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 MAY 31, 1994 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from to
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)
908-747-7800
(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 preceeding 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. 14,448,800 Class
A Common Shares and 8,438,467 Class B Common Shares were outstanding as of
June 30, 1994.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at May 31,
1994 (unaudited) and February 28, 1994 3
Consolidated Statements of Income and
Retained Earnings for the three months
ended May 31, 1994 and 1993 (unaudited) 5
Consolidated Statements of Stockholders' Equity
for the three months ended May 31, 1994
(unaudited) 6
Consolidated Statements of Cash Flows
for the three months ended May 31, 1994
and 1993 (unaudited) 7
Notes to Consolidated Financial
Statements (unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10
PART II. Other Information
Item 6(b). No reports on Form 8K have been
filed during the quarter for
which this report is filed.
Signatures 19
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
May 31, February 28,
ASSETS 1994 1994
------------ ------------
<S> <C> <C>
Cash:
Demand deposits.............................. $ 3,477 $ 23,274
Escrow accounts.............................. 4,462 5,043
------------ ------------
Total cash............................... 7,939 28,317
------------ ------------
Receivables:
Customer accounts and other.................. 15,255 17,935
Escrow and deposits.......................... 8,340 8,393
Related parties.............................. 1,560 1,411
------------ ------------
Total receivables........................ 25,155 27,739
------------ ------------
Mortgages and Notes Receivable:
Collateralized mortgages receivable.......... 24,392 30,755
Residential mortgages receivable............. 20,874 50,673
Other mortgages and notes receivable......... 3,761 3,808
------------ ------------
Mortgages and notes receivable........... 49,027 85,236
------------ ------------
Inventories - At cost, not in excess of market:
Real estate under development:
Accumulated cost of construction:
Finished................................. 30,833 22,247
In progress.............................. 39,644 25,395
Land and land development costs............ 169,736 146,665
Land, land options, and costs of projects
in planning................................ 89,773 84,431
------------ ------------
Total inventories........................ 329,986 278,738
------------ ------------
Property - At cost:
Operating property........................... 21,607 20,757
Less accumulated depreciation................ 11,283 10,925
------------ ------------
Net operating property..................... 10,324 9,832
------------ ------------
Rental property.............................. 63,214 69,116
Less accumulated depreciation................ 7,025 7,156
------------ ------------
Net rental property........................ 56,189 61,960
------------ ------------
Income producing properties under development 15,402 14,691
------------ ------------
Property - net........................... 81,915 86,483
------------ ------------
Investment In and Advances to Unconsolidated
Affiliate and Joint Ventures................. 5,217 4,353
------------ ------------
Prepaid Expenses and Other Assets.............. 34,533 28,736
------------ ------------
Total Assets................................... $533,772 $539,602
============ ============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
May 31, February 28,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1994
------------ ------------
<S> <C> <C>
Mortgages and Notes Payable:
Nonrecourse land mortgages................... $ 5,624 $ 7,494
Revolving credit agreement................... 54,375
Mortgage warehouse line of credit............ 8,808 39,307
Nonrecourse mortgages secured by building,
land, and land improvements................ 20,558 21,447
------------ ------------
Total mortgages and notes payable.......... 89,365 68,248
------------ ------------
Bonds Collateralized By Mortgages Receivable... 24,017 30,343
------------ ------------
Subordinated Notes............................. 200,000 200,000
------------ ------------
Accounts Payable............................... 17,924 19,821
------------ ------------
Customers' Deposits............................ 15,321 12,103
------------ ------------
Accrued Liabilities:
State income taxes........................... (673) 640
Federal income taxes:
Current.................................... (1,332) 8,288
Deferred................................... (6,593) (5,990)
Interest..................................... 6,683 7,660
Post development completion costs............ 10,519 12,145
Other........................................ 10,033 15,343
------------ ------------
Total accrued liabilities.................. 18,637 38,086
------------ ------------
Total liabilities........................ 365,264 368,601
------------ ------------
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 14,789,900 shares
(including 345,874 shares held in Treasury) 147 147
Common Stock,Class B,$.01 par value authorized
13,000,000 shares; issued 8,788,901 shares
(including 345,874 shares held in Treasury) 88 88
Paid in Capital.............................. 32,787 32,301
Retained Earnings............................ 140,785 143,764
Treasury Stock - at cost..................... (5,299) (5,299)
------------ ------------
Total stockholders' equity.............. 168,508 171,001
------------ ------------
Total Liabilities and Stockholders' Equity..... $533,772 $539,602
============ ============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
<CAPTION>
Three Months Ended
--------------------------
May 31, May 31,
1994 1993
------------ ------------
<S> <C> <C>
Revenues:
Housing sales................................ $92,876 $57,615
Land and lot sales........................... 163 804
Rental operations............................ 1,944 1,639
Mortgage banking and finance operations...... 2,437 1,947
Other operations............................. 1,569 945
------------ ------------
Total revenues............................. 98,989 62,950
------------ ------------
Cost and Expenses:
Construction, land, interest and operations.. 79,393 49,397
Selling, general and administrative.......... 16,562 10,246
Rental operations............................ 2,478 2,034
Mortgage banking and finance operations...... 3,035 2,243
Other operations............................. 2,000 643
------------ ------------
Total costs and expenses................... 103,468 64,563
------------ ------------
Loss Before Income Taxes and
Extraordinary Loss........................... (4,479) (1,613)
------------ ------------
State and Federal Income Taxes:
State........................................ 345 124
Federal:
Current.................................... (1,244) (2,567)
Deferred................................... (601) 1,817
------------ ------------
Total taxes................................ (1,500) (626)
------------ ------------
(2,979) (987)
Extraordinary Loss from Extinguishment of Debt,
Net of Income Taxes.......................... (1,277)
------------ ------------
Net Loss....................................... $(2,979) $(2,264)
============ ============
Earnings Per Common Share:
Loss before extraordinary loss............... $(0.13) $(0.04)
Extraordinary loss........................... (0.06)
------------ ------------
Net Loss....................................... $(0.13) $(0.10)
============ ============
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, February 28, 1994.. 14,361,591 $147 8,480,462 $88 $32,301 $143,764 ($5,299) $171,001
Issuance of Class A
Common Stock.............. 45,000 486 486
Conversion of Class B to
Class A common stock...... 37,435 (37,435)
Net Loss.................... (2,979) (2,979)
----------- -------- ----------- -------- ------- --------- --------- --------
Balance, May 31, 1994....... 14,444,026 $147 8,443,027 $88 $32,787 $140,785 ($5,299) $168,508
=========== ======== =========== ======== ======= ========= ========= ========
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Three Months Ended
---------------------
May 31, May 31,
1994 1993
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss....................................... ($2,979) ($2,264)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation............................... 878 597
Loss on sale and retirement of property
and assets............................... 436 38
Deferred income taxes...................... (507) 1,160
Decrease (increase) in assets:
Escrow cash.............................. 581 (441)
Receivables, prepaids and other assets... (2,727) (14,728)
Mortgages receivable..................... 29,734 20,355
Inventories.............................. (51,248) (40,101)
Increase (decrease) in liabilities:
State and Federal income taxes........... (10,933) (6,405)
Customers' deposits...................... 3,218 7,470
Interest and other accrued liabilities... (6,383) (4,615)
Post development completion costs........ (1,626) 205
Accounts payable......................... (1,897) 2,915
---------- ----------
Net cash used in operating activities.... (43,453) (35,814)
---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of property and assets...... 4,644 282
Cost of property and assets sold............... (5,698) (275)
Purchase of operating property................. (883) (676)
Investment in and advances to unconsolidated
affiliates................................... (864) 38
Net investment in income producing properties.. 5,191 (8,572)
Investment in loans from sale of subsidiaries.. 92
---------- ----------
Net cash provided by (used in)
investing activities................... 2,390 (9,111)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes.............. 135,109 104,284
Principal payments on mortgages and notes...... (120,318) (70,062)
Investment in mortgages receivable............. 6,475 2,992
---------- ----------
Net cash provided by financing
activities............................. 21,266 37,214
---------- ----------
Net Decrease In Cash............................. (19,797) (7,711)
Cash Balance, Beginning Of Period................ 23,274 10,211
---------- ----------
Cash Balance, End Of Period...................... $3,477 $2,500
========== ==========
See Notes to consolidated financial statements.
</TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. The consolidated financial statements, except for the
February 28, 1994 consolidated balance sheets, have been prepared
without audit. In the opinion of management, all adjustments for
interim periods presented have been made, which include only normal
recurring accruals and deferrals necessary for a fair presentation of
consolidated financial position, results of operations, and changes in cash
flows. Results for the interim periods are not necessarily indicative of
the results which might be expected for a full year.
2. Interest costs incurred, expensed and capitalized were:
Three Months Ended
------------------
5/31/94 5/31/93
-------- --------
(Dollars in Thousands)
Interest Incurred (1):
Residential (3)...................$ 5,009 $ 4,483
Commercial(4)..................... 1,246 1,166
------- -------
Total Incurred..................$ 6,255 $ 5,649
======= =======
Interest Expensed:
Residential (3)...................$ 3,051 $ 2,562
Commercial (4)..................... 1,182 1,080
------- -------
Total Expensed.................$ 4,233 $ 3,642
======= =======
Interest Capitalized at
Beginning of Period...............$26,443 $23,365
Plus Interest Incurred............... 6,255 5,649
Less Interest Expensed............... 4,233 3,642
Less Charges to Reserves............. 103 76
Less Sale of Assets.................. 355
------- -------
Interest Capitalized at
End of Period ....................$28,007 $25,296
======= =======
Interest Capitalized at
End of Period:
Residential(3)....................$22,064 $19,355
Commercial(2)..................... 5,943 5,941
------- -------
Total Capitalized...............$28,007 $25,296
======= =======
(1) Does not include interest incurred by the Company's mortgage and finance
subsidiaries.
(2) Does not include a reduction for depreciation.
(3) Represents acquisition interest for construction, land and development
costs which is charged to cost of sales.
(4) Represents interest charged to rental operations.
3. In July 1993, the Company redeemed all of its outstanding 12 1/4%
Subordinated Notes due 1998 at a price of 102% of par. The principal
amount redeemed was $50,000,000 and the redemption resulted in an
extraordinary loss of $1,277,000, net of income taxes of $658,000. As
of May 31, 1993, the Company accrued and expensed the premium paid and
expensed all unamortized prepaid issuance expenses as an extraordinary loss.
4. On May 10, 1994, the Board of Directors of the Company adopted a
resolution providing that the date for the year end of the fiscal year of the
Company be changed from the last day of February to October 31. The report
covering the three month periods ending May 31, 1994 and August 31, 1994 will
be filed on Form 10-Q. The report covering the eight month transition period
of March 1 through October 31, 1994 will be filed on Form 10-K. Thereafter,
the Company will file reports on January 31, April 30, July 31, and
October 31.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The Company's uses for cash during the three months ended May 31,
1994 were for operating expenses, seasonal increases in housing inventories,
construction, income taxes, and interest. The Company provided for its cash
requirements from the Revolving Credit Facility and from housing and other
revenues. The Company believes that these sources of cash are sufficient to
finance its working capital requirements and other needs.
The Company's bank borrowings are made pursuant to a revolving credit
agreement (the "Agreement") that provides a revolving credit line of up to
$130,000,000 (the "Revolving Credit Facility") through July 1996. The
Company currently is in compliance and intends to maintain compliance with
its covenants under the Agreement. As of May 31, 1994, borrowings under the
Agreement were $54,375,000.
The Company's 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 the Company's subsidiaries. As of May
31, 1994, the aggregate principal amount of all such borrowings was
$32,825,000.
The book value of the Company's residential inventories, rental
condominiums, and commercial properties completed and under development
amounted to the following:
May 31, February 28,
1994 1994
------------ ------------
Residential real estate inventory............ $329,986,000 $278,738,000
Residential rental property.................. 8,240,000 8,411,000
------------ ------------
Total Residential Real Estate.............. 338,226,000 287,149,000
Commercial properties........................ 63,351,000 68,240,000
------------ ------------
Combined Total............................. $401,577,000 $355,389,000
============ ============
Total residential real estate increased $51,077,000 during the three
months ended May 31, 1994 as a result of an inventory increase of
$51,248,000, and a rental condominium decrease of $171,000. The increase in
residential real estate inventory was primarily due to the Company's seasonal
increase in construction activities for deliveries later this year, and the
Company's overall increase in housing volume. The Company's rental
condominiums declined due to the Company's continued liquidation of New
Hampshire rentals. Substantially all residential homes under construction or
completed and included in real estate inventory at May 31, 1994 are expected
to be sold and closed during the next twelve months. Most residential real
estate completed or under development is financed through the Company's line
of credit and subordinated indebtedness.
The following table summarizes housing lots in the Company's active
communities under development:
Home Remaining
Lots Contracted Lots
Commun- Owned/ Homes Not Available
ities Approved Closed Closed (1) (2)
------- -------- ------ ---------- ---------
May 31, 1994........ 86 11,932 3,978 2,026 5,928
February 28, 1994... 82 12,355 4,903 1,891 5,561
(1) Includes 76 and 283 lots under option at May 31, 1994 and February 28,
1994, respectively.
(2) Of the total home lots available, 370 and 359 were under construction or
complete (including 80 and 83 models and sales offices) and 2,299 and 2,534
were under option at May 31, 1994 and February 28, 1994, respectively.
In addition, in substantially completed or suspended developments the
Company owned 707 and 666 home lots at May 31, 1994 and February 28, 1994,
respectively. The Company also controls a supply of land primarily through
options for future development. This land is consistent with anticipated
home building requirements in its housing markets. At May 31, 1994 the
Company controlled such land to build 12,495 proposed homes, compared to
12,916 homes at February 28, 1994.
The Company's commercial properties represent long-term investments in
commercial and retail facilities completed or under development (see "Rental
Program" and "Other Operations" under "Results of Operations"). During the
three months ended May 31, 1994, the decrease in commercial properties was
primarily the result of the sale of a mini-storage facility and office
building in Hamilton Township, NJ and the sale of an office/warehouse
facility in Pompano Beach, FL. When individual facilities are completed and
substantially leased, the Company will have the ability to obtain long-term
financing on such properties. At May 31, 1994, the Company had long-term
non-recourse financing aggregating $17,866,000 on two commercial facilities,
a decrease of $879,000 from February 28, 1994, due to principal amortization
and the sale of the Pompano Beach, FL office/warehouse facility.
The Company's mortgages and notes receivable amounted to the following:
May 31, February 28,
1994 1994
------------ ------------
Collateralized mortgages receivable........ $24,392,000 $30,755,000
Residential mortgages receivable........... 20,874,000 50,673,000
Land and lot mortgages receivable.......... 2,538,000 2,609,000
Notes from the sale of subsidiaries........ 1,223,000 1,199,000
----------- -----------
Total Mortgages and Notes Receivable $49,027,000 $85,236,000
=========== ===========
The collateralized mortgages receivable are pledged against non-recourse
collateralized mortgage obligations. Residential mortgages receivable
amounting to $13,915,000 and $43,502,000 at May 31, 1994 and February 28,
1994, 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 the Company. The Company 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,
the Company has incurred minimal credit losses. Land and lot mortgages are
usually short term (5 years or less) and not subject to construction loan
subordination. Notes from the sale of subsidiaries are secured by the assets
and/or stock of the subsidiaries and amortized over ten years.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MAY 31, 1994 COMPARED TO THE
THREE MONTHS ENDED MAY 31, 1993
The Company's operations consist primarily of residential housing
development and sales in its Northeast Region (comprising primarily of New
Jersey and eastern Pennsylvania), North Carolina, southeastern Florida, and
metro Washington, D.C. (northern Virginia). In addition, the Company is in
the mortgage banking and title insurance businesses, and develops and
operates commercial properties as long-term investments in New Jersey, and,
to a lesser extent, Florida.
Historically, the Company's quarter ending May 31 produces the least
amount of deliveries for the year. This is primarily due to its building
cycles because of winter climatic conditions in the Northeast Region causing
housing starts to be at their lowest for the year. In addition, due to the
change in year end (see Notes to Consolidated Financial Statements - Note 4),
certain costs amortized to homes closed during the year will be amortized to
homes closed during the eight months ending October 31, 1994. On a pro rata
basis, since fewer homes are delivered per month in the first eight months of
the year, the year end change resulted in a higher per home amoritization
during the three months ended May 31, 1994. As a result, deliveries for the
three months ended May 31, 1994 and 1993 were insufficient to cover overheads
and losses in its other operations.
At May 31, 1994 the Company's home contract backlog for future delivery
was 2,106 homes, with an aggregate sales value of $318.5 million, compared
to 2,067 homes, with an aggregate sales value of $299.0 million at the same
time last year. For the three months ended May 31, 1994 net contracts signed
amounted to $127.9 million or 815 homes, compared to $155.0 million or 1,068
homes for the same period last year. This decrease is primarily the result
of fewer contracts in the Company's Northeast Region and Florida. In all its
markets, the Company and its competition have seen a decline in buyer traffic
and contracts during this period and June 1994. In addition, the Northeast
Region contracts are down as a result of delayed openings of new communities.
Such delays are usually caused by additional time needed to obtain final
approval to build from the local governing authority. Also, in Florida, the
Company has intentionally slowed contracts by raising prices. The Company
believes sales in Florida were too far ahead of production causing lower
margins as costs increased on homes contracted at a fixed price.
The following table sets forth, for the periods indicated, certain
income statement items as percentages of total revenues:
Three Months Ended
May 31,
------------------
1994 1993
-------- --------
Total Revenues........................... 100.0% 100.0%
-------- --------
Costs and Expenses:
Construction, land, interest
and operations....................... 80.2 78.5
Selling, general and administrative.... 16.7 16.3
Mortgage banking and finance operations 3.1 3.6
Rental and other operations............ 4.5 4.2
-------- --------
Total costs and expenses............. 104.5 102.6
-------- --------
Loss Before Income Taxes and
Extraordinaty Loss..................... (4.5) (2.6)
Total Income Taxes....................... (1.5) (1.0)
-------- --------
Loss Before Extraordinary Loss........... (3.0) (1.6)
Extraordinary Loss From Extinguishment
of Debt, Net of Income Taxes........... (2.0)
-------- --------
Net Loss................................. (3.0)% (3.6)%
======== ========
Total Revenues:
Revenues for the three months ended May 31, 1994 increased $36.0
million, or 57.3%, compared to the same period last year. This was primarily
a result of increased housing revenues of $35.2 million. Revenues from
rental and other operations increased $0.9 million primarily due to the
addition of a retail center and related rentals. Mortgage banking and
finance operations increased $0.5 million and land and lot sales decreased
$0.6 million.
Housing Operations:
Housing revenues increased $35.2 million, or 61.2%, during the three
months ended May 31, 1994, compared to the same period last year. Housing
revenues 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
May 31,
-------------------
1994 1993
-------- --------
(Dollars in Thousands)
Northeast Region:
Housing Revenues.......... $48,000 $29,917
Homes Delivered........... 311 222
North Carolina:
Housing Revenues.......... $24,363 $10,622
Homes Delivered........... 177 89
Florida:
Housing Revenues.......... $11,573 $ 8,275
Homes Delivered........... 87 69
Metro Washington, D.C.:
Housing Revenues.......... $ 8,441 $ 8,543
Homes Delivered........... 52 65
Other:
Housing Revenues.......... $ 499 $ 258
Homes Delivered........... 8 5
Totals:
Housing Revenues.......... $92,876 $57,615
Homes Delivered........... 635 450
The three months ended May 31, 1994 housing revenue increase (compared
to the prior year) was due to increased homes delivered and increased average
sales prices in all the Company's markets. In the Northeast Region one
reason average sales prices are increasing is because of the Company's
diversified product mix of more detached single family homes and larger
townhouses with garages designed for the move-up buyer. In Florida, housing
revenues are increasing as a result of the addition of new single family
developments. In the Company's North Carolina Division, home deliveries
increased due to increased market share. In addition, the Company has raised
sales prices in all its markets.
Construction, land, interest, and operations include expenses for
housing and land and lot sales. A breakout of construction, land, interest,
and operations expenses for housing sales and housing gross margin is set
forth below:
Three Months Ended
May 31,
------------------
1994 1993
-------- --------
(Dollars in Thousands)
Housing sales................... $92,876 $57,615
-------- --------
Construction, land and
operations expenses........... 76,239 46,249
Interest expense................ 3,018 2,538
-------- --------
Total expenses................ 79,257 48,787
-------- --------
Housing gross margin............ $13,619 $ 8,828
======== ========
Gross margin percentage......... 14.7% 15.3%
Construction, land and operating expenses as a percentage of housing
sales increased 1.8% to 82.1% for the three months ended May 31, 1994 from
80.3% for the same period last year. Such costs as a percentage of housing
sales increased due to (1) a one-time expense of $1.2 million for warranty
repair work to remedy a Northeast Region roof design problem, (2) a change in
product mix with an additional 8% of home sales coming from North Carolina
where such costs are traditionally a higher percentage, and (3) a 10%
increase in such costs as a percentage of Florida home sales. The North
Carolina market is more competitive which keeps prices and margins down. In
Florida, 6% of the 10% increase was caused by higher developed lot costs.
The balance of 4% was caused by sharply higher material costs resulting from
demand being greater than current supplies. In the Northeast Region such
costs as a percentage of housing sales decreased 1.5% before the $1.2 million
in warranty repair work.
Housing interest has declined 1.1% as a percentage of housing sales to
3.3% for the three months ended May 31, 1994, from 4.4% for the same period
last year. This decrease is primarily the result of the Company's increased
inventory turnover and the use of equity to finance operations. Interest is
capitalized during construction and expensed as houses are delivered.
Selling, general and administrative expenses increased $6.3 million, or
61.6%, during the three months ended May 31, 1994 compared to the same period
last year. As a percentage of housing revenues such expenses increased
less than 0.1 % to 17.8% for the period. The increase in the dollar amount
of such expenses was primarily due to (1) a 61.2% increase in housing
revenues, (2) a 34% overall increase in housing and Corporate associates due
to anticipated growth in the near future, and (3) the accelerated
amortization of such costs over fewer monthly home deliveries during the
eight months ending October 31, 1994. Due to the change in year end (see
Notes to Consolidated Financial Statements - Note 4), certain division
selling, general, and administrative expenses amortized to homes delivered
during a year will be amortized to homes delivered during the eight months
ending October 31, 1994. On a pro rata basis, since fewer homes are
delivered per month in the first eight months of the year, the year end
change resulted in a higher per home amortization during the three months
ended May 31, 1994.
Land and Lot Operations:
A breakout of construction, land, interest and operating expenses for
land and lot sales and gross margin is set forth below:
Three Months Ended
May 31,
------------------
1994 1993
------- --------
(Dollars in Thousands)
Land and lot sales........... $ 163 $ 804
------- --------
Construction, land and
operations expenses........ 103 586
Interest expense............. 33 24
------- --------
Total expenses............. 136 610
------- --------
Land and lot sales
Gross margin............... $ 27 $ 194
======= ========
Land and lot sales are incidental to the Company's residential housing
operations and are expected to continue in the future but will significantly
fluctuate up or down. During the three months ended May 31, 1994 land and
lot sales consisted of two lot sales in the Northeast Region.
Mortgage Banking and Finance Operations:
Mortgage banking and finance operations consist primarily of originating
mortgages from sales of the Company's homes and selling such mortgages in the
secondary market. Such operations also include interest income and expense
from the Company's collateralized mortgages receivable and related collateral
mortgage obligations. Servicing rights on new mortgages originated by the
Company are sold as the loans are closed.
Rental Program:
At May 31, 1994 the Company owned and was leasing three office
buildings, three office/warehouse facilities, three retail centers, and a
senior citizen residential complex. During the three months ended May 31,
1994 compared to the same period last year, rental operations increased
primarily due to the completion and leasing of additional commercial
properties and the senior citizen complex and the acquisition of a retail
center. Rental operations include interest amounted to $1.2 million and $1.1
million for the three months ended May 31, 1994 and 1993, respectively. The
Company is also renting condominium homes in New Hampshire but is
liquidating these rentals through a reduced house price sales program. The
Company expects such operations to operate at a loss after deducting interest
and depreciation.
Other Operations:
Other operations consisted primarily of title insurance, investment
properties, sale of assets and other income from residential housing
operations including interest income, contract deposit forfeitures, and fees
in California for managing certain homes as they are constructed and sold.
The investment properties division supervises the construction of commercial
properties and manages completed properties for the Company. Such
properties, when completed, result in additional rental operations for the
Company. During the three months ended May 31, 1994 the Company sold a
51,855 sq. ft. mini-storage facility and a 14,408 sq. ft. office building in
Hamilton Township, NJ. In addition, the Company sold a 30,000 sq. ft.
office/warehouse facility in Pompano Beach, FL. Included in other operations
is the pretax loss from these sales amounting to $745,000.
Extraordinary Item:
In July 1993, the Company redeemed all of its outstanding 12 1/4%
Subordinated Notes due 1998 at a price of 102% of par. The principal amount
redeemed was $50,000,000 and the redemption resulted in an extraordinary
loss of $1,277,000, net of income taxes of $658,000. As of May 31, 1993, the
Company accrued and expensed the premium paid and expensed all
unamortized prepaid issuance expenses as an extraordinary loss.
Inflation:
Inflation has a long-term effect on the Company 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 the Company's
housing market and have not had a significant adverse effect on the sale
of the Company's homes. However, some material costs (primarily lumber) have
recently increased above the rate of inflation due to demand being higher
than available supplies. 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 it sells homes, the Company
has not found this risk to be a significant problem.
Inflation has a lesser short-term effect on the Company because the
Company 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 51%
of the Company's total costs and expenses.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
l934, the registrant has duly caused this report to be signed onits
behalf by the undersigned thereunto duly authorized.
HOVNANIAN ENTERPRISES, INC.
(Registrant)
DATE: 7/14/94 KEVORK S. HOVNANIAN/S/
Kevork S. Hovnanian,
Chairman of the Board and
Chief Executive Officer
DATE: 7/14/94 PAUL W. BUCHANAN/S/
Paul W. Buchanan,
Senior Vice President
Corporate Controller
