, which closed in March 2005.
During August 2005, we signed an additional 1,467 net contracts
amounting to $498.9 million in consolidated communities and 182 net
contracts amounting to $75.1 million in unconsolidated joint ventures
compared to 1,290 net contracts amounting to $417.4 million in
consolidated communities and 44 net contracts amounting to $24.5 million
in unconsolidated joint ventures in the same month last year. In
addition, as a result of our acquisitions of First Home Builders of
Florida and Oster Homes in August 2005, we acquired contract backlog of
4,153 homes with a dollar value of $913 million.
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,
--------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
(Dollars in Thousands)
Sale of Homes.............. $1,289,373 $1,044,610 $3,495,014 $2,702,826
Cost of Sales, excluding
interest................. 939,815 778,121 2,571,916 2,014,799
---------- ---------- ---------- ----------
Housing Gross Margin, before
interest expense......... 349,558 266,489 923,098 688,027
Cost of Sales Interest..... 19,229 13,369 46,850 39,138
---------- ---------- ---------- ----------
Housing Gross Margin, after
interest expense......... $ 330,329 $ 253,120 $ 876,248 $ 648,889
========== ========== ========== ==========
Gross Margin Percentage,
before interest expense... 27.1% 25.5% 26.4% 25.4%
Gross Margin Percentage,
after interest expense.... 25.6% 24.2% 25.1% 24.0%
Cost of Sales expenses as a percentage of home sales revenues are
presented below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------- --------
2005 2004 2005 2004
-------- -------- -------- --------
Sale of Homes................ 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of Sales, excluding
interest:
Housing, land &
development costs.... 64.8% 66.7% 65.5% 66.6%
Commissions............ 2.6% 2.2% 2.3% 2.2%
Financing concessions.. 1.0% 1.0% 1.0% 1.0%
Overheads.............. 4.6% 4.6% 4.9% 4.7%
-------- -------- -------- --------
Total Cost of Sales, before
interest expense........... 72.9% 74.5% 73.6% 74.5%
-------- -------- -------- --------
Gross Margin Percentage,
before interest expense.... 27.1% 25.5% 26.4% 25.4%
Cost of sales interest....... 1.5% 1.3% 1.3% 1.4%
-------- -------- -------- --------
Gross Margin Percentage,
after interest expense..... 25.6% 24.2% 25.1% 24.0%
======== ======== ======== ========
We sell a variety of home types in various local communities, each
yielding a different gross margin. As a result, depending on the
geographic mix of deliveries and 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. The consolidated gross margin before interest expense for the
three and nine months ended July 31, 2005 was 160 and 100 basis points,
respectively, higher than the same periods in 2004. Our gross margin
after interest expense for the three and nine months ended July 31, 2005
was 140 and 110 basis points, respectively, more than the same periods
last year. Cost of sales interest related to homes sold as a percentage
of home revenues amounted to 1.5% and 1.3% for the three and nine months
ended July 31, 2005, respectively, and 1.3% and 1.4% for the three and
nine months ended July 31, 2004, respectively. These minor fluctuations
from period to period in cost of sales interest as a percentage of home
revenues are due to the mix of homes sold and the inventory carrying
period for those homes.
Homebuilding selling, general, and administrative expenses as a
percentage of homebuilding revenues increased to 9.0% and 9.1% for the
three and nine months ended July 31, 2005, respectively, compared to 7.9%
and 8.7% for the three and nine months ended July 31, 2004. Such expenses
increased $33.8 million and $84.8 million for the three and nine months
ended July 31, 2005 compared to the same period last year. The dollar and
percentage increases were in line with our growth goals as we increase
selling, general and administrative costs associated with the expected
increase in the number of active selling communities in all of our
regions.
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,
------------------ ------------------
2005 2004 2005 2004
-------- -------- -------- --------
Land and Lot Sales................ $ 441 $ 230 $ 24,618 $ 1,815
Cost of Sales..................... 387 95 16,369 1,458
-------- -------- -------- --------
Land and Lot Sales Gross Margin... 54 135 8,249 357
-------- -------- -------- --------
Interest Expense.................. 28 - 239 21
-------- -------- -------- --------
Land and Lot Sales Profit Before
Tax............................. $ 26 $ 135 $ 8,010 $ 336
======== ======== ======== ========
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 and selling such mortgages in the secondary market, and
title insurance activities. For the three and nine months ended July 31,
2005, financial services provided a $6.2 million and $15.3 million profit
before income taxes, respectively, compared to a profit of $5.0 million
and $16.6 million for the same periods in 2004, respectively. The
decrease in pretax profit for the nine months ended July 31, 2005 is
primarily due to reduced spreads resulting from the steady rise in
homebuyers choosing to use Adjustable Rate Mortgage (ARM) products which
historically are less profitable to originate and lower gross spreads due
to increased competition for purchase mortgages as the market for
refinancing mortgages has significantly declined. The financial services
profits were also reduced due to additional overhead expenses in advance
of our anticipated growth.
Corporate General and Administrative
Corporate general and administrative expenses represent the
operations at our headquarters in Red Bank, New Jersey. Such expenses
include our executive offices, information services, human resources,
corporate accounting, training, treasury, process redesign, internal
audit, construction services, and administration of insurance, quality,
and safety. As a percentage of total revenues, such expenses increased to
1.4% for the three months ended July 31, 2005 from 1.2% for the prior
year's three months and decreased to 1.4% for the nine months ended July
31, 2005 from 1.5% for the prior year's nine months. Corporate general
and administrative expenses increased $5.9 million and $7.4 million during
the three and nine months ended July 31, 2005, compared to the same
periods last year. The increase in corporate general and administrative
expenses is primarily attributed to additional salary and employee expense
due to increased headcount as our company continues to grow, as well as
additional professional services related to Sarbanes-Oxley compliance.
Other Interest
Other interest declined $0.1 million and $1.3 million for the three
months and nine months ended July 31, 2005, respectively. This reduction
is primarily due to lower borrowing rates and the ratio of capitalized
interest to total interest incurred.
Other Operations
Other operations consist primarily of miscellaneous residential
housing operations expenses, senior rental residential property
operations, amortization of senior and senior subordinated note issuance
expenses, earnout payments from homebuilding company acquisitions,
minority interest relating to consolidated joint ventures, and corporate
owned life insurance. The increase in other operations to $7.4 million
for the three months ended July 31, 2005, compared to $3.4 million for the
three months ended July 31, 2004 is primarily due to increased earnout
expenses related to several recent acquisitions.
Intangible Amortization
We are amortizing our definite life intangibles over their expected
useful life, ranging from three to seven years. Intangible amortization
increased $2.1 million and $13.1 million for the three and nine months
ended July 31, 2005, when compared to the same periods last year. This
increase was the result of the amortization expense associated with the
fiscal 2002 California acquisition brand name, which is being phased out,
as well as amortization related to the Cambridge Homes acquisition in
March 2005.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share
Based Payment" ("SFAS 123R"), which is a revision of SFAS 123 and
supersedes APB 25 and SFAS 148. This statement requires that the cost
resulting from all share-based payment transactions be recognized in an
entity's financial statements. This statement establishes fair value as
the measurement objective in accounting for share-based payment
arrangements and requires all entities to apply a fair value based
measurement method in accounting for share-based payment transactions with
employees except for equity instruments held by employee share ownership
plans. See Note 2 to the Condensed Consolidated Financial Statements for
a further description of SFAS 123R and its expected impact on our first
quarter fiscal 2006 net income.
In March 2005, the Securities and Exchange Commission released SEC
Staff Accounting Bulletin ("SAB") No. 107, "Share-Based Payment". SAB No.
107 provides the SEC staff position regarding the application of SFAS No.
123R. SAB No. 107 contains interpretive guidance related to the
interaction between SFAS No. 123R and certain SEC rules and regulations,
as well as provides the staff's views regarding the valuation of share-
based payment arrangements for public companies. SAB No. 107 also
highlights the importance of disclosures made related to the accounting
for share-based payment transactions. We are currently evaluating SAB No.
107 and will be incorporating it as part of our adoption of SFAS No. 123R.
In December 2004, the FASB issued Staff Position 109-1 ("FSP 109-
1"), Application of FASB Statement No. 109 ("FASB No. 109"), "Accounting
for Income Taxes", to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004. FSP 109-1 clarifies
guidance that applies to the new deduction for qualified domestic
production activities. When fully phased-in, the deduction will be up to
9% of the lesser of "qualified production activities income" or taxable
income. FSP 109-1 clarifies that the deduction should be accounted for as
a special deduction under FASB No. 109 and will reduce tax expense in the
period or periods that the amounts are deductible on the tax return. Any
tax benefits resulting from the new deduction will be effective for our
fiscal year ending October 31, 2006. We are in the process of assessing
the impact, if any, the new deduction will have on our financial
statements.
In June 2005, the Emerging Issues Task Force ("EITF") released Issue
No. 04-5 "Determining Whether a General Partner, or the General Partners
as a Group, Controls a Limited Partnership or Similar Entity When the
Limited Partners Have Certain Rights" ("EITF 04-5"). EITF 04-5 creates a
framework for evaluating whether a general partner or a group of general
partners controls a limited partnership and therefore should consolidate
the partnership. EITF 04-5 states that the presumption of general partner
control would be overcome only when the limited partners have certain
specific rights as outlined in EITF 04-5. EITF 04-5 is effective
immediately for all newly formed limited partnerships and for existing
limited partnership agreements that are modified. For general partners in
all other limited partnerships, EITF 04-5 is effective no later than the
beginning of the first reporting period in fiscal years beginning after
December 15, 2005. Implementation of EITF 04-5 is not expected to have a
material impact on the Company's results of operations or financial
position.
Total Taxes
Total taxes as a percentage of income before taxes increased for the
three months ended July 31, 2005 to 40.4% from 38.1% for the three months
ended July 31, 2004 and for the nine months ended July 31, 2005 to 39.4%
from 37.7% for the same period last year. The prior year effective rates
were lower than the current year due to refunds recorded in the second
quarter of 2004 related to adjustments to previous years' taxes, as well
as due to higher than estimated taxes upon filing our 2004 tax returns in
the third quarter of 2005.
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, 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, because we generally
negotiate fixed price contracts with many, but not all, of 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 three to twelve months.
Construction costs for residential buildings represent approximately 56%
of our homebuilding cost of sales.
Mergers and Acquisitions
On March 1, 2005, we acquired for cash the assets of Cambridge
Homes, a privately held Orlando homebuilder and provider of related
financial services, headquartered in Altamonte Springs, Florida. The
acquisition provides us with a presence in the greater Orlando market,
which is the 9th largest housing market in the U.S., based on 2003 new
home starts.
Cambridge Homes designs, markets and sells both single family homes
and attached townhomes and focuses on first-time, move up and luxury
homebuyers. Cambridge Homes also provides mortgage financing, as well as
title and settlement services to its homebuyers.
The Cambridge Homes acquisition was accounted for as a purchase,
with the results of its operations included in our consolidated financial
statements as of the date of the acquisition.
On March 2, 2005, we acquired the operations of Town & Country
Homes, a privately held homebuilder and land developer headquartered in
Lombard, Illinois, which occurred concurrently with our entering into a
joint venture agreement with affiliates of Blackstone Real Estate Advisors
in New York to own and develop Town & Country's existing residential
communities. The joint venture is being accounted for under the equity
method. Town & Country Homes operations beyond the existing owned and
optioned communities, as of the acquisition date, are wholly owned and
included in our consolidated financial statements.
The Town & Country acquisition provides us with a strong initial
position in the greater Chicago market, which is the 6th largest housing
market in the U.S., based on 2003 new home starts. This acquisition also
expands our operations into the Florida markets of West Palm Beach, Boca
Raton and Fort Lauderdale and bolsters our current presence in
Minneapolis/St. Paul, which is the 10th largest housing market in the
U.S., based on 2003 new home starts. Town & Country designs, markets and
sells a diversified product portfolio in each of its markets, including
single family homes and attached townhomes, as well as mid-rise
condominiums in Florida. Town & Country serves a broad customer base
including first-time, move-up and luxury homebuyers.
On August 8, 2005 we acquired substantially all of the assets of
First Home Builders of Florida, a privately held homebuilder and provider
of related financial services headquartered in Cape Coral, Florida. First
Home Builders is a leading builder in Western Florida and ranked 1st in
the greater Fort Myers-Cape Coral market and 51st nationally based on 2004
permit activity as tracked by Builder Magazine. Thus, the acquisition
provides Hovnanian with the number one market position in the high growth
Fort Myers-Cape Coral market, which is the 18th largest housing market in
the U.S. as ranked by Builder Magazine based on 2004 permits.
First Home Builders of Florida designs, markets and sells single
family homes, with a focus on the first-time home buying segment. The
company also provides mortgage financing, title and settlement services to
its homebuyers. In 2004, First Home Builders delivered 1,819 homes with
revenues of $308 million. As of July 31, 2005, First Home Builders had
4,048 homes in contract backlog with a sales value of $888 million.
On August 3, 2005, we acquired substantially all of the homebuilding
assets of Oster Homes, a privately held Ohio homebuilder, headquartered in
Lorain, Ohio. The acquisition provides Hovnanian with a complementary
presence to its Ohio "build-on-your-own-lot" homebuilding operations.
Oster Homes builds in Lorain County in Northeast Ohio, just west of
Cleveland. Lorain is part of the greater Cleveland MSA, which is the 50th
largest housing market in the U. S., based on 2004 new home starts.
Oster Homes designs, markets and sells single family homes, with a
focus on first-time and move up homebuyers. Additionally, Oster Homes
utilizes a design center to market extensive pre-prices options and
upgrades.
In its 2004 fiscal year, Oster Homes delivered 247 homes with
revenue of $56 million. As of August 3, 2005, Oster Homes currently has
approximately 105 homes in contract backlog, with a sales value of $25
million, and owns or controls approximately 3,000 lots throughout the
greater Cleveland area. Oster Homes ranked as the 4th largest builder in
the Cleveland MSA in 2004 by Builder Magazine.
Both the First Home Builders of Florida and Oster acquisitions will
be accounted for as purchases with the results of their operations
included in our consolidated financial statements as of the dates of the
acquisitions.
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 Reform Act of 1995. Such statements
involve known and unknown risks, uncertainties and other factors that may
cause actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. Although we
believe that our plans, intentions and expectations reflected in, or
suggested by such forward-looking statements are reasonable, we can give
no assurance that such plans, intentions, or expectations will be
achieved. Such risks, uncertainties and other factors include, but are
not limited to:
. Changes in general and local economic and business conditions;
. Adverse weather conditions and natural disasters;
. 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 home building, sales and customer
financing processes, and the environment;
. Fluctuations in interest rates and the availability of mortgage
financing;
. Shortages in, and price fluctuations of, raw materials and labor;
. The availability and cost of suitable land and improved lots;
. Levels of competition;
. Availability of financing to the Company;
. Utility shortages and outages or rate fluctuations; and
. Geopolitical risks, terrorist acts and other acts of war.
Certain 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, 2004.
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 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, 2005,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, 2005
--------------------------------------------------
Expected Maturity Date
FMV @
2005 2006 2007 2008 2009 2010 Thereafter Total 7/31/05
------- ------- -------- ------- -------- -------- --------- --------- -----------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate.... $31,221 $ 644 $140,937 $ 737 $ 786 $100,841 $ 985,803 $1,260,967 $1,306,841
Average
interest rate 8.40% 6.66% 10.48% 6.70% 6.72% 6.01% 7.14% 7.46%
Variable Rate.
Average
interest rate
(1) Does not include bonds collateralized by mortgages receivable.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the
Company's reports under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosures. Any
controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control
objectives. The Company's management, with the participation of the
Company's chief executive officer and chief financial officer, has
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of July 31, 2005. Based upon that
evaluation and subject to the foregoing, the Company's chief executive
officer and chief financial officer concluded that the design and operation
of the Company's disclosure controls and procedures are effective to
accomplish their objectives.
In addition, there was no change in the Company's internal control over
financial reporting that occurred during the quarter ended July 31, 2005
that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
We are subject to extensive and complex regulations that affect the
development and home building, sales and customer financing processes,
including zoning, density, building standards and mortgage financing; and
we are involved in litigation arising in the ordinary course of business,
none of which is expected to have a material adverse effect on our
financial position or results of operations. In addition, in March 2005,
we received two requests for information pursuant to Section 308 of the
Clean Water Act from Region 3 of the Environmental Protection Agency
("EPA") requesting information about storm water discharge practices in
connection with completed, ongoing and planned homebuilding projects by
subsidiaries in the states and district that comprise EPA Region 3. We also
received a notice of violations for one project in Pennsylvania and
requests for sampling plan implementation in two projects in Pennsylvania.
The amount requested by the EPA to settle the asserted violations at the
one project was not material. We have provided the information requested.
To the extent that the information provided were to lead the EPA to assert
violations of state and/or federal regulatory requirements and request
injunctive relief and/or civil penalties, we will defend and attempt to
resolve such asserted violations.
Our sales and customer financing processes are subject to the
jurisdiction of the U. S. Department of Housing and Urban Development
("HUD"). In connection with the Real Estate Settlement Procedures Act, HUD
has recently inquired about our process of referring business to our
affiliated mortgage company and has separately requested documents related
to customer financing. We have responded to HUD's inquiries.
At this time, we cannot predict the outcome of the EPA's or HUD's
reviews or estimate the costs that may be involved in resolving such
matters.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
This table provides information with respect to purchases of shares of our
Class A Common Stock made by or on behalf of Hovnanian Enterprises during the
fiscal third quarter of 2005.
Issuer Purchases of Equity Securities (1)
Total Number
Of Shares Maximum Number of
Purchased as Shares That May
Part of Publicly Yet Be Purchased
Total Number of Average Price Announced Plans Under The Plans
Period Shares Purchased Paid Per Share or Programs or Programs
- ---------------- ---------------- -------------- ---------------- -----------------
May 1, 2005
Through
May 31, 2005 1,787,668
- -------------------------------------------------------------------------------------
June 1, 2005
Through
June 30, 2005 100,000 $61.58 100,000 1,687,668
- -------------------------------------------------------------------------------------
July 1, 2005
Through
July 31, 2005 1,687,668
- -------------------------------------------------------------------------------------
Total 100,000 $61.58 100,000
================ ============== ================
(1) In July 2001, our Board of Directors authorized a stock repurchase program
to purchase up to 4 million shares of Class A Common Stock. On March 5, 2004,
our Board of Directors authorized a 2-for-1 stock split in the form of a 100%
stock dividend. All share information reflects our dividend.
No shares of our Class B Common Stock were purchased by or on behalf of
Hovnanian Enterprises during the fiscal third quarter of 2005.
Item 6. Exhibits
Exhibit 3(a) Certificate of Incorporation of
the Registrant. (1)
Exhibit 3(b) Certificate of Amendment of
Certificate of Incorporation of the
Registrant. (2)
Exhibit 3(c) Certificate of Amendment of
Certificate of Incorporation of the Registrant. (3)
Exhibit 3(d) Restated Bylaws of the Registrant. (4)
Exhibit 4(a) Indenture, dated as of August 8, 2005,
relating to 6.25% Senior Notes due 2016, among
K. Hovnanian Enterprises, Inc., the Guarantors
named therein and Wachovia Bank, National
Association, as trustee, including form of 6.25%
Senior Notes due 2016. (5)
Exhibit 4(b) Certificate of Designations, Powers,
Preferences and Rights of the 7.625% Series A Preferred
Stock of Hovnanian Enterprises, Inc., dated
July 12, 2005.(6)
Exhibit 10(a) Fifth Amended and Restated Credit Agreement
dated June 14, 2005. (5)
Exhibit 10(b) Amended and Restated Guaranty and Suretyship
Agreement, dated June 14, 2005. (5)
Exhibit 31(a) Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer.
Exhibit 31(b) Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer.
Exhibit 32(a) Section 1350 Certification of Chief
Executive Officer.
Exhibit 32(b) Section 1350 Certification of Chief
Financial Officer.
(1) Incorporated by reference to Exhibits to
Registration Statement (No. 2-85198) on
Form S-1 of the Registrant.
(2) Incorporated by reference to Exhibit 4.2 to Registration
Statement (No. 333-106761) on Form S-3
of the Registrant.
(3) Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q of the Registrant for
the quarter ended January 31, 2004.
(4) Incorporated by reference to Exhibit 3.2 to
Registration Statement (No. 1-08551) on
Form 8-A of the Registrant.
(5) Incorporated by reference to Exhibits to Registration
Statement (No. 333-127806) on Form S-4 of the Registrant.
(6) Incorporated by reference to Exhibits to the Current
Report on Form 8-K of the Registrant, filed on July 13,
2005.
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 9, 2005 /S/J. LARRY SORSBY
J. Larry Sorsby,
Executive Vice President and
Chief Financial Officer
DATE: September 9, 2005 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
CERTIFICATIONS Exhibit 31(a) I, Ara K. Hovnanian, President & Chief Executive Officer of Hovnanian Enterprises, Inc., 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 officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 9, 2005 /S/ARA K. HOVNANIAN Ara K. Hovnanian President and Chief Executive Officer
CERTIFICATIONS Exhibit 31(b) I, J. Larry Sorsby, Executive Vice President & Chief Financial Officer of Hovnanian Enterprises, Inc., 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 officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 9, 2005 /S/J.LARRY SORSBY J. Larry Sorsby Executive Vice President and Chief Financial Officer
Exhibit 32(a) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Hovnanian Enterprises, Inc. (the "Company") on Form 10-Q for the period ended July 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ara K. Hovnanian, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: September 9, 2005 /S/ARA K. HOVNANIAN Ara K. Hovnanian President and Chief Executive Officer
Exhibit 32(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Hovnanian Enterprises, Inc. (the "Company") on Form 10-Q for the period ended July 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, J. Larry Sorsby, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: September 9, 2005 /S/J. LARRY SORSBY J. Larry Sorsby Executive Vice President and Chief Financial Officer