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 <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) <CAPTION> April 30, October 31, ASSETS 2001 2000 ----------- ----------- (unaudited) <S> <C> <C> 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. </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) <CAPTION> April 30, October 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000 ----------- ----------- (unaudited) <S> <C> <C> 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. </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Per Share Data) (Unaudited) <CAPTION> Three Months Ended Six Months Ended April 30, April 30, ------------------- ------------------- 2001 2000 2001 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> 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. </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 48,361 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. </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (unaudited) <CAPTION> Six Months Ended April 30, --------------------- 2001 2000 ---------- ---------- <S> <C> <C> 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. </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 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 $120,600,000. The subordinated notes, senior notes, and the revolving credit agreement are fully and unconditionally guaranteed by the Parent. Each of the wholly owned subsidiaries of the Parent (collectively the "Guarantor Subsidiaries"), with the exception of four subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, a mortgage lending subsidiary, a subsidiary holding and licensing the "K. Hovnanian" trade name, and a subsidiary engaged in homebuilding activity in Poland (collectively the "Non-guarantor Subsidiaries"), have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under the senior notes and the revolving credit agreement of the Subsidiary Issuer. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries we have included the accompanying consolidated condensed financial statements. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. The following consolidating condensed financial information present the results of operations, financial position and cash flows of (i) the Parent (ii) the Subsidiary Issuer (iii) the Guarantor Subsidiaries of the Parent (iv) the Non-Guarantor Subsidiaries of the Parent and (v) the eliminations to arrive at the information for Hovnanian Enterprises, Inc. on a consolidated basis. <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED BALANCE SHEET APRIL 30, 2001 (Thousands of Dollars) <CAPTION> Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> ASSETS Homebuilding.......................$ 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) $1,071,102 ======== ========== ========== ============ ========== ========== </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED BALANCE SHEET OCTOBER 31, 2000 (Thousands of Dollars) <CAPTION> Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Assets Homebuilding.......................$ (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 APRIL 30, 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.....................$ $ 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 ======= ========== ========== ============ ========== ========== </TABLE> <TABLE> 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) <CAPTION> Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> 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 ======= ========== ========== ============ ========== ========== </TABLE> <TABLE> 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) <CAPTION> Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> 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 ======= ========== ========== ============ ========== ========== </TABLE> <TABLE> 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) <CAPTION> Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> 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 ======= ========== ========== ============ ========== ========== </TABLE> <TABLE> 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) <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.........................$ 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 ======== ========= ========== ============ ========== ========== </TABLE> <TABLE> 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) <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.........................$ 6,910 $ 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 ======== ========= ========== ============ ========== ========== </TABLE> 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. <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 ----------- ------- ---------- --------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> 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 ======= ========== ========== ========== =========== </TABLE> 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