UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For quarterly period ended APRIL 30, 2006 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-8551
Hovnanian Enterprises, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-1851059
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
110 West Front Street, P.O. Box 500, Red Bank, NJ 07701
(Address of Principal Executive Offices) (Zip Code)
732-747-7800
(Registrant's Telephone Number, Including Area Code)
10 Highway 35, P. O. Box 500, Red Bank, NJ 07701
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant: (l) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. (See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act).
Large Accelerated Filer [ X ] Accelerated Filer [ ]
Non-Accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 47,052,034
shares of Class A Common Stock and 14,670,716 shares of Class B Common Stock
were outstanding as of May 26, 2006.
Explanatory Paragraph
This Form 10-Q/A for the quarterly period ended April 30, 2006 is being
filed for the purpose of restating Note 3 in our Notes to Condensed
Consolidated Financial Statements, which includes expanded reportable segment
footnote disclosure related to our homebuilding operations. We have restated
the accompanying Consolidated Financial Statements to revise our segment
disclosures for all periods presented to show six reportable homebulding
segments. The restatement has no impact on our condensed consolidated
balance sheets as of April 30, 2006 and October 31, 2005, or condensed
consolidated statements of income and related income per common share amounts
for the three and six months ended April 30, 2006 and 2005, or condensed
consolidated statements of cash flows for the six months ended April 30, 2006
and 2005. Conforming and other changes that are responsive to certain
disclosure comments, primarily relating to segment reporting received from
the Division of Corporation Finance of the Securities and Exchange
Commission, have been made to Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 2 and our Controls and
Procedures Discussion in Item 4 of this Form 10-Q/A. See Note 3 in the Notes
to Condensed Consolidated Financial Statements for further information
relating to the restatement. Each amendment noted is solely. This Form 10-
Q/A has not been updated for events or information subsequent to the date of
filing of the original Form 10-Q, except in connection with the foregoing.
HOVNANIAN ENTERPRISES, INC.
FORM 10-Q/A
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Financial Statements:
Condensed Consolidated Balance Sheets as of April 30,
2006 (unaudited) and October 31, 2005 4
Condensed Consolidated Statements of Income for the
three and six months ended April 30, 2006 and
2005 (unaudited) 6
Condensed Consolidated Statement of Stockholders'
Equity for the six months ended
April 30, 2006 (unaudited) 7
Condensed Consolidated Statements of Cash Flows for
the six months ended April 30, 2006
and 2005 (unaudited) 8
Notes to Condensed Consolidated Financial
Statements (unaudited) 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 33
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 56
Item 4. Controls and Procedures 57
PART II. Other Information
Item 1. Legal Proceedings 59
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 61
Item 4. Submission of Matters to a Vote of Security
Holders 62
Item 6. Exhibits 63
Signatures 66
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
April 30, October 31,
ASSETS 2006 2005
----------- -----------
(unaudited)
Homebuilding:
Cash and cash equivalents.................... $ 47,525 $ 201,641
----------- -----------
Restricted cash.............................. 8,766 17,189
----------- -----------
Inventories - At the lower of cost or fair
value:
Sold and unsold homes and lots under
development.............................. 3,306,101 2,459,431
----------- -----------
Land and land options held for future
development or sale...................... 561,220 595,806
----------- -----------
Consolidated Inventory Not Owned:
Specific performance options............. 10,696 9,289
Variable interest entities............... 381,178 242,825
Other options............................ 136,530 129,269
----------- -----------
Total Consolidated Inventory Not Owned.. 528,404 381,383
----------- -----------
Total Inventories........................ 4,395,725 3,436,620
----------- -----------
Investments in and advances to unconsolidated
joint ventures............................. 211,556 187,205
----------- -----------
Receivables, deposits, and notes ............ 82,206 125,388
----------- -----------
Property, plant, and equipment - net......... 110,509 96,891
----------- -----------
Prepaid expenses and other assets............ 165,642 125,662
----------- -----------
Goodwill..................................... 32,658 32,658
----------- -----------
Definite life intangibles.................... 204,875 249,506
----------- -----------
Total Homebuilding....................... 5,259,462 4,472,760
----------- -----------
Financial Services:
Cash and cash equivalents.................... 5,153 9,632
Restricted cash.............................. 1,351 1,037
Mortgage loans held for sale................. 214,190 211,248
Other assets................................. 6,482 15,375
----------- -----------
Total Financial Services................. 227,176 237,292
----------- -----------
Income Taxes Receivable - Including Deferred
Tax Benefits................................. 96,650 9,903
----------- -----------
Total Assets................................... $ 5,583,288 $ 4,719,955
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
April 30, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2006 2005
----------- -----------
(unaudited)
Homebuilding:
Nonrecourse land mortgages....................... $ 38,117 $ 48,673
Accounts payable and other liabilities........... 500,286 510,529
Customers' deposits.............................. 238,709 259,930
Nonrecourse mortgages secured by operating
properties..................................... 24,017 24,339
Liabilities from inventory not owned............. 254,691 177,014
----------- -----------
Total Homebuilding........................... 1,055,820 1,020,485
----------- -----------
Financial Services:
Accounts payable and other liabilities........... 8,887 8,461
Mortgage warehouse line of credit................ 195,189 198,856
----------- -----------
Total Financial Services..................... 204,076 207,317
----------- -----------
Notes Payable:
Revolving credit agreement....................... 275,000 -
Senior notes..................................... 1,399,247 1,098,739
Senior subordinated notes........................ 400,000 400,000
Accrued interest................................. 25,375 20,808
----------- -----------
Total Notes Payable.......................... 2,099,622 1,519,547
----------- -----------
Total Liabilities.................................. 3,359,518 2,747,349
----------- -----------
Minority interest from inventory not owned......... 243,339 180,170
----------- -----------
Minority interest from consolidated joint ventures. 3,241 1,079
----------- -----------
Stockholders' Equity:
Preferred Stock,$.01 par value-authorized 100,000
shares; issued 5,600 shares at April 30,
2006 and at October 31, 2005 with a
liquidation preference of $140,000............. 135,299 135,389
Common Stock,Class A,$.01 par value-authorized
200,000,000 shares; issued 58,378,455 shares at
April 30, 2006 and 57,976,455 shares at
October 31, 2005 (including 11,295,656 shares
at April 30, 2006 and 10,995,656 shares at
October 31, 2005 held in Treasury).............. 584 580
Common Stock,Class B,$.01 par value (convertible
to Class A at time of sale) authorized
30,000,000 shares; issued 15,363,534 shares at
April 30, 2006 and 15,370,250 shares at
October 31, 2005 (including 691,748 shares at
April 30, 2006 and October 31, 2005 held in
Treasury)....................................... 154 154
Paid in Capital................................... 234,018 236,001
Retained Earnings................................. 1,705,359 1,522,952
Deferred Compensation............................. (19,648)
Treasury Stock - at cost.......................... (98,224) (84,071)
----------- -----------
Total Stockholders' Equity.................... 1,977,190 1,791,357
----------- -----------
Total Liabilities and Stockholders' Equity..........$ 5,583,288 $ 4,719,955
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
April 30, April 30,
----------------------- ----------------------
2006 2005 2006 2005
----------- ---------- ---------- ----------
Revenues:
Homebuilding:
Sale of homes...................... $ 1,479,548 $1,189,672 $2,725,745 $2,205,641
Land sales and other revenues...... 73,382 3,528 85,915 27,927
----------- ---------- ---------- ----------
Total Homebuilding............... 1,552,930 1,193,200 2,811,660 2,233,568
Financial Services................... 21,191 16,269 40,453 30,462
----------- ---------- ---------- ----------
Total Revenues................... 1,574,121 1,209,469 2,852,113 2,264,030
----------- ---------- ---------- ----------
Expenses:
Homebuilding:
Cost of sales, excluding interest.. 1,180,299 876,827 2,114,986 1,648,083
Cost of sales interest............. 20,283 18,464 36,852 36,231
----------- ---------- ---------- ----------
Total Cost of Sales.............. 1,200,582 895,291 2,151,838 1,684,314
----------- ---------- ---------- ----------
Selling, general and administrative 151,853 106,704 287,087 203,292
Inventory impairment loss.......... 5,595 1,500 8,704 1,998
----------- ---------- ---------- ----------
Total Homebuilding............... 1,358,030 1,003,495 2,447,629 1,889,604
Financial Services................... 14,517 11,467 28,047 21,387
Corporate General and Administrative. 25,911 14,916 53,633 30,794
Other Interest....................... 700 539 1,520 694
Other Operations..................... 8,521 1,279 15,522 3,219
Intangible Amortization.............. 13,391 10,386 25,060 20,474
----------- ---------- ---------- ----------
Total Expenses................... 1,421,070 1,042,082 2,571,411 1,966,172
----------- ---------- ---------- ----------
Income from unconsolidated joint
ventures........................... 9,497 7,140 17,072 8,575
----------- ---------- ---------- ----------
Income Before Income Taxes............. 162,548 174,527 297,774 306,433
----------- ---------- ---------- ----------
State and Federal Income Taxes:
State................................ 6,235 10,318 11,109 15,764
Federal.............................. 52,664 58,073 98,920 103,051
----------- ---------- ---------- ----------
Total Taxes........................ 58,899 68,391 110,029 118,815
----------- ---------- ---------- ----------
Net Income............................. 103,649 106,136 187,745 187,618
Less: Preferred Stock Dividends....... 2,669 5,338
----------- ---------- ---------- ----------
Net Income Available to Common
Stockholders......................... $ 100,980 $ 106,136 $ 182,407 $ 187,618
=========== ========== ========== ==========
Per Share Data:
Basic:
Income per common share.............. $ 1.60 $ 1.71 $ 2.90 $ 3.01
Weighted average number of common
shares outstanding................. 62,919 62,233 62,864 62,237
Assuming dilution:
Income per common share.............. $ 1.55 $ 1.62 $ 2.80 $ 2.87
Weighted average number of common
shares outstanding................ 65,106 65,498 65,254 65,459
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars In Thousands)
(Unaudited)
A Common Stock B Common Stock Preferred Stock
------------------ ------------------ ---------------------
Shares Shares Shares
Issued and Issued and Issued and Paid-In Retained Deferred Treasury
Outstanding Amount Outstanding Amount Outstanding Amount Capital Earnings Comp. Stock Total
----------- ------ ----------- ------ ----------- --------- -------- ---------- -------- --------- ----------
Balance,
October 31, 2005. 46,980,799 $ 580 14,678,502 $ 154 5,600 $ 135,389 $236,001 $1,522,952 $(19,648)$(84,071) $1,791,357
Issuance costs.... (90) (90)
Preferred Dividend
Declared
($476.56 per
Share).......... (5,338) (5,338)
Stock Options,
amortization
and issuances,
net of tax...... 200,596 2 11,296 11,298
Restricted Stock
amortization,
issuances and
forfeitures,
net of tax...... 194,688 2 6,369 6,371
Reclass Due to
SFAS 123R
Implementation
(See Note 2).... (19,648) 19,648 -
Conversion of
Class B to
Class A
common stock.... 6,716 (6,716) -
Treasury Stock
Purchases....... (300,000) (14,153) (14,153)
Net Income........ 187,745 187,745
----------- ------ ----------- ------ ----------- ---------- -------- ---------- -------- --------- ----------
Balance,
April 30, 2006... 47,082,799 $ 584 14,671,786 $ 154 5,600 $ 135,299 $234,018 $1,705,359 $ - $(98,224) $1,977,190
=========== ====== =========== ====== ========== ========= ======== ========== ======== ========= ==========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands - unaudited)
Six Months Ended
April 30,
------------------------
2006 2005
----------- -----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 187,745 $ 187,618
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation.................................... 6,319 3,513
Intangible amortization......................... 25,060 20,474
Compensation from stock options and awards...... 16,955 2,891
Amortization of bond discounts.................. 508 309
Excess tax benefits from share-based payment.... (3,802) -
Loss (gain) on sale and retirement of property
and assets.................................... 145 (663)
Equity earnings in unconsolidated entities..... (17,072) (8,575)
Distributions from unconsolidated entities..... 9,829 5,626
Deferred income taxes........................... (40,761) (6,357)
Impairment losses............................... 8,704 1,998
Decrease (increase) in assets:
Mortgage notes receivable..................... (2,940) 52,540
Restricted cash, receivables, prepaids and
other assets................................. 44,128 (26,091)
Inventories................................... (805,208) (213,974)
(Decrease) increase in liabilities:
State and Federal income taxes................ (45,986) (92,197)
Customers' deposits........................... (20,977) 23,067
Interest and other accrued liabilities........ 5,349 (23,234)
Accounts payable.............................. (10,705) (15,223)
----------- -----------
Net cash (used in) operating activities..... (642,709) (88,278)
----------- -----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets....... 166 1,238
Purchase of property, equipment and other fixed
Assets and acquisitions........................... (44,454) (119,375)
Investments in and advances to unconsolidated
entities.......................................... (17,343) (52,730)
Distributions from unconsolidated entities.......... 271 625
----------- -----------
Net cash (used in) investing activities..... (61,360) (170,242)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 47,736 45,028
Net proceeds (payments) related to revolving
credit agreement................................. 275,000 (9,900)
Net (payments) related to mortgage
warehouse line of credit.......................... (3,668) (64,091)
Proceeds from senior debt........................... 300,000 200,000
Proceeds from senior subordinated debt.............. - 100,000
Payments of issuance costs.......................... (90)
Principal payments on mortgages and notes........... (58,529) (27,795)
Excess tax benefits from share-based payment........ 3,802 -
Preferred dividends paid........................... (5,338) -
Purchase of treasury stock.......................... (14,153) (15,934)
Proceeds from sale of stock and employee stock plan. 714 5,360
----------- -----------
Net cash provided by financing activities.... 545,474 232,668
----------- -----------
Net (Decrease) in Cash................................. (158,595) (25,852)
Cash and Cash Equivalents Balance, Beginning
of Period........................................... 211,273 60,959
----------- -----------
Cash and Cash Equivalents Balance, End of Period...... $ 52,678 $ 35,107
=========== ===========
Supplemental Disclosures of Cash Flow
Cash paid during the year for:
Interest......................................... $ 37,296 $ 33,681
=========== ===========
Income taxes..................................... $ 165,446 $ 211,146
=========== ===========
Supplemental disclosures of noncash operating
activities:
Consolidated Inventory Not Owned:
Specific performance options..................... $ 9,385 $ 34,309
Variable interest entities....................... 363,888 113,652
Other options.................................... 134,015 115,162
----------- -----------
Total Inventory Not Owned.......................... $ 507,288 $ 263,123
=========== ===========
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information
and with the instructions to Form 10-Q/A and Article 10 of Regulation S-X.
In the opinion of management, all adjustments for interim periods presented
have been made, which include only normal recurring accruals and deferrals
necessary for a fair presentation of our consolidated financial position,
results of operations, and changes in cash flows. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates and these differences could have a significant impact on the
financial statements. Results for interim periods are not necessarily
indicative of the results which might be expected for a full year. The
balance sheet at October 31, 2005 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. Effective November 1, 2005, the Company adopted Statement of
Financial Accounting Standards ("SFAS") 123R, "Share-Based Payments", which
revises SFAS 123, "Accounting for Stock-Based Compensation". Prior to
fiscal year 2006, the Company accounted for stock awards granted to
employees under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations. As a result, the recognition of
stock-based compensation expense was generally limited to the expense
attributed to nonvested stock awards, as well as the amortization of
certain acquisition-related deferred compensation.
SFAS 123R applies to new awards and to awards modified, repurchased,
or cancelled after the required effective date, as well as to the unvested
portion of awards outstanding as of the required effective date. The
Company uses the Black-Scholes model to value its new stock option grants
under SFAS 123R, applying the "modified prospective method" for existing
grants which requires the Company to value stock options prior to its
adoption of SFAS 123R under the fair value method and expense the unvested
portion over the remaining vesting period. The fair value for options is
established at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions for April 30, 2006: risk-
free interest rate of 4.13%; dividend yield of zero; volatility factor of
the expected market price of our common stock of 0.44; and a weighted
average expected life of the option of 5.2 years. SFAS 123R also requires
the Company to estimate forfeitures in calculating the expense related to
stock-based compensation (estimated at 2% for fiscal 2006 and fiscal 2005,
respectively,) and requires the Company to reflect the benefits of tax
deductions in excess of recognized compensation cost to be reported as both
a financing cash inflow and an operating cash outflow upon adoption.
Compensation cost arising from nonvested stock granted to employees
and from non-employee stock awards is recognized as expense using the
straight-line method over the vesting period. Unearned compensation is
included in deferred compensation in stockholders' equity beginning in the
first quarter of fiscal 2004. Upon adoption of SFAS 123R, deferred
compensation is no longer recorded for non vested stock awards, therefore
deferred compensation was reclassified to Paid-In Capital.
For the three months and six months ended April 30, 2006, the
Company's total stock-based compensation expense was $9.1 million ($5.8
million net of tax) and $17.0 million ($10.7 million net of tax),
respectively. Included in this total stock-based compensation expense was
incremental expense for stock options of $4.1 million ($2.6 million net of
tax) and $7.4 million ($4.7 million net of tax) for the three and six
months ended April 30, 2006, respectively.
The following table illustrates the effect (in thousands, except per
share amounts) on net income and earnings per share for the three and six
months ended April 30, 2005 as if the Company's stock-based compensation
had been determined based on the fair value at the grant dates for awards
made prior to fiscal 2006, under those plans and consistent with SFAS 123R:
Three Months Ended Six Months Ended
April 30, 2005 April 30, 2005
------------------ -----------------
Net income as reported.......... $106,136 $187,618
Deduct: total stock-based employee
compensation expense determined
using Black-Scholes fair value
based method for all awards... 1,490 2,842
-------- --------
Pro forma net income............ $104,646 $184,776
======== ========
Pro forma basic earnings per share $ 1.68 $ 2.97
======== ========
Basic earnings per share as
reported...................... $ 1.71 $ 3.01
======== ========
Pro forma diluted earnings per
share......................... $ 1.60 $ 2.82
======== ========
Diluted earnings per share as
reported...................... $ 1.62 $ 2.87
======== ========
Pro forma information regarding net income and earnings per share is
calculated as if we had accounted for our stock-based compensation under
the fair value method of SFAS 123R. The fair value for options is
established at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions for April 30, 2005: risk-
free interest rate of 4.17% for both periods; dividend yield of zero;
volatility factor of the expected market price of our common stock of 0.43;
and a weighted average expected life of the option of 4.9 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because our employee stock options have
characteristics significantly different from traded options, and changes in
the subjective input assumptions can materially affect the fair value
estimate, management believes the existing models do not necessarily
provide a reliable measure of the fair value of its employee stock options.
On November 10, 2005, the FASB issued FASB Staff Position No. SFAS
123(R)-3, "Transition Election Related to Accounting for Tax Effects of
Share-Based Payment Awards" (FSP 123R-3). The alternative transition method
includes simplified methods to establish the beginning balance of the
additional paid-in capital pool (APIC pool) related to the tax effects of
employee stock-based compensation, and to determine the subsequent impact
on the APIC pool and Consolidated Statements of Cash Flows of the tax
effects of employee stock-based compensation awards that are outstanding
upon adoption of SFAS 123R. The Company has until November 2006 to make a
one-time election to adopt the transition method described in FSP 123R-3.
The Company is currently evaluating FSP 123R-3; however, if the Company
were to make the one-time election, it is not expected to affect operating
income or net income.
3. Operating and Reporting Segments (as Restated)
Subsequent to the issuance of the Company's condensed consolidated
financial statements for the quarterly period ended April 30, 2006, the
Company expanded its disclosure of reportable segments in accordance with
the provisions of Financial Accounting Standards No. 131 ("SFAS 131"),
("Disclosures About Segments of an Enterprise and Related Information").
SFAS 131 defines operating segments as a component of an enterprise for
which discrete financial information is available and is reviewed regularly
by the chief operating decision-maker, or decision-making group, to
evaluate performance and make operating decisions. The Company has
identified its chief operating decision-maker as the Chief Executive
Officer. The Company had historically aggregated its homebuilding
operating segments into a single, national reportable segment, but has
restated its segment disclosure to include six homebuilding reportable
segments, as identified below, for the three and six months ended April 30,
2006 and 2005. The restatement has no impact on the Company's condensed
consolidated balance sheets as of April 30, 2006 and October 31, 2005,
condensed consolidated statements of income and related income per common
share amounts for the three and six months ended April 30, 2006 and 2005 or
condensed consolidated statements of cash flows for the three months ended
April 30, 2006 and 2005.
The Company's operating segments are aggregated into reportable
segments in accordance with SFAS 131, based primarily upon geographic
proximity, similar regulatory environments, land acquisition
characteristics and similar methods used to construct and sell homes. The
Company's reportable segments consist of:
Homebuilding:
(1) Northeast (New Jersey, New York, Pennsylvania)
(2) Mid-Atlantic (Delaware, Maryland, Virginia, West Virginia,
Washington D.C.)
(3) Midwest (Illinois, Michigan, Minnesota, Ohio)
(4) Southeast (Florida, Georgia, North Carolina, South Carolina)
(5) Southwest (Arizona, Texas)
(6) West (California)
Financial Services
Operations of the Company's Homebuilding segments primarily include
the sale and construction of single-family attached and detached homes,
attached townhomes and condominiums, mid-rise and high-rise condominiums,
urban infill and active adult homes in planned residential developments.
Operations of the Company's Financial Services segment include mortgage
banking and title services to the homebuilding operations' customers. We
do not retain or service mortgages that we originate but rather sell the
mortgages and related servicing rights to investors.
Evaluation of segment performance is based primarily on operating
earnings from continuing operations before provision for income taxes.
Operating earnings for the Homebuilding segments consist of revenues
generated from the sales of homes and land, equity in earnings from
unconsolidated entities and management fees and other income, net, less the
cost of homes and land sold, selling, general and administrative expenses
and minority interest expense, net. Operating earnings for the Financial
Services segment consist of revenues generated from mortgage banking and
title services, less the cost of such services and certain selling, general
and administrative expenses incurred by the Financial Services segment.
Each reportable segment follows the same accounting policies
described in Note 10 - "Operating and Reporting Segments (as restated)" to
the consolidated financial statements in the Company's 2005 Annual Report
on Form 10-K/A. Operational results of each segment are not necessarily
indicative of the results that would have occurred had the segment been an
independent, stand-alone entity during the periods presented.
Financial information relating to the Company's operations was as
follows:
Three Months Ended Six Months Ended
April 30, April 30,
--------------------- ----------------------
(In thousands) 2006 2005 2006 2005
---------- ---------- ---------- ----------
Revenues:
Northeast $ 204,268 $ 250,111 $ 411,228 $ 472,547
Mid-Atlantic 251,506 184,060 449,788 342,546
Midwest 37,439 17,583 64,961 36,121
Southeast 318,243 151,243 588,288 256,854
Southwest 234,828 164,708 418,692 301,945
West 505,572 423,731 875,437 821,557
---------- ---------- ---------- ----------
Total Homebuilding
Revenues 1,551,856 1,191,436 2,808,394 2,231,570
---------- ---------- ---------- ----------
Financial Services 21,191 16,269 40,453 30,462
Corporate and Unallocated 1,074 1,764 3,276 1,998
---------- ---------- ---------- ----------
Total Revenues $1,574,121 $1,209,469 $2,852,113 $2,264,030
========== ========== ========== ==========
Income Before Income Taxes:
Northeast 29,335 54,106 64,993 88,014
Mid-Atlantic 39,921 33,791 76,498 50,400
Midwest (6,646) (2,871) (11,989) (5,028)
Southeast 26,013 12,745 49,044 18,315
Southwest 22,425 11,573 35,898 15,676
West 69,317 80,339 120,671 162,343
---------- ---------- ---------- ----------
Homebuilding Income
Before Income Taxes 180,365 189,683 335,115 329,720
---------- ---------- ---------- ----------
Financial Services 6,674 4,803 12,405 9,076
Corporate and Unallocated (24,491) (19,959) (49,746) (32,363)
---------- ---------- ---------- ----------
Income before
income taxes $ 162,548 $ 174,527 $ 297,774 $ 306,433
========== ========== ========== ==========
April 30, October 31,
2006 2005
---------- ----------
(In thousands)
Assets:
Northeast $1,195,422 $1,058,155
Mid-Atlantic 719,979 621,836
Midwest 200,133 156,464
Southeast 819,088 688,880
Southwest 533,959 377,866
West 1,539,632 1,143,747
---------- ----------
Total Homebuilding
Assets 5,008,213 4,046,948
---------- ----------
Financial Services 227,176 237,292
Corporate and Unallocated 347,899 435,715
---------- ----------
Total Assets $5,583,288 $4,719,955
========== ==========
4. Interest costs incurred, expensed and capitalized were:
Three Months Ended Six Months Ended
April 30, April 30,
------------------ ------------------
2006 2005 2006 2005
-------- -------- -------- --------
(Dollars in Thousands)
Interest Capitalized at
Beginning of Period(1)..... $ 61,781 $ 40,587 $ 48,366 $ 37,465
Plus Interest Incurred(2).... 36,250 22,904 67,054 43,948
Less Cost of Sales Interest
Expensed(3)................ 20,283 18,464 36,852 36,231
Less Other Interest Expensed. 700 539 1,520 694
-------- -------- -------- --------
Interest Capitalized at
End of Period.............. $ 77,048 $ 44,488 $ 77,048 $ 44,488
======== ======== ======== ========
(1) Beginning balance for 2006 does not include interest incurred of
$2.3 million which is capitalized in property, plant, and equipment.
(2) Data does not include interest incurred by our mortgage and finance
subsidiaries.
(3) Represents interest on borrowings for construction, land and
development costs, which are charged to interest expense when homes
are delivered.
5. Accumulated depreciation at April 30, 2006 and October 31, 2005
amounted to $36.5 million and $30.5 million, respectively, for our
homebuilding assets.
6. In accordance with Financial Accounting Standards No. 144 ("SFAS
144"), "Accounting for the Impairment of or Disposal of Long Lived Assets",
we record impairment losses on inventories related to communities under
development when events and circumstances indicate that they may be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than their carrying amounts. In addition, from time to
time, we will write off certain residential land options including approval
and engineering costs for land we decided not to purchase. We wrote off
such costs in the amount of $5.6 million and $1.5 million during the three
months ended April 30, 2006 and 2005, respectively, and $8.7 million and
$2.0 million during the six months ended April 30, 2006 and 2005,
respectively. Residential inventory impairment losses and option write-
offs are reported in the Condensed Consolidated Statements of Income as
"Homebuilding-Inventory impairment loss".
7. We provide a warranty accrual for repair costs over $1,000 to
homes, community amenities, and land development infrastructure. We accrue
for warranty costs as part of cost of sales at the time each home is closed
and title and possession have been transferred to the homebuyer. In
addition, we accrue warranty costs under our general liability insurance
deductible as part of selling, general and administrative costs. For
fiscal 2006, our deductible is $20 million per occurrence with an aggregate
$20 million for construction defect claims. (deductible was $5 million per
occurrence for homes built in fiscal 2005). Additions and charges incurred
in the warranty accrual and general liability accrual for the three and six
months ended April 30, 2006 and 2005 are as follows:
Three Months Ended Six Months Ended
April 30, April 30,
------------------ ------------------
2006 2005 2006 2005
-------- -------- -------- --------
(Dollars in Thousands)
Balance, beginning of period..... $ 87,631 $ 74,116 $ 86,706 $ 64,922
Company acquisitions during
period......................... 186 186
Additions........................ 5,066 12,580 12,330 25,917
Charges incurred................. (2,650) (5,574) (8,989) (9,717)
-------- -------- -------- --------
Balance, end of period.......... $ 90,233 $ 81,122 $ 90,233 $ 81,122
======== ======== ======== ========
Warranty accruals are based upon historical experience. We engage a
third party actuary that uses our historical warranty data to estimate our
unpaid claims, claim adjustment expenses and incurred but not reported
claims reserves for the risks that we are assuming under the general
liability and workers compensation programs. The estimates include
provisions for inflation, claims handling and legal fees.
Insurance claims paid by our insurance carriers were $4.8 million and
$7.0 million for the six months ended April 30, 2006 and 2005,
respectively.
8. We are involved in litigation arising in the ordinary course of
business, none of which is expected to have a material adverse effect on
our financial position or results of operations and we are subject to
extensive and complex regulations that affect the development and home
building, sales and customer financing processes, including zoning,
density, building standards and mortgage financing. These regulations
often provide broad discretion to the administering governmental
authorities. This can delay or increase the cost of development or
homebuilding.
We also are subject to a variety of local, state, federal and foreign
laws and regulations concerning protection of health and the environment.
The particular environmental laws which apply to any given community vary
greatly according to the community site, the site's environmental
conditions and the present and former uses of the site. These
environmental laws may result in delays, may cause us to incur substantial
compliance, remediation, and/or other costs, and can prohibit or severely
restrict development and homebuilding activity in certain environmentally
sensitive regions or areas.
In March 2005, we received two requests for information pursuant to
Section 308 of the Clean Water Act from Region 3 of the Environmental
Protection Agency (the "EPA"). These requests sought information
concerning storm water discharge practices in connection with completed,
ongoing and planned homebuilding projects by subsidiaries in the states and
district that comprise EPA Region 3. We also received a notice of
violations for one project in Pennsylvania and requests for sampling plan
implementation in two projects in Pennsylvania. The amount requested by
the EPA to settle the asserted violations at the one project was not
material. We provided the EPA with information in response to its
requests. We have since been advised by the Department of Justice ("DOJ")
that it will be involved in the review of our storm water discharge
practices. We cannot predict the outcome of the review of these practices
or estimate the costs that may be involved in resolving the matter. To the
extent that the EPA or the DOJ asserts violations of regulatory
requirements and requests injunctive relief or penalties, we will defend
and attempt to resolve such asserted violations.
In addition, in November 2005, we received two notices from the
California Regional Water Quality Control Board alleging violations of
certain storm water discharge rules and assessing an administrative civil
liability of $0.2 million and $0.3 million. We do not consider these
assessments to be material and are considering our response to the notices.
It can be anticipated that increasingly stringent requirements will
be imposed on developers and homebuilders in the future. Although we
cannot predict the effect of these requirements, they could result in time-
consuming and expensive compliance programs and in substantial
expenditures, which could cause delays and increase our cost of operations.
In addition, the continued effectiveness of permits already granted or
approvals already obtained is dependent upon many factors, some of which
are beyond our control, such as changes in policies, rules and regulations
and their interpretations and application.
Our sales and customer financing processes are subject to the
jurisdiction of the U. S. Department of Housing and Urban Development
("HUD"). In connection with the Real Estate Settlement Procedures Act, HUD
recently inquired about our process of referring business to our affiliated
mortgage company and has separately requested documents related to customer
financing. We have responded to HUD's inquiries. In connection with these
inquiries, the Inspector General of HUD has recommended to the Secretary of
HUD that we indemnify HUD for any losses that it may sustain in connection
with nine loans that it alleges were improperly underwritten. We cannot
predict the outcome of HUD's inquiry or estimate the costs that may be
involved in resolving the matter. We do not expect the ultimate cost to be
material.
9. As of April 30, 2006 and October 31, 2005, respectively, we are
obligated under various performance letters of credit amounting to $432.8
million and $330.8 million.
10. As of April 30, 2006, our amended and restated unsecured
Revolving Credit Agreement ("Agreement") with a group of banks provided a
revolving credit line of $1.2 billion through July 2009. The facility
contained an accordion feature under which the aggregate commitment could
be increased to $1.3 billion subject to the availability of additional
commitments. Interest was payable monthly at various rates at our option,
based on either (1) a LIBOR-based rate for a one, two, three, or six month
interest period as selected by us plus a margin ranging from 1.00% to 1.95%
per annum, depending on our Consolidated Leverage Ratio, as defined in the
Agreement or (2) a base rate determined by reference to the higher of (a)
PNC Bank, National Association's prime rate and (b) the federal funds rate
plus 1/2%. In addition, we paid a fee ranging from 0.20% to 0.30% per
annum on the unused portion of the revolving credit line depending on our
Consolidated Leverage Ratio and the average percentage unused portion of
the revolving credit line. As of April 30, 2006 and October 31, 2005, the
outstanding balance under the Agreement was $275.0 million and zero,
respectively.
On May 31, 2006, we entered into an amended and restated unsecured
Revolving Credit Agreement ("May 2006 Agreement") with a group of lenders.
The May 2006 Agreement replaced the Agreement and increased the revolving
credit line from $1.2 billion to $1.5 billion and extended the maturity
through May 2011. The facility contains an accordion feature under which
the aggregate commitment can be increased to $2.0 billion subject to the
availability of additional commitments. Loans under the May 2006 Agreement
will bear interest at various rates based on (1) a base rate determined by
reference to the higher of (a) PNC Bank, National Association's prime rate
and (b) the federal funds rate plus 1/2% or (2) a margin ranging from 0.65%
to 1.50% per annum, depending on our Leverage Ratio, as defined in the May
2006 Agreement, and our debt ratings plus a LIBOR-based rate for a one,
two, three, or six month interest period as selected by us. In addition,
we pay a fee ranging from 0.15% to 0.25% per annum on the unused portion of
the revolving credit line depending on our Leverage Ratio and our debt
ratings and the average percentage unused portion of the revolving credit
line.
We and each of our significant subsidiaries, except for K. Hovnanian
Enterprises, Inc., the borrower, and various subsidiaries formerly engaged
in the issuance of collateralized mortgage obligations, a subsidiary
formerly engaged in homebuilding activity in Poland, our financial services
subsidiaries, joint ventures, and certain other subsidiaries, is a
guarantor under the May 2006 Agreement and was a guarantor under the prior
Agreement.
Our amended secured mortgage loan warehouse agreement with a group of
banks, which is a short-term borrowing facility, provides up to $250
million through October 30, 2006. Interest is payable monthly at the
Eurodollar Rate plus 1.0%. The loan is repaid when we sell the underlying
mortgage loans to permanent investors. On May 19, 2006, we amended our
secured mortgage loan warehouse agreement. Pursuant to the new agreement,
we may borrow up to $250 million through May 18, 2007. Interest is payable
monthly at the LIBOR Rate plus 1.0%.
We also have a $100 million commercial paper facility. On April 21,
2006, we amended our $100 million commercial paper facility. Pursuant to
the new agreement, the facility will expire on April 20, 2007 and interest
is payable monthly at the LIBOR Rate plus 0.65%. As of April 30, 2006 and
October 31, 2005, borrowings under both agreements were $195.2 million and
$198.9 million, respectively.
11. On November 30, 2004, we issued $200 million of 6 1/4% Senior
Notes due 2015 and $100 million of 6% Senior Subordinated Notes due 2010.
The net proceeds of the issuance were used to repay the outstanding balance
on our revolving credit facility as of November 30, 2004 and for general
corporate purposes.
On August 8, 2005, we issued $300 million 6 1/4% Senior Notes due
2016. The notes were issued at a discount to yield 6.46% and have been
reflected net of the unamortized discount in the Condensed Consolidated
Balance Sheets. The notes are redeemable in whole or in part at our option
at 100% of their principal amount plus the payment of a make-whole amount.
The net proceeds of the issuance were used to repay the outstanding balance
under our revolving credit facility as of August 8, 2005, and for general
corporate purposes, including acquisitions.
On February 27, 2006, we issued $300 million of 7 1/2% Senior Notes
due 2016. The notes are redeemable in whole or in part at our option at
100% of their principal amount plus the payment of a make-whole amount.
The net proceeds of the issuance were used to repay a portion of the
outstanding balance under our revolving credit facility as of February 27,
2006.
At April 30, 2006, we had $1,405.3 million of outstanding senior
notes ($1,399.2 million, net of discount), comprised of $140.3 million 10
1/2% Senior Notes due 2007, $100 million 8% Senior Notes due 2012, $215
million 6 1/2% Senior Notes due 2014, $150 million 6 3/8% Senior Notes due
2014, $200 million 6 1/4% Senior Notes due 2015, $300 million 6 1/4% Senior
Notes due 2016, and $300 million 7 1/2% Senior Notes due 2016. At April
30, 2006, we had $400.0 million of outstanding senior subordinated notes,
comprised of $150 million 8 7/8% Senior Subordinated Notes due 2012, $150
million 7 3/4% Senior Subordinated Notes due 2013, and $100 million 6%
Senior Subordinated Notes due 2010.
On June 5, 2006, we entered into an underwriting agreement to
sell $250 million 8 5/8% Senior Notes due 2017. The estimated net proceeds
of $247.7 million, after giving effect to discounts and commissions but
without giving effect to our estimated expenses of the offering, will be
used to repay amounts outstanding under the May 2006 Agreement. Subject to
customary closing conditions contained in the underwriting agreement, we
expect to settle this transaction on June 12, 2006.
Under the terms of the indentures governing our debt securities, we
have the right to make certain redemptions and depending on market
conditions, may do so from time to time.
12. Per Share Calculations - Basic earnings per common share is
computed using the weighted average number of shares outstanding. Diluted
earnings per common share is computed using the weighted average number of
shares outstanding adjusted for the incremental shares attributed to non-
vested stock and outstanding options to purchase common stock, of 2.2
million and 3.3 million for the three months ended April 30, 2006 and 2005,
respectively, and approximately 2.4 million and 3.2 million for the six
months ended April 30, 2006 and 2005, respectively.
13. On July 12, 2005, we issued 5,600 shares of 7.625% Series A
Preferred Stock, with a liquidation preference of $25,000 per share for net
proceeds of $135 million. Dividends on the Series A Preferred Stock are
not cumulative and are paid at an annual rate of 7.625%. The Series A
Preferred Stock is not convertible into the Company's common stock and is
redeemable in whole or in part at our option at the liquidation preference
of the shares beginning on the fifth anniversary of their issuance. The
Series A Preferred Stock is traded as depositary shares, with each
depositary share representing 1/1000th of a share of Series A Preferred
Stock. The depositary shares are listed on the Nasdaq National Market
under the symbol "HOVNP". The net proceeds from the offering, reflected in
Preferred Stock in the Condensed Consolidated Balance Sheet, were used for
the partial repayment of the outstanding balance under our revolving credit
facility as of July 12, 2005. On both January 17, 2006 and April 17, 2006,
we paid $2.7 million of dividends on the Series A Preferred Stock.
14. Variable Interest Entities - In January 2003, the Financial
Accounting Standards Board ("FASB") issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). A Variable
Interest Entity ("VIE") is created when (i) the equity investment at risk
is not sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties or (ii) equity
holders either (a) lack direct or indirect ability to make decisions about
the entity, (b) are not obligated to absorb expected losses of the entity
or (c) do not have the right to receive expected residual returns of the
entity if they occur. If an entity is deemed to be a VIE pursuant to FIN
46, an enterprise that absorbs a majority of the expected losses of the VIE
is considered the primary beneficiary and must consolidate the VIE.
Based on the provisions of FIN 46, we have concluded that whenever we
option land or lots from an entity and pay a non-refundable deposit, a VIE
is created under condition (ii) (b) and (c) of the previous paragraph. We
are deemed to have provided subordinated financial support, which refers to
variable interests that will absorb some or all of an entity's expected
theoretical losses if they occur. For each VIE created with a significant
nonrefundable option fee (we currently define significant as greater than
$100,000 because we have determined that in the aggregate the VIEs related
to deposits of this size or less are not material), we compute expected
losses and residual returns based on the probability of future cash flows
as outlined in FIN 46. If we are deemed to be the primary beneficiary of
the VIE we consolidate it on our balance sheet. The fair value of the
VIE's inventory is reported as "Consolidated Inventory Not Owned - Variable
interest entities".
Typically, the determining factor in whether or not we are the
primary beneficiary is the deposit amount as a percentage of the total
purchase price, because it determines the amount of the first risk of loss
we take on the contract. The higher this percentage deposit, the more
likely we are to be the primary beneficiary. Other important criteria that
impact the outcome of the analysis, are the probability of getting the
property through the approval process for residential homes, because this
impacts the ultimate value of the property, as well as who is the
responsible party (seller or buyer) for funding the approval process and
development work that will take place prior to the decision to exercise the
option.
Management believes FIN 46 was not clearly thought out for
application in the homebuilding industry for land and lot options. Under
FIN 46, we can have an option and put down a small deposit as a percentage
of the purchase price and still have to consolidate the entity. Our
exposure to loss as a result of our involvement with the VIE is only the
deposit, not its total assets consolidated on the balance sheet. In
certain cases, we will have to place inventory the VIE has optioned to
other developers on our balance sheet. In addition, if the VIE has
creditors, its debt will be placed on our balance sheet even though the
creditors have no recourse against us. Based on these observations we
believe consolidating VIEs based on land and lot option deposits does not
reflect the economic realities or risks of owning and developing land.
At April 30, 2006, all 35 VIEs we were required to consolidate were
the result of our options to purchase land or lots from the selling
entities. We paid cash or issued letters of credit deposits to these VIEs
totaling $27.3 million. Our option deposits represent our maximum exposure
to loss. The fair value of the property owned by these VIEs was $381.2
million. Since we do not own an equity interest in any of the unaffiliated
variable interest entities that we must consolidate pursuant to FIN 46, we
generally have little or no control or influence over the operations of
these entities or their owners. When our requests for financial
information are denied by the land sellers, certain assumptions about the
assets and liabilities of such entities are required. In most cases, we
determine the fair value of the assets of the consolidated entities based
on the remaining contractual purchase price of the land or lots we are
purchasing. In these cases, it is assumed that the entities have no debt
obligations and the only asset recorded is the land or lots we have the
option to buy with a related offset to minority interest for the assumed
third party investment in the variable interest equity. At April 30, 2006,
the balance reported in minority interest from inventory not owned was
$243.3 million. Creditors of these VIEs have no recourse against us.
We will continue to control land and lots using options. Not all our
deposits are with VIEs. Including the deposits with the 35 VIEs above, at
April 30, 2006, we have total cash and letters of credit deposits amounting
to approximately $465.7 million to purchase land lots with a total purchase
price of $5.3 billion. The maximum exposure to loss is limited to the
deposits, although some deposits are refundable at our request or
refundable if certain conditions are not met.
15. Investments in Unconsolidated Homebuilding and Land Development
Joint Ventures - We enter into homebuilding and land development joint
ventures from time to time as a means of accessing lot positions, expanding
our market opportunities, establishing strategic alliances, managing our
risk profile, leveraging our capital base, and enhancing returns on
capital. Our homebuilding joint ventures are generally entered into with
third party investors to develop land and construct homes that are sold
directly to third party homebuyers. Our land development joint ventures
include those entered into with developers and other homebuilders, as well
as financial investors, to develop finished lots for sale to the joint
venture's members or other third parties. As of April 30, 2006, we have
investments in nine homebuilding joint ventures and nine land development
joint ventures. The tables set forth below summarize the combined
financial information related to our unconsolidated homebuilding and land
development joint ventures that are accounted for under the equity method.
April 30, 2006
------------------------------------------------
Homebuilding Land Development Total
-------------- ---------------- --------------
Assets:
Cash and cash equivalents....... $ 50,487 $ 3,820 $ 54,307
Inventories..................... 687,372 205,055 892,427
Other assets.................... 126,973 3,927 130,900
-------------- ---------------- --------------
Total assets.................... $ 864,832 $ 212,802 $ 1,077,634
============== ================ ==============
Liabilities and Equity:
Accounts payable and
accrued liabilities........... $ 140,945 $ 23,472 $ 164,417
Notes payable................... 352,582 60,818 413,400
Equity of:
Hovnanian Enterprises, Inc.... 89,838 90,570 180,408
Others........................ 281,467 37,942 319,409
-------------- ---------------- --------------
Total Equity.................... 371,305 128,512 499,817
-------------- ---------------- --------------
Total liabilities and equity.... $ 864,832 $ 212,802 $ 1,077,634
============== ================ ==============
Debt to Capitalization Ratio.... 49% 32% 45%
October 31, 2005
------------------------------------------------
Homebuilding Land Development Total
-------------- ---------------- --------------
Assets:
Cash and cash equivalents....... $ 46,200 $ 5,012 $ 51,212
Inventories..................... 694,408 198,267 892,675
Other assets.................... 166,974 295 167,269
-------------- ---------------- --------------
Total assets.................... $ 907,582 $ 203,574 $ 1,111,156
============== ================ ==============
Liabilities and Equity:
Accounts payable and
accrued liabilities........... $ 228,264 $ 21,523 $ 249,787
Notes payable................... 316,532 59,131 375,663
Equity of:
Hovnanian Enterprises, Inc.... 75,349 86,593 161,942
Others........................ 287,437 36,327 323,764
-------------- ---------------- --------------
Total Equity.................... 362,786 122,920 485,706
-------------- ---------------- --------------
Total liabilities and equity.... $ 907,582 $ 203,574 $ 1,111,156
============== ================ ==============
Debt to Capitalization Ratio.... 47% 32% 44%
As of April 30, 2006 and October 31, 2005, we had advances outstanding of
approximately $27.9 million and $23.7 million, respectively, to these
unconsolidated joint ventures, which were included in the accounts payable
and accrued liabilities balances in the table above. On our Hovnanian
Enterprises, Inc. Condensed Consolidated Balance Sheet our "Investments in
and advances to unconsolidated joint ventures" amounted to $211.6 million and
$187.2 million at April 30, 2006 and October 31, 2005, respectively. The
minor difference between the Hovnanian equity balance plus advances to
unconsolidated joint ventures balance disclosed here compared to the
Hovnanian Enterprises, Inc. Condensed Consolidated Balance Sheet is due to a
different inside basis versus outside basis in certain joint ventures.
For the Three Months Ended April 30,2006
------------------------------------------------
Homebuilding Land Development Total
-------------- ---------------- --------------
Revenues........................ $ 248,120 $ 4,030 $ 252,150
Cost of sales and expenses...... (213,086) (4,594) (217,680)
-------------- ---------------- --------------
Net income (loss)............... $ 35,034 $ (564) $ 34,470
============== ================ ==============
Our share of net earnings (losses)$ 9,959 $ (462) $ 9,497
============== ================ ==============
For the Three Months Ended April 30,2005
------------------------------------------------
Homebuilding Land Development Total
-------------- ---------------- --------------
Revenues........................ $ 124,007 $ 4,973 $ 128,980
Cost of sales and expenses...... (107,848) (5,952) (113,800)
-------------- ---------------- --------------
Net income (loss)............... $ 16,159 $ (979) $ 15,180
============== ================ ==============
Our share of net earnings (losses)$ 7,319 $ (179) $ 7,140
============== ================ ==============
For the Six Months Ended April 30,2006
------------------------------------------------
Homebuilding Land Development Total
-------------- ---------------- --------------
Revenues........................ $ 464,168 $ 12,431 $ 476,599
Cost of sales and expenses...... (403,983) (12,251) (416,234)
-------------- ---------------- --------------
Net income...................... $ 60,185 $ 180 $ 60,365
============== ================ ==============
Our share of net earnings (losses)$ 17,258 $ (186) $ 17,072
============== ================ ==============
For the Six Months Ended April 30,2005
------------------------------------------------
Homebuilding Land Development Total
-------------- ---------------- --------------
Revenues........................ $ 135,189 $ 7,701 $ 142,890
Cost of sales and expenses...... (117,121) (8,962) (126,083)
-------------- ---------------- --------------
Net income (loss)............... $ 18,068 $ (1,261) $ 16,807
============== ================ ==============
Our share of net earnings (losses)$ 8,952 $ (377) $ 8,575
============== ================ ==============
Income from unconsolidated joint ventures is reflected as a separate
line in the accompanying Condensed Consolidated Financial Statements and
reflects our proportionate share of the income of these unconsolidated
homebuilding and land development joint ventures. Our ownership interests
in the joint ventures vary but are generally less than or equal to 50
percent. In determining whether or not we must consolidate joint ventures,
where we are the manager of the joint venture, we consider the guidance in
EITF 04-5 in assessing whether the other partners have specific rights to
overcome the presumption of control by us or the manager of the joint
venture. In most cases, the presumption is overcome because the joint
venture agreements require that both partners agree on establishing the
operating and capital decisions of the partnership, including budgets, in
the ordinary course of business.
Typically, our unconsolidated joint ventures obtain separate project
specific mortgage financing for each venture. Generally, the amount of
such financing is limited to no more than 50% of the joint venture's total
assets, and such financing is obtained on a non-recourse basis, with
guarantees from us limited only to performance and completion guarantees
and limited environmental indemnifications.
16. Recent Accounting Pronouncements - In May 2005, the FASB issued
SFAS 154, "Accounting Changes and Error Corrections". This statement,
which replaces APB Opinion No. 20, "Accounting Changes", and SFAS No. 3,
"Reporting Accounting Changes in Interim Financial Statements", changes the
requirements for the accounting for and reporting of a change in accounting
principle. The statement requires retrospective application of changes in
accounting principle to prior periods' financial statements unless it is
impracticable to determine the period-specific effects or the cumulative
effect of the change. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15,
2005. The adoption of SFAS No. 154 is not expected to have a material
impact on our consolidated financial position, results of operations or
cash flows.
In June 2005, the Emerging Issues Task Force ("EITF") released Issue
No. 04-5, "Determining Whether a General Partner, or the General Partners
as a Group, Controls a Limited Partnership or Similar Entity When the
Limited Partners Have Certain Rights" ("EITF 04-5"). EITF 04-5 creates a
framework for evaluating whether a general partner or a group of general
partners controls a limited partnership and therefore should consolidate
the partnership. EITF 04-5 states that the presumption of general partner
control would be overcome only when the limited partners have certain
specific rights as outlined in EITF 04-5. EITF 04-5 is effective
immediately for all newly formed limited partnerships and for existing
limited partnership agreements that are modified. For general partners in
all other limited partnerships, EITF 04-5 is effective no later than the
beginning of the first reporting period in fiscal years beginning after
December 15, 2005. Implementation of EITF 04-5 is not expected to have a
material impact on our consolidated financial position, results of
operations or cash flows.
17. Intangible Assets - The intangible assets recorded on our
balance sheet are goodwill, which has an indefinite life, and definite life
intangibles, including tradenames, architectural designs, distribution
processes, and contractual agreements resulting from our acquisitions. We
no longer amortize goodwill, but instead assess it periodically for
impairment. We are amortizing the definite life intangibles over their
expected useful lives, ranging from three to seven years.
18. On March 1, 2005, we acquired for cash the assets of Cambridge
Homes, a privately held Orlando homebuilder and provider of related
financial services, headquartered in Altamonte Springs, Florida. Cambridge
Homes also provides mortgage financing, as well as title and settlement
services to its homebuyers. In connection with the acquisition, based on an
appraisal of acquisition intangibles, we have definite life intangible
assets equal to the excess of purchase price over the fair value of the net
tangible assets of $22 million. We are amortizing the various definite
life intangibles over their estimated lives.
On March 2, 2005, we acquired the operations of Town & Country Homes,
a privately held homebuilder and land developer headquartered in Lombard,
Illinois, which occurred concurrently with our entering into a joint
venture agreement with affiliates of Blackstone Real Estate Advisors in New
York to own and develop Town & Country's existing residential communities.
The joint venture is being accounted for under the equity method. Town &
Country Homes' operations beyond the existing owned and optioned
communities, as of the acquisition date, are wholly-owned and included in
our consolidated financial statements.
On August 3, 2005, we acquired substantially all of the homebuilding
assets of Oster Homes, a privately held Ohio homebuilder, headquartered in
Lorain, Ohio.
On August 8, 2005, we acquired substantially all of the assets of
First Home Builders of Florida, a privately held homebuilder and provider
of related financial services headquartered in Cape Coral, Florida.
In connection with the First Home Builders of Florida and Oster Homes
acquisitions, we have definite life intangible assets equal to the excess
purchase price over the fair value of net tangible assets of $121 million
in the aggregate. We are awaiting the appraisal from these acquisitions.
Until the appraisals are received, we estimated the intangible value for
amortization calculations. We expect to have final appraisals by the third
quarter ended July 31, 2006. We expect to amortize the definite life
intangibles over their estimated lives.
On April 17, 2006, we acquired for cash the assets of CraftBuilt
Homes, a privately held homebuilder headquartered in Bluffton, South
Carolina. In connection with the acquisition, we have definite life
intangible assets equal to the excess purchase price over the fair value of
net tangible assets of $4.5 million in the aggregate. We are awaiting the
appraisal from this acquisition. Until the appraisal is received, we
estimated the intangible value for amortization calculations. We expect to
have the final appraisal by the end of the second quarter of fiscal 2007.
We expect to amortize the definite life intangibles over their estimated
lives.
19. Hovnanian Enterprises, Inc., the parent company (the "Parent"),
is the issuer of publicly traded common stock and preferred stock. One of
its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc. (the
"Subsidiary Issuer"), acts as a finance entity that as of April 30, 2006
had issued and outstanding $400 million of Senior Subordinated Notes,
$1,405.3 million face value of Senior Notes, and $275 million drawn on a
Revolving Credit Agreement. The Senior Subordinated Notes, Senior Notes
and the Revolving Credit Agreement are fully and unconditionally guaranteed
by the Parent.
In addition to the Parent, each of the wholly owned subsidiaries of
the Parent other than the Subsidiary Issuer (collectively, the "Guarantor
Subsidiaries"), with the exception of various subsidiaries formerly engaged
in the issuance of collateralized mortgage obligations, our mortgage
lending subsidiaries, a subsidiary formerly engaged in homebuilding
activity in Poland, our title insurance subsidiaries, joint ventures, and
certain other subsidiaries (collectively, the "Non-guarantor
Subsidiaries"), have guaranteed fully and unconditionally, on a joint and
several basis, the obligations of the Subsidiary Issuer to pay principal
and interest under the Senior Notes, Senior Subordinated Notes, and the
Revolving Credit Agreement.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries we have included the accompanying condensed
consolidating financial statements. Management does not believe that
separate financial statements of the Guarantor Subsidiaries are material to
investors. Therefore, separate financial statements and other disclosures
concerning the Guarantor Subsidiaries are not presented.
The following condensed consolidating financial information presents
the results of operations, financial position, and cash flows of (i) the
Parent, (ii) the Subsidiary Issuer, (iii) the Guarantor Subsidiaries, (iv)
the Non-guarantor Subsidiaries, and (v) the eliminations to arrive at the
information for Hovnanian Enterprises, Inc. on a consolidated basis.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING BALANCE SHEET
APRIL 30, 2006
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
---------- ---------- ------------ ------------ ----------- ----------
ASSETS
Homebuilding..................... $ 1,238 $ 130,096 $ 4,844,120 $ 284,008 $ $5,259,462
Financial Services................. 99 227,077 227,176
Income Taxes (Payable) Receivable.. 35,799 60,565 286 96,650
Investments in and amounts due to
and from consolidated
subsidiaries................... 1,940,153 2,281,543 (2,374,684) (241,662) (1,605,350) -
---------- ---------- ------------ ------------ ----------- ----------
Total Assets..................... $1,977,190 $2,411,639 $ 2,530,100 $ 269,709 $(1,605,350)$5,583,288
========== ========== ============ ============ =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding................... $ $ $ 1,025,003 $ 30,817 $ $1,055,820
Financial Services............. 58 204,018 204,076
Notes Payable................... 2,098,584 1,038 2,099,622
Minority Interest................ 243,339 3,241 246,580
Stockholders' Equity............. 1,977,190 313,055 1,260,662 31,633 (1,605,350) 1,977,190
---------- ---------- ------------ ------------ ----------- ----------
Total Liabilities and Stockholders'
Equity......................... $1,977,190 $2,411,639 $ 2,530,100 $ 269,709 $(1,605,350)$5,583,288
========== ========== ============ ============ =========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 2005
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
---------- ---------- ------------ ------------ ---------- -----------
Assets
Homebuilding......................$ 1,192 $ 325,997 $ 3,931,333 $ 214,238 $ $4,472,760
Financial Services................ 200 237,092 237,292
Income Taxes (Payable) Receivable. (22,704) 32,970 (363) 9,903
Investments in and Amounts Due to
And From Consolidated
Subsidiaries.................... 1,812,869 1,413,666 (1,617,271) (189,626) (1,419,638) -
---------- ---------- ------------ ------------ ----------- ----------
Total Assets......................$1,791,357 $1,739,663 $ 2,347,232 $ 261,341 $(1,419,638) $4,719,955
========== ========== ============ ============ ============ ==========
Liabilities
Homebuilding......................$ $ 20,431 $ 996,428 $ 3,626 $ $1,020,485
Financial Services................. 81 207,236 207,317
Notes Payable...................... 1,498,739 (3,531) 24,339 1,519,547
Minority Interest.................. 180,170 1,079 181,249
Stockholders' Equity...............1,791,357 220,493 1,174,084 25,061 (1,419,638) 1,791,357
---------- ----------- ------------ ------------ ----------- ----------
Total Liabilities and Stockholders'
Equity......................... $1,791,357 $1,739,663 $ 2,347,232 $ 261,341 $(1,419,638) $4,719,955
========== ========== ============ ============ ============ ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2006
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.................... $ $ 98 $1,541,591 $ 11,241 $ $1,552,930
Financial Services............... 2,021 19,170 21,191
Intercompany Charges............. 76,084 75,685 (151,769) -
Equity In Pretax Income of
Consolidated Subsidiaries...... 162,548 (162,548) -
-------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 162,548 76,182 1,619,297 30,411 (314,317) 1,574,121
-------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 497 1,436,417 5,686 (36,047) 1,406,553
Financial Services............... 1,296 13,221 14,517
-------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 497 1,437,713 18,907 (36,047) 1,421,070
-------- ---------- ---------- ------------ ---------- ----------
Income from Unconsolidated
Joint Ventures................... 9,497 9,497
-------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes. 162,548 75,685 191,081 11,504 (278,270) 162,548
State and Federal Income Taxes..... 58,899 24,637 69,886 4,879 (99,402) 58,899
-------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)................. $103,649 $ 51,048 $ 121,195 $ 6,625 $ (178,868)$ 103,649
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2005
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 59 $1,192,973 $ 168 $ $1,193,200
Financial Services............... 1,945 14,324 16,269
Intercompany Charges............. 52,263 52,864 (105,127) -
Equity In Pretax Income of
Consolidated Subsidiaries...... 174,527 (174,527) -
-------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 174,527 52,322 1,247,782 14,492 (279,654) 1,209,469
-------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... (543) 1,060,303 857 (30,002) 1,030,615
Financial Services............... 1,042 11,418 (993) 11,467
-------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. (543) 1,061,345 12,275 (30,995) 1,042,082
-------- ---------- ---------- ------------ ---------- ----------
Income from Unconsolidated
Joint Ventures.................. 7,140 7,140
-------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes. 174,527 52,865 193,577 2,217 (248,659) 174,527
State and Federal Income Taxes..... 68,391 6,074 37,704 (2,852) (40,926) 68,391
-------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss).................$ 106,136 $ 46,791 $ 155,873 $ 5,069 $ (207,733)$ 106,136
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 2006
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.................... $ $ 251 $2,798,018 $ 13,391 $ $2,811,660
Financial Services............... 4,276 36,177 40,453
Intercompany Charges............. 142,842 142,388 (285,230) -
Equity In Pretax Income of
Consolidated Subsidiaries...... 297,774 (297,774) -
-------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 297,774 143,093 2,944,682 49,568 (583,004) 2,852,113
-------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 705 2,601,758 7,141 (66,240) 2,543,364
Financial Services............... 2,179 26,113 (245) 28,047
-------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 705 2,603,937 33,254 (66,485) 2,571,411
-------- ---------- ---------- ------------ ---------- ----------
Income from Unconsolidated
Joint Ventures................... 17,072 17,072
-------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes. 297,774 142,388 357,817 16,314 (516,519) 297,774
State and Federal Income Taxes..... 110,029 48,048 131,750 6,791 (186,589) 110,029
-------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)................. $187,745 $ 94,340 $ 226,067 $ 9,523 $ (329,930)$ 187,745
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 2005
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 101 $2,232,571 $ 896 $ $2,233,568
Financial Services............... 2,974 27,488 30,462
Intercompany Charges............. 100,660 101,849 (202,509) -
Equity In Pretax Income of
Consolidated Subsidiaries......306,433 (306,433) -
-------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 306,433 100,761 2,337,394 28,384 (508,942) 2,264,030
-------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... (1,088) 1,996,758 2,028 (52,913) 1,944,785
Financial Services............... 1,772 21,493 (1,878) 21,387
-------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. (1,088) 1,998,530 23,521 (54,791) 1,966,172
-------- ---------- ---------- ------------ ---------- ----------
Income from Unconsolidated
Joint Ventures................. 8,575 8,575
-------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes. 306,433 101,849 347,439 4,863 (454,151) 306,433
State and Federal Income Taxes.....118,815 23,172 92,627 1,306 (117,105) 118,815
-------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss).................$187,618 $ 78,677 $ 254,812 $ 3,557 $ (337,046)$ 187,618
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2006
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income........................ $187,745 $ 94,340 $ 226,067 $ 9,523 $(329,930) $187,745
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... (65,373) 60 (1,045,498) (49,573) 329,930 (830,454)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In) 122,372 94,400 (819,431) (40,050) - (642,709)
Operating Activities...........
Net Cash (Used In)
Investing Activities............... (51,401) (9,959) (61,360)
Net Cash Provided By (Used In)
Financing Activities.............. 4,912 575,000 (28,336) (6,102) 545,474
Intercompany Investing and Financing
Activities - Net..................(127,284) (867,877) 943,125 52,036
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... - (198,477) 43,957 (4,075) (158,595)
Balance, Beginning of Period......... 16 298,596 (97,024) 9,685 211,273
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period..................... $ 16 $100,119 $ (53,067)$ 5,610 $ $ 52,678
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2005
(Dollars in Thousands)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income........................ $187,618 $ 78,677 $ 254,812 $ 3,557 $ (337,046)$ 187,618
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... (87,806) (11,476) (498,303) (15,357) 337,046 (275,896)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 99,812 67,201 (243,491) (11,800) - (88,278)
Net Cash (Used In)
Investing Activities............... (5,554) (164,649) (39) (170,242)
Net Cash Provided By (Used In)
Financing Activities............... (18,825) 290,100 25,585 (64,192) 232,668
Intercompany Investing and Financing
Activities - Net................... (75,432) (315,110) 316,607 73,935 -
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... 1 42,191 (65,948) (2,096) (25,852)
Balance, Beginning of Period......... 15 29,369 20,017 11,558 60,959
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period..................... $ 16 $ 71,560 $ (45,931)$ 9,462 $ $ 35,107
======== ========= ========== ============ ========== ==========
20. Subsequent Events -
As discussed in Note 9, on May 19, 2006, we amended our secured
mortgage loan warehouse agreement. Pursuant to the new agreement, we may
borrow up to $250 million through May 18, 2007. Interest is payable monthly
at the LIBOR Rate plus 1.0%.
As discussed in Note 9, on May 31, 2006, we amended and restated our
unsecured Revolving Credit Agreement. The amended and restated agreement
provides a revolving credit line of $1.5 billion through May 2011.
On June 5, 2006, we entered into an underwriting agreement to sell
$250 million 8 5/8% Senior Notes due 2017. The estimated net proceeds of
$247.7 million, after giving effect to discounts and commissions but
without giving effect to our estimated expenses of the offering, will be
used to repay amounts outstanding under the May 2006 Agreement. Subject to
customary closing conditions contained in the underwriting agreement, we
expect to settle this transaction on June 12, 2006.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Restatement of Notes to Financial Statements
As discussed in Note 3 to the condensed consolidated financial
statements, subsequent to the issuance of our condensed consolidated
financial statements for the quarterly period ended April 30, 2006, we
expanded our disclosures of reportable segments in accordance with the
provisions of Statements of Financial Accounting Standards ("SFAS ") 131,
Disclosures About Segments of an Enterprise and Related Information. We
had historically aggregated our homebuilding operating segments into a
single, national reportable segment, but we have restated our segment
disclosure to include six reportable homebuilding segments for the three
and six months ended April 30, 2006 and 2005 (see Note 3). The restatement
has no impact on our condensed consolidated balance sheets as of April 30,
2006, condensed consolidated statement of income and related income per
common share amounts for the three and six months ended April 30, 2006 and
2005 or condensed consolidated statements of cash flows for the six months
ended April 30, 2006 and 2005. We have amended our Annual Report on Form
10-K for the year ended October 31, 2005 for the related impact of this
restatement.
CRITICAL ACCOUNTING POLICIES
Management believes that the following critical accounting policies
affect its more significant judgments and estimates used in the preparation
of its consolidated financial statements:
Business Combinations - When we make an acquisition of another
company, we use the purchase method of accounting in accordance with the
Statement of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations". Under SFAS No. 141, we record as our cost the estimated
fair value of the acquired assets less liabilities assumed. Any difference
between the cost of an acquired company and the sum of the fair values of
tangible and intangible assets less liabilities is recorded as goodwill.
The reported income of an acquired company includes the operations of the
acquired company from the date of acquisition.
Income Recognition from Home and Land Sales - We are primarily
engaged in the development, construction, marketing and sale of residential
single-family and multi-family homes where the planned construction cycle
is less than 12 months. For these homes, in accordance with SFAS No. 66,
"Accounting for Sales of Real Estate" ("SFAS 66"), revenue is recognized
when title is conveyed to the buyer, adequate cash payment has been
received and there is no continued involvement.
Additionally, in certain markets, we sell lots to customers,
transferring title, collecting proceeds, and entering into contracts to
build homes on these lots. In these cases, we do not recognize the revenue
from the lot sale until we deliver the completed home and have no continued
involvement related to that home. The cash received on the lot is recorded
as customer deposits until the revenue is recognized.
Income Recognition from High-Rise/Mid-Rise Projects - We are
developing several high-rise/mid-rise projects that will take more than 12
months to complete. If these projects qualify, revenues and costs are
recognized using the percentage of completion method of accounting in
accordance with SFAS 66. Under the percentage of completion method,
revenues and costs are to be recognized when construction is beyond the
preliminary stage, the buyer is committed to the extent of having a
sufficient deposit that the buyer cannot require be refunded except for
non-delivery of the home, sufficient units in the project have been sold to
ensure that the property will not be converted to rental property, the
sales prices are collectible and the aggregate sales proceeds and the total
cost of the project can be reasonably estimated. We currently do not have
any projects that meet these criteria, therefore the revenues from
delivering homes in high-rise/mid-rise projects are recognized when title
is conveyed to the buyer, adequate cash payment has been received and there
is no continued involvement with respect to that home.
Income Recognition from Mortgage Loans - Profits and losses relating
to the sale of mortgage loans are recognized when legal control passes to
the buyer of the mortgage and the sales price is collected.
Interest Income Recognition for Mortgage Loans Receivable and
Recognition of Related Deferred Fees and Costs - Interest income is
recognized as earned for each mortgage loan during the period from the loan
closing date to the sale date when legal control passes to the buyer and the
sale price is collected. All fees related to the origination of mortgage
loans and direct loan origination costs are deferred and recorded as either
(a) an adjustment to the related mortgage loans upon the closing of a loan
or (b) recognized as a deferred asset or deferred revenue while the loan is
in process. These fees and costs include loan origination fees, loan
discount, and salaries and wages. Such deferred fees and costs relating to
the closed loans are recognized over the life of the loans as an adjustment
of yield or taken into operations upon sale of the loan to a permanent
investor.
Inventories - Inventories and long-lived assets held for sale are
recorded at the lower of cost or fair value less selling costs. Fair value
is defined as the amount at which an asset could be bought or sold in a
current transaction between willing parties, that is, other than in a
forced or liquidation sale. Construction costs are accumulated during the
period of construction and charged to cost of sales under specific
identification methods. Land, land development, and common facility costs
are allocated based on buildable acres to product types within each
community then charged to cost of sales equally based upon the number of
homes to be constructed in each product type. For inventories of
communities under development, a loss is recorded when events and
circumstances indicate impairment and the undiscounted future cash flows
generated are less than the related carrying amounts. The impairment loss
is based on discounted future cash flows generated from expected revenue,
less cost to complete including interest, and selling costs.
Insurance Deductible Reserves - For fiscal 2006, our deductible is
$20 million per occurrence with an aggregate $20 million for premise
liability claims and an aggregate $20 million for construction defect
claims under our general liability insurance. Our worker's compensation
insurance deductible is $1 million per occurrence in fiscal 2006. Reserves
have been established based upon actuarial analysis of estimated losses
incurred during fiscal 2006 and fiscal 2005. We engage a third party
actuary that uses our historical warranty data to estimate our unpaid
claims, claim adjustment expenses and incurred but not reported claims
reserves for the risks that we are assuming under the general liability and
workers compensation programs. The estimates include provisions for
inflation, claims handling and legal fees.
Interest - In accordance with SFAS 34 "Capitalization of Interest
Cost", interest incurred is first capitalized to properties under
development during the land development and home construction period and
expensed along with the associated cost of sales as the related inventories
are sold. Interest in excess of interest capitalized or interest incurred
on borrowings directly related to properties not under development is
expensed immediately in "Other Interest".
Land Options - Costs are capitalized when incurred and either
included as part of the purchase price when the land is acquired or charged
to operations when we determine we will not exercise the option. In
accordance with Financial Accounting Standards Board ("FASB")
Interpretation No. 46R ("FIN 46R") "Consolidation of Variable Interest
Entities", an interpretation of Accounting Research Bulletin No. 51, SFAS
No. 49 "Accounting for Product Financing Arrangements" ("SFAS 49"), SFAS
No. 98 "Accounting for Leases" ("SFAS 98"), and Emerging Issues Task Force
("EITF") No. 97-10 "The Effects of Lessee Involvement in Asset
Construction" ("EITF 97-10"), we record on the Condensed Consolidated
Balance Sheet specific performance options, options with variable interest
entities, and other options under "Consolidated Inventory Not Owned" with
the offset to "Liabilities from inventory not owned" and "Minority interest
from inventory not owned".
Unconsolidated Homebuilding and Land Development Joint Ventures -
Investments in unconsolidated homebuilding and land development joint
ventures are accounted for under the equity method of accounting. Under
the equity method, we recognize our proportionate share of earnings and
losses earned by the joint venture upon the delivery of lots or homes to
third parties. Our ownership interest in joint ventures varies but is
generally less than or equal to 50%. In determining whether or not we must
consolidate joint ventures, where we are the managing member of the joint
venture, we consider the guidance in EITF 04-5 in assessing whether the
other partners have specific rights to overcome the presumption of control
by us as the manager of the joint venture. In most cases, the presumption
is overcome because the joint venture agreements require that both partners
agree on establishing the operating and capital decisions of the
partnership, including budgets, in the ordinary course of business.
Intangible Assets - The intangible assets recorded on our balance
sheet are goodwill, which has indefinite life, and definite life
intangibles, including tradenames, architectural designs, distribution
processes, and contractual agreements resulting from our acquisitions. We
no longer amortize goodwill, but instead assess it periodically for
impairment. We are amortizing the definite life intangibles over their
expected useful lives, ranging from three to eight years.
Post Development Completion and Warranty Costs - In those instances
where a development is substantially completed and sold and we have
additional construction work to be incurred, an estimated liability is
provided to cover the cost of such work. In addition, our warranty accrual
includes estimated costs for construction work that is unforeseen, but
estimable based on past history, at the time of closing. Both of these
liabilities are recorded in "Accounts payable and other liabilities" in the
Condensed Consolidated Balance Sheets.
CAPITAL RESOURCES AND LIQUIDITY
Our operations consist primarily of residential housing development
and sales in the Northeast (New Jersey, New York, Pennsylvania), the
Midwest (Illinois, Michigan,Minnesota, Ohio), the Mid-Atlantic (Delaware,
Maryland, Virginia, West Virginia, Washington D.C.), the Southeast
(Florida, North Carolina, South Carolina, Georgia), the Southwest (Arizona,
Texas), and the West (California). In addition, we provide financial
services to our homebuilding customers.
Our cash uses during the six months ended April 30, 2006 were for
operating expenses, increases in housing inventories, construction, income
taxes, interest, preferred stock dividends, the acquisition of CraftBuilt
Homes and repayments of our revolving credit facility. We provided for our
cash requirements from housing and land sales, the revolving credit
facility, Senior Notes issued in February 2006, financial service revenues,
and other revenues. We believe that these sources of cash are sufficient
to finance our working capital requirements and other needs.
On July 3, 2001, our Board of Directors authorized a stock repurchase
program to purchase up to 4 million shares of Class A Common Stock. As of
April 30, 2006, 2.8 million shares of Class A Common Stock have been
purchased under this program.
On July 12, 2005, we issued 5,600 shares of 7.625% Series A Preferred
Stock, with a liquidation preference of $25,000 per share for net proceeds
of $135 million. Dividends on the Series A Preferred Stock are not
cumulative and are paid at an annual rate of 7.625%. The Series A
Preferred Stock is not convertible into the Company's common stock and is
redeemable in whole or in part at our option at the liquidation preference
of the shares beginning on the fifth anniversary of their issuance. The
Series A Preferred Stock is traded as depositary shares, with each
depositary share representing 1/1000th of a share of Series A Preferred
Stock. The depositary shares are listed on the Nasdaq National Market
under the symbol "HOVNP". The net proceeds from the offering, reflected in
Preferred Stock in the Condensed Consolidated Balance Sheet, were used for
the partial repayment of the outstanding balance under our revolving credit
facility as of July 12, 2005. On both January 17, 2006 and April 17, 2006,
we paid $2.7 million of dividends on the Series A Preferred Stock.
Our homebuilding bank borrowings were made pursuant to an amended and
restated unsecured revolving credit agreement (the "Agreement") effective
June 17, 2005, that provided a revolving credit line and letter of credit
line of $1.2 billion through July 2009. The facility contained an
accordion feature under which the aggregate commitment could be increased
to $1.3 billion subject to the availability of additional commitments.
Interest was payable monthly at various rates, at our option, based on
either (1) a LIBOR-based rate for a one, two, three or six month interest
period as selected by us or (2) a base rate determined by reference to the
higher of (a) PNC Bank, National Association's prime rate and (b) the
federal funds rate plus 1/2% plus a margin ranging from 1.00% to 1.95% per
annum, depending on our Consolidated Leverage Ratio, as defined in the
Agreement. In addition, we paid a fee ranging from 0.20% to 0.30% per
annum on the unused portion of the revolving credit line depending on its
Leverage Ratio and the average percentage unused portion of the revolving
credit line. At April 30, 2006, there was $275.0 million drawn under this
Agreement and we had approximately $47.5 million of homebuilding cash. At
April 30, 2006, we had issued $432.8 million of letters of credit which
reduced cash available under the Agreement.
On May 31, 2006, we entered into an amended and restated unsecured
Revolving Credit Agreement ("May 2006 Agreement") with a group of lenders.
The May 2006 Agreement replaced the Agreement and increased the revolving
credit line from $1.2 billion to $1.5 billion and extended the maturity
through May 2011. The facility contains an accordion feature under which
the aggregate commitment can be increased to $2.0 billion subject to the
availability of additional commitments. Loans under the May 2006 Agreement
will bear interest at various rates based on (1) a base rate determined by
reference to the higher of (a) PNC Bank, National Association's prime rate
and (b) the federal funds rate plus 1/2% or (2) a margin ranging from 0.65%
to 1.50% per annum, depending on our Leverage Ratio, as defined in the May
2006 Agreement, and our debt ratings plus a LIBOR-based rate for a one,
two, three, or six month interest period as selected by us. In addition,
we pay a fee ranging from 0.15% to 0.25% per annum on the unused portion of
the revolving credit line depending on our Leverage Ratio and our debt
ratings and the average percentage unused portion of the revolving credit
line.
We believe that we will be able either to extend the Agreement beyond
May 2011 or negotiate a replacement facility, but there can be no assurance
of such extension or replacement facility. We currently are in compliance
and intend to maintain compliance with the covenants under the Agreement.
We and each of our significant subsidiaries, except for K. Hovnanian
Enterprises, Inc., the borrower, and various subsidiaries formerly engaged
in the issuance of collateralized mortgage obligations, a subsidiary
formerly engaged in homebuilding activity in Poland, our financial services
subsidiaries, joint ventures, and certain other subsidiaries, is a
guarantor under the Agreement.
At April 30, 2006, we had $1,405.3 million of outstanding senior
notes ($1,399.2 million, net of discount), comprised of $140.3 million 10
1/2% Senior Notes due 2007, $100 million 8% Senior Notes due 2012, $215
million 6 1/2% Senior Notes due 2014, $150 million 6 3/8% Senior Notes due
2014, $200 million 6 1/4% Senior Notes due 2015, $300 million 6 1/4% Senior
Notes due 2016 and $300 million 7 1/2% Senior Notes due 2016. At April 30,
2006, we had $400.0 million of outstanding senior subordinated notes,
comprised of $150 million 8 7/8% Senior Subordinated Notes due 2012, $150
million 7 3/4% Senior Subordinated Notes due 2013, and $100 million 6%
Senior Subordinated Notes due 2010. We and each of our wholly owned
subsidiaries, except for K. Hovnanian Enterprises, Inc., the issuer of the
senior and senior subordinated notes, and various subsidiaries formerly
engaged in the issuance of collateralized mortgage obligations, our
mortgage lending subsidiaries, a subsidiary formerly engaged in
homebuilding activity in Poland, our title insurance subsidiaries, joint
ventures, and certain other subsidiaries is a guarantor of the senior notes
and senior subordinated notes.
On June 5, 2006, we entered into an underwriting agreement to sell
$250 million 8 5/8% Senior Notes due 2017. The estimated net proceeds of
$247.7 million, after giving effect to discounts and commissions but
without giving effect to our estimated expenses of the offering, will be
used to repay amounts outstanding under the May 2006 Agreement. Subject to
customary closing conditions contained in the underwriting agreement, we
expect to settle this transaction on June 12, 2006.
Our mortgage banking subsidiary's warehouse agreement was amended on
May 19, 2006. Pursuant to the agreement, we may borrow up to $250 million
through May 2007. Interest is payable monthly at the LIBOR Rate plus 1.0%.
We also have a $100 million commercial paper facility. The facility was
amended on April 21, 2006 and expires in April 2007. Interest of LIBOR
plus .65% is payable monthly. As of April 30, 2006, the aggregate
principal amount of all borrowings under this agreement was $195.2 million.
Total inventory increased $812.1 million during the six months ended
April 30, 2006. This increase excluded the increase in consolidated
inventory not owned of $147.0 million consisting of specific performance
options, options with variable interest entities, and other options that
were added to our balance sheet in accordance with SFAS 49, SFAS 98, and
EITF 97-10, and variable interest entities in accordance with FIN 46R. See
"Notes to Condensed Consolidated Financial Statements" - Note 14 for
additional information on FIN 46R. Excluding the impact from an
acquisition of $23.9 million, the total inventory in the Southeast
increased $111.2 million, the Northeast increased $170.1 million, the Mid-
Atlantic increased $118.7 million, the Midwest increased $39.4 million, the
Southwest increased $73.0 million, and the West increased $275.8 million.
The increase in inventory was primarily the result of future planned
organic growth in our existing markets as we have increased the number of
communities open for sale from 367 at October 31, 2005 to 411 at April 30,
2006. Substantially all homes under construction or completed and included
in inventory at April 30, 2006 are expected to be closed during the next
twelve months. Most inventory completed or under development is partially
financed through our revolving credit agreement and senior and senior
subordinated indebtedness.
We usually option property for development prior to acquisition. By
optioning property, we are only subject to the loss of the cost of the
option and predevelopment costs if we choose not to exercise the option.
As a result, our commitment for major land acquisitions is reduced.
The following table summarizes the number of buildable homes included
in our total residential real estate. The April 30, 2006 and October 31,
2005 numbers exclude real estate owned and options in locations where we
have ceased development.
Active Proposed Grand
Active Communities Developable Total
Communities Homes Homes Homes
----------- --------- ------------ ---------
April 30, 2006:
Northeast........ 44 7,550 17,652 25,202
Mid-Atlantic..... 86 9,056 13,343 22,399
Midwest.......... 29 3,630 5,068 8,698
Southeast........ 91 14,503 14,016 28,519
Southwest........ 103 13,577 7,019 20,596
West............. 58 10,636 10,261 20,897
----------- --------- ------------ ---------
Consolidated Total 411 58,952 67,359 126,311
===========
Unconsolidated
Joint Ventures.. 6,024 2,431 8,455
--------- ------------ ---------
Total Including
Unconsolidated
Joint Ventures.. 64,976 69,790 134,766
========= ============ =========
Owned.......... 28,147 6,553 34,700
Optioned....... 26,323 60,806 87,129
--------- ------------ ---------
Controlled Lots... 54,470 67,359 121,829
Construction to
Permanent Financing
Lots............ 4,482 - 4,482
Lots Controlled by
Unconsolidated
Joint ventures.. 6,024 2,431 8,455
--------- ------------ ---------
Total Including
Unconsolidated
Joint Ventures.. 64,976 69,790 134,766
========= ============ =========
Active Proposed Grand
Active Communities Developable Total
Communities Homes Homes Homes
----------- ----------- ------------ ----------
October 31, 2005:
Northeast........ 40 7,179 19,465 26,644
Mid-Atlantic..... 70 7,137 16,445 23,582
Midwest.......... 25 3,618 3,463 7,081
Southeast........ 78 14,576 9,668 24,244
Southwest........ 102 12,905 7,547 20,452
West............. 52 9,285 9,718 19,003
----------- ----------- ----------- -----------
Consolidated Total 367 54,700 66,306 121,006
===========
Unconsolidated
Joint Ventures.. 6,655 3,396 10,051
----------- ----------- -----------
Total Including Unconsolidated
Joint Ventures.. 61,355 69,702 131,057
=========== =========== ===========
Owned.......... 24,731 5,657 30,388
Optioned....... 25,046 60,649 85,695
----------- ----------- -----------
Controlled Lots... 49,777 66,306 116,083
Construction to
Permanent Financing
Lots............ 4,923 - 4,923
Lots Controlled by
Unconsolidated
Joint ventures.. 6,655 3,396 10,051
----------- ----------- -----------
Total Including
Unconsolidated
Joint Ventures.. 61,355 69,702 131,057
=========== =========== ===========
The following table summarizes our started or completed unsold homes
and models. The increase in total started or completed unsold homes
compared to the prior year is primarily due to the increase in mid-rise and
high-rise buildings for which we count all units started when vertical
construction begins and the growth in the number of active selling
communities.
April 30, October 31,
2006 2005
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast........... 510 24 534 294 18 312
Mid-Atlantic........ 351 22 373 167 19 186
Midwest............. 211 14 225 175 17 192
Southeast........... 380 35 415 250 37 287
Southwest........... 945 80 1,025 901 70 971
West................ 582 144 726 275 157 432
------ ------ ----- ------ ------ -----
Total 2,979 319 3,298 2,062 318 2,380
====== ====== ===== ====== ====== =====
Investments in and advances to unconsolidated joint ventures
increased $24.4 million during the six months ended April 30, 2006. This
increase is due to income from joint ventures not distributed and
additional investment in joint ventures. As of April 30, 2006, we have
investments in nine homebuilding joint ventures and nine land development
joint ventures. Other than performance and completion guarantees and
limited environmental indemnifications, no other guarantees associated with
unconsolidated joint ventures have been given.
Receivables, deposits, and notes decreased $43.2 million to $82.2
million at April 30, 2006. The decrease was primarily due to a decrease in
miscellaneous receivables for a payment received in the first quarter of
2006 from an unconsolidated joint venture. It was also due to the
reduction in the receivables from home sales, which were in transit from
various title companies, amounting to $27.2 million and $39.4 million at
April 30, 2006 and October 31, 2005, respectively.
Prepaid expenses and other assets are as follows:
April 30, October 31, Dollar
2006 2005 Change
---------- ----------- ---------
Prepaid insurance.................... $ 13,036 $ - $ 13,036
Prepaid project costs................ 79,004 61,773 17,231
Senior residential rental properties. 8,554 8,754 (200)
Other prepaids....................... 30,098 24,547 5,551
Other assets......................... 34,950 30,588 4,362
----------- ----------- ---------
$ 165,642 $ 125,662 $ 39,980
=========== =========== =========
Prepaid insurance increased due to a payment of a full year of
liability insurance premium costs during the first quarter of every year.
These costs are amortized on a straight line basis. Prepaid project costs
and other prepaids increased due to the growth in the number of
communities. Prepaid project costs consist of community specific
expenditures that are used over the life of the community. Such prepaids
are expensed as homes are delivered. The increase in other prepaids is due
to advertising materials purchased for new start-up communities, which are
amortized as homes are delivered. The increase in other assets is
primarily attributable to the executive deferred compensation plan, due to
increased profit sharing contributions for senior management.
At April 30, 2006, we had $32.7 million of goodwill. This amount
resulted from Company acquisitions prior to fiscal 2000.
Definite life intangibles decreased $44.6 million to $204.9 million
at April 30, 2006. The decrease was the result of amortization during the
six months of $25.1 million, and an adjustment to the First Home Builders
of Florida acquisition accounting offset by our Cambridge Homes acquisition
earnout and contingent payments related to past acquisitions. As we
finalize our valuation of the assets acquired from First Home Builders of
Florida, we established a deferred tax asset as part of the purchase price
allocation, which reduced the recorded intangibles. For any acquisition,
professionals are hired to appraise all acquired intangibles. See "-
Critical Accounting Policies - Intangible Assets" above for additional
information on intangibles. For tax purposes all our intangibles, except
those resulting from an acquisition classified as a tax free exchange, are
being amortized over 15 years.
Accounts payable and other liabilities are as follows:
April 30, October 31, Dollar
2006 2005 Change
--------- ----------- --------
Accounts payable.......................$182,827 $ 191,469 $ (8,642)
Reserves............................... 100,362 95,310 5,052
Accrued expenses....................... 41,305 48,647 (7,342)
Accrued compensation................... 67,296 75,655 (8,359)
Other liabilities...................... 108,496 99,448 9,048
--------- ----------- --------
$500,286 $ 510,529 $(10,243)
========= =========== ========
The decrease in accounts payable was primarily due to decreased
deliveries in the second quarter of 2006 compared to the fourth quarter of
2005 throughout our markets, which resulted in less activity and lower
payables. Reserves increased for our general liability insurance
deductible and bonding. The decrease in accrued expenses is due to timing
of property tax payments and acquisition earnout obligations. The decrease
in accrued compensation was primarily due to the payout of our fiscal year
2005 bonuses during the first quarter of 2006. The increase in other
liabilities is mainly due to increased contributions to our executive
deferred compensation plan and an increase in deferred income from an
advance related to a lot option in the Southwest.
Financial Services - Mortgage loans held for sale consist of
residential mortgages receivable of which $214.2 million and $211.2 million
at April 30, 2006 and October 31, 2005, respectively, are being temporarily
warehoused and awaiting sale in the secondary mortgage market. We may
incur risk with respect to mortgages that are delinquent, but only to the
extent the losses are not covered by mortgage insurance or resale value of
the house. Historically, we have incurred minimal credit losses.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 30, 2006 COMPARED TO
THE SIX MONTHS ENDED APRIL 30, 2005
Total Revenues:
Compared to the same prior period, revenues increased as follows:
Three Months Ended
--------------------------------------------
April 30, April 30, Dollar Percentage
2006 2005 Change Change
----------- ----------- -------- ----------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $1,479,548 $1,189,672 $289,876 24.4%
Land sales and other
revenues........... 73,382 3,528 69,854 1,980.0%
Financial Services..... 21,191 16,269 4,922 30.3%
----------- ----------- -------- ----------
Total Revenues... $1,574,121 $1,209,469 $364,652 30.1%
=========== =========== ======== ==========
Six Months Ended
--------------------------------------------
April 30, April 30, Dollar Percentage
2006 2005 Change Change
----------- ----------- -------- ----------
(Dollars In Thousands)
Homebuilding:
Sale of homes........ $2,725,745 $2,205,641 $520,104 23.6%
Land sales and other
revenues........... 85,915 27,927 57,988 207.6%
Financial Services..... 40,453 30,462 9,991 32.8%
----------- ----------- -------- ----------
Total Revenues... $2,852,113 $2,264,030 $588,083 26.0%
=========== =========== ======== ==========
Homebuilding:
Compared to the same prior period, housing revenues increased $289.9
million or 24.4% during the three months ended April 30, 2006 and increased
$520.1 million or 23.6% during the six months ended April 30, 2006. Land
sales are incidental to our residential housing operations and are expected
to continue in the future but may significantly fluctuate up or down. For
further details on land sales and other revenues, see paragraph titled
"Land Sales and Other Revenues" later in this document.
Information on homes delivered by market area is set forth below:
Three Months Ended Six Months Ended
April 30, April 30,
---------------------- ----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
(Dollars in Thousands)
Northeast:
Dollars............ $ 203,828 $ 248,843 $ 400,127 $ 468,734
Homes.............. 437 589 879 1,142
Mid-Atlantic:
Dollars............ $ 251,012 $ 183,782 $ 448,890 $ 342,111
Homes.............. 491 404 870 752
Midwest (1):
Dollars............ $ 29,124 $ 18,402 $ 58,327 $ 36,972
Homes.............. 209 136 379 270
Southeast (2):
Dollars............ $ 311,202 $ 151,118 $ 580,980 $ 256,623
Homes.............. 1,316 714 2,464 1,268
Southwest:
Dollars............ $ 232,289 $ 164,133 $ 415,548 $ 300,044
Homes.............. 1,054 900 1,926 1,615
West:
Dollars............ $ 452,093 $ 423,394 $ 821,873 $ 801,157
Homes.............. 1,048 1,005 1,882 1,967
Consolidated Total:
Dollars............ $ 1,479,548 $1,189,672 $2,725,745 $2,205,641
Homes.............. 4,555 3,748 8,400 7,014
Unconsolidated Joint
Ventures (3):
Dollars............ $ 244,402 $ 123,732 $ 459,014 $ 135,317
Homes.............. 612 351 1,197 373
Totals:
Housing Revenues... $ 1,723,950 $1,313,404 $3,184,759 $2,340,958
Homes Delivered.... 5,167 4,099 9,597 7,387
(1) Midwest includes deliveries from our Ohio acquisition of
Oster Homes on August 3, 2005.
(2) Southeast includes deliveries from our Florida acquisitions
of Cambridge Homes and First Home Builders of Florida on March 1,
2005 and August 8, 2005, respectively, and our acquisition of
CraftBuilt Homes on April 1, 2006 with deliveries in South
Carolina and Georgia.
(3) Unconsolidated Joint Ventures includes deliveries from our joint
venture with affiliates of Blackstone Real Estate Advisors that
acquired Town & Country Homes existing residential communities on
March 2, 2005.
An important indicator of our future results are recently signed
contracts and home contract backlog for future deliveries. Our sales
contracts and homes in contract backlog using base sales prices by market
area are set forth below:
Net Contracts(1) for the
Six Months Ended Contract Backlog
April 30, as of April 30,
------------------------- ------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
(Dollars in Thousands)
Northeast:
Dollars............ $ 420,376 $ 416,882 $ 758,960 $ 681,208
Homes.............. 961 1,029 1,665 1,646
Mid-Atlantic:
Dollars........... $ 497,147 $ 511,983 $ 761,279 $ 706,815
Homes............. 967 1,034 1,478 1,451
Midwest (1):
Dollars........... $ 81,606 $ 26,459 $ 110,774 $ 50,831
Homes............. 408 227 610 454
Southeast (3):
Dollars............ $ 503,789 $ 311,184 $ 1,438,488 $ 437,550
Homes.............. 1,648 1,333 5,265 1,785
Southwest:
Dollars............ $ 436,494 $ 400,535 $ 315,309 $ 272,554
Homes.............. 2,036 2,119 1,406 1,428
West:
Dollars............ $ 600,454 $ 860,487 $ 587,465 $ 862,048
Homes.............. 1,292 2,122 1,163 2,072
Consolidated Total:
Dollars............ $ 2,539,866 $ 2,527,530 $ 3,972,275 $ 3,011,006
Homes.............. 7,312 7,864 11,587 8,836
Unconsolidated Joint
Ventures (4):
Dollars............ $ 238,329 $ 361,784 $ 810,115 $ 879,482
Homes.............. 654 704 1,797 2,150
Totals:
Dollars............ $ 2,778,195 $ 2,889,314 $ 4,782,390 $ 3,890,488
Homes.............. 7,966 8,568 13,384 10,986
(1) Net contracts are defined as new contracts during the period for the
purchase of homes, less cancellations of prior contracts.
(2) The number and the dollar amount of net contracts and contract backlog
in the Midwest in 2006 include the effect of the
Oster Homes acquisition, which closed in August 2005.
(3) The number and the dollar amount of net contracts and contract backlog
in the Southeast in 2006 include the effects of the
Cambridge Homes, First Home Builders of Florida and CraftBuilt
Homes acquisitions, which closed in March 2005, August 2005 and April
2006, respectively.
(4) The number and the dollar amount of net contracts and contract backlog
in Unconsolidated Joint Ventures in 2006 include our joint
venture with affiliates of Blackstone Real Estate Advisors that
acquired Town & Country Homes existing residential communities on
March 2, 2005.
Our reported level of net contracts has been impacted by an increase
in our cancellation rates over the past few quarters. The cancellation
rate represents the number of cancelled contracts in the quarter divided by
the number of gross sales contracts executed in the quarter. For
comparison, the following are historical cancellation rates:
Quarter 2003 2004 2005 2006
------- ---- ---- ---- ----
First 23% 23% 27% 30%
Second 18% 19% 21% 32%
Third 21% 20% 24%
Fourth 25% 24% 25%
Most cancellations occur within the legal rescission period, which
varies by state but is generally less than two weeks. Cancellations also
occur as a result of buyer failure to qualify for a mortgage, which
generally occurs during the first few weeks after signing. Cancellation
rates can be higher in markets where buyers sign contracts so as to tie up
a house they like and then cancel within the rescission period once they
reach a final decision on the house they want. This situation is more
common in certain markets, particularly California.
Cost of sales includes expenses for homebuilding and land sales. A
breakout of such expenses for homebuilding sales and homebuilding gross
margin is set forth below:
Three Months Ended Six Months Ended
April 30, April 30,
---------------------- ----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
(Dollars in Thousands)
Sale of Homes.............. $1,479,548 $1,189,672 $2,725,745 $2,205,641
Cost of Sales, excluding
interest................. 1,128,530 875,016 2,055,352 1,632,101
---------- ---------- ---------- ----------
Homebuilding Gross Margin,
before interest expense.. 351,018 314,656 670,393 573,540
Homebuilding Cost of
Sales Interest........... 19,861 18,441 35,972 36,020
---------- ---------- ---------- ----------
Homebuilding Gross Margin,
after interest expense... $ 331,157 $ 296,215 $ 634,421 $ 537,520
========== ========== ========== ==========
Gross Margin Percentage,
before interest expense.. 23.7% 26.4% 24.6% 26.0%
Gross Margin Percentage,
after interest expense... 22.4% 24.9% 23.3% 24.4%
========== ========== ========== ==========
Cost of Sales expenses as a percentage of home sales revenues are
presented below:
Three Months Ended Six Months Ended
April 30, April 30,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
Sale of Homes................ 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- ---------
Cost of Sales, excluding
interest:
Homebuilding, land &
development costs.... 68.4% 65.7% 67.2% 65.8%
Commissions............ 2.4% 2.1% 2.3% 2.1%
Financing concessions.. .9% .9% .9% .9%
Overheads.............. 4.6% 4.9% 5.0% 5.2%
-------- -------- -------- ---------
Total Cost of Sales, before
interest expense........... 76.3% 73.6% 75.4% 74.0%
-------- -------- -------- ---------
Gross Margin Percentage,
before interest expense.... 23.7% 26.4% 24.6% 26.0%
Cost of sales interest....... 1.3% 1.5% 1.3% 1.6%
-------- -------- -------- ---------
Gross Margin Percentage,
after interest expense..... 22.4% 24.9% 23.3% 24.4%
======== ======== ======== =========
We sell a variety of home types in various local communities, each
yielding a different gross margin. As a result, depending on the
geographic mix of deliveries and the mix of both communities and of home
types delivered, consolidated quarterly gross margin will fluctuate up or
down and may not be representative of the consolidated gross margin for the
year. The consolidated gross margin before interest expense for the three
and six months ended April 30, 2006 was 270 and 140 basis points lower than
the same period in 2005, respectively. Our gross margin after interest
expense for the three and six months ended April 30, 2006 was 250 and 110
basis points less than the same period last year, respectively. These
decreases are attributed to more prevalent use of incentives and increases
in land development and other costs.
Homebuilding selling, general, and administrative expenses as a
percentage of homebuilding revenues increased to 10.3% for the three months
ended April 30, 2006, compared to 9.0% for the three months ended April 30,
2005 and increased to 10.5% for the six months ended April 30, 2006,
compared to 9.2% for the six months ended April 30, 2006. Such expenses
increased $45.1 million for the three months ended April 30, 2006 and
increased $83.8 million for the six months ended April 30, 2006 compared to
the same period last year. Included in these expenses are increased
advertising costs associated with new community openings and more active
selling communities in total, a reaction to slower market conditions, and
higher costs due to the acquisitions of Cambridge Homes, First Home
Builders of Florida, Oster Homes and to a lesser extent CraftBuilt Homes in
the last 13 months. The dollar and percentage increases were in line with
our growth goals as we increase selling, general and administrative costs
associated with the expected increase in the number of active selling
communities in all of our regions.
Land Sales and Other Revenues:
Land sales and other revenues consist primarily of land and lot
sales. A breakout of land and lot sales is set forth below:
Three Months Ended Six Months Ended
April 30, April 30,
------------------ -------------------
2006 2005 2006 2005
-------- -------- -------- ---------
Land Sales........................ $ 70,238 $ 1,173 $ 80,793 $ 24,177
Cost of Sales, Excluding Interest. 51,769 1,811 59,634 15,981
-------- -------- -------- ---------
Land Sales Gross Margin,
Excluding Interest.............. 18,469 (638) 21,159 8,196
-------- -------- -------- --------
Interest Expense.................. 422 23 880 211
-------- -------- -------- --------
Land Sales Gross Margin,
Including Interest.............. $ 18,047 $ (661) $ 20,279 $ 7,985
======== ======== ======== ========
Land sales are incidental to our residential homebuilding
operations and are expected to continue in the future but may significantly
fluctuate up or down. Profits from land sales in the first half of the
year were significantly more than the first half of 2005, and for the full
fiscal year 2006, we expect pre-tax profit from land sales to be higher
than they were in fiscal 2005. The increase in land sale profits has to do
with a few larger developments that we have undertaken, where we have
strategically decided at the outset to sell some portion of the community
to one or more other builders. These are typically locations with higher
land costs so the sales proceeds are becoming slightly more significant.
Although we budget land sales, they are often dependent upon receiving
approvals and entitlements, the timing of which can be uncertain. As a
result, projecting the amount and timing of land sales is difficult.
Financial Services
Financial services consist primarily of originating mortgages from
our homebuyers and selling such mortgages in the secondary market, and
title insurance activities. For the three and six months ended April 30,
2006, financial services provided a $6.7 million and $12.4 million profit
before income taxes, compared to a profit of $4.8 million and $9.1 million
for the same period in 2005, respectively. The increase in pretax profit
for the three and six months ended April 30, 2006 is primarily due to
increased mortgage settlements and the addition of mortgage operations as a
result of our 2005 acquisitions.
Corporate General and Administrative
Corporate general and administrative expenses represent the
operations at our headquarters in Red Bank, New Jersey. Such expenses
include our executive offices, information services, human resources,
corporate accounting, training, treasury, process redesign, internal audit,
construction services, and administration of insurance, quality, and
safety. As a percentage of total revenues, such expenses increased to 1.7%
for the three months ended April 30, 2006 from 1.2% for the prior year's
three months and increased to 1.9% from the six months ended April 30, 2006
from 1.4% for the prior year's six months. Corporate general and
administrative expenses increased $11.0 and $22.8 million during the three
and six months ended April 30, 2006 respectively, compared to the same
period last year. The increase in corporate general and administrative
expenses is primarily attributed to increased depreciation expense for new
software systems, increased consulting services related to the new software
implementation, Sarbanes-Oxley compliance costs, increased compensation
with more headcount and higher profit based bonuses, as well as the
adoption of SFAS 123R resulting in the expensing of stock options.
While the sum of homebuilding, selling, general and administrative
expenses and corporate general and administrative expenses as a percentage
of total revenues for the second quarter is higher than the prior year's
second quarter percentage, we expect these expenses as a percentage of
revenues for the full fiscal year to be just slightly higher than to the
prior year.
Other Interest
Other interest increased $0.2 million and $0.8 million for the three
and six months ended April 30, 2006, compared to three and six months ended
April 30, 2005. This slight increase is primarily due to an increase in
interest incurred and expensed on nonrecourse land mortgages directly
related to property not yet under development.
Other Operations
Other operations consist primarily of miscellaneous residential
housing operations expenses, senior rental residential property operations,
earnout payments from homebuilding company acquisitions, minority interest
relating to consolidated joint ventures, and corporate owned life
insurance. The increase in other operations to $8.5 and $15.5 million for
the three and six months ended April 30, 2006 respectively, compared to
$1.3 and $3.2 million for the three and six months ended April 30, 2005,
respectively, is primarily due to increased earnout expenses related to
several recent acquisitions.
Intangible Amortization
We are amortizing our definite life intangibles over their expected
useful life, ranging from three to seven years. Intangible amortization
increased $3.0 million and $4.6 million for the three and six months ended
April 30, 2006, when compared to the same period last year. This increase
was the result of the amortization expense related to the acquisition of
Cambridge Homes in March 2005, Oster Homes in August 2005, First Home
Builders of Florida in August 2005 and CraftBuilt Homes in April 2006,
offset by reduced amortization on older acquisitions.
Recent Accounting Pronouncements
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections". This statement, which replaces APB Opinion No. 20,
"Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements", changes the requirements for the accounting
for and reporting of a change in accounting principle. The statement
requires retrospective application of changes in accounting principle to
prior periods' financial statements unless it is impracticable to determine
the period-specific effects or the cumulative effect of the change. SFAS
No. 154 is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. The adoption of SFAS
No. 154 is not expected to have a material impact on our consolidated
financial position, results of operations or cash flows.
In June 2005, the Emerging Issues Task Force ("EITF") released Issue
No. 04-5 "Determining Whether a General Partner, or the General Partners as
a Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights" ("EITF 04-5"). EITF 04-5 creates a framework
for evaluating whether a general partner or a group of general partners
controls a limited partnership and therefore should consolidate the
partnership. EITF 04-5 states that the presumption of general partner
control would be overcome only when the limited partners have certain
specific rights as outlined in EITF 04-5. EITF 04-5 is effective
immediately for all newly formed limited partnerships and for existing
limited partnership agreements that are modified. For general partners in
all other limited partnerships, EITF 04-5 is effective no later than the
beginning of the first reporting period in fiscal years beginning after
December 15, 2005. Implementation of EITF 04-5 is not expected to have a
material impact on the Company's results of operations or financial
position.
Total Taxes
Total taxes as a percentage of income before taxes decreased for the
three months ended April 30, 2006 to 36.2% from 39.2% for the three months
ended April 30, 2005, and for the six months ended April 30, 2006 to 37.0%
from 38.8% for the six months ended April 30, 2005. This decrease is
primarily due to the benefit of the tax deduction on qualified production
activities provided by the American Jobs Creation Act of 2004 and the
settlement of a prior year item that allowed the release of a reserve.
Deferred federal and state income tax assets primarily represent the
deferred tax benefits arising from temporary differences between book and
tax income which will be recognized in future years as an offset against
future taxable income. If, for some reason, the combination of future
years income (or loss) combined with the reversal of the timing differences
results in a loss, such losses can be carried back to prior years to
recover the deferred tax assets. As a result, management is confident such
deferred tax assets are recoverable regardless of future income.
Inflation
Inflation has a long-term effect, because increasing costs of land,
materials, and labor result in increasing sale prices of our homes. In
general, these price increases have been commensurate with the general rate
of inflation in our housing markets and have not had a significant adverse
effect on the sale of our homes. A significant risk faced by the housing
industry generally is that rising house construction costs, including land
and interest costs, will substantially outpace increases in the income of
potential purchasers. Recently in the more highly regulated markets that
have seen significant home price appreciation, customer affordability has
become a concern. Our broad product array insulates us to some extent, but
customer affordability of our homes is something we monitor closely.
Inflation has a lesser short-term effect, because we generally
negotiate fixed price contracts with many, but not all, of our
subcontractors and material suppliers for the construction of our homes.
These prices usually are applicable for a specified number of residential
buildings or for a time period of between three to twelve months.
Construction costs for residential buildings represent approximately 60% of
our homebuilding cost of sales.
Mergers and Acquisitions
On March 1, 2005, we acquired for cash the assets of Cambridge Homes,
a privately held Orlando homebuilder and provider of related financial
services, headquartered in Altamonte Springs, Florida. The acquisition
provides us with a presence in the greater Orlando market. Cambridge Homes
designs, markets and sells both single family homes and attached townhomes
and focuses on first-time, move-up and luxury homebuyers. Cambridge Homes
also provides mortgage financing, as well as title and settlement services
to its homebuyers. The Cambridge Homes acquisition was accounted for as a
purchase, with the results of its operations included in our consolidated
financial statements as of the date of the acquisition.
On March 2, 2005, we acquired the operations of Town & Country Homes,
a privately held homebuilder and land developer headquartered in Lombard,
Illinois, which occurred concurrently with our entering into a joint
venture agreement with affiliates of Blackstone Real Estate Advisors in New
York to own and develop Town & Country's existing residential communities.
The joint venture is being accounted for under the equity method. Town &
Country Homes' operations beyond the existing owned and optioned
communities, as of the acquisition date, are wholly owned and included in
our consolidated financial statements.
The Town & Country acquisition provides us with a strong initial
position in the greater Chicago market, and expands our operations into the
Florida markets of West Palm Beach, Boca Raton and Fort Lauderdale and
bolsters our current presence in Minneapolis/St. Paul. Town & Country
designs, markets and sells a diversified product portfolio in each of its
markets, including single family homes and attached townhomes, as well as
mid-rise condominiums in Florida. Town & Country serves a broad customer
base including first-time, move-up and luxury homebuyers.
On August 3, 2005, we acquired substantially all of the homebuilding
assets of Oster Homes, a privately held Ohio homebuilder, headquartered in
Lorain, Ohio. The acquisition provides Hovnanian with a complementary
presence to its Ohio "build-on-your-own-lot" homebuilding operations.
Oster Homes builds in Lorain County in Northeast Ohio, just west of
Cleveland. Oster Homes designs, markets and sells single family homes,
with a focus on first-time and move-up homebuyers. Additionally, Oster
Homes utilizes a design center to market extensive pre-prices, options and
upgrades.
On August 8, 2005, we acquired substantially all of the assets of
First Home Builders of Florida, a privately held homebuilder and provider
of related financial services headquartered in Cape Coral, Florida. First
Home Builders is a leading builder in Western Florida and ranked first in
the greater Fort Myers-Cape Coral market. First Home Builders of Florida
designs, markets and sells single family homes, with a focus on the first-
time home buying segment. The company also provides mortgage financing,
title and settlement services to its homebuyers.
Both the First Home Builders of Florida and the Oster Homes
acquisitions were accounted for as purchases with the results of their
operations included in our consolidated financial statements as of the
dates of the acquisitions.
On April 17, 2006, we acquired for cash the assets of CraftBuilt
Homes, a privately held homebuilder headquartered in Bluffton, South
Carolina. The acquisition expands our operations into the coastal markets
of South Carolina and Georgia. CraftBuilt Homes designs, markets and sells
single family detached homes. Due to its close proximity to Hilton Head,
CraftBuilt Homes focuses on first-time, move-up, empty-nester and retiree
homebuyers. This acquisition is being accounted for as a purchase with the
results of its operations included in our consolidated financial statements
as of the date of the acquisition.
All fiscal 2006 and 2005 acquisitions provide for other payments to be
made, generally dependant upon achievement of certain future operating and
return objectives.
Transactions with Related Parties
In December 2005, we entered into an agreement to purchase land in
New Jersey from an entity that is owned by family relatives of our Chairman
of the Board and our Chief Executive Officer at a base price of $25
million. The land will be acquired in four phases over a period of 30
months from the date of acquisition of the first phase. The purchase
prices for phases two through four are subject to an increase in the
purchase price for the phase of not less than 6% per annum and not more
than 8% per annum from the date of the closing of the first phase based on
an identified prime rate. As of the end of the second quarter of 2006, no
land has been acquired. A deposit in the amount of $500,000, however, has
been made by the Company. Neither the Company nor the Chairman of the
Board or the Chief Executive Officer has a financial interest in the
relatives' company from whom the land will be purchased.
During the second quarter of 2006, an existing lease on a building
occupied by one of our companies in the Southeast Region was amended. The
lessor is a company, whom at the time of the transaction, was owned partly
by Geaton A. Decesaris, Jr., formerly a member of the Company's Board of
Directors. The amendment provided for an increase in the square footage of
the lease space, an increased security deposit related to the square
footage increase and an increase in the lease term. In total the lease is
for 39,637 square feet at $18.86 per square foot per year, with a total
security deposit of $34,511.
Pursuant to the Board of Director requirements, prior to these
agreements being finalized, an independent appraisal of the transaction
was performed. Upon review of the appraisal by the independent members of
the Board of Directors the transactions were approved.
Safe Harbor Statement
All statements in this Form 10-Q/A that are not historical facts
should be considered as "Forward-Looking Statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such statements
involve known and unknown risks, uncertainties and other factors that may
cause actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. Although we
believe that our plans, intentions and expectations reflected in, or
suggested by such forward-looking statements are reasonable, we can give no
assurance that such plans, intentions, or expectations will be achieved.
Such risks, uncertainties and other factors include, but are not limited
to:
. Changes in general and local economic and business conditions;
. Adverse weather conditions and natural disasters;
. Changes in market conditions;
. Changes in home prices and sales activity in the markets where the
Company builds homes;
. Government regulation, including regulations concerning
development of land, the home building, sales and customer
financing processes, and the environment;
. Fluctuations in interest rates and the availability of mortgage
financing;
. Shortages in, and price fluctuations of, raw materials and labor;
. The availability and cost of suitable land and improved lots;
. Levels of competition;
. Availability of financing to the Company;
. Utility shortages and outages or rate fluctuations; and
. Geopolitical risks, terrorist acts and other acts of war.
Certain risks, uncertainties, and other factors are described in
detail in Item 1 and 2 "Business and Properties" in our Form 10-K/A for the
year ended October 31, 2005.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk facing us is interest rate risk on our long-
term debt. In connection with our mortgage operations, mortgage loans held
for sale and the associated mortgage warehouse line of credit are subject to
interest rate risk; however, such obligations reprice frequently and are
short-term in duration. In addition, we hedge the interest rate risk on
mortgage loans by obtaining forward commitments from private investors.
Accordingly, the risk from mortgage loans is not material. We do not hedge
interest rate risk other than on mortgage loans using financial instruments.
We are also subject to foreign currency risk but this risk is not material.
The following table sets forth as of April 30, 2006, our long term debt
obligations, principal cash flows by scheduled maturity, weighted average
interest rates and estimated fair market value ("FMV").
As of April 30, 2006
-------------------------------------------
Expected Maturity Date
FMV @
2006 2007 2008 2009 2010 Thereafter Total 4/30/06
------ ------- ------- -------- -------- ---------- ---------- ----------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate.... $38,117 $140,927 $ 722 $ 773 $100,827 $1,586,018 $1,867,384 $1,803,680
Average
interest rate 6.17% 10.48% 6.70% 6.72% 6.01% 7.04% 7.23% -
(1) Does not include bonds collateralized by mortgages receivable or the
warehouse line of credit.
In addition, we have reassessed the market risk for our variable rate
debt, which is based on either (1) a LIBOR-based rate for a one, two, three,
or six month interest period as selected by us plus a margin or (2) a base rate
determined by reference to the higher of (a) a PNC Bank, National Association's
prime rate and (b) the federal funds rate plus 1/2%. We believe that a one
percent increase in this rate would have an approximate $0.7 million increase
in interest expense for the six months ended April 30, 2006, assuming an
average of $137.5 million of variable rate debt outstandingfrom November 1,
2005 to April 30, 2006.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the
Company's reports under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosures. Any
controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control
objectives. The Company's management, with the participation of the
Company's chief executive officer and chief financial officer, has
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of April 30, 2006. Based upon that
evaluation and subject to the foregoing, the Company's chief executive
officer and chief financial officer concluded that the design and
operation of the Company's disclosure controls and procedures are
effective to accomplish their objectives.
In addition, there was no change in the Company's internal control over
financial reporting that occurred during the quarter ended April 30, 2006
that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
As described in Note 3 to our condensed consolidated financial
statements, we have restated Note 3 to the condensed consolidated
financial statements included in the Report to revise our segment
disclosures to show six reportable homebuilding segments, rather than
treating our homebuilding business as a single national, reportable
segment. The treatment of our homebuilding business as a single, national
reportable segment was in accordance with the practice followed by
substantially all the large, geographically diverse homebuilders that file
reports with the SEC. The restatement represents a change in judgment as
to the application of Statement of Financial Accounting Standards No. 131
("SFAS 131"). The restatement has no impact on our previously reported
consolidated financial position, results of operations or cash flows for
any of the periods presented. Our Company management, with the
participation of the Company's chief executive officer and chief financial
officer, has re-evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures as of April 30, 2006, to
determine whether the restatement changes their prior conclusion. Subject
to the foregoing, and based upon that re-evaluation, the Company's chief
executive officer and chief financial officer have determined that it does
not change their conclusion that, as of April 30, 2006, the design and
operation of the Company's disclosure controls and procedures were
effective to accomplish their objectives.
We had previously included in the description of our business and in
our Management's Discussion and Analysis of Financial Condition and
Results of Operations some information, which is not subject to SFAS 131,
on the basis of purely geographic regions, without taking account of other
factors that affect what are appropriate reportable segments under SFAS
131. We are now presenting that information on the basis of the same
regions we are using to report segment information, so that all regional
information in our reports will be presented on the basis of the same
regions. However, we are doing that for the purpose of consistency, not
because our management has concluded that presenting information on the
prior basis was not appropriate. Therefore, our management does not
believe the fact that we have changed the basis on which we are presenting
information that is not subject to SFAS 131 indicates that our disclosure
controls and procedures were not effective to ensure that the information
required to be disclosed in the Company's reports under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms.
PART II. Other Information
Item 1. Legal Proceedings
We are involved in litigation arising in the ordinary course of
business, none of which is expected to have a material adverse effect on
our financial position or results of operations and we are subject to
extensive and complex regulations that affect the development and home
building, sales and customer financing processes, including zoning,
density, building standards and mortgage financing. These regulations
often provide broad discretion to the administering governmental
authorities. This can delay or increase the cost of development or
homebuilding.
We also are subject to a variety of local, state, federal and
foreign laws and regulations concerning protection of health and the
environment. The particular environmental laws which apply to any given
community vary greatly according to the community site, the site's
environmental conditions and the present and former uses of the site.
These environmental laws may result in delays, may cause us to incur
substantial compliance, remediation, and/or other costs, and can prohibit
or severely restrict development and homebuilding activity in certain
environmentally sensitive regions or areas.
In March 2005, we received two requests for information pursuant to
Section 308 of the Clean Water Act from Region 3 of the Environmental
Protection Agency (the "EPA"). These requests sought information
concerning storm water discharge practices in connection with completed,
ongoing and planned homebuilding projects by subsidiaries in the states
and district that comprise EPA Region 3. We also received a notice of
violations for one project in Pennsylvania and requests for sampling plan
implementation in two projects in Pennsylvania. The amount requested by
the EPA to settle the asserted violations at the one project was not
material. We provided the EPA with information in response to its
requests. We have since been advised by the Department of Justice ("DOJ")
that it will be involved in the review of our storm water discharge
practices. We cannot predict the outcome of the review of these practices
or estimate the costs that may be involved in resolving the matter. To
the extent that the EPA or the DOJ asserts violations of regulatory
requirements and request injunctive relief or penalties, we will defend
and attempt to resolve such asserted violations.
In addition, in November 2005, we received two notices from the
California Regional Water Quality Control Board alleging violations of
certain storm water discharge rules and assessing an administrative civil
liability of $0.2 million and $0.3 million. We do not consider these
assessments to be material and are considering our response to the
notices.
It can be anticipated that increasingly stringent requirements will
be imposed on developers and homebuilders in the future. Although we
cannot predict the effect of these requirements, they could result in
time-consuming and expensive compliance programs and in substantial
expenditures, which could cause delays and increase our cost of
operations. In addition, the continued effectiveness of permits already
granted or approvals already obtained is dependent upon many factors, some
of which are beyond our control, such as changes in policies, rules and
regulations and their interpretations and application.
Our sales and customer financing processes are subject to the
jurisdiction of the U. S. Department of Housing and Urban Development
("HUD"). In connection with the Real Estate Settlement Procedures Act,
HUD recently inquired about our process of referring business to our
affiliated mortgage company and has separately requested documents related
to customer financing. We have responded to HUD's inquiries. In
connection with these inquiries, the Inspector General of HUD has
recommended to the Secretary of HUD that we indemnify HUD for any losses
that it may sustain in connection with nine loans that it alleges were
improperly underwritten. We cannot predict the outcome of HUD's inquiry
or estimate the costs that may be involved in resolving the matter. We do
not expect the ultimate cost to be material.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
This table provides information with respect to purchases of shares
of our Class A Common Stock made by or on behalf of Hovnanian Enterprises
or any affiliated purchaser during the second fiscal quarter of 2006.
Issuer Purchases of Equity Securities (1)
Total Number
Of Shares Maximum Number of
Purchased as Shares That May
Part of Publicly Yet Be Purchased
Total Number of Average Price Announced Plans Under The Plans
Period Shares Purchased Paid Per Share or Programs or Programs
---------------- ---------------- -------------- ---------------- -----------------
February 1, 2006
Through
February 28, 2006 150,000 $45.60 150,000 1,187,668
-------------------------------------------------------------------------------------
March 1, 2006
Through
March 31, 2006 - - - 1,187,668
-------------------------------------------------------------------------------------
April 1, 2006
Through
April 30, 2006 - - - 1,187,668
-------------------------------------------------------------------------------------
Total 150,000 $45.60 150,000
================ ============== ================
(1) In July 2001, our Board of Directors authorized a stock repurchase
program to purchase up to 4 million shares of Class A Common Stock.
No shares of our Class B Common Stock or of our 7.625% Series A Preferred
Stock were purchased by or on behalf of Hovnanian Enterprises or any
affiliated purchaser during the second fiscal quarter of 2006.
Item 4. Submission of Matters to a Vote of Security Holders.
We held our annual stockholders meeting on March 8, 2006 at 10:30 a.m.
at Chelsea Meeting Room of the Millenium Hilton Hotel, 55 Church Street,
New York, New York. The following matters were voted at the meeting:
(1) Election of all Directors to hold office until the next Annual
Meeting of Stockholders. There were no broker non-votes. The
elected Directors were:
Class A Class B
Votes For Votes Withheld Votes For Votes Withheld
---------- -------------- ----------- --------------
Kevork S. Hovnanian 27,745,399 16,530,111 141,491,192 24,750
Ara K. Hovnanian 27,701,823 16,573,687 141,491,192 24,750
Robert B. Coutts 40,012,069 4,263,441 141,512,392 3,550
Geaton A. DeCesaris, Jr. 27,704,267 16,571,243 141,491,192 24,750
Edward A. Kangas 39,933,293 4,342,217 141,514,992 950
Joseph A. Marengi 40,012,680 4,262,830 141,512,392 3,550
John J. Robbins 39,943,218 4,332,292 141,514,992 950
J. Larry Sorsby 25,847,371 18,428,139 141,491,192 24,750
Stephen D. Weinroth 35,792,288 8,483,222 141,514,992 950
(2) Ratification of selection of Ernst & Young, LLP as independent
registered public accountants for fiscal year ending October 31,
2006. There were no broker non-votes.
Class A Class B
------------ ------------
.. Votes For 43,864,854 141,513,742
.. Votes Against 381,096 2,200
.. Abstain 29,559 0
Item 6. Exhibits
Exhibit 3(a) Certificate of Incorporation of
the Registrant. (1)
Exhibit 3(b) Certificate of Amendment of
Certificate of Incorporation of the
Registrant. (2)
Exhibit 3(c) Certificate of Amendment of
Certificate of Incorporation of the Registrant. (3)
Exhibit 3(d) Restated Bylaws of the Registrant. (4)
Exhibit 4(a) Indenture, dated as of November 3, 2003,
among K. Hovnanian Enterprises, Inc., Hovnanian
Enterprises, Inc. and Wachovia Bank, National
Association, as Trustee. (5)
Exhibit 4(b) First Supplemental Indenture, dated
as of November 3, 2003, among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc., the
other Guarantors named therein and Wachovia Bank,
National Association, as Trustee. (6)
Exhibit 4(c) Second Supplemental Indenture, dated
as of March 18, 2004, among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc., the
other Guarantors named therein and Wachovia Bank,
National Association, as Trustee. (7)
Exhibit 4(d) Third Supplemental Indenture, dated
as of July 15, 2004, among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc., the
other Guarantors named therein and Wachovia Bank,
National Association, as Trustee. (7)
Exhibit 4(e) Fourth Supplemental Indenture, dated
as of April 19, 2005, among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc., the
other Guarantors named therein and Wachovia Bank,
National Association, as Trustee. (7)
Exhibit 4(f) Fifth Supplemental Indenture, dated
as of September 6, 2005, among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc., the
other Guarantors named therein and Wachovia Bank,
National Association, as Trustee. (7)
Exhibit 4(g) Sixth Supplemental Indenture, dated
as of February 27, 2006, among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc., the
other Guarantors named therein and Wachovia Bank,
National Association, as Trustee, relating to the
7 1/2% Senior Notes due 2016 (including form of 7 1/2%
Senior Notes due 2016). (8)
Exhibit 4(h) Certificate of Designations, Powers,
Preferences and Rights of the 7.625% Series A Preferred
Stock of Hovnanian Enterprises, Inc., dated
July 12, 2005.(9)
Exhibit 10(a) Sixth Amended and Restated Credit Agreement
dated May 31, 2006. (10)
Exhibit 10(b) Amended and Restated Guaranty and Suretyship
Agreement, dated May 31, 2006. (10)
Exhibit 31(a) Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer.
Exhibit 31(b) Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer.
Exhibit 32(a) Section 1350 Certification of Chief
Executive Officer.
Exhibit 32(b) Section 1350 Certification of Chief
Financial Officer.
(1) Incorporated by reference to Exhibits to
Registration Statement (No. 2-85198) on
Form S-1 of the Registrant.
(2) Incorporated by reference to Exhibit 4.2 to Registration
Statement (No. 333-106761) on Form S-3
of the Registrant.
(3) Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q of the Registrant for
the quarter ended January 31, 2004.
(4) Incorporated by reference to Exhibit 3.2 to
Registration Statement (No. 1-08551) on
Form 8-A of the Registrant.
(5) Incorporated by reference to Exhibits to
Registration Statement (No. 333-125738) on Form S-3
of the Registrant.
(6) Incorporated by reference to Exhibits to
Current Report of the Registrant on Form 8-K on
November 7, 2003.
(7) Incorporated by reference to Exhibits to Registration
Statement (No. 333-131982) on Form S-3 of the
Registrant.
(8) Incorporated by reference to Exhibits to Current
Report of the Registrant on Form 8-K filed on
February 27, 2006.
(9) Incorporated by reference to Exhibits to Current
Report on Form 8-K of the Registrant, filed on July 13,
2005.
(10) Incorporated by reference to Exhibits to Current Report
on Form 8-K of the Registrant, filed on June 6, 2006.
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: December 20, 2006 /S/J. LARRY SORSBY
J. Larry Sorsby,
Executive Vice President and
Chief Financial Officer