UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10Q [ X ] Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For quarterly period ended JANUARY 31, 2000 or [ ] Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 Commission file number 1-8551 Hovnanian Enterprises, Inc. (Exact name of registrant as specified in its charter) Delaware 22-1851059 (State or other jurisdiction or (I.R.S. Employer incorporation or organization) Identification No.) l0 Highway 35, P.O. Box 500, Red Bank, N. J. 07701 (Address of principal executive offices) 732-747-7800 (Registrant's telephone number, including area code) Same (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Sections l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 14,277,631 Class A Common Shares and 7,641,446 Class B Common Shares were outstanding as of March 3, 2000. HOVNANIAN ENTERPRISES, INC. FORM 10Q INDEX PAGE NUMBER PART I. Financial Information Item l. Consolidated Financial Statements: Consolidated Balance Sheets at January 31, 2000 (unaudited) and October 31, 1999 3 Consolidated Statements of Income for the three months ended January 31, 2000 and 1999 (unaudited) 5 Consolidated Statements of Stockholders' Equity for the three months ended January 31, 2000 (unaudited) 6 Consolidated Statements of Cash Flows for the three months ended January 31, 2000 and 1999 (unaudited) 7 Notes to Consolidated Financial Statements (unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II. Other Information Item 6(a). Exhibit 10(a) - Second Amended and Restated Credit Agreement Item 6(b). Exhibit 27 - Financial Data Schedules Item 6(b). No reports on Form 8K have been filed during the quarter for which this report is filed. Signatures 21 <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) <CAPTION> (unaudited) January 31, October 31, ASSETS 2000 1999 ----------- ----------- <S> <C> <C> Homebuilding: Cash and cash equivalents....................... $ 9,740 $ 17,163 ----------- ----------- Inventories - At the lower of cost or fair value: Sold and unsold homes and lots under development.................................. 501,606 475,196 Land and land options held for future development or sale......................... 59,790 52,034 ----------- ----------- Total Inventories........................... 561,396 527,230 ----------- ----------- Receivables, deposits, and notes................ 38,494 30,675 ----------- ----------- Property, plant, and equipment - net............ 34,081 26,500 ----------- ----------- Senior Residential rental properties - net...... 10,565 10,650 ----------- ----------- Prepaid expenses and other assets............... 61,760 56,753 ----------- ----------- Total Homebuilding.......................... 716,036 668,971 ----------- ----------- Financial Services: Cash and cash equivalents....................... 1,937 2,202 Mortgage loans held for sale.................... 22,365 33,158 Other assets.................................... 1,681 1,563 ----------- ----------- Total Financial Services.................... 25,983 36,923 ----------- ----------- Collateralized Mortgage Financing: Collateral for bonds payable.................... 4,743 5,006 Other assets.................................... 237 238 ----------- ----------- Total Collateralized Mortgage Financing..... 4,980 5,244 ----------- ----------- Income Taxes Receivable - Including deferred tax benefits........................................ 4,782 1,723 ----------- ----------- Total Assets...................................... $751,781 $712,861 =========== =========== See notes to consolidated financial statements. </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) <CAPTION> (unaudited) January 31, October 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999 ----------- ----------- <S> <C> <C> Homebuilding: Nonrecourse land mortgages........................ $ 8,986 $ 6,407 Accounts payable and other liabilities............ 72,906 73,989 Customers' deposits............................... 30,856 25,647 Nonrecourse mortgages secured by operating properties...................................... 3,644 3,662 ----------- ----------- Total Homebuilding............................ 116,392 109,705 ----------- ----------- Financial Services: Accounts payable and other liabilities............ 1,156 1,218 Mortgage warehouse line of credit................. 17,447 30,034 ----------- ----------- Total Financial Services...................... 18,603 31,252 ----------- ---------- Collateralized Mortgage Financing: Bonds collateralized by mortgages receivable...... 3,489 3,699 ----------- ----------- Total Collateralized Mortgage Financing....... 3,489 3,699 ----------- ----------- Notes Payable: Revolving credit agreement........................ 118,475 70,125 Senior notes...................................... 150,000 150,000 Subordinated notes................................ 100,000 100,000 Accrued interest.................................. 6,239 11,654 ----------- ----------- Total Notes Payable........................... 374,714 331,779 ----------- ----------- Total Liabilities............................. 513,198 476,435 ----------- ----------- Stockholders' Equity: Preferred Stock,$.01 par value-authorized 100,000 shares; none issued Common Stock,Class A,$.01 par value-authorized 87,000,000 shares; issued 17,226,896 shares (including 2,910,274 shares in January 2000 and 2,710,274 shares in October 1999 held in Treasury) .................................. 172 172 Common Stock,Class B,$.01 par value-authorized 13,000,000 shares; issued 7,988,629 shares (including 345,874 shares held in Treasury)..... 79 79 Paid in Capital................................... 45,737 45,856 Retained Earnings................................. 216,709 213,257 Treasury Stock - at cost.......................... (24,114) (22,938) ----------- ----------- Total Stockholders' Equity.................... 238,583 236,426 ----------- ----------- Total Liabilities and Stockholders' Equity.......... $751,781 $712,861 =========== =========== See notes to consolidated financial statements. </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Per Share Data) (unaudited) <CAPTION> Three Months Ended January 31, ------------------- 2000 1999 --------- --------- <S> <C> <C> Revenues: Homebuilding: Sale of homes...................... $250,118 $194,885 Land sales and other revenues...... 2,065 2,441 --------- --------- Total Homebuilding............... 252,183 197,326 Financial Services................... 4,851 5,658 Collateralized Mortgage Financing.... 115 136 --------- --------- Total Revenues................... 257,149 203,120 --------- --------- Expenses: Homebuilding: Cost of sales...................... 205,503 155,587 Selling, general and administrative 24,928 17,330 --------- --------- Total Homebuilding............... 230,431 172,917 --------- --------- Financial Services................... 5,305 5,242 --------- --------- Collateralized Mortgage Financing.... 98 131 --------- --------- Corporate General and Administration. 6,874 6,435 --------- --------- Interest............................. 7,868 7,042 --------- --------- Other Operations..................... 1,797 1,175 --------- --------- Total Expenses................... 252,373 192,942 --------- --------- Income Before Income Taxes............. 4,776 10,178 --------- --------- State and Federal Income Taxes: State................................ 155 1,488 Federal.............................. 1,169 2,562 --------- --------- Total Taxes........................ 1,324 4,050 --------- --------- Net Income............................. $ 3,452 $ 6,128 ========= ========= Per Share Data: Basic: Income per common share.............. $ 0.15 $ 0.28 Weighted average number of common shares outstanding................. 22,327 21,512 Assuming dilution: Income per common share.............. $ 0.15 $ 0.28 Weighted average number of common shares outstanding................. 22,413 21,725 See notes to consolidated financial statements. </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars In Thousands) <CAPTION> A Common Stock B Common Stock ------------------- ------------------- Shares Shares Issued and Issued and Paid-In Retained Treasury Outstanding Amount Outstanding Amount Capital Earnings Stock Total ----------- ------ ----------- ------ ------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance, October 31, 1999. 14,508,168 $172 7,651,209 $79 $45,856 $213,257 ($22,938) $236,426 Acquisitions............. (119) (119) Conversion of Class B to Class A Common Stock.... 8,454 (8,454) Treasury stock purchases.. (200,000) (1,176) (1,176) Net Income................ 3,452 3,452 ----------- ------ ----------- ------ ------- -------- -------- -------- Balance, January 31, 2000 (unaudited)............. 14,316,622 $172 7,642,755 $79 $45,737 $216,709 ($24,114) $238,583 =========== ====== =========== ====== ======= ======== ======== ======== See notes to consolidated financial statements. </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (unaudited) <CAPTION> Three Months Ended January 31, --------------------- 2000 1999 ---------- ---------- <S> <C> <C> Cash Flows From Operating Activities: Net Income (Loss)................................... $ 3,452 $ 6,128 Adjustments to reconcile net income to net cash Provided by (used in) operating activities: Depreciation.................................... 1,591 1,200 (Gain) loss on sale and retirement of property and assets.................................... (209) 393 Deferred income taxes........................... (281) 2,617 Decrease (increase) in assets: Mortgage notes receivable..................... 11,116 9,359 Receivables, prepaids and other assets........ (13,091) (12,964) Inventories................................... (34,275) (25,345) Increase (decrease) in liabilities: State and Federal income taxes................ (2,778) (1,055) Customers' deposits........................... 5,395 (2,199) Interest and other accrued liabilities........ (5,833) (3,689) Post development completion costs............. 993 (608) Accounts payable.............................. (1,907) (3,078) ---------- ---------- Net cash (used in) provided by operating activities................................ (35,827) (29,241) ---------- ---------- Cash Flows From Investing Activities: Net proceeds from sale of property and assets....... 318 18,210 Purchase of property, equipment and other fixed assets...................................... (8,997) (1,576) Acquisition of homebuilding companies............... (119) Investment in and advances to unconsolidated affiliates........................................ (1) (4) ---------- ---------- Net cash (used in) provided by investing activities................................ (8,799) 16,630 ---------- ---------- Cash Flows From Financing Activities: Proceeds from mortgages and notes................... 336,378 179,965 Principal payments on mortgages and notes........... (298,263) (167,040) Purchase of treasury stock.......................... (1,176) (1,525) Proceeds from sale of stock......................... 29 ---------- ---------- Net cash provided by financing activities................................ 36,939 11,429 ---------- ---------- Net (Decrease) In Cash and Cash Equivalents........... (7,687) (1,182) Cash and Cash Equivalents and Balance, Beginning Of Period........................................... 19,365 15,554 ---------- ---------- Cash and Cash Equivalent and Balance, End Of Period... $ 11,678 $ 14,372 ========== ========== See notes to consolidated financial statements. </TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED 1. The consolidated financial statements, except for the October 31, 1999 consolidated balance sheets, have been prepared without audit and should be read in conjunction with the financial statements and notes thereto included in our 1999 Annual Report on Form 10-K. In the opinion of management, all adjustments for interim periods presented have been made, which include only normal recurring accruals and deferrals necessary for a fair presentation of consolidated financial position, results of operations, and changes in cash flows. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and these differences could have a significant impact on the financial statements. Results for the interim periods are not necessarily indicative of the results which might be expected for a full year. 2. Interest costs incurred, expensed and capitalized were: Three Months Ended January 31, ------------------- 2000 1999 -------- -------- (Dollars in Thousands) Interest Capitalized at Beginning of Period......... $ 21,966 $ 25,545 Plus Interest Incurred(1)(3).. 8,023 5,055 Less Interest Expensed(3)..... 7,868 7,042 Less Sale of Assets........... 1,469 -------- -------- Interest Capitalized at End of Period(2)(3)......... $ 22,121 $ 22,089 ======== ======== (1) Data does not include interest incurred by our mortgage and finance subsidiaries. (2) Data does not include a reduction for depreciation. (3) Represents acquisition interest for construction, land and development costs which is charged to interest expense when homes are delivered and when land is not under active development. 3. Homebuilding accumulated depreciation at January 31, 2000 and October 31, 1999 amounted to $20,954,000 and $19,550,000, respectively. Senior residential rental property accumulated depreciation at January 31, 2000 and October 31, 1999 amounted to $2,310,000 and $2,211,000, respectively. 4. We are involved from time to time in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on us. As of January 31, 2000 and 1999, respectively, we are obligated under various performance letters of credit amounting to $4,794,000 and $6,868,000. 5. Our credit facility has been amended as of February 22, 2000. Pursuant to the Amendment, our credit line increased to $375,000,000 and is extended through July 2003. Interest is payable monthly and at various rates of either the prime rate plus .25% or Libor plus 1.70%. 6. Hovnanian Enterprises, Inc., the parent company (the "Parent" or "Company") is the issuer of publicly traded common stock. One of its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc., (the "Subsidiary Issuer") was the issuer of certain Senior Notes on May 4, 1999. The Subsidiary Issuer acts as a finance and management entity that as of January 31, 2000 had issued and outstanding approximately $100,000,000 subordinated notes, $150,000,000 senior notes and a revolving credit agreement with an outstanding balance of $118,475,000. The subordinated notes, senior notes and the revolving credit agreement are fully and unconditionally guaranteed by the Parent. Each of the wholly owned subsidiaries of the Parent (collectively the "Guarantor Subsidiaries"), with the exception of four subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, a mortgage lending subsidiary, a subsidiary holding and licensing the "K. Hovnanian" trade name and a subsidiary engaged in homebuilding activity in Poland (collectively the "Non-guarantor Subsidiaries"), have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under the senior notes and the revolving credit agreement of the Subsidiary Issuer. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries we have included the accompanying consolidated condensed financial statements based on our understanding of the Securities and Exchange Commission's interpretation and application of Rule 3-10 of the Securities and Exchange Commission's Regulations S-X and Staff Accounting Bulletin 53. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate financial statement and other disclosures concerning the Guarantor Subsidiaries are not presented. The following consolidating condensed financial information present the results of operations, financial position and cash flows of (i) the Parent (ii) the Subsidiary Issuer (iii) the Guarantor Subsidiaries of the Parent (iv) the Non-guarantor Subsidiaries of the Parent and (v) the eliminations to arrive at the information for Hovnanian Enterprises, Inc. on a consolidated basis. <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED BALANCE SHEET JANUARY 31, 2000 (Thousands of Dollars) <CAPTION> Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> ASSETS Homebuilding.......................$ 92 $ 49,631 $ 661,626 $ 4,687 $ $ 716,036 Financial Services and CMO......... 884 30,079 30,963 Income Taxes (Payables)Receivables. (20,672) (416) 28,251 (2,381) 4,782 Investments in and amounts due to and from consolidated subsidiaries..................... 259,163 330,803 (394,924) 5,135 (200,177) -------- ---------- ---------- ------------ ---------- ---------- Total Assets.......................$238,583 $ 380,018 $ 295,837 $ 37,520 $(200,177) $ 751,781 ======== ========== ========== ============ ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Homebuilding.......................$ $ 6,183 $ 109,572 $ 637 $ 116,392 Financial Services and CMO......... 371 21,721 22,092 Notes Payable...................... 374,376 338 374,714 Stockholders' Equity............... 238,583 (541) 185,556 15,162 (200,177) 238,583 -------- ----------- ---------- ------------ ---------- ---------- Total Liabilities and Stockholders' Equity...........................$238,583 $ 380,018 $ 295,837 $ 37,520 $(200,177) $ 751,781 ======== ========== ========== ============ ========== ========== </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED BALANCE SHEET OCTOBER 31, 1999 (Thousands of Dollars) <CAPTION> Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> ASSETS Homebuilding.......................$ 53 $ 34,735 $ 630,074 $ 4,109 $ $ 668,971 Financial Services and CMO......... (4,807) 46,974 42,167 Income Taxes (Payables)Receivables. (4,303) (374) 8,562 (2,162) 1,723 Investments in and amounts due to and from consolidated subsidiaries..................... 240,676 304,811 (305,942) 2,252 (241,797) -------- ---------- ---------- ------------ ---------- ---------- Total Assets.......................$236,426 $ 339,172 $ 327,887 $ 51,173 $(241,797) $ 712,861 ======== ========== ========== ============ ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Homebuilding.......................$ $ 7,060 $ 102,282 $ 363 $ $ 109,705 Financial Services and CMO......... 495 34,456 34,951 Notes Payable...................... 331,491 288 331,779 Stockholders' Equity............... 236,426 621 224,822 16,354 (241,797) 236,426 -------- ---------- ---------- ------------ ---------- ---------- Total Liabilities and Stockholders' Equity...........................$236,426 $ 339,172 $ 327,887 $ 51,173 $(241,797) $ 712,861 ======== ========== ========== ============ ========== ========== </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS THREE MONTHS ENDED JANUARY 31, 2000 (Thousands of Dollars) <CAPTION> Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Revenues: Homebuilding.....................$ $ 154 $ 251,406 $ 2,092 $ (1,469) $ 252,183 Financial Services and CMO....... 1,750 3,216 4,966 Intercompany Charges............. 23,046 2,448 (25,494) Equity In Pretax Income of Consolidated Subsidiaries...... 4,776 (4,776) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ 4,776 23,200 255,604 5,308 (31,739) 257,149 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 23,058 241,375 454 (17,917) 246,970 Financial Services and CMO....... 1,374 4,188 (159) 5,403 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 23,058 242,749 4,642 (18,076) 252,373 ------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes......... 4,776 142 12,855 666 (13,663) 4,776 State and Federal Income Taxes..... 1,324 35 4,166 230 (4,431) 1,324 ------- ---------- ---------- ------------ ---------- ---------- Net Income.........................$ 3,452 $ 107 $ 8,689 $ 436 $ (9,232) $ 3,452 ======= ========== ========== ====================== ========== HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS THREE MONTHS ENDED JANUARY 31, 1999 (Thousands of Dollars) Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- Revenues: Homebuilding.....................$ $ 86 $ 196,558 $ 4,261 $ (3,579) $ 197,326 Financial Services and CMO....... 820 4,974 5,794 Intercompany Charges............. 20,896 649 (21,545) Equity In Pretax Income of Consolidated Subsidiaries...... 10,178 (10,178) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ 10,178 20,982 198,027 9,235 (35,302) 203,120 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 20,965 183,351 1,022 (17,769) 187,569 Financial Services and CMO....... 490 4,880 3 5,373 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 20,965 183,841 5,902 (17,766) 192,942 ------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes......... 10,178 17 14,186 3,333 (17,536) 10,178 State and Federal Income Taxes..... 4,050 5,621 1,445 (7,066) 4,050 ------- ---------- ---------- ------------ ---------- ---------- Net Income.........................$ 6,128 $ 17 $ 8,565 $ 1,888 $ (10,470) $ 6,128 ======= ========== ========== ============ ========== ========== </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS THREE MONTHS ENDED JANUARY 31, 2000 (Thousands of Dollars) <CAPTION> Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Cash Flows From Operating Activities: Net Income.........................$ 3,452 $ 107 $ 8,689 $ 436 $ (9,232) $ 3,452 Adjustments to reconcile net income to net cash provided by (used in) operating activities... 16,257 170 (80,276) 15,338 9,232 (39,279) -------- --------- ---------- ------------ ---------- ---------- Net Cash Provided By (Used In) Operating Activities........... 19,709 277 (71,587) 15,774 (35,827) Net Cash Provided by (Used In) Investing Activities............... (8,327) (470) (2) (8,799) Net Cash Provided By(Used In) Financing Activities............... (1,176) 48,350 2,552 (12,787) 36,939 Intercompany Investing and Financing Activities - Net..................... (18,487) (34,743) 33,067 (2,883) -------- --------- ---------- ------------ ---------- ---------- Net Increase (Decrease) In Cash and Cash Equivalents................... 46 5,557 (13,392) 102 (7,687) Cash and Cash Equivalent Balance, Beginning of Period................ 46 (5,395) 24,608 106 19,365 -------- --------- ---------- ------------ ---------- ---------- Cash and Cash Equivalent Balance, End of Period......................$ 92 $ 162 $ 11,216 $ 208 $ $ 11,678 ======== ========= ========== ============ ========== ========== HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS THREE MONTHS ENDED JANUARY 31, 1999 (Thousands of Dollars) Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ ---------- ---------- Cash Flows From Operating Activities: Net Income........................ $ 6,128 $ 17 $ 8,565 $ 1,888 $ (10,470) $ 6,128 Adjustments to reconcile net income to net cash provided by (used in) operating activities... (5,673) (1,604) (49,662) 11,100 10,470 (35,369) -------- --------- ---------- ------------ ---------- ---------- Net Cash Provided By (Used In) Operating Activities........... 455 (1,587) (41,097) 12,988 (29,241) Net Cash Provided by (Used In) Investing Activities............... (1,237) 17,909 (42) 16,630 Net Cash Provided By(Used In) Financing Activities............... (1,525) 24,225 (3,583) (7,688) 11,429 Intercompany Investing and Financing Activities - Net................... 1,806 (15,617) 18,507 (4,696) -------- --------- ---------- ------------ ---------- ---------- Net Increase (Decrease) In Cash and Cash Equivalents................... 736 5,784 (8,264) 562 (1,182) Cash and Cash Equivalent Balance, Beginning of Period................ 14 (9,660) 23,023 2,177 15,554 -------- --------- ---------- ------------ ---------- ---------- Cash and Cash Equivalent Balance, End of Period......................$ 750 $ (3,876) $ 14,759 $ 2,739 $ $ 14,372 ======== ========= ========== ============ ========== ========== </TABLE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY Our cash uses during the three months ended January 31, 2000 were for operating expenses, seasonal increases in housing inventories, construction, income taxes, interest, and the repurchase of common stock. We provided for our cash requirements from the revolving credit facility, housing and land sales, financial service fees, and other revenues. We believe that these sources of cash are sufficient to finance our working capital requirements and other needs. In December 1998 the Board of Directors increased the stock repurchase program to purchase up to 3 million shares of Class A Common Stock. This authorization expires on December 31, 2000. As of January 31, 2000, 2,564,400 shares were repurchased under this program of which 200,000 were purchased during the three months ended January 31, 2000. Our bank borrowings are made pursuant to a revolving credit agreement (the "Agreement") that provides a revolving credit line of up to $375,000,000 (the "Revolving Credit Facility") through July 2003. Interest is payable monthly and at various rates of either the prime rate plus .25% or Libor plus 1.70%. We believe that we will be able either to extend the Agreement beyond July 2003 or negotiate a replacement facility, but there can be no assurance of such extension or replacement facility. We are currently in compliance and intend to maintain compliance with its covenants under the Agreement. As of January 31, 2000, borrowings under the Agreement were $118,475,000. The subordinated indebtedness issued by us and outstanding as of January 31, 2000 was $100,000,000 9 3/4% Subordinated Notes due June 2005. The senior indebtedness issued by us and outstanding as of January 31, 2000 was $150,000,000 9 1/8% Senior Notes due May 2009. Our mortgage banking subsidiary borrows under a bank warehousing arrangement. Other finance subsidiaries formerly borrowed from a multi-builder owned financial corporation and a builder owned financial corporation to finance mortgage backed securities, but in fiscal 1988 decided to cease further borrowing from multi-builder and builder owned financial corporations. These non-recourse borrowings have been generally secured by mortgage loans originated by one of our subsidiaries. As of January 31, 2000, the aggregate principal amount of all such borrowings was $20,936,000. Total inventory increased $34,166,000 during the three months ended January 31, 2000. The increase was primarily due to significant anticipated openings of a number of communities in the Northeast Region and California and our expansion in the Maryland market. Substantially all homes under construction or completed and included in inventory at January 31, 2000 are expected to be closed during the next twelve months. Most inventory completed or under development is financed through our line of credit and subordinated indebtedness. The following table summarizes housing lots in our active selling communities under development (including Poland): (1) (2) Homes Contracted Remaining Commun- Approved Deliv- Not Home Sites ities Lots ered Delivered Available ------- -------- ------ ---------- ---------- January 31, 2000...... 109 19,620 6,607 1,796 11,217 October 31, 1999...... 110 19,963 6,899 1,844 11,220 (1) Includes 86 and 96 lots under option at January 31, 2000 and October 31, 1999, respectively. (2) Of the total home lots available, 675 and 599 were under construction or complete (including 93 and 76 models and sales offices), 6,535 and 7,057 were under option, and 444 and 216 were financed through purchase money mortgages at January 31, 2000 and October 31, 1999, respectively. In addition, at January 31, 2000 and October 31, 1999, respectively, in substantially completed or suspended communities, we owned or had under option 90 and 94 home lots. We also control a supply of land primarily through options for future development. This land is consistent with anticipated home building requirements in its housing markets. At January 31, 2000 we controlled such land to build 17,044 proposed homes, compared to 13,573 homes at October 31, 1999. The following table summarizes our started or completed unsold homes in active, substantially complete and suspended communities: January 31, October 31, 2000 1999 ----------------------- ----------------------- Unsold Unsold Homes Models Total Homes Models Total ------ ------ ----- ------ ------ ----- Northeast Region.... 127 40 167 114 31 145 North Carolina...... 89 -- 89 129 -- 129 Florida............. 39 -- 39 5 -- 5 Metro D.C........... 10 9 19 13 9 22 California.......... 133 16 149 53 10 63 Texas............ 208 28 236 255 28 253 Poland.............. 31 -- 31 14 -- 14 ------ ------ ----- ------ ------ ----- Total 637 93 730 553 78 631 ====== ====== ===== ====== ====== ===== Financial Services - Mortgage loans held for sale consist of residential mortgages receivable of which $22,051,000 and $32,844,000 at January 31, 2000 and October 31, 1999, respectively, are being temporarily warehoused and awaiting sale in the secondary mortgage market. The balance of such mortgages is being held as an investment by us. We may incur risk with respect to mortgages that are delinquent, but only to the extent the losses are not covered by mortgage insurance or resale value of the house. Historically, we have incurred minimal credit losses. Collateral Mortgage Financing - Collateral for bonds payable consist of collateralized mortgages receivable which are pledged against non-recourse collateralized mortgage obligations. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2000 COMPARED TO THE THREE MONTHS ENDED JANUARY 31, 1999 Our operations consist primarily of residential housing development and sales in our Northeast Region (comprising of New Jersey, southern New York State and eastern Pennsylvania), North Carolina, southeastern Florida, Metro D.C. (northern Virginia and Maryland), southern California, Texas and Poland. Our Texas operations are the result of the acquisition of a Texas homebuilder on October 1, 1999. In addition, we provide financial services to our homebuilding customers as well as third parties. Important indicators of the future results are recently signed contracts and home contract backlog for future deliveries. Our sales contracts and homes in contract backlog (using base sales prices) by market area is set forth below: Sales Contracts for the Three Months Ended Contract Backlog January 31, as of January 31, ----------------------- -------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (Dollars in Thousands) Northeast Region(1): Dollars............. $109,040 $ 90,163 $284,240 $250,181 Homes............... 422 402 1,086 1,056 North Carolina: Dollars............. $ 26,892 $ 31,111 $ 44,081 $ 50,899 Homes............... 144 150 213 231 Florida: Dollars............. $ 3,134 $ 11,530 $ 7,676 $ 18,655 Homes............... 12 53 29 88 Metro D.C.: Dollars............. $ 13,449 $ 11,077 $ 32,144 $ 24,621 Homes............... 52 50 136 111 California: Dollars............. $ 23,839 $ 17,817 $ 33,217 $ 21,659 Homes............... 93 94 128 110 Texas: Dollars............. $ 39,830 $ - $ 42,951 $ - Homes............... 202 - 204 - Poland: Dollars............. $ 1,059 $ 482 $ 1,600 $ 428 Homes............... 38 5 47 3 Totals: Dollars............. $217,243 $162,180 $445,909 $366,443 Homes............... 963 754 1,843 1,599 (1) Three months ended January 31, 2000 includes $14,332,000 total sales and 43 homes and $37,196,000 total contract backlog and 116 homes from a New Jersey homebuilder acquired on August 7, 1999. Total Revenues: Revenues for the three months ended January 31, 2000 increased $54.0 million or 26.6%, compared to the same period last year. This was the result of a $55.2 million increase in revenues from the sale of homes. This increase was partially offset by a $0.4 million decrease in land sales and other homebuilding revenues, and a $0.8 million decrease in financial services. Homebuilding: Revenues from the sale of homes increased $55.2 million or 28.3% during the three months ended January 31, 2000, compared to the same period last year. Revenues from sales of homes are recorded at the time each home is delivered and title and possession have been transferred to the buyer. Information on homes delivered by market area is set forth below: Three Months Ended January 31, ------------------- 2000 1999 --------- -------- (Dollars in Thousands) Northeast Region(1): Housing Revenues..... $127,252 $126,683 Homes Delivered...... 461 478 North Carolina: Housing Revenues..... $ 27,370 $ 29,080 Homes Delivered...... 138 154 Florida: Housing Revenues..... $ 4,499 $ 8,333 Homes Delivered...... 20 38 Metro D.C.: Housing Revenues..... $ 15,845 $ 12,547 Homes Delivered...... 65 54 California: Housing Revenues..... $ 25,636 $ 17,311 Homes Delivered...... 94 103 Texas: Housing Revenues..... $ 49,215 - Homes Delivered...... 259 - Poland: Housing Revenues..... $ 301 $ 931 Homes Delivered...... 4 9 Totals: Housing Revenues..... $250,118 $194,885 Homes Delivered...... 1,041 836 (1) Three months ended January 31, 2000 includes $18,140,000 housing revenues and 50 homes from a New Jersey homebuilder acquired on August 7, 1999. The increase in the number of homes delivered compared to the prior year was primarily due to the acquisition of two homebuilding companies, one in New Jersey and one in Texas during the fourth quarter ended October 31, 1999. The increase in housing revenues was primarily due to increased home deliveries in Texas and Metro D. C. slightly offset by decreases in the Northeast Region, North Carolina, Florida, and California. Average home prices increased slightly to $240,267 in 2000 compared to $233,117 in 1999, primarily resulting from increased sales prices and selling more options. Cost of sales includes expenses for housing and land and lot sales. A breakout of such expenses for housing sales and housing gross margin is set forth below: Three Months Ended January 31, ------------------- 2000 1999 -------- -------- (Dollars in Thousands) Sale of Homes................ $250,118 $194,885 Cost of Sales................ 204,710 154,249 -------- -------- Housing Gross Margin......... $ 45,408 $ 40,636 ======== ======== Gross Margin Percentage...... 18.2% 20.9% Cost of Sales expenses as a percentage of home sales revenues are presented below: Three Months Ended January 31, ------------------- 2000 1999 -------- -------- Sale of Homes................ 100.0% 100.0% -------- -------- Cost of Sales: Housing, land & development costs.... 73.4% 70.9% Commissions............ 2.3% 2.0% Financing concessions.. 0.9% 0.8% Overheads.............. 5.2% 5.4% -------- -------- Total Cost of Sales.......... 81.8% 79.1% -------- -------- Gross Margin................. 18.2% 20.9% ======== ======== We sell a variety of home types in various local communities, each yielding a different gross margin. As a result, depending on the mix of both communities and of home types delivered, consolidated quarterly gross margin will fluctuate up or down and may not be representative of the consolidated gross margin for the year. For the three months ended January 31, 2000 our gross margin percentage decreased 2.7% compared to the same period last year. This can be attributed to a less rich community mix from the Northeast Region and more deliveries in our new Texas market where they report lower margins. Selling, general, and administrative expenses as a percentage of total homebuilding revenues, increased to 9.9% for the three months ended January 31, 2000 from 8.9% for the prior year three months. Such expenses increased during the three months ended January 31, 2000 $7.6 million compared to the same period last year. The overall percentage and dollar increases in selling, general and administrative is due to increased deliveries, community openings, and increases in administrative costs primarily in our Northeast Region and California, and the addition of Texas. Land Sales and Other Revenues: Land sales and other revenues consist primarily of land and lot sales. A breakout of land and lot sales is set forth below: Three Months Ended January 31, ------------------ 2000 1999 -------- -------- Land and Lot Sales................ $ 934 $ 1,327 Cost of Sales..................... 793 1,338 -------- -------- Land and Lot Sales Gross Margin... 141 (11) Interest Expense.................. 191 133 -------- -------- Land and Lot Sales Profit Before Tax............................. $ (50) $ (144) ======== ======== Land and lot sales are incidental to our residential housing operations and are expected to continue in the future but may significantly fluctuate up or down. Financial Services Financial services consist primarily of originating mortgages from our homebuyers, as well as from third parties, selling such mortgages in the secondary market and title insurance activities. For the three months ended January 31, 2000 financial services recorded a $0.5 million loss before income taxes compared to a profit of $0.4 million in 1999. Our mortgage banking goals are to improve profitability by increasing the capture rate of our homebuyers and expanding our business to include originations from unrelated third parties. Collateralized Mortgage Financing In the years prior to February 29, 1988 we pledged mortgage loans originated by its mortgage banking subsidiaries against our collateralized mortgage obligations ("CMO's"). Subsequently we discontinued our CMO program. As a result, CMO operations are diminishing as pledged loans are decreasing through principal amortization and loan payoffs, and related bonds are reduced. In recent years, as a result of bonds becoming callable, we have also sold a portion of our CMO pledged mortgages. Corporate General and Administrative Corporate general and administrative expenses includes the operations at our headquarters in Red Bank, New Jersey. Such expenses include our executive offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, and administration of insurance, quality, and safety. As a percentage of total revenues such expenses decreased to 2.7% for the three months ended January 31, 2000 from 3.2% for the prior year three months due to increased housing revenues. Corporate general and administrative expenses slightly increased $0.4 million during the three months ended January 31, 2000 compared to the same period last year. Increases in Corporate general and administrative expenses are primarily attributed to increased process redesign costs associated with the design and development of streamlined business processes associated with the implementation of SAP, our new enterprise wide fully integrated software package and increased depreciation of capitalized process redesign costs in prior years. Interest Interest expense includes housing, and land and lot interest. Interest expense is broken down as follows: Three Months Ended January 31, ------------------ 2000 1999 -------- -------- Sale of Homes.............. $ 7,677 $ 6,909 Land and Lot Sales......... 191 133 -------- -------- Total...................... $ 7,868 $ 7,042 ======== ======== Housing interest as a percentage of sale of homes revenues amounted to 3.1% for the three months ended January 31, 2000 which is slightly less than the 3.6% for the three months ended January 31, 1999. Other Operations Other operations consist primarily of miscellaneous residential housing operations expenses, investment property operations, amortization of senior and subordinated note issuance expenses, earnout payments from homebuilding company acquisitions and corporate owned life insurance loan interest. Total Taxes Total taxes as a percentage of income before taxes amounted to approximately 27.7% and 39.8% for the three months ended January 31, 2000 and 1999, respectively. The decrease in this percentage from 1999 to 2000 is primarily attributed to lower state income taxes and senior rental tax credits. Although the credits are the same in 1999 and 2000, they reduce our effective tax rate more significantly when pretax profits decline. 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. Year 2000 We completed all Year 2000 readiness work and experienced no problems with regard to this matter. Inflation Inflation has a long-term effect on us because increasing costs of land, materials and labor result in increasing sale prices of its homes. In general, these price increases have been commensurate with the general rate of inflation in our housing markets and have not had a significant adverse effect on the sale of our homes. A significant risk faced by the housing industry generally is that rising house costs, including land and interest costs, will substantially outpace increases in the income of potential purchasers. In recent years, in the price ranges in which our homes sell, we have not found this risk to be a significant problem. Inflation has a lesser short-term effect on us because we generally negotiates fixed price contracts with its subcontractors and material suppliers for the construction of its homes. These prices usually are applicable for a specified number of residential buildings or for a time period of between four to twelve months. Construction costs for residential buildings represent approximately 57% of our total costs and expenses. All statements in this Form 10Q that are not historical facts should be considered "forward-looking statements" within the meaning of the Private Securities Litigation Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Such risks, uncertainties and other factors include, but are not limited to, changes in general economic conditions, fluctuations in interest rates, increases in raw materials and labor costs, levels of competition and other factors described in detail in the Company's Form 10-K for the year ended October 31, 1999. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOVNANIAN ENTERPRISES, INC. (Registrant) DATE: March 14, 2000 /S/J.LARRY SORSBY J. Larry Sorsby, Senior Vice President, Treasurer and Chief Financial Officer DATE: March 14, 2000 /S/PAUL W. BUCHANAN Paul W. Buchanan, Senior Vice President Corporate Controller