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, 1995 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 principle 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 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 [ ]
No [ X ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 14,847,335 Class
A Common Shares and 8,189,718 Class B Common Shares were outstanding as of
March 8, 1995.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at January 31,
1995 (unaudited) and October 31, 1994 3
Consolidated Statements of Income and
Retained Earnings for the three months
ended January 31, 1995 and 1994 (unaudited) 5
Consolidated Statements of Stockholders' Equity
for the three months ended January 31, 1995
(unaudited) 6
Consolidated Statements of Cash Flows
for the three months ended January 31, 1995
and 1994 (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(a) 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 19
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
January 31, October 31,
ASSETS 1995 1994
----------- -----------
<S> <C> <C>
Homebuilding:
Cash and cash equivalents.......................... $ 9,587 $17,299
----------- -----------
Inventories - At cost, not in excess of net
realizable value:
Sold and unsold homes and lots under
development....................................... 361,167 328,961
Land and land options held for future
development or sale.............................. 80,140 57,579
----------- -----------
Total Inventories................................ 441,307 386,540
----------- -----------
Receivables, deposits, and notes..................... 29,751 25,778
----------- -----------
Property, plant, and equipment - net................. 11,427 11,437
----------- -----------
Prepaid expenses and other assets.................... 31,197 26,757
----------- -----------
Total Homebuilding............................... 523,269 467,811
----------- -----------
Financial Services:
Cash and cash equivalents............................ 638 138
Mortgage loans held for sale......................... 14,992 29,459
Other assets......................................... 1,190 1,451
----------- ----------
Total Financial Services......................... 16,820 31,048
----------- -----------
Investment Properties:
Rental property - net................................ 55,642 56,181
Property under development or held for future
development........................................ 15,225 15,298
Investment in and advances to unconsolidated
joint venture...................................... 3,902 3,994
Other assets......................................... 3,764 3,231
----------- -----------
Total Investment Properties...................... 78,533 78,704
----------- -----------
Collateralized Mortgage Financing:
Collateral for bonds payable......................... 20,544 21,275
Other assets......................................... 1,249 1,404
----------- -----------
Total Collateralized Mortgage Financing.......... 21,793 22,679
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits............................................. 12,955 12,683
----------- -----------
Total Assets........................................... $653,370 $612,925
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION> January 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
------------ ------------
<S> <C> <C>
Homebuilding:
Nonrecourse land mortgages................................... $ 31,248 $ 26,938
Accounts payable and other liabilities....................... 39,521 42,586
Customers' deposits.......................................... 15,423 12,138
Nonrecourse mortgage secured by operating property........... 2,930 2,946
------------ ------------
Total Homebuilding....................................... 89,122 84,608
------------ ------------
Financial Services:
Accounts payable and other liabilities....................... 588 772
Mortgage warehouse line of credit............................ 7,244 20,554
------------ ------------
Total Financial Services................................. 7,832 21,326
------------ ------------
Investment Properties:
Accounts payable and other liabilities....................... 1,822 1,731
Nonrecourse mortgages secured by rental property............. 17,513 17,541
------------ ------------
Total Investment Properties.............................. 19,335 19,272
------------ ------------
Collateralized Mortgage Financing:
Accounts payable and other liabilities....................... 16 15
Bonds collateralized by mortgages receivable................. 19,934 20,815
------------ ------------
Total Collateralized Mortgage Financing.................. 19,950 20,830
------------ ------------
Notes Payable:
Revolving credit agreement................................... 148,200 99,200
Subordinated notes........................................... 200,000 200,000
Accrued interest............................................. 6,067 5,559
------------ ------------
Total Notes Payable...................................... 354,267 304,759
------------ ------------
Total Liabilities........................................ 490,506 450,795
------------ ------------
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 15,164,704 shares
(including 345,874 shares held in Treasury)................ 149 149
Common Stock,Class B,$.01 par value-authorized
13,000,000 shares; issued 8,549,097 shares
(including 345,874 shares held in Treasury)................ 88 88
Paid in Capital.............................................. 33,858 33,858
Retained Earnings............................................ 134,068 133,334
Treasury Stock - at cost..................................... (5,299) (5,299)
------------ ------------
Total Stockholders' Equity............................... 162,864 162,130
------------ ------------
Total Liabilities and Stockholders' Equity...................... $653,370 $612,925
============ ============
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
January 31,
-----------------------------
1995 1994
--------- ---------
<S> <C> <C>
Revenues:
Homebuilding:
Sale of homes.............................. $117,674 $165,862
Land sales and other revenues.............. 3,677 2,426
--------- ---------
Total Homebuilding....................... 121,351 168,288
Financial Services........................... 1,139 1,816
Investment Properties........................ 2,566 2,521
Collateralized Mortgage Financing............ 540 832
--------- ---------
Total Revenues........................... 125,596 173,457
--------- ---------
Expenses:
Homebuilding:
Cost of sales.............................. 94,992 130,258
Selling, general and administrative........ 15,634 11,258
--------- ---------
Total Homebuilding....................... 110,626 141,516
Financial Services........................... 2,007 1,645
Investment Properties........................ 1,454 1,360
Collateralized Mortgage Financing............ 514 969
Corporate General and Administration......... 3,099 2,585
Interest..................................... 4,915 5,701
Other operations............................. 2,193 1,218
Provision for loan writedown................. 1,883
--------- ---------
Total Expenses............................ 124,808 156,877
--------- ---------
Income Before Income Taxes...................... 788 16,580
--------- ---------
State and Federal Income Taxes:
State......................................... 167 (36)
Federal....................................... (113) 5,163
--------- ---------
Total Taxes................................ 54 5,127
--------- ---------
Net Income..................................... $ 734 $ 11,453
========= =========
Earnings Per Common Share...................... $ 0.03 $ 0.50
========= =========
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, 1994.. 14,730,299 $149 8,291,754 $88 $33,858 $133,334 $(5,299) $162,130
Conversion of Class B to
Class A common stock...... 88,531 (88,531)
Net Income.................. 734 734
----------- -------- ----------- -------- ------- --------- --------- --------
Balance, January 31, 1995... 14,818,830 $149 8,203,223 $88 $33,858 $134,068 $(5,299) $162,864
=========== ======== =========== ======== ======= ========= ========= ========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Three Months Ended
January 31,
----------------------
1995 1994
--------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income............................................... $ 734 $ 11,453
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation......................................... 994 784
Gain on sale and retirement of property and assets... (70) (82)
Writedown of loan from sale of subsidiary............ 1,883
Deferred income taxes................................ 1,794 1,433
Decrease (increase) in assets:
Escrow cash........................................ (1,700) 540
Receivables, prepaids and other assets............. (8,593) 1,655
Mortgage notes receivable.......................... 13,966 (7,412)
Inventories........................................ (54,767) (18,325)
Increase (decrease) in liabilities:
State and Federal income taxes..................... (2,066) 3,694
Customers' deposits................................ 3,295 (2,961)
Interest and other accrued liabilities............. (1,737) (3,469)
Post development completion costs.................. (489) (1,506)
Accounts payable................................... (554) (3,210)
Amortization of debenture discounts................ 3
--------- ----------
Net cash used in operating activities............ (49,193) (15,520)
--------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of property and assets................ 249 289
Investment in property and assets........................ (220) (185)
Purchase of property..................................... (443) (923)
Investment in and advances to unconsolidated affiliates.. 294 136
Investment in income producing properties...... 138 (4,646)
Net cash provided by (used in) --------- ----------
investing activities............................. 18 (5,329)
--------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes........................ 323,488 191,231
Principal payments on mortgages and notes................ (284,294) (172,808)
Principal payments on subordinated debt.................. (2,160)
Investment in mortgage notes receivable.................. 1,219 3,100
--------- ----------
Net cash provided by financing activities........ 40,413 19,363
--------- ----------
Net Increase (Decrease) In Cash............................ (8,762) (1,486)
Cash Balance, Beginning Of Period.......................... 14,537 3,001
--------- ----------
Cash Balance, End Of Period................................ $ 5,775 $ 1,515
========= ==========
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,
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
-------------------
1/31/95 1/31/94
-------- --------
(Dollars in Thousands)
Interest Incurred (1):
Residential (3).................. $ 6,989 $ 4,852
Commercial(4).................... 1,200 1,279
-------- --------
Total Incurred................. $ 8,189 $ 6,131
======== ========
Interest Expensed:
Residential (3).................. 3,750 4,620
Commercial (4)................... 1,165 1,081
-------- --------
Total Expensed................ $ 4,915 $ 5,701
======== ========
Interest Capitalized at
Beginning of Period.............. $28,948 $27,925
Plus Interest Incurred............. 8,189 6,131
Less Interest Expensed............. 4,915 5,701
Less Charges to Reserves........... 50 38
-------- --------
Interest Capitalized at
End of Period ................... $32,172 $28,317
======== ========
Interest Capitalized at
End of Period (5):
Residential(3)................... $26,025 $22,020
Commercial(2).................... 6,147 6,297
-------- -------
Total Capitalized.............. $32,172 $28,317
======== ========
(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.
(5) Capitalized commercial interest at January 31, 1995 includes $139,000
reported at October 31, 1994 as capitalized residential interest. This
reclassification was the result of the transfer of a senior citizen rental
facility from inventory.
3. Included in the consolidated balance sheets is total operating
property amounting to $24,176,000 and $23,740,000 and accumulated
depreciation on operating property amounting to $12,326,000 and $11,854,000
at January 31, 1995 and October 31, 1994, respectively. Accumulated
depreciation on rental property amounted to $8,255,000 and $7,781,000 at
January 31, 1995 and October 31, 1994, respectively.
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. Prior to
October 31, 1994 the Company filed the reports covering the three month
period ended May 31, 1994 and the three and six month periods ended August
31, 1994 on Form 10-Q. The report covering the eight month transition period
of March 1 through October 31, 1994 was 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 January 31,
1995 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, land purchase notes, 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
$225,000,000 (the "Revolving Credit Facility") through March 1997. Interest
is payable monthly and at various rates of either prime plus 1/2% or Libor
plus 2%. The Company currently is in compliance and intends to maintain
compliance with its covenants under the Agreement. As of January 31, 1995,
borrowings under the Agreement were $148,200,000.
The aggregate principal amount of subordinated indebtedness issued by
the Company and outstanding as of October 31, 1994 was $200,000,000. Annual
sinking fund payments of $20,000,000 are required in April 2001 and 2002 with
additional payments of $60,000,000 and $100,000,000 due in April 2002 and
June 2005.
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
January 31, 1995, the aggregate principal amount of all such borrowings was
$27,178,000.
The book value of the Company's residential inventories, rental
condominiums, and commercial properties completed and under development
amounted to the following:
January 31, October 31,
1995 1994
------------ ------------
Residential real estate inventory............ $441,307,000 $386,540,000
Residential rental property.................. 8,131,000 8,158,000
------------ ------------
Total Residential Real Estate.............. 449,438,000 394,698,000
Commercial properties........................ 62,736,000 63,321,000
------------ ------------
Combined Total............................. $512,174,000 $458,019,000
============ ============
Total residential real estate increased $54,740,000 during the three
months ended January 31, 1995 primarily as a result of an inventory increase
of $54,767,000. 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. Substantially all residential homes under construction or completed
and included in real estate inventory at January 31, 1995 are expected to be
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
selling communities under development:
(1) (2)
Contracted Remaining
Commun- Approved Homes Not Home Sites
ities Lots Closed Closed Available
------- -------- ------ ---------- ---------
January 31, 1995.... 96 16,124 4,934 1,874 9,316
October 31, 1994... 86 17,033 5,302 1,794 9,937
(1) Includes 72 and 88 lots under option at January 31, 1995 and October 31,
1994, respectively.
(2) Of the total home lots available, 726 and 641 were under construction or
complete (including 121 and 115 models and sales offices) and 1,902 and 2,554
were under option at January 31, 1995 and October 31, 1994, respectively.
In addition, in substantially completed or suspended developments the
Company owned or had under option 336 and 332 home lots at January 31, 1995
and October 31, 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 January 31, 1995 the Company controlled such land to build
13,719 proposed homes, compared to 12,696 homes at October 31, 1994.
The Company's commercial properties represent long-term investments in
commercial and retail facilities completed or under development (see
"Investment Properties" under "Results of Operations"). When individual
facilities are completed and substantially leased, the Company will have the
ability to obtain long-term financing on such properties. At January 31,
1995, the Company had long-term non-recourse financing aggregating
$17,513,000 on two commercial facilities, a decrease of $28,000 from October
31, 1994, due to principal amortization.
The collateralized mortgages receivable are pledged against non-recourse
collateralized mortgage obligations. Residential mortgages receivable
amounting to $9,481,000 and $23,460,000 at January 31, 1995 and October 31,
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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 1995 COMPARED TO
THE THREE MONTHS ENDED JANUARY 31, 1994
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, metro
Washington, D.C. (northern Virginia), and southwestern California.
Operations in California began for the first time during the summer of 1994.
In addition, the Company develops and operates commercial properties as long-
term investments in New Jersey, and, to a lesser extent, Florida.
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 reports
covering the three month periods ended May 31, 1994 and August 31, 1994 were
filed on Form 10-Q. The report covering the eight month transition period of
March 1, 1994 through October 31, 1994 was filed on Form 10-K. Thereafter,
the Company will file reports as of January 31, April 30, July 31, and
October 31.
Historically, the Company realized a substantial portion of its net
income in the fourth quarter of the year and a very small portion or even a
loss in the first quarter. As an example, in the old fiscal year ended
February 28, 1994, the Company's fourth quarter net income was $11.4 million
or 61.0% of the year's total, while the first quarter had a $2.3 million
loss. The Company still expects the fourth quarter to show a larger portion
of the new fiscal year ended October 31 net income, and the first quarter to
show a very small portion of the year's net income.
As a result of the year end change noted above, the first quarter of the
fiscal year ending October 31, 1995 is being compared to a substantial
portion of the old fourth quarter ended February 28, 1994. Since the home
sales revenue volume is significantly lower for the three months ended
January 31, 1995, certain comparisons (primarily overheads) to the three
months ended January 31, 1994 will be unfavorable and misleading. The first
quarter of the fiscal year ending October 31, 1995 did report net income of
$0.7 million compared to the loss noted in the previous paragraph of $2.3
million. Where applicable in the following "Results of Operations",
comparisons will be made to the three months ended May 31, 1994 which would
have been the first quarter of the year ended February 28, 1995 had the year
end not been changed.
At January 31, 1995 the Company's home contract backlog for future
delivery was 1,914 homes, with an aggregate sales value of $330.2 million,
compared to 2,476 homes, with an aggregate sales value of $358.4 million at
the same time last year. For the three months ended January 31, 1995 net
contracts signed amounted to $127.2 million or 781 homes, compared to $126.5
million or 922 homes for the same period last year.
Total Revenues:
Revenues for the three months ended January 31, 1995 decreased $47.9
million or 27.6%, compared to the same period last year. This was a result
of decreased revenues from sale of homes of $48.2 million., a $0.7 million
decrease in financial services revenues, and a $0.3 million decrease in
collateralized mortgage financing revenues. These decreases were partially
offset by a $1.3 million increase in land sales and other homebuilding
revenues.
Homebuilding:
Sale of homes revenues decreased $48.2 million, or 29.1% during the
three months ended January 31, 1995, compared to the same period last year.
Sale of homes 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 Three Months
January 31, Ended
------------------- May 31,
1995 1994 1994
-------- -------- ------------
(Dollars in Thousands)
Northeast Region:
Housing Revenues.......... $ 72,874 $123,367 $ 48,000
Homes Delivered........... 395 741 311
North Carolina:
Housing Revenues.......... $ 21,585 $ 21,317 $ 24,363
Homes Delivered........... 135 164 177
Florida:
Housing Revenues.......... $ 15,917 $ 14,947 $ 11,573
Homes Delivered........... 104 124 87
Metro Washington, D.C.:
Housing Revenues.......... $ 4,886 $ 5,866 $ 8,441
Homes Delivered........... 25 33 52
California:
Housing Revenues.......... $ 2,094 -- --
Homes Delivered........... 11 -- --
Other:
Housing Revenues.......... $ 318 $ 365 $ 499
Homes Delivered........... 6 6 8
Totals:
Housing Revenues.......... $117,674 $165,862 $ 92,876
Homes Delivered........... 676 1,068 635
The three months ended January 31, 1995 sale of homes revenues decrease
(compared to the prior year) was due to the Company's change in year end.
Average sales prices have increased from $155,302 for the January 31, 1994
period to $173,817 for the January 31, 1995 period. 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, average
sales prices are increasing as a result of the addition of new higher priced
single family developments. In North Carolina, average sales prices
increased primarily due to the addition of higher priced communities to their
line of homes previously offered for sale. In Metro Washington, D.C. average
sales prices increased because during the three months ended January 31, 1995
there was a higher percentage of single family detached homes delivered than
during the three months ended January 31, 1994.
Cost of sales include 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,
---------------------
1995 1994
--------- ---------
(Dollars in Thousands)
Sale of Homes................... $117,674 $165,862
Cost of Sales................... 94,586 129,512
--------- ---------
Housing Gross Margin............ $ 23,088 $ 36,350
========= =========
Gross Margin Percentage......... 19.6% 21.9%
The Company sells a variety of home types in various local communities,
each yielding a different gross margin. As a result, depending on the mix of
both communities and of home types delivered, consolidated quarterly gross
margin will fluctuate up or down and may not be representative of the
consolidated gross margin for the year. In addition, the decrease in the
gross margin was also due to the following reasons:
. Material costs have increased in all markets during the above
periods as demand increased for such materials.
. A change in product mix with an additional 10.0% of home sales
coming from North Carolina and Florida where gross margins are
traditionally lower.
. Increased competition in all markets which keeps prices and margins
down.
Selling, general, and administrative expenses increased $4.4 million
during the three months ended January 31, 1995 compared to the same period
last year. As a percentage of sale of homes revenues such expenses increased
to 13.3% for the three months ended January 31, 1995 from 6.8% for the prior
year. The increas in selling, general, and administrative expenses is
primarily due to an increased number of communities open for sale, and
increased advertising and buyer concessions due to a more competitive sales
environment. The increase as a percentage of sale of homes revenues is the
result of a lower volume due to the change in year end (see year end comments
above). Selling, general, and administrative expenses for the three months
ended May 31, 1994 as a percentage of sale of homes revenues was 14.0%.
Land and Lot Operations:
Land sales and other revenues consist primarily of land and lot sales,
title insurance activities, interest income, contract deposit forfeitures,
and during the three months ended January 31, 1995, California housing
management operations.
A breakout of land and lot sales is set forth below:
Three Months Ended
January 31,
--------------------
1995 1994
--------- ---------
Land and Lot Sales............................. $ 1,307 $ 1,121
Cost of Sales.................................. 406 746
--------- ---------
Land and Lot Sales Gross Margin................ $ 901 $ 375
========= =========
Land and lot sales are incidental to the Company's residential housing
operations and are expected to continue in the future but may significantly
fluctuate up or down.
In May 1994, the Company purchased a homebuilding and management company
in California for $0.8 million. Although no new management contracts are
being obtained, the existing contracts resulted in $0.7 million of revenues
for the three months ended January 31, 1995. Included in Other Operations
(see below) are expenses associated with the California homebuilding
management operations, and amortization of a portion of the acquisition price
of management contracts.
Financial Services
Financial services consists primarily of originating mortgages from
sales of the Company's homes, and selling such mortgages in the secondary
market. Approximately 30% and 20% of the Company's homebuyers obtained
mortgages originated by the Company's wholly-owned mortgage banking
subsidiaries during the years ended October 31, 1994 and 1993, respectively.
For the three months ended January 31, 1995 a loss was incurred primarily due
to expansion costs into other Company housing markets, reduced volume, and
reduced interest rate spreads, due to increased competition. Most servicing
rights on new mortgages originated by the Company will be sold as the loans
are closed.
Investment Properties
Investment Properties consist of rental properties, property management,
and gains or losses from sale of such property. At January 31, 1995, the
Company owned and was leasing two office buildings, three office/warehouse
facilities, three retail centers, and a senior citizen rental community in
New Jersey. Investment Properties expenses do not include interest expense
which is reported below under "Interest."
Collateralized Mortgage Financing
In the years prior to February 29, 1988 the Company pledged mortgage
loans originated by its mortgage banking subsidiaries against collateralized
mortgage obligations ("CMO's"). Subsequently the Company discontinued its
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, the Company has sold CMO pledged
mortgages. The cost of such sales and the write-off of unamortized issuance
expenses resulted in the loss during the three months ended January 31, 1994.
Corporate General and Administrative
Corporate general and administration expenses includes the operations at
the Company's headquarters in Red Bank, New Jersey. Such expenses includes
the Company's long term improvement initiatives of total quality, process
redesign, and training. Such initiatives resulted in additional expenses for
the three months ended January 31, 1995 over 1994 amounting to approximately
$0.4 million. Excluding such initiatives, Corporate general and
administration expenses increased $0.1 million during the three months ended
January 31, 1995 compared to the same period last year, or 4.4%. As a
percentage of total revenues such expenses were 2.6% and 1.5% for the three
months ended January 31, 1995 and 1994, respectively. As a percentage of
total revenues such expenses were 3.2% for the three months ended May 31,
1994.
Interest
Interest expense includes housing, land and lot, and rental properties
interest. Interest expense is broken down as follows:
Three Months Ended
January 31,
--------------------
1995 1994
--------- ---------
Sale of Homes......................... $ 3,727 $ 4,607
Land and Lot Sales.................... 23 13
Rental Properties..................... 1,165 1,081
--------- ---------
Total................................. $ 4,915 $ 5,701
========= =========
Housing interest as a percentage of sale of homes revenues amounted to 3.2%
and 2.8% for the three months ended January 31, 1995 and 1994, respectively.
The increase of interest as a percentage of sale of homes revenues is
primarily attributable to increased interest rates on the Company's line of
credit.
Other Operations
Other operations consisted primarily of title insurance activities,
miscellaneous residential housing operations expenses, amortization of
prepaid subordinated note issuance expenses, corporate owned life insurance
loan interest, and California housing management operations (see "Land Sales
and Other Revenues" above). During the three months ended January 31, 1995
other expenses included California homebuilding management expenses and
amortization of purchased management contracts totaling $0.8 million.
Total Taxes
Total taxes as a percentage of income before income taxes amounted to
6.9% and 30.9% for the three months ended January 31, 1995 and 1994,
respectively. The low percentage for the three months ended January 31, 1995
was due primarily to permanent differences between book and tax income. The
lower income before income taxes is the greater the impact such differences
have on taxes as a percentage of income. Deferred federal and state income
tax assets primarily represents the deferred tax benefits arising from
temporary differences between book and tax income which will be recognized in
future years.
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 on
its behalf by the undersigned thereunto duly authorized.
HOVNANIAN ENTERPRISES, INC.
(Registrant)
DATE: 3/16/95 /S/KEVORK S. HOVNANIAN
Kevork S. Hovnanian,
Chairman of the Board and
Chief Executive Officer
DATE: 3/16/95 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Article 5
Multiplier 1,000 except EPS
Period 3 months
Fiscal Year End October 31, 1995
Period End January 31, 1995
Cash 10,532
Securities --
Receivables 29,545
Allowances For Doubtful Accounts --
Inventory 441,307
Total Current Assets 513,935
PP&E 24,176
Accumulated Depreciation 12,326
Total Assets 640,414
Total Current Liabilities 237,173
Bonds and Mortgages 240,377
Preferred Stock --
Common Stock 237
Other Stockholder's Equity 162,627
Total Liability and Equity 640,414
Net Sales of Tangible Products --
Total Revenues 125,596
Costs of Tangible Goods Sold --
Total Cost and Expenses Applicable
to Sales and Revenues 119,893
Other Costs and Expenses --
Provision for Doubtful Accounts --
Interest Expense 4,915
Income Before Taxes 788
Income Tax Expense 54
Income/Loss Continuing Operations 734
Discontinued Operations --
Extraordinary Items --
Cumulative Effect-Change In
Accounting Principles --
Net Income or Loss 734
EPS-Primary 0.03
EPS-Diluted 0.03
</TABLE>
