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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10Q
[ X ] Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For quarterly period ended APRIL 30, 2001 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Commission file number 1-8551
Hovnanian Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-1851059
(State or other jurisdiction or (I.R.S. Employer
incorporation or organization) Identification No.)
l0 Highway 35, P.O. Box 500, Red Bank, N. J. 07701
(Address of principal executive offices)
732-747-7800
(Registrant's telephone number, including area code)
Same
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Sections l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 20,450,766 Class A Common
Shares and 7,504,007 Class B Common Shares were outstanding as of June 1,
2001.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at April 30,
2001 (unaudited) and October 31, 2000 3
Consolidated Statements of Income for the three
and six months ended April 30, 2001 and 2000
(unaudited) 5
Consolidated Statements of Stockholders' Equity
for the six months ended April 30, 2001
(unaudited) 6
Consolidated Statements of Cash Flows for
the six months ended April 30, 2001
and 2000 (unaudited) 7
Notes to Consolidated Financial
Statements (unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16
PART II. Other Information
Item 6(a). No reports on Form 8K have been filed during
the quarter for which this report is filed.
Signatures 26
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
April 30, October 31,
ASSETS 2001 2000
----------- -----------
(unaudited)
Homebuilding:
Cash and cash equivalents....................... $ 36,138 $ 40,131
----------- -----------
Inventories - At the lower of cost or fair
value:
Sold and unsold homes and lots under
development................................. 656,237 525,116
Land and land options held for future
development or sale......................... 107,684 89,867
----------- -----------
Total Inventories........................... 763,921 614,983
----------- -----------
Receivables, deposits, and notes ............... 54,451 36,190
----------- -----------
Property, plant, and equipment - net............ 33,140 35,594
----------- -----------
Senior residential rental properties - net...... 10,083 10,276
----------- -----------
Prepaid expenses and other assets............... 88,132 64,897
----------- -----------
Total Homebuilding.......................... 985,865 802,071
----------- -----------
Financial Services:
Cash and cash equivalents....................... 2,294 3,122
Mortgage loans held for sale.................... 72,916 61,860
Other assets.................................... 3,149 2,145
----------- -----------
Total Financial Services.................... 78,359 67,127
----------- -----------
Collateralized Mortgage Financing:
Collateral for bonds payable.................... 3,779 4,145
Other assets.................................... 199 198
----------- -----------
Total Collateralized Mortgage Financing..... 3,978 4,343
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits........................................ 2,900
----------- -----------
Total Assets...................................... $1,071,102 $873,541
=========== ===========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
April 30, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
----------- -----------
(unaudited)
Homebuilding:
Nonrecourse land mortgages........................ $ 12,798 $ 18,166
Accounts payable and other liabilities............ 91,296 82,205
Customers' deposits............................... 39,392 31,475
Nonrecourse mortgages secured by operating
properties...................................... 3,474 3,554
----------- -----------
Total Homebuilding............................ 146,960 135,400
----------- -----------
Financial Services:
Accounts payable and other liabilities............ 2,309 2,078
Mortgage warehouse line of credit................. 53,831 56,486
----------- -----------
Total Financial Services...................... 56,140 58,564
----------- -----------
Collateralized Mortgage Financing:
Bonds collateralized by mortgages receivable...... 2,712 3,007
----------- -----------
Total Collateralized Mortgage Financing....... 2,712 3,007
----------- -----------
Notes Payable:
Revolving credit agreement........................ 120,600
Senior notes...................................... 296,608 296,430
Subordinated notes................................ 99,747 100,000
Accrued interest.................................. 13,473 12,709
----------- -----------
Total Notes Payable........................... 530,428 409,139
----------- -----------
Income Taxes Payable................................. 4,072
----------- -----------
Total Liabilities............................. 736,240 610,182
----------- -----------
Stockholders' Equity:
Preferred Stock,$.01 par value-authorized 100,000
shares; none issued
Common Stock,Class A,$.01 par value-authorized
87,000,000 shares; issued 24,138,457 shares
(including 3,736,921 shares in April 2001 and
October 2000 held in Treasury).................. 242 173
Common Stock,Class B,$.01 par value-authorized
13,000,000 shares; issued 7,853,936 including
345,874 shares in April 2001 and October 2000
held in Treasury)............................... 78 79
Paid in Capital................................... 96,682 46,086
Retained Earnings................................. 267,403 246,420
Deferred Compensation............................. (211)
Treasury Stock - at cost.......................... (29,332) (29,399)
----------- -----------
Total Stockholders' Equity.................... 334,862 263,359
----------- -----------
Total Liabilities and Stockholders' Equity.......... $1,071,102 $873,541
=========== ===========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
April 30, April 30,
------------------- -------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues:
Homebuilding:
Sale of homes...................... $393,301 $235,055 $676,706 $485,173
Land sales and other revenues...... 2,916 3,378 8,002 5,443
--------- --------- --------- ---------
Total Homebuilding............... 396,217 238,433 684,708 490,616
Financial Services................... 6,679 3,344 12,119 8,195
Collateralized Mortgage Financing.... 70 111 168 226
--------- --------- --------- ---------
Total Revenues................... 402,966 241,888 696,995 499,037
--------- --------- --------- ---------
Expenses:
Homebuilding:
Cost of sales...................... 314,788 187,911 541,364 393,414
Selling, general and administrative 34,875 25,764 63,100 50,692
Inventory impairment loss.......... 764 513 938 513
--------- --------- --------- ---------
Total Homebuilding............... 350,427 214,188 605,402 444,619
Financial Services................... 4,665 4,139 8,362 9,444
Collateralized Mortgage Financing.... 51 93 134 191
Corporate General and Administration. 9,401 7,487 19,279 14,361
Interest............................. 13,949 7,780 23,454 15,648
Other Operations..................... 1,906 2,749 3,757 4,546
Restructuring Charges................ 2,480
--------- --------- --------- ---------
Total Expenses................... 380,399 236,436 662,868 488,809
--------- --------- --------- ---------
Income Before Income Taxes............. 22,567 5,452 34,127 10,228
--------- --------- --------- ---------
State and Federal Income Taxes:
State................................ 1,028 304 1,427 459
Federal.............................. 7,479 1,690 11,717 2,859
--------- --------- --------- ---------
Total Taxes........................ 8,507 1,994 13,144 3,318
-------- -------- -------- --------
Net Income............................. $ 14,060 $ 3,458 $ 20,983 $ 6,910
========= ========= ========= =========
Per Share Data:
Basic:
Income per common share.............. $ 0.50 $ 0.16 $ 0.83 $ 0.31
Weighted average number of common
shares outstanding................. 28,176 22,054 25,262 22,192
Assuming dilution:
Income per common share.............. $ 0.48 $ 0.16 $ 0.80 $ 0.31
Weighted average number of common
shares outstanding................ 29,472 22,111 26,116 22,271
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars In Thousands)
A Common Stock B Common Stock
------------------- -------------------
Shares Shares
Issued and Issued and Paid-In Retained Deferred Treasury
Outstanding Amount Outstanding Amount Capital Earnings Comp Stock Total
----------- ------ ----------- ------ ------- -------- -------- -------- --------
Balance, October 31, 2000 13,572,448 $ 173 7,633,029 $ 79 $46,086 $246,420 $ $(29,399) $263,359
Acquisitions.............. 6,352,900 64 48,361 48,425
Sale of common stock under
employee stock option
plan.................... 300,140 3 1,769 1,772
Stock bonus plan.......... 51,081 1 466 467
Conversion of Class B to
Class A Common Stock.... 124,967 1 (124,967) (1)
Deferred compensation..... (211) (211)
Treasury stock purchases
adjustment.............. 67 67
Net Income................ 20,983 20,983
----------- ------ ----------- ------ ------- -------- -------- -------- --------
Balance, April 30, 2001
(unaudited)............... 20,401,536 $ 242 7,508,062 $ 78 $96,682 $267,403 $ (211) $(29,332) $334,862
=========== ====== =========== ====== ======= ======== ======== ======== ========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
Six Months Ended
April 30,
---------------------
2001 2000
---------- ----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 20,983 $ 6,910
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation.................................... 4,018 3,151
Amortization of goodwill........................ 1,627 1,182
(Gain) on sale and retirement of property
and assets.................................... (36) (154)
Deferred income taxes........................... 1,033 668
Impairment losses............................... 938 513
Decrease (increase) in assets:
Mortgage notes receivable..................... (10,615) 2,763
Receivables, prepaids and other assets........ (22,324) (17,749)
Inventories................................... (9,087) (63,253)
Increase (decrease) in liabilities:
State and Federal income taxes................ (3,439) (5,075)
Tax effect from exercise of stock options..... 398
Customers' deposits........................... 4,593 9,512
Interest and other accrued liabilities........ (4,109) (1,807)
Post development completion costs............. 834 (1,256)
Accounts payable.............................. (10,612) (2,679)
---------- ----------
Net cash used in operating activities........ (25,798) (67,274)
---------- ----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets....... 1,002 256
Purchase of property, equipment and other fixed
assets............................................ (2,253) (10,762)
Acquisition of homebuilding companies............... (37,190) (147)
Investment in and advances to unconsolidated
affiliates........................................ (181)
---------- ----------
Net cash used in investing activities....... (38,622) (10,653)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 813,780 604,654
Principal payments on mortgages and notes........... (756,487) (535,387)
Purchase of treasury stock.......................... 67 (2,430)
Proceeds from sale of stock and employee stock plan. 2,239
---------- ----------
Net cash provided by financing activities... 59,599 66,837
---------- ----------
Net (Decrease) In Cash and Cash Equivalents........... (4,821) (11,090)
Cash and Cash Equivalents Balance, Beginning
Of Period........................................... 43,253 19,365
---------- ----------
Cash and Cash Equivalents Balance, End Of Period...... $ 38,432 $ 8,275
========== ==========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. The consolidated financial statements, except for the October 31,
2000 consolidated balance sheet have been prepared without audit. In the
opinion of management, all adjustments for interim periods presented have been
made, which include only normal recurring accruals and deferrals necessary for
a fair presentation of consolidated financial position, results of operations,
and changes in cash flows. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates and these differences could have a significant impact on the
financial statements. Results for the interim periods are not necessarily
indicative of the results which might be expected for a full year.
2. Interest costs incurred, expensed and capitalized were:
Three Months Ended Six Months Ended
April 30, April 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Dollars in Thousands)
Interest Capitalized at
Beginning of Period......... $31,365 $22,121 $25,694 $21,966
Plus Acquired Entity Interest. 3,604
Plus Interest Incurred(1)(3).. 12,333 9,291 23,905 17,314
Less Interest Expensed(3)..... 13,949 7,780 23,454 15,648
-------- -------- -------- --------
Interest Capitalized at
End of Period (2) (3)..... $29,749 $23,632 $29,749 $23,632
======== ======== ======== ========
(1) Data does not include interest incurred by our mortgage and finance
subsidiaries.
(2) Data does not include a reduction for depreciation.
(3) Represents acquisition interest for construction, land and development
costs which is charged to interest expense when homes are delivered and
when land is not under active development.
3. Homebuilding accumulated depreciation at April 30, 2001 and October
31, 2000 amounted to $25,460,000 and $22,164,000, respectively. Senior
residential rental property accumulated depreciation at April 30, 2001 and
October 31, 2000 amounted to $2,435,000 and $2,294,000, respectively.
4. In accordance with "Financial Accounting Standards No. 121 ("FAS
121") "Accounting for the Impairment of Long Lived Assets and For Long Lived
Assets to Be Disposed Of", we record impairment losses on inventories related
to communities under development when events and circumstances indicate that
they may be impaired and the undiscounted cash flows estimated to be generated
by those assets are less than their related carrying amounts. In addition,
from time to time, we will write off certain residential land options
including approval, engineering, and capitalized interest costs for land
management decided not to purchase. We wrote off such costs in New Jersey,
Metro D. C., and California amounting to $174,000 and $764,000 during the
three months ended January 31, 2001 and April 30, 2001, respectively. During
the three months ended April 30, 2000, we wrote off costs amounting to
$513,000 in California. Residential inventory FAS 121 impairment losses and
option write offs are reported in the Consolidated Statements of Income as
"Homebuilding-Inventory Impairement Loss."
5. We are involved from time to time in litigation arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on us. As of April 30, 2001 and October 31, 2000, we are
obligated under various performance letters of credit amounting to $4,742,000
and $4,284,000, respectively.
6. Our credit facility has been amended as of February 22, 2000.
Pursuant to the Amendment, our credit line increased to $375,000,000 and is
extended through July 2003. Interest is payable monthly and at various rates
of either the prime rate plus .25% or Libor plus 1.70%.
7. On January 23, 2001 we merged with Washington Homes, Inc. for a
total purchase price of $87.4 million, of which $38.5 million was paid in cash
and 6,352,900 shares of our Class A Common Stock were issued. At the date of
acquisition we loaned Washington Homes, Inc. approximately $57,000,000 to pay
off their third party debt.
The merger with Washington Homes, Inc. was accounted for as a purchase
with the results of operations of the merged entity included in our
consolidated financial statements as of the date of the merger. The purchase
price was allocated based on estimated fair value at the date of the merger.
Such allocation is preliminary and is pending management's assessment of the
deferred tax assets and liabilities acquired. An intangible asset equal to
the excess purchase price over the fair value of the net assets of $12,794,000
is recorded in prepaid expenses and other assets on the consolidated balance
sheet. This amount is being amortized on a straight line basis over a period
of ten years.
The following unaudited pro forma financial data for the three and six
months ended April 30, 2001 and 2000 has been prepared as if the merger with
Washington Homes, Inc. on January 23, 2001 had occurred on November 1, 1999.
Unaudited pro forma financial data is presented for information purposes only
and may not be indicative of the actual amounts of the Company had the events
occurred on the dates listed above, nor does it purport to represent future
periods (in thousands).
Three Months Ended Six Months Ended
April 30, April 30,
--------------------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues...............................$402,966 $361,273 $766,733 $711,725
Expenses............................... 380,399 350,375 732,103 693,149
Income Taxes........................... 8,507 4,351 12,602 6,919
-------- -------- -------- --------
Net Income.............................$ 14,060 $ 6,547 $ 22,028 $ 11,657
======== ======== ======== ========
Diluted Net Income Per Common Share....$ 0.48 $ 0.23 $ 0.76 $ 0.41
======== ======== ======== ========
8. Restructuring Charges - Restructuring charges are estimated expenses
associated with the merger of our operations with those of Washington Homes,
Inc. on January 23, 2001. Under our merger plan, administration offices in
Maryland, Virginia, and North Carolina will be either closed, relocated, or
combined. The merger of administration offices is expected to be completed by
July 31, 2001. Expenses were accrued for salaries, severance and outplacement
costs for the involuntary termination of associates, costs to close and/or
relocate existing administrative offices, and lost rent and leasehold
improvements. We estimate that approximately 58 associates will be
terminated. We have accrued approximately $1.7 million to cover termination
and related costs. Associates being terminated are primarily administrative.
In addition, we accrued approximately $0.8 million to cover closing and/or
relocating various administrative offices in these three states. At April 30,
2001 $686,000 has been charged against termination costs relating to the
termination of 35 associates and $369,000 has been charged against closing and
relocation costs.
9. Recent Accounting Pronouncements - Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998. This statement addresses the accounting
for and disclosure of derivative instruments, including derivative instruments
imbedded in other contracts, and hedging activities. The statement requires
us to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives are either offset against the change in fair
value of assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivative's change is recognized
in earnings. The impact of the adoption of the new statement as of November
1, 2000 did not have a significant impact on our earnings or financial
position. The effect of FAS 133 is immaterial to our financial statements.
We manage our interest rate risk on mortgage loans held for sale and our
estimated future commitments to originate and close mortgage loans at fixed
prices through the use of best-efforts whole loan delivery commitments. These
instruments are classified as derivatives and generally have maturities of
three months or less. Accordingly, gains and losses are recognized in current
earnings during the period of change.
10. Hovnanian Enterprises, Inc., the parent company (the "Parent") is
the issuer of publicly traded common stock. One of its wholly owned
subsidiaries, K. Hovnanian Enterprises, Inc., (the "Subsidiary Issuer") was
the issuer of certain Senior Notes on May 4, 1999 and October 2, 2000.
The Subsidiary Issuer acts as a finance and management entity that as of
April 30, 2001 had issued and outstanding approximately $99,747,000 of
subordinated notes, $300,000,000 senior notes, and a revolving credit
agreement with an outstanding balance of $120,600,000. The subordinated
notes, senior notes, and the revolving credit agreement are fully and
unconditionally guaranteed by the Parent.
Each of the wholly owned subsidiaries of the Parent (collectively the
"Guarantor Subsidiaries"), with the exception of four subsidiaries formerly
engaged in the issuance of collateralized mortgage obligations, a mortgage
lending subsidiary, a subsidiary holding and licensing the "K. Hovnanian"
trade name, and a subsidiary engaged in homebuilding activity in Poland
(collectively the "Non-guarantor Subsidiaries"), have guaranteed fully and
unconditionally, on a joint and several basis, the obligation to pay principal
and interest under the senior notes and the revolving credit agreement of the
Subsidiary Issuer.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries we have included the accompanying consolidated
condensed financial statements. Management does not believe that separate
financial statements of the Guarantor Subsidiaries are material to investors.
Therefore, separate financial statements and other disclosures concerning the
Guarantor Subsidiaries are not presented.
The following consolidating condensed financial information present the
results of operations, financial position and cash flows of (i) the Parent
(ii) the Subsidiary Issuer (iii) the Guarantor Subsidiaries of the Parent (iv)
the Non-Guarantor Subsidiaries of the Parent and (v) the eliminations to
arrive at the information for Hovnanian Enterprises, Inc. on a consolidated
basis.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED BALANCE SHEET
APRIL 30, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
ASSETS
Homebuilding.......................$ 3 $ 53,043 $ 923,891 $ 8,928 $ $ 985,865
Financial Services and CMO......... 826 81,511 82,337
Income Taxes (Payables)Receivables. (346) (5,030) 10,304 (2,028) 2,900
Investments in and amounts due to
and from consolidated
subsidiaries..................... 335,205 490,706 (764,986) 6,242 (67,167)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$334,862 $ 538,719 $ 170,035 $ 94,653 $ (67,167)$1,071,102
======== ========== ========== ============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding.......................$ $ 8,190 $ 138,380 $ 390 $ $ 146,960
Financial Services and CMO......... 421 58,431 58,852
Notes Payable...................... 530,367 61 530,428
Stockholders' Equity............... 334,862 162 31,173 35,832 (67,167) 334,862
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$334,862 $ 538,719 $ 170,035 $ 94,653 $ (67,167) $1,071,102
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ (63) $ 76,648 $ 717,484 $ 8,002 $ $ 802,071
Financial Services and CMO......... 994 70,476 71,470
Income Taxes (Payables)Receivables. (4,585) (5,873) 12,567 (2,109)
Investments in and amounts due to
and from consolidated
subsidiaries..................... 268,007 353,115 (473,872) 577 (147,827)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$263,359 $ 423,890 $ 257,173 $ 76,946 $(147,827) $ 873,541
======== ========== ========== ============ ========== ==========
Liabilities
Homebuilding.......................$ $ 11,533 $ 122,807 $ 1,060 $ $ 135,400
Financial Services and CMO......... 457 61,114 61,571
Notes Payable...................... 409,041 98 409,139
Income Taxes Payable............... 4,072 4,072
Stockholders' Equity............... 263,359 3,316 129,739 14,772 (147,827) 263,359
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$263,359 $ 423,890 $ 257,173 $ 76,946 $(147,827) $ 873,541
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 364 $ 394,465 $ 3,016 $ (1,628) $ 396,217
Financial Services and CMO....... 3,217 3,532 6,749
Intercompany Charges............. 29,809 2,387 (32,196)
Equity In Pretax Income of
Consolidated Subsidiaries...... 22,567 (22,567)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 22,567 30,173 400,069 6,548 (56,391) 402,966
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 29,584 376,680 1,135 (31,716) 375,683
Financial Services and CMO....... 2,100 2,713 (97) 4,716
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 29,584 378,780 3,848 (31,813) 380,399
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 22,567 589 21,289 2,700 (24,578) 22,567
State and Federal Income Taxes..... 8,507 165 8,811 997 (9,973) 8,507
------- ---------- ---------- ------------ ---------- ----------
Net Income ........................$14,060 $ 424 $ 12,478 $ 1,703 $ (14,605) $ 14,060
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 69 $ 237,666 $ 4,350 $ (3,652) $ 238,433
Financial Services and CMO....... 1,001 2,454 3,455
Intercompany Charges............. 24,860 1,550 (26,410)
Equity In Pretax Income of
Consolidated Subsidiaries...... 5,452 (5,452)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 5,452 24,929 240,217 6,804 (35,514) 241,888
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 24,502 228,884 219 (21,401) 232,204
Financial Services and CMO....... 936 3,356 (60) 4,232
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 24,502 229,820 3,575 (21,461) 236,436
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 5,452 427 10,397 3,229 (14,053) 5,452
State and Federal Income Taxes..... 1,994 204 3,667 1,136 (5,007) 1,994
------- ---------- ---------- ------------ ---------- ----------
Net Income ........................$ 3,458 $ 223 $ 6,730 $ 2,093 $ (9,046) $ 3,458
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 429 $ 681,587 $ 10,532 $ (7,840) $ 684,708
Financial Services and CMO....... 5,235 7,052 12,287
Intercompany Charges............. 60,219 433 (60,652)
Equity In Pretax Income of
Consolidated Subsidiaries...... 34,127 (34,127)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 34,127 60,648 687,255 17,584 (102,619) 696,995
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 59,497 660,606 2,389 (68,120) 654,372
Financial Services and CMO....... 3,388 5,302 (194) 8,496
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 59,497 663,994 7,691 (68,314) 662,868
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 34,127 1,151 23,261 9,893 (34,305) 34,127
State and Federal Income Taxes..... 13,144 517 8,881 3,811 (13,209) 13,144
------- ---------- ---------- ------------ ---------- ----------
Net Income ........................$20,983 $ 634 $ 14,380 $ 6,082 $ (21,096) $ 20,983
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 223 $ 489,072 $ 6,442 $ (5,121) $ 490,616
Financial Services and CMO....... 2,751 5,670 8,421
Intercompany Charges............. 47,906 3,998 (51,904)
Equity In Pretax Income of
Consolidated Subsidiaries...... 10,228 (10,228)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ $10,228 $ 48,129 $ 495,821 $ 12,112 $ (67,253) $ 499,037
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 47,560 470,259 673 (39,318) 479,174
Financial Services and CMO....... 2,310 7,544 (219) 9,635
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 47,560 472,569 8,217 (39,537) 488,809
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 10,228 569 23,252 3,895 (27,716) 10,228
State and Federal Income Taxes..... 3,318 239 7,833 1,366 (9,438) 3,318
------- ---------- ---------- ------------ ---------- ----------
Net Income.........................$ 6,910 $ 330 $ 15,419 $ 2,529 $ (18,278) $ 6,910
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 20,983 $ 634 $ 14,380 $ 6,082 $ (21,096) $ 20,983
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 93,186 70,155 (232,718) 1,500 21,096 (46,781)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 114,169 70,789 (218,338) 7,582 (25,798)
Net Cash (Used In) Provided By
Investing Activities............... (46,972) (18,093) 26,544 (99) (38,620)
Net Cash Provided By (Used In)
Financing Activities............... 67 120,525 (58,045) (2,950) 59,597
Intercompany Investing and Financing
Activities - Net................... (67,198) (198,444) 271,307 (5,665)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash
and Cash Equivalents............... 66 (25,223) 21,468 (1,132) (4,821)
Cash and Cash Equivalents Balance,
Beginning of Period................ (63) 17,629 22,506 3,181 43,253
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 3 $ (7,594) $ 43,974 $ 2,049 $ $ 38,432
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 6,910 $ 330 $ 15,419 $ 2,529 $ (18,278) $ 6,910
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities............. (4,792) 44,407 (142,308) 10,231 18,278 (74,184)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 2,118 44,737 (126,889) 12,760 (67,274)
Net Cash (Used In) Provided By
Investing Activities............... (147) (9,762) (742) (2) (10,653)
Net Cash (Used In) Provided By
Financing Activities............... (2,430) 62,025 10,790 (3,548) 66,837
Intercompany Investing and Financing
Activities - Net................... 775 (98,287) 105,677 (8,165)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash and
Cash Equivalents................... 316 (1,287) (11,164) 1,045 (11,090)
Cash and Cash Equivalents Balance,
Beginning of Period................ 46 (5,395) 24,608 106 19,365
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 362 $ (6,682) $ 13,444 1,151 $ $ 8,275
======== ========= ========== ============ ========== ==========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Our uses for cash during the six months ended April 30, 2001 were for
operating expenses, seasonal increases in housing inventories, construction,
income taxes, interest, and the merger with Washington Homes, Inc. We
provided for our cash requirements from housing and land sales, the revolving
credit facility, financial service revenues and other revenues. We believe
that these sources of cash are sufficient to finance our working capital
requirements and other needs.
In March 2000 the Board of Directors authorized a stock repurchase
program to purchase up to 4 million shares of Class A Common Stock. This
authorization expired on December 31, 2000. As of April 30, 2001, 3,391,047
shares were repurchased under this program.
Our bank borrowings are made pursuant to a revolving credit agreement
(the "Agreement") that provides a revolving credit line of up to $375,000,000
(the "Revolving Credit Facility") through July 2003. Interest is payable
monthly and at various rates of either prime plus .25% or Libor plus 1.70%.
We believe that we will be able either to extend the Agreement beyond July
2003 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 our covenants under the Agreement. As of
April 30, 2001, borrowings under the Agreement were $120,600,000.
The subordinated indebtedness issued by us and outstanding as of April
30, 2001 was $99,747,000 9 3/4% Subordinated Notes due June 2005. The senior
indebtedness issued by us and outstanding as of April 30, 2001 was
$150,000,000 (issued at a discount of $146,400,000), 10 1/2 Senior Notes due
October 2007 and $150,000,000 9 1/8% Senior Notes due May 2009.
Our mortgage banking subsidiary borrows under a bank warehousing
arrangement. Other finance subsidiaries formerly borrowed from a multi-
builder owned financial corporation and a builder owned financial corporation
to finance mortgage backed securities, but in fiscal 1988 decided to cease
further borrowing from multi-builder and builder owned financial corporations.
These non-recourse borrowings have been generally secured by mortgage loans
originated by one of our subsidiaries. As of April 30, 2001, the aggregate
principal amount of all such borrowings was $56,543,000.
Total inventory increased $148,938,000 during the six months ended April
30, 2001. The increase was primarily due to the merger with Washington Homes,
Inc. In addition, inventory levels increased in most of our housing markets.
Substantially all homes under construction or completed and included in
inventory at April 30, 2001 are expected to be closed during the next twelve
months. Most inventory completed or under development is financed through our
line of credit and subordinated indebtedness.
The following table summarizes housing lots included in our total residential real
estate:
Active Contracted Active Proposed Grand Total
Active Selling Not Lots Developable Lots
Communities Lots Delivered Available Lots Available
----------- ------- ---------- --------- ----------- -----------
April 30, 2001:
Northeast Region.. 24 4,185 1,338 2,847 10,935 13,782
North Carolina.... 57 4,731 833 3,898 2,735 6,633
Metro D.C......... 36 3,164 1,019 2,145 4,864 7,009
California........ 12 1,723 307 1,416 483 1,899
Texas............. 40 1,779 372 1,407 499 1,906
Mid South......... 19 1,470 156 1,314 - 1,314
Other............. 1 93 20 73 2,374 2,447
----------- ------- ---------- ---------- ---------- -----------
189 17,145 4,045 13,100 21,890 34,990
=========== ======= ========== ========== ========== ===========
Owned.......... 8,161 3,340 4,821 4,384 9,205
Optioned....... 8,984 705 8,279 17,506 25,785
------- ---------- ---------- ---------- -----------
Total........ 17,145 4,045 13,100 21,890 34,990
======= ========== ========== ========== ===========
Active Contracted Active Proposed Grand Total
Active Selling Not Lots Developable Lots
Communities Lots Delivered Available Lots Available
----------- ------- ---------- --------- ----------- -----------
October 31, 2000:
Northeast Region.. 28 4,941 1,149 3,792 11,016 14,808
North Carolina.... 29 2,331 215 2,116 400 2,516
Metro D.C......... 6 708 215 493 4,875 5,368
California........ 12 2,015 151 1,864 576 2,440
Texas............. 44 1,628 282 1,346 752 2,098
Other............. 1 186 84 102 2,374 2,476
----------- ------- ---------- ---------- ---------- -----------
120 11,809 2,096 9,713 19,993 29,706
=========== ======= ========== ========== ========== ===========
Owned.......... 6,236 1,963 4,273 3,776 8,049
Optioned....... 5,573 133 5,440 16,217 21,657
------- ---------- ---------- ---------- -----------
Total........ 11,809 2,096 9,713 19,993 29,706
======= ========== ========== ========== ===========
The following table summarizes our started or completed unsold homes in
active, substantially complete and suspended communities:
April 30, October 31,
2001 2000
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 82 55 137 133 48 181
North Carolina...... 218 50 268 102 31 133
Metro D. C.......... 86 39 125 6 7 13
California.......... 55 22 77 136 32 168
Texas.............. 268 13 281 238 8 246
Mid South.......... 57 21 78 - - -
Other............... 33 - 33 58 - 58
------ ------ ----- ------ ------ -----
Total 799 200 999 673 126 799
====== ====== ===== ====== ====== =====
Financial Services - Mortgage loans held for sale consist of residential
mortgages receivable of which $72,709,000 and $61,549,000 at April 30, 2001
and October 31, 2000, respectively, are being temporarily warehoused and
awaiting sale in the secondary mortgage market. The balance of such mortgages
is being held as an investment by us. We may incur risk with respect to
mortgages that are delinquent, but only to the extent the losses are not
covered by mortgage insurance or resale value of the house. Historically, we
have incurred minimal credit losses. Collateralized Mortgage Financing -
Collateral for bonds payable consist of collateralized mortgages receivable
which are pledged against non-recourse collateralized mortgage obligations.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 2001
COMPARED TO THE THREE AND SIX MONTHS ENDED APRIL 30, 2000
Our operations consist primarily of residential housing development and
sales in our Northeast Region (comprising of New Jersey, southern New York
State and eastern Pennsylvania), North Carolina, Metro D. C. (northern
Virginia and Maryland), southern California, Texas, the Mid South (Tennessee,
Alabama, and Mississippi), and Poland. Our Mid South operations are the
result of the merger with Washington Homes, Inc. In addition, we provide
financial services to our homebuilding customers.
Important indicators of the future results are recently signed contracts
and home contract backlog for future deliveries. Our sales contracts and
homes in contract (using base sales prices) by market area are set forth
below:
Sales Contracts for the
Six Months Ended Contract Backlog
April 30, as of April 30,
----------------------- ----------------------
2001 2000 2001 2000
--------- --------- ----------- ---------
(Dollars in Thousands)
Northeast Region:
Dollars............. $281,126 $283,166 $ 371,745 $358,531
Homes............... 1,036 1,073 1,338 1,327
North Carolina:
Dollars............. $151,134 $ 60,872 $ 151,840 $ 47,229
Homes............... 851 320 833 229
Metro D. C.:
Dollars............. $170,966 $ 38,593 $ 257,958 $ 39,924
Homes............... 696 146 1,019 164
California:
Dollars............. $154,167 $ 75,953 $ 109,315 $ 56,280
Homes............... 448 244 307 162
Texas:
Dollars............. $101,520 $ 86,501 $ 82,057 $ 52,618
Homes............... 495 438 372 259
Mid South:
Dollars............. $ 24,105 $ - $ 25,331 $ -
Homes............... 160 - 156 -
Other:
Dollars............. $ 1,299 $ 14,878 $ 2,640 $ 15,464
Homes............... 31 92 20 102
Totals:
Dollars............. $884,317 $559,963 $1,000,886 $570,046
Homes............... 3,717 2,313 4,045 2,243
Total Revenues:
Revenues for the three months ended April 30, 2001 increased $161.1
million or 67%, compared to the same period last year. This was the result of
a $158.2 million increase in revenues from the sale of homes and a $3.3
million increase in financial services revenues. This increase was partially
offset by a $0.5 million decrease in land sales and other homebuilding
revenues.
Revenues for the six months ended April 30, 2001 increased $198 million
or 40%, compared to the same period last year. This was the result of a
$191.5 million increase in revenues from the sale of homes, a $2.6 million
increase in land sales and other homebuilding revenues, and a $3.9 million
increase in financial services revenues.
Homebuilding:
Revenues from the sale of homes increased $158.2 million or 67% during
the three months ended April 30, 2001, and increased $191.5 million or 39%
during the six months ended April 30, 2001, compared to the same period last
year. Revenues from the sales of homes are recorded at the time each home is
delivered and title and possession have been transferred to the buyer.
Information on homes delivered by market area is set forth below:
Three Months Ended Six Months Ended
April 30, April 30,
------------------- ------------------
2001 2000 2001 2000
--------- -------- -------- --------
(Dollars in Thousands)
Northeast Region:
Housing Revenues..... $126,700 $113,732 $250,326 $240,984
Homes Delivered...... 420 410 847 871
North Carolina:
Housing Revenues..... $ 60,457 $ 30,891 $ 92,255 $ 58,261
Homes Delivered...... 355 160 535 298
Metro D.C.:
Housing Revenues..... $ 74,263 $ 17,459 $110,954 $ 33,304
Homes Delivered...... 333 66 495 131
California:
Housing Revenues..... $ 65,339 $ 30,313 $109,653 $ 55,949
Homes Delivered...... 186 117 292 211
Texas:
Housing Revenues..... $ 46,434 $ 37,573 $ 84,244 $ 86,788
Homes Delivered...... 228 181 405 440
Mid South:
Housing Revenues..... $ 11,846 $ - $ 14,923 $ -
Homes Delivered...... 81 - 103 -
Other:
Housing Revenues..... $ 8,262 $ 5,087 $ 14,351 $ 9,887
Homes Delivered...... 49 16 97 40
Totals:
Housing Revenues..... $393,301 $235,055 $676,706 $485,173
Homes Delivered...... 1,652 950 2,774 1,991
The increase in the number of homes delivered and related revenues
compared to the prior year was primarily due to the merger with Washington
Homes, Inc. and an increase in the average home price in California.
Cost of sales includes expenses for housing and land and lot sales. A
breakout of such expenses for housing sales and housing gross margin is set
forth below:
Three Months Ended Six Months Ended
April 30, April 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Dollars in Thousands)
Sale of Homes................ $393,301 $235,055 $676,706 $485,173
Cost of Sales................ 313,860 187,102 537,535 391,812
-------- -------- -------- --------
Housing Gross Margin......... $ 79,441 $ 47,953 $139,171 $ 93,361
======== ======== ======== ========
Gross Margin Percentage...... 20.2% 20.4% 20.6% 19.2%
Cost of Sales expenses as a percentage of home sales revenues are
presented below:
Three Months Ended Six Months Ended
April 30, April 30,
------------------- -------- --------
2001 2000 2001 2000
-------- -------- -------- --------
Sale of Homes................ 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of Sales:
Housing, land &
development costs.... 71.6% 71.2% 71.3% 72.3%
Commissions............ 2.5% 2.3% 2.3% 2.3%
Financing concessions.. 0.8% 0.9% 0.8% 0.9%
Overheads.............. 4.9% 5.2% 5.0% 5.3%
-------- -------- -------- --------
Total Cost of Sales.......... 79.8% 79.6% 79.4% 80.8%
-------- -------- -------- --------
Gross Margin................. 20.2% 20.4% 20.6% 19.2%
======== ======== ======== ========
We sell a variety of home types in various local communities, each
yielding a different gross margin. As a result, depending on the mix of both
communities and of home types delivered, consolidated quarterly gross margin
will fluctuate up or down and may not be representative of the consolidated
gross margin for the year. In addition, gross margin percentages are higher
in the Northeast Region compared to our other markets. For the three months
ended April 30, 2001 our gross margin percentage slightly decreased 0.2%
compared to the same period last year. This decrease is due to increased
activity in Metro D. C., North Carolina, and added markets in the Mid South
that report lower margins. The increased activity in these areas is the
result of the merger with Washington Homes, Inc. For the six months ended
April 30, 2001 our gross margin percentage increased 1.4% compared to the same
period last year. This can be attributable to improved gross margins in the
Northeast Region and Texas The improvements are primarily attributed to
increased sales prices and tighter cost controls.
Selling, general, and administrative expenses as a percentage of total
homebuilding revenues decreased to 8.8% for the three months ended April 30,
2001 from 10.8% for the prior year's three months and decreased to 9.2% for
the six months ended April 30, 2001 from 10.3% for the prior year's six
months. Such expenses increased during the three and six months ended April
30, 2001 $9.1 million and $12.4 million, respectively, compared to the same
periods last year. The dollar increase in selling, general, and
administrative is due to increased advertising and selling costs in California
due to the addition of five new communities, increases in administrative costs
in our Northeast Region and Texas due to increased bonus accruals, and the
addition of Washington Homes, Inc.
Land Sales and Other Revenues:
Land sales and other revenues consist primarily of land and lot sales.
A breakout of land and lot sales is set forth below:
Three Months Ended Six Months Ended
April 30, April 30,
------------------ -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Land and Lot Sales................ $ 1,072 $ 882 $ 4,238 $ 1,816
Cost of Sales..................... 928 809 3,829 1,602
-------- -------- -------- --------
Land and Lot Sales Gross Margin... 144 73 409 214
Interest Expense.................. 56 48 289 239
-------- -------- -------- --------
Land and Lot Sales Profit (Loss)
Before Tax...................... $ 88 $ 25 $ 120 $ (25)
======== ======== ======== ========
Land and lot sales are incidental to our residential housing operations
and are expected to continue in the future but may significantly fluctuate up
or down.
Financial Services
Financial services consist primarily of originating mortgages from our
homebuyers, selling such mortgages in the secondary market, and title
insurance activities. For the three and six months ended April 30, 2001
financial services provided a $2.0 million and $3.8 million profit before
income taxes compared to a loss of $0.8 million and $1.2 million for the same
periods in 2000. These increases are primarily due to a change in management,
reduced costs, and increased mortgage loan amounts. In addition to our
wholly-owned mortgage facillity, customers obtained mortgages from our
mortgage joint ventures in our Texas and Washington Homes divisions.
Collateralized Mortgage Financing
In the years prior to February 29, 1988 we pledged mortgage loans
originated by our mortgage banking subsidiaries against collateralized
mortgage obligations ("CMO's"). Subsequently we discontinued our CMO program.
As a result, CMO operations are diminishing as pledged loans are decreasing
through principal amortization and loan payoffs, and related bonds are
reduced. In recent years, as a result of bonds becoming callable, we have
also sold a portion of our CMO pledged mortgages.
Corporate General and Administrative
Corporate general and administrative expenses include the operations at
our headquarters in Red Bank, New Jersey. Such expenses include our executive
offices, information services, human resources, corporate accounting,
training, treasury, process redesign, internal audit, construction services,
and administration of insurance, quality, and safety. As a percentage of
total revenues such expenses decreased to 2.3% for the three months ended
April 30, 2001 from 3.1% for the prior year's three months and decreased to
2.8% for the six months ended April 30, 2001 from 2.9% for the prior year's
six months. Corporate general and administrative expenses increased $1.9
million and $4.9 million during the three and six months ended April 30, 2001
compared to the same periods last year. Increases in corporate general and
administrative expenses are primarily attributed to less process redesign
costs associated with SAP capitalized during the three and six months ended
April 30, 2001 compared to the same period last year, increased depreciation
resulting from capitalized process redesign costs in prior years, and
increased bonus accruals based upon increased return on equity and increased
staff levels in order to serve a much larger company resulting from the merger
with Washington Homes, Inc. Process redesign costs are capitalized in
accordance with SOP 98-1 "Accounting For the Cost of Computer Software
Development For or Obtained for Internal Use".
Interest
Interest expense includes housing and land and lot interest. Interest
expense is broken down as follows:
Three Months Ended Six Months Ended
April 30, April 30,
------------------ -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Sale of Homes.............. $ 13,893 $ 7,732 $ 23,165 $ 15,409
Land and Lot Sales......... 56 48 289 239
-------- -------- -------- --------
Total...................... $ 13,949 $ 7,780 $ 23,454 $ 15,648
======== ======== ======== ========
Housing interest as a percentage of sale of homes revenues slightly
increased to 3.5% and 3.4% for the three and six months ended April 30, 2001,
respectively, compared to 3.3% and 3.2% for the three and six months ended
April 30, 2000, respectively.
Other Operations
Other operations consist primarily of miscellaneous residential housing
operations expenses, senior residential property operations, amortization of
senior and subordinated note issuance expenses, amortization of goodwill from
homebuilding company acquisitions, earnout payments from homebuilding company
acquisitions and corporate owned life insurance loan interest.
Restructuring Charges
Restructuring charges are estimated expenses associated with the
integration of our operations with those of Washington Homes, Inc. These
expenses are salaries, severance and outplacement costs for the termination of
associates, and costs to close and relocate existing administrative offices,
and lost rent and leasehold improvements. At April 30, 2001, $686,000 has
been charged against the $1.7 million accrual for termination and related
costs while $369,000 has been charged against the $0.8 million accrual
established for closing and relocation costs.
Total Taxes
Total taxes as a percentage of income before taxes amounted to
approximately 38.5% and 32.4% for the six months ended April 30, 2001 and
2000, respectively. The increase in this percentage from 2000 to 2001 is
primarily attributed to an increase in the effective federal income tax rate.
The increased effective rate is due primarily to higher amounts of expenses in
2001 not deductible for federal taxes and a reduced effect of our senior
rental tax credits. Although the credits are the same in 2001 and 2000, they
reduce our effective tax rate less when pretax profits are higher. Deferred
federal and state income tax assets primarily represent the deferred tax
benefits arising from temporary differences between book and tax income which
will be recognized in future years as an offset against future taxable income.
If for some reason the combination of future years income (or loss) combined
with the reversal of the timing differences results in a loss, such losses can
be carried back to prior years to recover the deferred tax assets. As a
result, management is confident such deferred tax assets are recoverable
regardless of future income.
Inflation
Inflation has a long-term effect on us because increasing costs of land,
materials, and labor result in increasing sale prices of our homes. In
general, these price increases have been commensurate with the general rate of
inflation in our housing markets and have not had a significant adverse effect
on the sale of our homes. A significant risk faced by the housing industry
generally is that rising house costs, including land and interest costs, will
substantially outpace increases in the income of potential purchasers. In
recent years, in the price ranges in which our homes sell, we have not found
this risk to be a significant problem.
Inflation has a lesser short-term effect on us because we generally
negotiate fixed price contracts with our subcontractors and material suppliers
for the construction of our homes. These prices usually are applicable for a
specified number of residential buildings or for a time period of between four
to twelve months. Construction costs for residential buildings represent
approximately 57% of our homebuilding cost of sales.
Merger With Washington Homes, Inc.
On January 23, 2001 we merged with Washington Homes, Inc. for a total
purchase price of $87.4 million, of which $38.5 was paid in cash and 6,352,900
shares of our Class A common stock were issued. The addition of Washington
Homes operations for slightly more than three full quarters is expected to
increase revenues more than 40% in fiscal 2001 from fiscal 2000.
Safe Harbor Statement
Certain statements contained in this Form 10-Q that are not historical
facts should be considered as "Forward-Looking Statements" within the meaning
of the Private Securities Litigation Act of 1995. Such statements involve
known and unknown risks, uncertainties and other factors that may cause actual
results to differ materially. Such risks, uncertainties and other factors
include, but are not limited to:
. Changes in general economic and market conditions
. Changes in interest rates and the availability of mortgage financing
. Changes in costs and availability of material, supplies and labor
. General competitive conditions
. The availability of capital
. The ability to successfully effect acquisitions
These risks, uncertainties, and other factors are described in detail in
Item 1 and 2 Business and Properties in our Form 10-K for the year ended
October 31, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOVNANIAN ENTERPRISES, INC.
(Registrant)
DATE: June 13, 2001 /S/J. LARRY SORSBY
J. Larry Sorsby,
Executive Vice President and
Chief Financial Officer
DATE: June 13, 2001 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller