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 JANUARY 31, 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. 20,087,921 Class A Common Shares and 7,586,396 Class B Common Shares were outstanding as of March 9, 2001. HOVNANIAN ENTERPRISES, INC. FORM 10Q INDEX PAGE NUMBER PART I. Financial Information Item l. Consolidated Financial Statements: Consolidated Balance Sheets at January 31, 2001 (unaudited) and October 31, 2000 3 Consolidated Statements of Income for the three months ended January 31, 2001 and 2000 (unaudited) 5 Consolidated Statements of Stockholders' Equity for the three months ended January 31, 2001 (unaudited) 6 Consolidated Statements of Cash Flows for the three months ended January 31, 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 14 Item 4. Submission of Matters to a Vote of Security Holders 23 PART II. Other Information Item 6(a). Exhibit 10 - Registration Rights Agreement and Employment Agreement (Geaton A. DeCesaris, Jr.) Item 6(b). Exhibit 10 - Restated By Laws of Hovnanian Enterprises, Inc. Item 6(c). Reports on Form 8K filed during the quarter for which this report is filed 23 Signatures 24 <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) <CAPTION> (unaudited) January 31, October 31, ASSETS 2001 2000 ----------- ----------- <S> <C> <C> Homebuilding: Cash and cash equivalents....................... $ 33,408 $ 40,131 ----------- ----------- Inventories - At the lower of cost or fair value: Sold and unsold homes and lots under development.................................. 672,310 525,116 Land and land options held for future development or sale......................... 92,802 89,867 ----------- ----------- Total Inventories........................... 765,112 614,983 ----------- ----------- Receivables, deposits, and notes................ 54,927 36,190 ----------- ----------- Property, plant, and equipment - net............ 35,414 35,594 ----------- ----------- Senior Residential rental properties - net...... 10,179 10,276 ----------- ----------- Prepaid expenses and other assets............... 88,884 64,897 ----------- ----------- Total Homebuilding.......................... 987,924 802,071 ----------- ----------- Financial Services: Cash and cash equivalents....................... 2,684 3,122 Mortgage loans held for sale.................... 42,857 61,860 Other assets.................................... 1,617 2,145 ----------- ----------- Total Financial Services.................... 47,158 67,127 ----------- ----------- Collateralized Mortgage Financing: Collateral for bonds payable.................... 4,000 4,145 Other assets.................................... 192 198 ----------- ----------- Total Collateralized Mortgage Financing..... 4,192 4,343 ----------- ----------- Income Taxes Receivable - Including deferred tax benefits........................................ 1,291 ----------- ----------- Total Assets...................................... $1,040,565 $873,541 =========== =========== See notes to consolidated financial statements. </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) <CAPTION> (unaudited) January 31, October 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000 ----------- ----------- <S> <C> <C> Homebuilding: Nonrecourse land mortgages........................ $ 16,402 $ 18,166 Accounts payable and other liabilities............ 95,836 82,205 Customers' deposits............................... 35,930 31,475 Nonrecourse mortgages secured by operating properties...................................... 3,529 3,554 ----------- ----------- Total Homebuilding............................ 151,697 135,400 ----------- ----------- Financial Services: Accounts payable and other liabilities............ 1,591 2,078 Mortgage warehouse line of credit................. 38,041 56,486 ----------- ----------- Total Financial Services...................... 39,632 58,564 ----------- ---------- Collateralized Mortgage Financing: Bonds collateralized by mortgages receivable...... 2,878 3,007 ----------- ----------- Total Collateralized Mortgage Financing....... 2,878 3,007 ----------- ----------- Notes Payable: Revolving credit agreement........................ 119,775 Senior notes...................................... 296,518 296,430 Subordinated notes................................ 100,000 100,000 Accrued interest.................................. 11,074 12,709 ----------- ----------- Total Notes Payable........................... 527,367 409,139 ----------- ----------- Income Taxes Payable................................ 4,072 ----------- ----------- Total Liabilities............................. 721,574 610,182 ----------- ----------- 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 23,820,893 shares (including 3,736,921 shares in January 2001 and October 2000 held in Treasury)............. 237 173 Common Stock,Class B,$.01 par value-authorized 13,000,000 shares; issued 7,932,219 shares (including 345,874 shares held in Treasury)..... 79 79 Paid in Capital................................... 94,930 46,086 Retained Earnings................................. 253,343 246,420 Deferred Compensation............................. (266) Treasury Stock - at cost.......................... (29,332) (29,399) ----------- ----------- Total Stockholders' Equity.................... 318,991 263,359 ----------- ----------- Total Liabilities and Stockholders' Equity.......... $1,040,565 $873,541 =========== =========== See notes to consolidated financial statements. </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Per Share Data) (unaudited) <CAPTION> Three Months Ended January 31, ------------------- 2001 2000 --------- --------- <S> <C> <C> Revenues: Homebuilding: Sale of homes...................... $283,405 $250,118 Land sales and other revenues...... 5,086 2,065 --------- --------- Total Homebuilding............... 288,491 252,183 Financial Services................... 5,440 4,851 Collateralized Mortgage Financing.... 98 115 --------- --------- Total Revenues................... 294,029 257,149 --------- --------- Expenses: Homebuilding: Cost of sales...................... 226,576 205,503 Selling, general and administrative 28,225 24,928 Inventory impairment loss.......... 174 --------- --------- Total Homebuilding............... 254,975 230,431 Financial Services................... 3,697 5,305 Collateralized Mortgage Financing.... 83 98 Corporate General and Administration. 9,878 6,874 Interest............................. 9,505 7,868 Other Operations..................... 1,851 1,797 Restructuring Charges................ 2,480 --------- --------- Total Expenses................... 282,469 252,373 --------- --------- Income Before Income Taxes............. 11,560 4,776 --------- --------- State and Federal Income Taxes: State................................ 399 155 Federal.............................. 4,238 1,169 --------- --------- Total Taxes........................ 4,637 1,324 --------- --------- Net Income............................. $ 6,923 $ 3,452 ========= ========= Per Share Data: Basic: Income per common share.............. $ 0.31 $ 0.15 Weighted average number of common shares outstanding................. 22,286 22,327 Assuming dilution: Income per common share.............. $ 0.30 $ 0.15 Weighted average number of common shares outstanding................. 22,732 22,413 See notes to consolidated financial statements. </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars In Thousands) <CAPTION> 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 ----------- ------ ----------- ------ ------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> 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 48,161 48,225 Sale of common stock under employee stock option plan............ 65,000 367 367 Stock bonus plan......... 46,940 316 316 Conversion of Class B to Class A Common Stock.... 46,684 (46,684) Deferred compensation..... (266) (266) Treasury stock purchases adjustment............. 67 67 Net Income................ 6,923 6,923 ----------- ------ ----------- ------ ------- -------- -------- -------- -------- Balance, January 31, 2001 20,083,972 $237 7,586,345 $79 $94,930 $253,343 $ (266) $(29,332) $318,991 (unaudited) =========== ====== =========== ====== ======= ======== ======== ======== ======== See notes to consolidated financial statements. </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (unaudited) <CAPTION> Three Months Ended January 31, --------------------- 2001 2000 ---------- ---------- <S> <C> <C> Cash Flows From Operating Activities: Net Income.......................................... $ 6,923 $ 3,452 Adjustments to reconcile net income to net cash Provided by (used in) operating activities: Depreciation.................................... 1,965 1,591 Amortization of goodwill........................ 669 (Gain) on sale and retirement of property and assets.................................... (40) (209) Deferred income taxes........................... 145 (281) Impairment losses............................... 174 Decrease (increase) in assets: Mortgage notes receivable..................... 19,205 11,116 Receivables, prepaids and other assets........ (22,211) (13,091) Inventories................................... (9,514) (34,275) Increase (decrease) in liabilities: State and Federal income taxes................ (544) (2,778) Customers' deposits........................... 932 5,395 Interest and other accrued liabilities........ (7,587) (5,833) Post development completion costs............. 1,964 993 Accounts payable.............................. (6,642) (1,907) ---------- ---------- Net cash used in operating activities....... (14,561) (35,827) ---------- ---------- Cash Flows From Investing Activities: Net proceeds from sale of property and assets....... 7 318 Purchase of property, equipment and other fixed assets...................................... (1,073) (8,997) Acquisition of homebuilding companies............... (36,936) (119) Investment in and advances to unconsolidated affiliates........................................ (12) (1) ---------- ---------- Net cash used in investing activities....... (38,014) (8,799) ---------- ---------- Cash Flows From Financing Activities: Proceeds from mortgages and notes................... 480,328 336,378 Principal payments on mortgages and notes........... (435,664) (298,263) Purchase of treasury stock.......................... 67 (1,176) Proceeds from sale of stock......................... 683 ---------- ---------- Net cash provided by financing activities................................ 45,414 36,939 ---------- ---------- Net (Decrease) In Cash and Cash Equivalents........... (7,161) (7,687) Cash and Cash Equivalents and Balance, Beginning Of Period........................................... 43,253 19,365 ---------- ---------- Cash and Cash Equivalent and Balance, End Of Period... $ 36,092 $ 11,678 ========== ========== See notes to consolidated financial statements. </TABLE> 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 January 31, ------------------- 2001 2000 -------- -------- (Dollars in Thousands) Interest Capitalized at Beginning of Period......... $ 25,694 $ 21,966 Plus Acquired Entity Interest. 3,604 Plus Interest Incurred(1)(3).. 11,572 8,023 Less Interest Expensed(3)..... 9,505 7,868 -------- -------- Interest Capitalized at End of Period(2)(3)......... $ 31,365 $ 22,121 ======== ======== (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 January 31, 2001 and October 31, 2000 amounted to $24,868,000 and $22,164,000, respectively. Senior residential rental property accumulated depreciation at January 31, 2001 and October 31, 2000 amounted to $2,393,000 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 the amount of $63,000 in New Jersey and $111,000 in Metro D. C. during the three months ended January 31, 2001. Residential inventory FAS 121 impairment losses and option write offs are reported in the Consolidated Statements of Income as "Homebuilding-Inventory Impairment Loss." 5. We are involved from time to time in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on us. As of January 31, 2001 and October 31, 2000, respectively, we are obligated under various performance letters of credit amounting to $5,452,000 and $4,284,000. 6. Our credit facility was amended as of February 22, 2000. Pursuant to the Amendment, our credit line increased to $375,000,000 and was 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 months ended January 31, 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 January 31, ------------------------------ 2001 2000 ----------- ----------- Revenues.................................... $363,767 $350,452 Expenses.................................... 351,704 342,774 Income Taxes................................ 4,095 2,568 ----------- ----------- Net Income.................................. $ 7,968 $ 5,110 =========== =========== Diluted Net Income Per Common Share......... $ 0.28 $ 0.18 =========== =========== 8. Restructuring Charges - Restructuring charges are estimated expenses associated with the merger of our operations with those of Washington Homes, Inc. as a result of the merger on January 23, 2001. Under our merger plan, administration offices in Maryland, Virginia, and North Carolina 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 January 31, 2001 no costs have been charged against the above accrued liabilities. 9. 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 January 31, 2001 had issued and outstanding approximately $100,000,000 subordinated notes, $300,000,000 senior notes, and a revolving credit agreement with an outstanding balance of $119,775,000. The subordinated notes, senior notes, and the revolving credit agreement are fully and unconditionally guaranteed by the Parent. Each of the wholly owned subsidiaries of the Parent (collectively the "Guarantor Subsidiaries"), with the exception of four subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, a mortgage lending subsidiary, a subsidiary holding and licensing the "K. Hovnanian" trade name, and a subsidiary engaged in homebuilding activity in Poland (collectively the "Non-guarantor Subsidiaries"), have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under the senior notes and the revolving credit agreement of the Subsidiary Issuer. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries we have included the accompanying consolidated condensed financial statements. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. The following consolidating condensed financial information present the results of operations, financial position, and cash flows of (i) the Parent, (ii) the Subsidiary Issuer, (iii) the Guarantor Subsidiaries of the Parent, (iv) the Non-guarantor Subsidiaries of the Parent, and (v) the eliminations to arrive at the information for Hovnanian Enterprises, Inc. on a consolidated basis. <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED BALANCE SHEET JANUARY 31, 2001 (Thousands of Dollars) <CAPTION> Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> ASSETS Homebuilding.......................$ 9 $ 54,400 $ 924,715 $ 8,800 $ $ 987,924 Financial Services and CMO......... 888 50,462 51,350 Income Taxes (Payables)Receivables. (3,951) (4,257) 11,559 (2,060) 1,291 Investments in and amounts due to and from consolidated subsidiaries..................... 322,933 484,274 (748,000) 3,434 (62,641) -------- ---------- ---------- ------------ ---------- ---------- Total Assets.......................$318,991 $ 534,417 $ 189,162 $ 60,636 $ (62,641) $1,040,565 ======== ========== ========== ============ ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Homebuilding.......................$ $ 6,902 $ 144,003 $ 792 $ $ 151,697 Financial Services and CMO......... 355 42,155 42,510 Notes Payable...................... 527,308 59 527,367 Stockholders' Equity............... 318,991 207 44,745 17,689 (62,641) 318,991 -------- ----------- ---------- ------------ ---------- ---------- Total Liabilities and Stockholders' Equity...........................$318,991 $ 534,417 $ 189,162 $ 60,636 $ (62,641) $1,040,565 ======== ========== ========== ============ ========== ========== </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED BALANCE SHEET OCTOBER 31, 2000 (Thousands of Dollars) <CAPTION> Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Assets Homebuilding.......................$ (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 ======== ========== ========== ============ ========== ========== </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS THREE MONTHS ENDED JANUARY 31, 2001 (Thousands of Dollars) <CAPTION> Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Revenues: Homebuilding.....................$ $ 65 $ 287,122 $ 7,516 $ (6,212) $ 288,491 Financial Services and CMO....... 2,018 3,520 5,538 Intercompany Charges............. 30,410 (1,954) (28,456) Equity In Pretax Income of Consolidated Subsidiaries...... 11,560 (11,560) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ 11,560 30,475 287,186 11,036 (46,228) 294,029 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 29,913 283,926 1,254 (36,404) 278,689 Financial Services and CMO....... 1,288 2,589 (97) 3,780 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 29,913 285,214 3,843 (36,501) 282,469 ------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes......... 11,560 562 1,972 7,193 (9,727) 11,560 State and Federal Income Taxes..... 4,637 352 70 2,814 (3,236) 4,637 ------- ---------- ---------- ------------ ---------- ---------- Net Income.........................$ 6,923 $ 210 $ 1,902 $ 4,379 $ (6,491) $ 6,923 ======= ========== ========== ============ ========== ========== </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS THREE MONTHS ENDED JANUARY 31, 2000 (Thousands of Dollars) <CAPTION> Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Revenues: Homebuilding.....................$ $ 154 $ 251,406 $ 2,092 $ (1,469) $ 252,183 Financial Services and CMO....... 1,750 3,216 4,966 Intercompany Charges............. 23,046 2,448 (25,494) Equity In Pretax Income of Consolidated Subsidiaries...... 4,776 (4,776) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................. 4,776 23,200 255,604 5,308 (31,739) 257,149 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 23,058 241,375 454 (17,917) 246,970 Financial Services and CMO....... 1,374 4,188 (159) 5,403 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 23,058 242,749 4,642 (18,076) 252,373 ------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes......... 4,776 142 12,855 666 (13,663) 4,776 State and Federal Income Taxes..... 1,324 35 4,166 230 (4,431) 1,324 ------- ---------- ---------- ------------ ---------- ---------- Net Income.........................$ 3,452 $ 107 $ 8,689 $ 436 $ (9,232) $ 3,452 ======= ========== ========== ============ ========== ========== </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS THREE MONTHS ENDED JANUARY 31, 2001 (Thousands of Dollars) <CAPTION> Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Cash Flows From Operating Activities: Net Income.........................$ 6,923 $ 210 $ 1,902 $ 4,379 $ (6,491) $ 6,923 Adjustments to reconcile net income to net cash provided by (used in) operating activities... 93,226 35,300 (173,139) 16,639 6,491 (21,483) -------- --------- ---------- ------------ ---------- ---------- Net Cash Provided By (Used In) Operating Activities........... 100,149 35,510 (171,237) 21,018 (14,560) Net Cash Provided by (Used In) Investing Activities............... (45,218) (17,819) 25,023 (38,014) Net Cash Provided By(Used In) Financing Activities............... 67 119,863 (55,942) (18,574) 45,414 Intercompany Investing and Financing Activities - Net..................... (54,926) (161,569) 219,352 (2,857) -------- --------- ---------- ------------ ---------- ---------- Net Increase (Decrease) In Cash and Cash Equivalents................... 72 (24,015) 17,196 (413) (7,160) 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......................$ 9 $ (6,386) $ 39,702 $ 2,768 $ $ 36,093 ======== ========= ========== ============ ========== ========== </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS THREE MONTHS ENDED JANUARY 31, 2000 (Thousands of Dollars) <CAPTION> Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Cash Flows From Operating Activities: Net Income.........................$ 3,452 $ 107 $ 8,689 $ 436 $ (9,232) $ 3,452 Adjustments to reconcile net income to net cash provided by (used in) operating activities... 16,257 170 (80,276) 15,338 9,232 (39,279) -------- --------- ---------- ------------ ---------- ---------- Net Cash Provided By (Used In) Operating Activities........... 19,709 277 (71,587) 15,774 (35,827) Net Cash Provided by (Used In) Investing Activities............... (8,327) (470) (2) (8,799) Net Cash Provided By(Used In) Financing Activities............... (1,176) 48,350 2,552 (12,787) 36,939 Intercompany Investing and Financing Activities - Net..................... (18,487) (34,743) 33,067 (2,883) -------- --------- ---------- ------------ ---------- ---------- Net Increase (Decrease) In Cash and Cash Equivalents................... 46 5,557 (13,392) 102 (7,687) Cash and Cash Equivalents Balance, Beginning of Period................ 46 (5,395) 24,608 106 19,365 -------- --------- ---------- ------------ ---------- ---------- Cash and Cash Equivalents Balance, End of Period......................$ 92 $ 162 $ 11,216 $ 208 $ $ 11,678 ======== ========= ========== ============ ========== ========== </TABLE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY Our cash uses during the three months ended January 31, 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 increased the stock repurchase program to purchase up to 4 million shares of Class A Common Stock. This authorization expired on December 31, 2000 and is in the process of being revised. As of January 31, 2001, 3,391,047 shares were repurchased under this program. Our homebuilding 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 the prime rate 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 are currently in compliance and intend to maintain compliance with the covenants under the Agreement. As of January 31, 2001, borrowings under the Agreement were $119,775,000. The subordinated indebtedness issued by us and outstanding as of January 31, 2001 was $100,000,000 9 3/4% Subordinated Notes due June 2005. The senior indebtedness issued by us and outstanding as of January 31, 2001 was $150,000,000 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 January 31, 2001, the aggregate principal amount of all such borrowings was $38,041,000. Total inventory increased $150,129,000 during the three months ended January 31, 2001. The increase in inventory 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 January 31, 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 senior and subordinated indebtedness. <TABLE> The following table summarizes housing lots included in our total residential real estate: <CAPTION> Active Contracted Active Proposed Grand Total Active Selling Not Lots Developable Lots Communities Lots Delivered Available Lots Available ----------- ------- ---------- --------- ----------- ----------- January 31, 2001: <S> <C> <C> <C> <C> <C> <C> Northeast Region.. 28 4,598 1,201 3,397 10,569 13,966 North Carolina.... 65 5,117 570 4,547 2,351 6,898 Metro D.C......... 37 3,306 788 2,518 4,965 7,483 California........ 13 1,909 227 1,682 576 2,258 Texas............. 40 1,543 280 1,263 684 1,947 Mid South......... 21 1,631 106 1,525 160 1,685 Other............. 1 138 58 80 2,374 2,454 ----------- ------- ---------- ---------- ---------- ----------- 205 18,242 3,230 15,012 21,679 36,691 =========== ======= ========== ========== ========== =========== Owned.......... 8,244 2,742 5,502 4,177 9,679 Optioned....... 9,998 488 9,510 17,502 27,012 ------- ---------- ---------- ---------- ----------- Total........ 18,242 3,230 15,012 21,679 36,691 ======= ========== ========== ========== =========== 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 ======= ========== ========== ========== =========== </TABLE> The following table summarizes our started or completed unsold homes and models: January 31, October 31, 2001 2000 ----------------------- ----------------------- Unsold Unsold Homes Models Total Homes Models Total ------ ------ ----- ------ ------ ----- Northeast Region.... 119 59 178 133 48 181 North Carolina...... 216 54 270 102 31 133 Metro D.C........... 87 37 124 6 7 13 California.......... 98 22 120 136 32 168 Texas............... 238 9 247 238 8 246 Mid South........... 73 23 96 -- -- -- Other.............. 40 -- 40 58 -- 58 ------ ------ ----- ------ ------ ----- Total 871 204 1,075 673 126 799 ====== ====== ===== ====== ====== ===== Financial Services - Mortgage loans held for sale consist of residential mortgages receivable of which $42,546,000 and $61,549,000 at January 31, 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. Collateral 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 MONTHS ENDED JANUARY 31, 2001 COMPARED TO THE THREE MONTHS ENDED JANUARY 31, 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 backlog (using base sales prices) by market area are set forth below: Sales Contracts for the Three Months Ended Contract Backlog January 31, as of January 31, ----------------------- -------------------- 2001 2000 2001 2000 --------- --------- --------- --------- (Dollars in Thousands) Northeast Region: Dollars............. $125,433 $109,040 $327,437 $284,240 Homes............... 479 422 1,201 1,086 North Carolina: Dollars............. $ 41,651 $ 26,892 $102,786 $ 44,081 Homes............... 233 144 570 213 Metro D.C.: Dollars............. $ 32,009 $ 13,449 $193,098 $ 32,144 Homes............... 130 52 786 136 California: Dollars............. $ 65,547 $ 23,839 $ 82,106 $ 33,217 Homes............... 182 93 227 128 Texas: Dollars............. $ 37,177 $ 39,830 $ 62,754 $ 42,951 Homes............... 175 202 280 204 Mid South: Dollars............. $ 3,806 -- $ 17,037 -- Homes............... 29 -- 106 -- Other: Dollars............. $ 857 $ 4,193 $ 10,011 $ 9,276 Homes............... 22 50 60 76 Totals: Dollars............. $306,480 $217,243 $795,229 $445,909 Homes............... 1,250 963 3,230 1,843 During February 2001 we signed an additional 949 contracts compared to 359 in the same month last year. The February 2001 contracts along with our contract backlog at January 31, 2001 and deliveries for the three months ended January 31, 2001 amount to approximately 75% of our planned deliveries for fiscal 2001. Total Revenues: Revenues for the three months ended January 31, 2001 increased $36.9 million or 14.3%, compared to the same period last year. This was the result of a $33.3 million increase in revenues from the sale of homes, a $3.0 million increase in land sales and other homebuilding revenues, and a $0.6 million increase in financial service revenues. Homebuilding: Revenues from the sale of homes increased $33.3 million or 13.3% during the three months ended January 31, 2001, compared to the same period last year. Revenues from sales of homes are recorded at the time each home is delivered and title and possession have been transferred to the buyer. Information on homes delivered by market area is set forth below: Three Months Ended January 31, ------------------- 2001 2000 --------- -------- (Dollars in Thousands) Northeast Region: Housing Revenues..... $123,626 $127,252 Homes Delivered...... 427 461 North Carolina: Housing Revenues..... $ 31,798 $ 27,370 Homes Delivered...... 180 138 Metro D.C.: Housing Revenues..... $ 36,691 $ 15,845 Homes Delivered...... 162 65 California: Housing Revenues..... $ 44,314 $ 25,636 Homes Delivered...... 106 94 Texas: Housing Revenues..... $ 37,810 $ 49,215 Homes Delivered...... 177 259 Mid South: Housing Revenues..... $ 3,077 -- Homes Delivered...... 22 -- Other: Housing Revenues..... $ 6,089 $ 4,800 Homes Delivered...... 48 24 Totals: Housing Revenues..... $283,405 $250,118 Homes Delivered...... 1,122 1,041 The increase in the number of homes delivered and related revenues was due to an increase of three communities in the Metro D. C. market, an increase in the average home price in California, and the merger with Washington Homes, Inc. These increases were partially offset by decreases in the Northeast Region and Texas. The decrease in the Northeast Region was due to the timing of scheduled deliveries. The decrease in deliveries in Texas was due to the change in their fiscal year end when we acquired them October 31, 1999. Texas historically reported strong deliveries in their fourth quarter, which were represented in our first quarter ended January 31, 2000. Cost of sales includes expenses for housing and land and lot sales. A breakout of such expenses for housing sales and housing gross margin is set forth below: Three Months Ended January 31, ------------------- 2001 2000 -------- -------- (Dollars in Thousands) Sale of Homes................ $283,405 $250,118 Cost of Sales................ 223,675 204,710 -------- -------- Housing Gross Margin......... $ 59,730 $ 45,408 ======== ======== Gross Margin Percentage...... 21.1% 18.2% Cost of Sales expenses as a percentage of home sales revenues are presented below: Three Months Ended January 31, ------------------- 2001 2000 -------- -------- Sale of Homes................ 100.0% 100.0% -------- -------- Cost of Sales: Housing, land & development costs.... 70.8% 73.4% Commissions............ 2.2% 2.3% Financing concessions.. 0.9% 0.9% Overheads.............. 5.0% 5.2% -------- -------- Total Cost of Sales.......... 78.9% 81.8% -------- -------- Gross Margin................. 21.1% 18.2% ======== ======== 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 January 31, 2001 our gross margin percentage increased 2.9% compared to the same period last year. This can be attributed to improved profitability in the Northeast Region and increased sales prices in California. Selling, general, and administrative expenses as a percentage of total homebuilding revenues, decreased to 9.8% for the three months ended January 31, 2001 from 9.9% for the prior year three months. Such expenses increased $3.3 million during the three months ended January 31, 2001 compared to the same period last year. The dollar increase in selling, general and administrative is primarily 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 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 January 31, ------------------ 2001 2000 -------- -------- Land and Lot Sales................ $ 3,166 $ 934 Cost of Sales..................... 2,901 793 -------- -------- Land and Lot Sales Gross Margin... 265 141 Interest Expense.................. 233 191 -------- -------- Land and Lot Sales Profit (Loss) Before Tax...................... $ 32 $ (50) ======== ======== Land and lot sales are incidental to our residential housing operations and are expected to continue in the future but may significantly fluctuate up or down. Financial Services Financial services consist primarily of originating mortgages from our homebuyers, selling such mortgages in the secondary market, and title insurance activities. For the three months ended January 31, 2001 financial services provided a $1.7 million profit before taxes compared to a loss of $0.5 million in 2000. This increase is primarily due to a change in management, reduced costs, and increased mortgage loan amounts. In addition to our wholly-owned mortgage facility, 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 our 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, and administration of insurance, quality, and safety. As a percentage of total revenues such expenses increased to 3.4% for the three months ended January 31, 2001 from 2.7% for the prior year three months. Corporate general and administrative expenses increased $3.0 million during the three months ended January 31, 2001 compared to the same period last year. Increases in corporate general and administrative expenses are primarily attributed to less process redesign costs associated with SAP capitalized during the three months ended January 31, 2001 compared to the same period last year, our new enterprise wide fully integrated software package, increased depreciation resulting from capitalized process redesign costs in prior years, and increased bonus accruals based upon increased return on equity. 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 January 31, ------------------ 2001 2000 -------- -------- Sale of Homes.............. $ 9,272 $ 7,677 Land and Lot Sales......... 233 191 -------- -------- Total...................... $ 9,505 $ 7,868 ======== ======== Housing interest as a percentage of sale of homes revenues slightly increased to 3.3% for the three months ended January 31, 2001 compared to 3.1% for the three months ended January 31, 2000. Other Operations Other operations consist primarily of miscellaneous residential housing operations expenses, investment property operations, amortization of senior and subordinated note issuance expenses, earnout payments from homebuilding company acquisitions, amortization of goodwill, 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. Total Taxes Total taxes as a percentage of income before taxes amounted to approximately 40.1% and 27.7% for the three months ended January 31, 2001 and 2000, respectively. The increase in this percentage from 2000 to 2001 is primarily attributed to an increased 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 $37.9 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. Item 4. Submission of Matters to a Vote of Security Holders We held our annual stockholders meeting on March 8, 2001 at 10:30 a.m. in the Board Room of the American Stock Exchange, 13th floor, 86 Trinity Place, New York, New York. The following matters were voted at the meeting: . Election of all Directors to hold office until the next Annual Meeting of Stockholders. The elected Directors were: .. Kevork S. Hovnanian .. Ara K. Hovnanian .. Paul W. Buchanan .. Geaton A. DeCesaris, Jr. .. Arthur Greenbaum .. Desmond P. McDonald .. Peter S. Reinhart .. John J. Robbins .. J. Larry Sorsby .. Stephen D. Weinroth . Ratification of selection of Ernst & Young, LLP as certified independent accountants for fiscal year ending October 31, 2001. .. Votes For Class A 11,871,112 Class B 72,836,990 .. Votes Against Class A 13,652 Class B 617,160 .. Abstain Class A 6,247 Class B 7,730 Item 6c. Reports on Form 8-K. (i) 8-K filed on December 15, 2000 which was to file the press release dated December 14, 2000 relating to fourth quarter numbers. (ii) 8-K filed on February 7, 2001 which was to announce completion of the Washington Homes, Inc. merger on January 23, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOVNANIAN ENTERPRISES, INC. (Registrant) DATE: March 16, 2001 /S/J. LARRY SORSBY J. Larry Sorsby, Executive Vice President and Chief Financial Officer DATE: March 16, 2001 /S/PAUL W. BUCHANAN Paul W. Buchanan, Senior Vice President Corporate Controller