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 JULY 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. 20,239,324 Class A Common Shares and 7,483,926 Class B Common Shares were outstanding as of September 7, 2001 HOVNANIAN ENTERPRISES, INC. FORM 10Q INDEX PAGE NUMBER PART I. Financial Information Item l. Consolidated Financial Statements: Consolidated Balance Sheets at July 31, 2001 (unaudited) and October 31, 2000 3 Consolidated Statements of Income for the three and nine months ended July 31, 2001 and 2000 (unaudited) 5 Consolidated Statements of Stockholders' Equity for the nine months ended July 31, 2001 (unaudited) 6 Consolidated Statements of Cash Flows for the nine months ended July 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 17 PART II. Other Information Item 6(a). Exhibit 10(a) - $440,000,000 Revolving Credit Agreement Item 6(c). No reports on Form 8K have been filed during the quarter for which this report is filed. Signatures 27 <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) <CAPTION> July 31, October 31, ASSETS 2001 2000 ----------- ----------- <S> <C> <C> (unaudited) Homebuilding: Cash and cash equivalents....................... $ 52,655 $ 40,131 ----------- ----------- Inventories - At the lower of cost or fair value: Sold and unsold homes and lots under development.................................. 633,772 525,116 Land and land options held for future development or sale......................... 147,132 89,867 ----------- ----------- Total Inventories........................... 780,904 614,983 ----------- ----------- Receivables, deposits, and notes................ 43,350 36,190 ----------- ----------- Property, plant, and equipment - net............ 32,692 35,594 ----------- ----------- Senior residential rental properties - net....... 9,986 10,276 ----------- ----------- Prepaid expenses and other assets............... 82,714 64,897 ----------- ----------- Total Homebuilding.......................... 1,002,301 802,071 ----------- ----------- Financial Services: Cash and cash equivalents....................... 8,657 3,122 Mortgage loans held for sale.................... 106,656 61,860 Other assets.................................... 3,027 2,145 ----------- ----------- Total Financial Services.................... 118,340 67,127 ----------- ----------- Collateralized Mortgage Financing: Collateral for bonds payable.................... 3,530 4,145 Other assets.................................... 201 198 ----------- ----------- Total Collateralized Mortgage Financing..... 3,731 4,343 ----------- ----------- Total Assets...................................... $1,124,372 $ 873,541 =========== =========== See notes to consolidated financial statements. </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) <CAPTION> July 31, October 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000 ----------- ----------- <S> <C> <C> (unaudited) Homebuilding: Nonrecourse land mortgages........................ $ 11,111 $ 18,166 Accounts payable and other liabilities............ 122,163 82,205 Customers' deposits............................... 41,833 31,475 Nonrecourse mortgages secured by operating properties...................................... 3,424 3,554 ----------- ----------- Total Homebuilding............................ 178,531 135,400 ----------- ----------- Financial Services: Accounts payable and other liabilities............ 2,820 2,078 Mortgage warehouse line of credit................. 97,946 56,486 ----------- ----------- Total Financial Services...................... 100,766 58,564 ----------- ----------- Collateralized Mortgage Financing: Bonds collateralized by mortgages receivable...... 2,548 3,007 ----------- ----------- Total Collateralized Mortgage Financing....... 2,548 3,007 ----------- ----------- Notes Payable: Revolving credit agreement........................ 78,925 Senior Notes...................................... 296,701 296,430 Subordinated notes................................ 99,747 100,000 Accrued interest.................................. 11,210 12,709 ----------- ----------- Total Notes Payable........................... 486,583 409,139 ----------- ----------- Income Taxes Payable................................ 877 4,072 ----------- ----------- Total Liabilities............................. 769,305 610,182 ----------- ----------- 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 24,332,696 shares (including 3,904,521 shares in July 2001 and 3,736,921 in October 2000 held in Treasury)..... 243 173 Common Stock,Class B,$.01 par value-authorized 13,000,000 shares; issued 7,831,649 shares (including 345,874 shares in July 2001 and October 2000 held in Treasury).................. 78 79 Paid in Capital................................... 98,164 46,086 Retained Earnings................................. 288,415 246,420 Deferred Compensation............................. (167) Treasury Stock - at cost.......................... (31,666) (29,399) ----------- ----------- Total Stockholders' Equity.................... 355,067 263,359 ----------- ----------- Total Liabilities and Stockholders' Equity.......... $1,124,372 $ 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 Nine Months Ended July 31, July 31, ------------------- --------------------- 2001 2000 2001 2000 --------- --------- ---------- ---------- <S> <C> <C> <C> <C> Revenues: Homebuilding: Sale of homes...................... $497,291 $278,004 $1,173,997 $763,177 Land sales and other revenues...... 3,159 2,208 11,161 7,651 --------- --------- ---------- ---------- Total Homebuilding............... 500,450 280,212 1,185,158 770,828 Financial Services................... 9,395 4,664 21,514 12,859 Collateralized Mortgage Financing.... 87 106 255 332 --------- --------- ---------- ---------- Total Revenues................... 509,932 284,982 1,206,927 784,019 --------- --------- ---------- ---------- Expenses: Homebuilding: Cost of sales...................... 399,283 220,967 940,647 614,574 Selling, general and administrative 38,808 25,803 101,908 76,495 Inventory impairment loss.......... 412 1,003 1,350 1,517 --------- --------- ---------- ---------- Total Homebuilding............... 438,503 247,773 1,043,905 692,586 --------- --------- ---------- ---------- Financial Services................... 5,957 4,555 14,319 13,999 Collateralized Mortgage Financing.... 93 92 227 283 Corporate General and Administrative. 10,647 10,000 29,926 24,361 Interest............................. 13,485 8,802 36,939 24,256 Other Operations..................... 5,462 1,502 9,219 6,048 Restructuring Charges................ 500 2,980 --------- --------- ---------- ---------- Total Expenses................... 474,647 272,724 1,137,515 761,533 --------- --------- ---------- ---------- Income Before Income Taxes............. 35,285 12,258 69,412 22,486 --------- --------- ---------- ---------- State and Federal Income Taxes: State................................ 2,246 (36) 3,673 423 Federal.............................. 12,027 4,203 23,744 7,062 --------- --------- ---------- ---------- Total Taxes........................ 14,273 4,167 27,417 7,485 --------- --------- ---------- ---------- Net Income............................. $ 21,012 $ 8,091 $ 41,995 $ 15,001 ========= ========= ========== ========== Per Share Data: Basic: Income Per Common Share.............. $ 0.74 $ 0.37 $ 1.60 $ 0.68 Weighted average number of common shares outstanding................. 28,375 21,904 26,312 22,089 Assuming dilution: Income per common share............ $ 0.71 $ 0.37 $ 1.54 $ 0.68 Weighted average number of common shares outstanding.................. 29,623 21,949 27,309 22,158 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 48,868 48,932 Sale of common stock under Employee stock option plan 471,023 4 2,731 2,735 Stock bonus plan.......... 52,150 1 479 480 Conversion of Class B to Class A Common Stock.... 147,254 1 (147,254) (1) Deferred compensation..... (167) (167) Treasury stock purchases.. (167,600) (2,267) (2,267) Net Income................ 41,995 41,995 ----------- ------ ----------- ------ ------- -------- -------- -------- -------- Balance, July 31, 2001.... 20,428,175 $ 243 7,485,775 $ 78 $98,164 $288,415 $ (167) $(31,666) $355,067 (Unaudited) =========== ====== =========== ====== ======= ======== ======== ======== ======== See notes to consolidated financial statements. </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) <CAPTION> Nine Months Ended July 31, --------------------- 2001 2000 ---------- ---------- <S> <C> <C> Cash Flows From Operating Activities: Net Income.......................................... $ 41,995 $ 15,001 Adjustments to reconcile net income to net cash Provided by (used in) operating activities: Depreciation.................................... 5,901 4,933 Amortization of goodwill........................ 2,731 1,824 (Gain) on sale and retirement of property and assets.................................... (248) (231) Deferred income taxes........................... (597) 919 Impairment losses............................... 1,350 1,517 Decrease (increase) in assets: Mortgage notes receivable..................... (44,163) (11,227) Receivables, prepaids and other assets........ (7,602) (18,546) Inventories................................... (26,482) (90,713) Increase (decrease) in liabilities: State and Federal income taxes................ 2,932 (3,471) Tax effect from exercise of stock options..... (566) Customers' deposits........................... 7,462 11,902 Interest and other accrued liabilities........ 2,915 (7,272) Post development completion costs............. 4,440 (1,028) Accounts payable.............................. 7,639 3,191 ---------- ---------- Net cash (used in) operating activities..... (2,293) (93,201) ---------- ---------- Cash Flows From Investing Activities: Net Proceeds from sale of property and assets....... 3,127 1,019 Purchase of property,equipment and other fixed assets............................................ (3,439) (13,238) Acquisition of homebuilding companies............... (37,741) (488) Investment in and advances to unconsolidated affiliates........................................ (462) ---------- ---------- Net cash (used in) investing activities..... (38,515) (12,707) ---------- ---------- Cash Flows From Financing Activities: Proceeds from mortgages and notes................... 1,153,357 988,015 Principal payments on mortgages and notes...........(1,095,433) (876,122) Purchase of treasury stock.......................... (2,267) (5,036) Proceeds from sale of stock and employee stock plan. 3,210 494 ---------- ---------- Net cash provided by financing activities... 58,867 107,351 ---------- ---------- Net Increase In Cash and Cash Equivalents............. 18,059 1,443 Cash and Cash Equivalents Balance, Beginning Of Period................................. 43,253 19,365 ---------- ---------- Cash and Cash Equivalents Balance, End Of Period...... $ 61,312 $ 20,808 ========== ========== 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 accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and these differences could have a significant impact on the financial statements. Results for the interim periods are not necessarily indicative of the results which might be expected for a full year. 2. Interest costs incurred, expensed and capitalized were: Three Months Ended Nine Months Ended July 31, July 31, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (Dollars in Thousands) Interest Capitalized at Beginning of Period.........$ 29,749 $ 23,632 $ 25,694 $ 21,966 Plus Acquired Entity Interest. 3,604 Plus Interest Incurred(1)(3).. 11,903 10,779 35,808 28,093 Less Interest Expensed(3)..... 13,485 8,802 36,939 24,256 Less Impairment Write-off..... 194 -------- -------- -------- -------- Interest Capitalized at End of Period (2) (3)...... $ 28,167 $ 25,609 $ 28,167 $ 25,609 ======== ======== ======== ======== (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 July 31, 2001 and October 31, 2000 amounted to $19,698,000 and $22,164,000, respectively. Rental property accumulated depreciation at July 31, 2001 and October 31, 2000 amounted to $2,589,000 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. During the three months ended July 31, 2001 we recorded a $131,000 impairment loss on land in North Carolina. 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. During the three and nine months ended July 31, 2001 we wrote off costs in New Jersey, North Carolina, Metro D. C., and California amounting to $281,000 and $1,219,000, respectively. Costs in the amount of $1,003,000 and $1,517,000 were written off during the three and nine months ended July 31, 2000, respectively, in New Jersey, North Carolina, and California. 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 July 31, 2001 and October 31, 2000, respectively, we are obligated under various performance letters of credit amounting to $8,845,000 and $4,284,000. 6. Our credit facility was extended on August 28, 2001. Pursuant to the Extension, our credit line increased to $440,000,000 and was extended through August 2002. Interest is payable monthly and at various rates of either the prime rate plus .40% or Libor plus 1.85%. 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 $12,794,000 is recorded in prepaid expenses and other assets on the consolidated balance sheet. This amount is being amortized on a straight line basis over a period of ten years. The following unaudited pro forma financial data for the three and nine months ended July 31, 2001 and 2000 has been prepared as if the merger with Washington Homes, Inc. on January 23, 2001 had occurred on November 1, 1999. Unaudited pro forma financial data is presented for information purposes only and may not be indicative of the actual amounts of the Company had the events occurred on the dates listed above, nor does it purport to represent future periods (in thousands). Three Months Ended Nine Months Ended July 31, July 31, ------------------------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Revenues......................$ 509,932 $ 450,515 $1,276,665 $1,162,240 Expenses...................... 474,647 429,495 1,206,750 1,122,644 Income Taxes.................. 14,273 7,730 26,875 14,649 ---------- ---------- ---------- ---------- Net Income....................$ 21,012 $ 13,290 $ 43,040 $ 24,947 ========== ========== ========== ========== Diluted Net Income Per Common Share................$ 0.71 $ 0.47 $ 1.47 $ 0.87 ========== ========== ========== ========== 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 was 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 $1.9 million to cover termination and related costs. Associates being terminated are primarily administrative. In addition, we accrued approximately $1.1 million to cover closing and/or relocating various administrative offices in these three states. At July 31, 2001, $0.5 million of the $1.1 million was accrued because the subleasing of excess office space was estimated to take an additional six months. At July 31, 2001 $1.2 million has been charged against termination costs relating to the termination of 52 associates and $0.3 million 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. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination that is completed after June 30, 2001. SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The amortization of goodwill included in other expenses will also no longer be recorded upon adoption of the new rules. Intangible assets that do not have indefinite lives will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121. We are required to adopt SFAS No. 142 no later than November 1, 2002. We are currently evaluating our intangible assets in relation to the provisions of SFAS No. 142 to determine the impact, if any, the adoption of SFAS No. 142 will have on our results of operations or financial position. 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 July 31, 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 $78,925,000. 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 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 statement 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 JULY 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...................... $ 10 $ 52,980 $ 940,159 $ 9,152 $ $1,002,301 Financial Services and CMO........ 806 121,265 122,071 Income Taxes (Payables)Receivables 377 (5,311) 6,909 (1,975) Investments in and amounts due to and from consolidated subsidiaries.................... 354,680 450,572 (727,939) 1,632 (78,945) -------- ---------- ---------- ------------ ---------- ---------- Total Assets...................... $355,067 $ 498,241 $ 219,935 $ 130,074 $ (78,945) $1,124,372 ======== ========== ========== ============ ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Homebuilding...................... $ $ 11,205 $ 166,914 $ 412 $ $ 178,531 Financial Services and CMO........ 459 102,855 103,314 Notes Payable..................... 486,397 186 486,583 Income Taxes Payable.............. 877 877 Stockholders' Equity.............. 355,067 639 51,499 26,807 (78,945) 355,067 -------- ---------- ---------- ------------ ---------- ---------- Total Liabilities and Stockholders' Equity.......................... $355,067 $ 498,241 $ 219,935 $ 130,074 $ (78,945) $1,124,372 ======== ========== ========== ============ ========== ========== </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED BALANCE SHEET OCTOBER 31, 2000 (Thousands of Dollars) <CAPTION> Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Assets Homebuilding.......................$ (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 JULY 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.....................$ $ 17 $ 499,539 $ 9,837 $ (8,943) $ 500,450 Financial Services and CMO....... 4,175 5,307 9,482 Intercompany Charges............. 31,456 2,665 (34,121) Equity In Pretax Income of Consolidated Subsidiaries...... 35,285 (35,285) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ $35,285 $ 31,473 $ 506,379 $ 15,144 $ (78,349) $ 509,932 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 30,857 476,703 1,033 (39,996) 468,597 Financial Services and CMO....... 2,574 4,280 (804) 6,050 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 30,857 479,277 5,313 (40,800) 474,647 ------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes......... 35,285 616 27,102 9,831 (37,549) 35,285 State and Federal Income Taxes..... 14,273 257 11,139 3,699 (15,095) 14,273 ------- ---------- ---------- ------------ ---------- ---------- Net Income ....................... $21,012 $ 359 $ 15,963 $ 6,132 $ (22,454) $ 21,012 ======= ========== ========== ============ ========== ========== </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS THREE MONTHS ENDED JULY 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.....................$ $ 129 $ 279,175 $ 7,045 $ (6,137) $ 280,212 Financial Services and CMO....... 1,667 3,103 4,770 Intercompany Charges............. 28,607 (716) (27,891) Equity In Pretax Income of Consolidated Subsidiaries...... 12,258 (12,258) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ $12,258 $ 28,736 $ 280,126 $ 10,148 $ (46,286) $ 284,982 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 28,293 264,886 191 (25,293) 268,077 Financial Services and CMO....... 1,233 3,482 (68) 4,647 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 28,293 266,119 3,673 (25,361) 272,724 ------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes......... 12,258 443 14,007 6,475 (20,925) 12,258 State and Federal Income Taxes..... 4,167 277 4,626 2,298 (7,201) 4,167 ------- ---------- ---------- ------------ ---------- ---------- Net Income ....................... $ 8,091 $ 166 $ 9,381 $ 4,177 $ (13,724) $ 8,091 ======= ========== ========== ============ ========== ========== </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS NINE MONTHS ENDED JULY 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.....................$ $ 446 $1,181,126 $ 20,369 $ (16,783) $1,185,158 Financial Services and CMO....... 9,410 12,359 21,769 Intercompany Charges............. 91,675 3,098 (94,773) Equity In Pretax Income of Consolidated Subsidiaries...... 69,412 (69,412) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ $69,412 $ 92,121 $1,193,634 $ 32,728 $(180,968) $1,206,927 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 90,354 1,137,309 3,422 (108,116) 1,122,969 Financial Services and CMO....... 5,962 9,582 (998) 14,546 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 90,354 1,143,271 13,004 (109,114) 1,137,515 ------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes......... 69,412 1,767 50,363 19,724 (71,854) 69,412 State and Federal Income Taxes..... 27,417 774 20,020 7,510 (28,304) 27,417 ------- ---------- ---------- ------------ ---------- ---------- Net Income.........................$41,995 $ 993 $ 30,343 $ 12,214 $ (43,550) $ 41,995 ======= ========== ========== ============ ========== ========== </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS NINE MONTHS ENDED JULY 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.....................$ $ 352 $ 768,247 $ 13,487 $ (11,258) $ 770,828 Financial Services and CMO....... 4,418 8,773 13,191 Intercompany Charges............. 76,513 3,282 (79,795) Equity In Pretax Income of Consolidated Subsidiaries...... 22,486 (22,486) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ $22,486 $ 76,865 $ 775,947 $ 22,260 $(113,539) $ 784,019 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 75,853 735,145 864 (64,611) 747,251 Financial Services and CMO....... 3,543 11,026 (287) 14,282 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 75,853 738,688 11,890 (64,898) 761,533 ------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes......... 22,486 1,012 37,259 10,370 (48,641) 22,486 State and Federal Income Taxes..... 7,485 516 12,459 3,664 (16,639) 7,485 ------- ---------- ---------- ------------ ---------- ---------- Net Income.........................$15,001 $ 496 $ 24,800 $ 6,706 $ (32,002) $ 15,001 ======= ========== ========== ============ ========== ========== </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS NINE MONTHS ENDED JULY 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.........................$ 41,995 $ 993 $ 30,343 $ 12,214 $ (43,550) $ 41,995 Adjustments to reconcile net income to net cash provided by (used in) operating activities... 95,870 88,304 (224,079) (47,933) 43,550 (44,288) -------- --------- ---------- ------------ ---------- ---------- Net Cash (Used In) Provided By Operating Activities........... 137,865 89,297 (193,736) (35,719) (2,293) Net Cash (Used In) Investing Activities............... (48,453) (2,657) 11,697 898 (38,515) Net Cash Provided By(Used In) Financing Activities............... (1,667) 78,943 (59,409) 41,000 58,867 Intercompany Investing and Financing Activities - Net................... (87,672) (190,125) 278,852 (1,055) -------- --------- ---------- ------------ ---------- ---------- Net Increase (Decrease) In Cash and Cash Equivalents................... 73 (24,542) 37,404 5,124 18,059 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......................$ 10 $ (6,913) $ 59,910 $ 8,305 $ $ 61,312 ======== ========= ========== ============ ========== ========== </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS NINE MONTHS ENDED JULY 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.........................$ 15,001 $ 496 $ 24,800 $ 6,706 $ (32,002) $ 15,001 Adjustments to reconcile net income to net cash provided by (used in) operating activities... (4,328) 67,821 (182,850) (20,847) 32,002 (108,202) -------- --------- ---------- ------------ ---------- ---------- Net Cash (Used In) Provided By Operating Activities........... 10,673 68,317 (158,050) (14,141) (93,201) Net Cash (Used In) Investing Activities............... (6) (11,020) (1,679) (2) (12,707) Net Cash Provided By(Used In) Financing Activities............... (5,036) 96,150 6,612 9,625 107,351 Intercompany Investing and Financing Activities - Net................... (5,844) (147,594) 147,682 5,756 -------- --------- ---------- ------------ ---------- ---------- Net Increase (Decrease) In Cash and Cash Equivalents................... (213) 5,853 (5,435) 1,238 1,443 Cash and Cash Equivalents Balance, Beginning of Period................ 46 (5,395) 24,608 106 19,365 -------- --------- ---------- ------------ ---------- ---------- Cash and Cash Equivalents Balance, End of Period......................$ (167) $ 458 $ 19,173 $ 1,344 $ $ 20,808 ======== ========= ========== ============ ========== ========== </TABLE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY Our uses for cash during the nine months ended July 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 July 2001 the Board of Directors authorized a revision to our stock repurchase program to purchase up to 2 million shares of Class A Common Stock. This authorization expires on July 2003. As of July 31, 2001, 167,600 shares have been 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 $440,000,000(the "Revolving Credit Facility") through August 2002. Interest is payable monthly and at various rates of either prime plus .40% or Libor plus 1.85%. We believe that we will be able either to extend the Agreement beyond August 2002 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 July 31, 2001, borrowings under the agreement were $78,925,000. The subordinated indebtedness issued by us and outstanding as of July 31, 2001 was $99,747,000 9 3/4% Subordinated Notes due June 2005. The senior indebtedness issued by us and outstanding as of July 31, 2001 was $150,000,000 (issued at a discounted amount 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 July 31, 2001, the aggregate principal amount of all such borrowings was $100,494,000. Total inventory increased $165,900,000 during the nine months ended July 31, 2001. The increase was primarily due to the merger with Washington Homes, Inc. In addition, inventory increased in most of our housing markets. Substantially all homes under construction or completed and included in inventory at July 31, 2001 are expected to be closed during the next twelve months. Most inventory completed or under development is financed through our revolving credit facility and subordinated indebtedness. <TABLE> The following table summarizes housing lots in our active selling communities under development (including Poland): <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> July 31, 2001: Northeast Region.. 25 3,864 1,286 2,578 12,531 15,109 North Carolina.... 55 4,205 669 3,536 2,192 5,728 Metro D.C......... 33 2,818 866 1,952 5,003 6,955 California........ 11 1,502 349 1,153 584 1,737 Texas............. 40 1,891 372 1,519 299 1,818 Mid South......... 18 1,343 112 1,231 -- 1,231 Other............. 1 72 18 54 2,374 2,428 ----------- ------- ---------- ---------- ---------- ----------- 183 15,695 3,672 12,023 22,983 35,006 =========== ======= ========== ========== ========== =========== Owned.......... 7,428 3,099 4,329 4,451 8,780 Optioned....... 8,267 573 7,694 18,532 26,226 ------- ---------- ---------- ---------- ----------- Total........ 15,695 3,672 12,023 22,983 35,006 ======= ========== ========== ========== =========== 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: July 31, October 31, 2001 2000 ----------------------- ----------------------- Unsold Unsold Homes Models Total Homes Models Total ------ ------ ----- ------ ------ ----- Northeast Region.... 74 46 120 133 48 181 North Carolina...... 216 40 256 102 31 133 Metro D.C........... 50 30 80 6 7 13 California.......... 54 18 72 136 32 168 Texas............... 234 16 250 238 8 246 Mid South........... 53 18 71 -- -- -- Other............... 14 -- 14 58 -- 58 ------ ------ ----- ------ ------ ----- Total 695 168 863 673 126 799 ====== ====== ===== ====== ====== ===== Financial Services - Mortgage loans held for sale consist of residential mortgages receivable of which $106,450,000 and $61,549,000 at July 31, 2001 and October 31, 2000, respectively, are being temporarily warehoused and awaiting sale in the secondary mortgage market. The balance of such mortgages is being held as an investment by us. We may incur risk with respect to mortgages that are delinquent, but only to the extent the losses are not covered by mortgage insurance or resale value of the house. Historically, we have incurred minimal credit losses. Collateral Mortgage Financing - Collateral for bonds payable consist of collateralized mortgages receivable which are pledged against non- recourse collateralized mortgage obligations. RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2001 COMPARED TO THE THREE AND NINE MONTHS ENDED JULY 31, 2000 Our operations consist primarily of residential housing development and sales in our Northeast Region (comprising New Jersey, southern New York State and eastern Pennsylvania), North Carolina, Metro D. C. (northern Virginia and Maryland), southern California, Texas, and the Mid South (Tennessee, Alabama, and Mississippi). Our Mid South operations are the result of the merger with Washington Homes, Inc. In addition, we provide financial services to our homebuilding customers. Important indicators of our future results are recently signed contracts and home contract backlog for future deliveries. Our sales contracts and homes in contract (using base sales prices) by market area is set forth below: Sales Contracts for the Nine Months Ended Contract Backlog July 31, as of July 31, ------------------------- --------------------- 2001 2000 2001 2000 ----------- --------- --------- --------- (Dollars in Thousands) Northeast Region: Dollars.............$ 400,199 $398,815 $354,132 $357,359 Homes............... 1,483 1,506 1,286 1,308 North Carolina: Dollars.............$ 211,007 $ 93,210 $125,823 $ 46,276 Homes............... 1,174 501 669 243 Metro D.C.: Dollars.............$ 248,219 $ 62,052 $224,171 $ 50,107 Homes............... 984 241 866 205 California: Dollars.............$ 220,961 $117,303 $118,981 $ 52,640 Homes............... 658 369 349 123 Texas: Dollars.............$ 165,160 $141,209 $ 85,693 $ 61,272 Homes............... 781 693 372 286 Mid South: Dollars.............$ 36,499 -- $ 18,725 -- Homes............... 239 -- 112 -- Other: Dollars.............$ 1,578 $ 19,290 $ 1,009 $ 16,354 Homes............... 46 116 18 105 Totals: Dollars.............$1,283,623 $831,879 $928,534 $584,008 Homes............... 5,365 3,426 3,672 2,270 Total Revenues: Revenues for the three months ended July 31, 2001 increased $225.0 million or 79.0%, compared to the same period last year. This was the result of a $219.3 million increase in revenues from the sale of homes, a $1.0 million increase in land sales and other homebuilding revenues and a $4.7 million increase in financial services revenues. Revenues for the nine months ended July 31, 2001 increased $422.9 million or 53.9%, compared to the same period last year. This was the result of a $410.8 million increase in revenues from the sale of homes, a $3.5 million increase in land sales and other homebuilding revenues, and a $8.7 million increase in financial services revenues. These increases were partially offset by a $0.1 million decrease in collateralized mortgage financing. Homebuilding: Revenues from the sale of homes increased $219.3 million or 79.0% during the three months ended July 31, 2001, and increased $410.8 million or 53.8% during the nine months ended July 31, 2001 compared to the same periods 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 Nine Months Ended July 31, July 31, ------------------- --------------------- 2001 2000 2001 2000 --------- -------- ---------- -------- (Dollars in Thousands) Northeast Region: Housing Revenues..... $156,366 $131,668 $ 406,692 $372,652 Homes Delivered...... 499 452 1,346 1,323 North Carolina: Housing Revenues..... $ 85,887 $ 33,319 $ 178,142 $ 91,580 Homes Delivered...... 487 167 1,022 465 Metro D. C.: Housing Revenues..... $109,535 $ 13,901 $ 221,343 $ 47,205 Homes Delivered...... 439 54 938 185 California: Housing Revenues..... $ 61,830 $ 48,055 $ 171,483 $104,004 Homes Delivered...... 168 164 460 375 Texas: Housing Revenues..... $ 62,360 $ 47,318 $ 146,604 $134,106 Homes Delivered...... 286 228 691 668 Mid South: Housing Revenues..... $ 18,774 -- $ 33,697 -- Homes Delivered...... 123 -- 226 -- Other: Housing Revenues..... $ 2,539 $ 3,743 $ 16,036 $ 13,630 Homes Delivered...... 19 21 112 61 Totals: Housing Revenues..... $497,291 $278,004 $1,173,997 $763,177 Homes Delivered...... 2,021 1,086 4,795 3,077 The increase in housing revenues compared to the prior year was primarily due to the merger with Washington Homes, Inc., an increase in average sales prices in the Northeast Region, California, and Texas and increased home sales in all major markets. Continued strong housing demandin our major markets enabled us to increase home prices and home sales. Cost of sales includes expenses for housing and land and lot sales. A breakout of such expenses for housing sales and housing gross margin is set forth below: Three Months Ended Nine Months Ended July 31, July 31, ------------------- -------------------- 2001 2000 2001 2000 -------- -------- ---------- -------- (Dollars in Thousands) Sale of Homes................ $497,291 $278,004 $1,173,997 $763,177 Cost of Sales................ 398,304 220,000 935,839 612,006 -------- -------- ---------- -------- Housing Gross Margin......... $ 98,987 $ 58,004 $ 238,158 $151,171 ======== ======== ========== ========= Gross Margin Percentage...... 19.9% 20.9% 20.3% 19.8% Cost of Sales expenses as a percentage of home sales revenues are presented below: Three Months Ended Nine Months Ended July 31, July 31, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Sale of Homes................ 100.0% 100.0% 100.0% 100.0% -------- -------- -------- -------- Cost of Sales: Housing, land & development costs.... 72.4 71.2 71.8 71.9 Commissions............ 2.3 2.2 2.3 2.3 Financing concessions.. 1.1 0.8 0.9 0.9 Overheads.............. 4.3 4.9 4.7 5.1 -------- -------- -------- -------- Total Cost of Sales.......... 80.1 79.1 79.7 80.2 -------- -------- -------- -------- Gross Margin................. 19.9% 20.9% 20.3% 19.8% ======== ======== ======== ======== 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 on 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 July 31, 2001 our gross margin percentage decreased 1.0% 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 nine months ended July 31, 2001 our gross margin percentage increased 0.5% compared to the same period last year. This can be attributable to improved gross margins in the Northeast Region, Texas, and North Carolina. The improvements are primarily attributed to increased sales prices and tighter cost controls. Selling, general, and administrative costs as a percentage of total homebuilding revenues decreased to 7.8% for the three months ended July 31, 2001 from 9.2% for the prior year's three months, and decreased to 8.6% for the nine months ended July 31, 2001 from 9.9% for the prior year's nine months. Such expenses increased during the three and nine months ended July 31, 2001 by $13.0 million and $25.4 million, repsectively, compared to the same periods last year. The dollar increase in selling, general, and administrataive is due to increased advertising and selling costs in California due to the addition of five new communities, increases in administrataive 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 Nine Months Ended July 31, July 31, ------------------ ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Land and Lot Sales................ $ 1,160 $ 1,328 $ 5,398 $ 3,144 Cost of Sales..................... 979 966 4,808 2,568 -------- -------- -------- -------- Land and Lot Sales Gross Margin... 181 362 590 576 Interest Expense.................. 58 111 347 350 -------- -------- -------- -------- Land and Lot Sales Profit Before Tax...................... $ 123 $ 251 $ 243 $ 226 ======== ======== ======== ======== Land and lot sales are incidental to our residential housing perations 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 nine months ended July 31, 2001 financial services provided a $3.4 million and $7.2 million profit before income taxes compared to a profit of $0.1 million and a loss of $1.1 million for the same period in 2000. These increases are primarily due to a change in management, reduced costs, and increased mortgage loan amounts. 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 2.1% for the three months ended July 31, 2001 from 3.5% for the prior year's three months and decreased to 2.5% for the nine months ended July 31, 2001 from 3.1% for the prior year's nine months. Corporate general and administrative expenses increased $0.6 million and $5.7 million during the three and nine months ended July 31, 2001 compared to the same periods last year. Increases in corporate general and administrataive expenses are primarily attributed to less process redesign costs capitalized during the three and nine months ended July 31, 2001 compared to the same period last year, increased depreciation resulting from capitalized process redesign costs in prior years, 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 Nine Months Ended July 31, July 31, ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- Sale of Homes.............. $13,427 $ 8,691 $36,592 $23,906 Land and Lot Sales......... 58 111 347 350 -------- -------- -------- -------- Total...................... $13,485 $ 8,802 $36,939 $24,256 ======== ======== ======== ======== Housing interest as a percentage of sale of homes revenues decreased to 2.7% from 3.1% for the three months ended July 31, 2001 compared to the same period last year. During the nine months ended July 31, 2001 and 2000 housing interest amounted to 3.1%, respectively. Other Operations Other operations consist primarily of miscellaneous residential housing operations expenses, 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 July 31, 2001, $1.2 million has been charged against the $1.9 million accrual for termination and related costs while $0.3 million has been charged against the $1.1 million accrual established for closing and relocation costs. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination that is completed after June 30, 2001. SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The amortization of goodwill included in our other expenses will also no longer be recorded upon adoption of the new rules. Intangible assets that do not have indefinite lives will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121. We are required to adopt SFAS No. 142 no later than November 1, 2002. We are currently evaluating our intangible assets in relation ot the provisions of SFAS No. 142 to determine the impact, if any, the adoption of SFAS No. 142 will have on our results of operations or financial position. Total Taxes Total taxes as a percentage of income before taxes amounted to approximately 39.5% and 33.3% for the nine months ended July 31, 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: September 14, 2001 /S/J. LARRY SORSBY J. Larry Sorsby, Executive Vice President and Chief Financial Officer DATE: September 14, 2001 /S/PAUL W. BUCHANAN Paul W. Buchanan, Senior Vice President Corporate Controller