SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10Q
[ X ] Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For quarterly period ended JULY 31, 1996 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 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 [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 15,130,185 Class A Common
Shares and 7,906,868 Class B Common Shares were outstanding as of August 30,
1996.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at July 31,
1996 (unaudited) and October 31, 1995 3
Consolidated Statements of Income for the
three and nine months ended July 31, 1996
and 1995 (unaudited) 5
Consolidated Statements of Stockholders' Equity
for the nine months ended July 31, 1996
(unaudited) 6
Consolidated Statements of Cash Flows
for the nine months ended July 31,
1996 and 1995 (unaudited) 7
Notes to Consolidated Financial
Statements (unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
PART II. Other Information
Item 6(b). Exhibit 27 - Financial Data Schedules
Item 6(c). No reports on Form 8K have been filed during
the quarter for which this report is filed.
Signatures 17
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
July 31, October 31,
ASSETS 1996 1995
----------- -----------
<S> <C> <C>
Homebuilding:
Cash and cash equivalents....................... $ 12,624 $ 14,147
----------- -----------
Inventories - At cost, not in excess of fair
value:
Sold and unsold homes and lots under
development.................................. 393,037 345,410
Land and land options held for future
development or sale......................... 69,465 59,003
----------- -----------
Total Inventories........................... 462,502 404,413
----------- -----------
Receivables, deposits, and notes................ 32,728 27,782
----------- -----------
Property, plant, and equipment - net............ 17,590 14,644
----------- -----------
Prepaid expenses and other assets............... 42,049 26,422
----------- -----------
Total Homebuilding.......................... 567,493 487,408
----------- -----------
Financial Services:
Cash and cash equivalents....................... 1,306
Mortgage loans held for sale.................... 29,123 46,621
Other assets.................................... 1,572 1,940
----------- -----------
Total Financial Services.................... 30,695 49,867
----------- -----------
Investment Properties:
Rental property - net........................... 52,670 63,310
Property under development or held for future
development................................... 13,439 11,368
Other assets.................................... 3,047 3,795
Investment in and advances to unconsolidated
joint venture................................. 353 3,804
----------- -----------
Total Investment Properties................. 69,509 82,277
----------- -----------
Collateralized Mortgage Financing:
Collateral for bonds payable.................... 10,862 18,184
Other assets.................................... 538 1,281
----------- -----------
Total Collateralized Mortgage Financing..... 11,400 19,465
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits........................................ 6,422 6,361
----------- -----------
Total Assets...................................... $685,519 $645,378
=========== ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
July 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
----------- -----------
<S> <C> <C>
Homebuilding:
Nonrecourse land mortgages........................... $ 25,096 $ 25,046
Accounts payable and other liabilities............... 33,447 48,619
Customers' deposits.................................. 18,284 11,626
Nonrecourse mortgages secured by operating properties 3,941 4,003
----------- -----------
Total Homebuilding............................... 80,768 89,294
----------- -----------
Financial Services:
Accounts payable and other liabilities............... 3,593 1,043
Mortgage warehouse line of credit.................... 22,851 41,855
----------- -----------
Total Financial Services......................... 26,444 42,898
----------- -----------
Investment Properties:
Accounts payable and other liabilities............... 749 1,105
Nonrecourse mortgages secured by rental property..... 31,179 31,490
----------- -----------
Total Investment Properties...................... 31,928 32,595
----------- -----------
Collateralized Mortgage Financing:
Accounts payable and other liabilities............... 12 14
Bonds collateralized by mortgages receivable......... 10,433 17,880
----------- -----------
Total Collateralized Mortgage Financing.......... 10,445 17,894
----------- -----------
Notes Payable:
Revolving credit agreement........................... 148,700 80,650
Subordinated notes................................... 200,000 200,000
Accrued interest..................................... 6,041 5,712
----------- -----------
Total Notes Payable.............................. 354,741 286,362
----------- -----------
Total Liabilities................................ 504,326 469,043
----------- -----------
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 15,466,920 shares
(including 345,874 shares held in Treasury)........ 154 154
Common Stock,Class B,$.01 par value-authorized
13,000,000 shares; issued 8,261,881 shares
(including 345,874 shares held in Treasury)........ 83 83
Paid in Capital...................................... 33,935 33,935
Retained Earnings.................................... 152,320 147,462
Treasury Stock - at cost............................. (5,299) (5,299)
----------- -----------
Total Stockholders' Equity....................... 181,193 176,335
----------- -----------
Total Liabilities and Stockholders' Equity............. $685,519 $645,378
=========== ===========
<FN>
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 Nine Months Ended
July 31, July 31,
------------------- -------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Homebuilding:
Sale of homes...................... $187,128 $163,375 $439,202 $420,656
Land sales and other revenues...... 3,683 4,835 11,337 12,130
--------- --------- --------- ---------
Total Homebuilding............... 190,811 168,210 450,539 432,786
Financial Services................... 1,947 1,897 4,397 4,721
Investment Properties................ 2,240 2,524 8,790 7,010
Collateralized Mortgage Financing.... 814 522 1,689 1,516
--------- --------- --------- ---------
Total Revenues................... 195,812 173,153 465,415 446,033
--------- --------- --------- ---------
Expenses:
Homebuilding:
Cost of sales...................... 150,487 132,173 354,298 340,783
Selling, general and administrative 23,531 22,147 57,003 55,403
Inventory Impairment Loss.......... 559 559
--------- --------- --------- ---------
Total Homebuilding............... 174,577 154,320 411,860 396,186
Financial Services................... 1,989 2,413 5,572 6,524
Investment Properties................ 1,310 1,380 4,727 4,355
Collateralized Mortgage Financing.... 764 553 1,685 1,609
Corporate General and Administration. 3,179 2,798 10,375 9,023
Interest............................. 7,963 7,214 20,359 18,640
Other operations..................... 1,498 1,404 4,406 5,104
--------- --------- --------- ---------
Total Expenses................... 191,280 170,082 458,984 441,441
--------- --------- --------- ---------
Income Before Income Taxes............. 4,532 3,071 6,431 4,592
--------- --------- --------- ---------
State and Federal Income Taxes:
State................................ 759 383 1,595 889
Federal.............................. 663 603 (22) 205
--------- --------- --------- ---------
Total Taxes........................ 1,422 986 1,573 1,094
--------- --------- --------- ---------
Net Income............................. $ 3,110 $ 2,085 $ 4,858 $ 3,498
========= ========= ========= =========
Earnings Per Common Share.............. $ 0.13 $ 0.09 $ 0.21 $ 0.15
========= ========= ========= =========
<FN>
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, 1995... 15,038,483 $154 7,998,570 $83 $33,935 $147,462 $(5,299) $176,335
Conversion of Class B to
Class A Common Stock...... 82,563 (82,563)
Net Income.................. 4,858 4,858
----------- -------- ----------- -------- ------- --------- --------- --------
Balance, July 31, 1996...... 15,121,046 $154 7,916,007 $83 $33,935 $152,320 $(5,299) $181,193
=========== ======== =========== ======== ======= ========= ========= ========
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Nine Months Ended
July 31,
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income............................................. $ 4,858 $ 3,498
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation....................................... 3,747 3,033
Gain (loss) on sale and retirement of property
and assets....................................... (2,130) 59
Deferred income taxes.............................. 3,548 3,634
Decrease (increase) in assets:
Escrow cash...................................... (20) (1,407)
Receivables, prepaids and other assets........... (20,068) (15,596)
Mortgage notes receivable........................ 18,418 5,751
Inventories...................................... (58,089) (98,342)
Increase (decrease) in liabilities:
State and Federal income taxes................... (3,609) (3,405)
Customers' deposits.............................. 6,861 7,540
Interest and other accrued liabilities........... (5,712) (1,305)
Post development completion costs................ 1,675 (2,657)
Accounts payable................................. (11,436) 12,575
---------- ----------
Net cash used in operating activities.......... (61,957) (86,622)
---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of property and assets.............. 10,032 1,046
Investment in property and assets...................... (3,914) (4,015)
Investment in and advances to unconsolidated affiliates 3,625 331
Investment in income producing properties.............. (2,071) (4,438)
---------- ----------
Net cash provided (used) by investing activities 7,672 (7,076)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes...................... 846,319 763,129
Principal payments on mortgages and notes.............. (805,035) (679,959)
Investment in mortgage notes receivable................ 7,555 3,651
Proceeds from sale of stock............................ 77
---------- ----------
Net cash provided by financing activities...... 48,839 86,898
---------- ----------
Net Decrease In Cash..................................... (5,446) (6,800)
Cash Balance, Beginning Of Period........................ 11,914 14,537
---------- ----------
Cash Balance, End Of Period.............................. $ 6,468 $ 7,737
========== ==========
<FN>
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, 1995
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 Nine Months Ended
July 31, July 31,
------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
(Dollars in Thousands)
Interest Incurred (1):
Residential (3)............. $ 8,093 $ 8,448 $ 22,765 $ 23,683
Commercial(4)............... 1,300 1,305 4,201 4,095
-------- -------- -------- --------
Total Incurred............ $ 9,393 $ 9,753 $ 26,966 $ 27,778
======== ======== ======== ========
Interest Expensed:
Residential (3)............. $ 6,663 $ 5,858 $ 16,158 $ 14,690
Commercial (4).............. 1,300 1,356 4,201 3,950
-------- -------- -------- --------
Total Expensed........... $ 7,963 $ 7,214 $ 20,359 $ 18,640
======== ======== ======== ========
Interest Capitalized at
Beginning of Period......... $ 41,108 $ 35,831 $ 36,182 $ 29,480
Plus Interest Incurred........ 9,393 9,753 26,966 27,778
Less Interest Expensed........ 7,963 7,214 20,359 18,640
Less Charges to Reserves...... 222 73 473 321
-------- -------- -------- --------
Interest Capitalized at
End of Period .............. $ 42,316 $ 38,297 $ 42,316 $ 38,297
======== ======== ======== ========
Interest Capitalized at
End of Period (5):
Residential(3).............. $ 35,818 $ 31,922 $ 35,818 $ 31,922
Commercial(2)............... 6,498 6,375 6,498 6,375
-------- -------- -------- --------
Total Capitalized......... $ 42,316 $ 38,297 $ 42,316 $ 38,297
======== ======== ======== ========
(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 interest expense when homes are delivered.
(4) Represents interest allocated to or incurred on long term debt for
investment properties and charged to interest expense.
(5) Capitalized commercial interest at July 31, 1995 includes $257,000
reported at October 31, 1994 as capitalized residential interest. This
reclassification was the result of the transfer of two senior citizen
rental facilities from inventory.
3. Homebuilding accumulated depreciation at July 31, 1996 and October 31,
1995 amounted to $15,693,000 and $13,731,000, respectively. Rental property
accumulated depreciation at July 31, 1996 and October 31, 1995 amounted to
$10,442,000 and $9,440,000, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The Company's uses for cash during the nine months ended July 31, 1996 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
$245,000,000 (the "Revolving Credit Facility") through March 1999. Interest is
payable monthly and at various rates of either prime plus 1/4% or Libor plus
1.75%. The Company currently is in compliance and intends to maintain
compliance with its covenants under the Agreement. As of July 31, 1996,
borrowings under the Agreement were $148,700,000.
The aggregate principal amount of subordinated indebtedness issued by the
Company and outstanding as of July 31, 1996 was $200,000,000. Annual sinking
fund payments of $20,000,000 are required in April 2000 and 2001 with additional
payments of $60,000,000 and $100,000,000 due in April 2002 and June 2005,
respectively.
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 July 31, 1996, the aggregate
principal amount of all such borrowings was $33,284,000.
The book value of the Company's residential inventories, rental
condominiums, and commercial properties completed and under development amounted
to the following:
July 31, October 31,
1996 1995
------------ ------------
Residential real estate inventory.......... $462,502,000 $404,413,000
Residential rental property................ 12,685,000 12,381,000
------------ ------------
Total Residential Real Estate............ 475,187,000 416,794,000
Commercial properties...................... 53,424,000 62,297,000
------------ ------------
Combined Total........................... $528,611,000 $479,091,000
============ ============
Total residential real estate increased $58,393,000 during the nine months
ended July 31, 1996 primarily as a result of an inventory increase of
$58,089,000. The increase in residential real estate inventory was primarily
due to the Company's seasonal increase in construction activities for deliveries
later this year. Substantially all residential homes under construction or
completed and included in real estate inventory at July 31, 1996 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)
Homes Contracted Remaining
Commun- Approved Deliv- Not Home Sites
ities Lots ered Delivered Available
------- -------- ------ ---------- ---------
July 31, 1996...... 83 13,789 4,787 2,062 6,940
October 31, 1995... 92 14,767 4,743 1,426 8,598
(1) Includes 41 and 97 lots under option at July 31, 1996 and October 31, 1995,
respectively.
(2) Of the total home lots available, 595 and 420 were under construction or
complete (including 116 and 119 models and sales offices) and 1,341 and 2,353
were under option at July 31, 1996 and October 31, 1995, respectively.
In addition, at July 31, 1996 and October 31, 1995, respectively, in
substantially completed or suspended developments the Company owned or had under
option 379 and 323 home lots. 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 July 31, 1996
the Company controlled such land to build 12,516 proposed homes, compared to
12,637 homes at October 31, 1995.
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 July 31, 1996, the Company had long-
term non-recourse financing aggregating $31,179,000 on six commercial
facilities, a decrease from October 31, 1995, due to $311,000 in principal
amortization. In January, 1996 the Company sold a retail center with a book
value of $8,022,000 at October 31, 1995. The sale of this center and
depreciation were the primary causes for the $8,873,000 decrease in commercial
properties.
Collateral Mortgage Financing - collateral for bonds payable consist of
collateralized mortgages receivable which are pledged against non-recourse
collateralized mortgage obligations. Financial Services - mortgage loans held
for sale consist of residential mortgages receivable of which $28,404,000 and
$45,669,000 at July 31, 1996 and October 31, 1995, 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 AND NINE MONTHS ENDED JULY 31, 1996 COMPARED
TO THE THREE AND NINE MONTHS ENDED JULY 31, 1995
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. In addition,
the Company develops and operates commercial properties as long-term investments
in New Jersey, and, to a lesser extent, Florida.
Historically, for the Company each quarter of the first nine months of a
year produces significantly fewer deliveries than the last quarter of a year.
This was true for the three quarters ended July 31, 1995 and management believes
will be true for the three quarters ended July 31, 1996. As a result, net
income for the last quarter of fiscal 1996 will be significantly greater than
each of the first three quarters.
An important indicator of the future results is the Company's recently
signed contracts. For the nine months ended July 31, 1996 net contracts signed
amounted to $526.6 million or 3,030 homes, compared to $491.6 million or 2,951
homes for the same period last year. At July 31, 1996 the Company's home
contract backlog for future delivery was 2,128 homes, with an aggregate sales
value of $386.4 million, compared to 2,259 homes, with an aggregate sales value
of $407.3 million at the same time last year. The increase in net contracts
signed were primarily attributable to the Company's Florida and California
markets. The decrease in backlog is the result of a lower opening backlog at
November 1, 1995 compared to November 1, 1994.
Total Revenues:
Revenues for the three months ended July 31, 1996 increased $22.7 million
or 13.1%, compared to the same period last year. This was a result of increased
revenues from the sale of homes of $23.8 million, a $0.1 million increase in
financial servicing revenues, and a $0.3 million increase in collateralized
mortgage financing revenues. These increases were partially offset by a $0.3
million decrease in investment properties revenues and a $1.2 million decrease
in land sales and other homebuilding revenues.
Revenues for the nine months ended July 31, 1996 increased $19.4 million or
4.3%, compared to the same period last year. This was a result of increased
revenues from sale of homes of $18.5 million, a $0.2 million increase in
collateralized mortgage financing revenues and a $1.8 million increase in
investment properties. These increases were partially offset by a $0.8 million
decrease in land sales and other homebuilding revenues and a $0.3 million
decrease in financial services revenues.
Homebuilding:
Sale of homes revenues increased $23.8 million or 14.5% during the three
months ended July 31, 1996, and increased $18.5 million or 4.4% during the nine
months ended July 31, 1996 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 Nine Months Ended
July 31, July 31,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
(Dollars in Thousands)
Northeast Region:
Housing Revenues..... $112,665 $101,431 $249,980 $263,840
Homes Delivered...... 584 610 1,266 1,513
North Carolina:
Housing Revenues..... $ 33,506 $ 29,670 $ 79,013 $ 74,338
Homes Delivered...... 199 188 471 471
Florida:
Housing Revenues..... $ 21,407 $ 14,037 $ 60,175 $ 43,885
Homes Delivered...... 139 96 388 295
Metro Washington, D.C.:
Housing Revenues..... $ 3,614 $ 12,335 $ 11,211 $ 26,242
Homes Delivered...... 16 58 49 135
California:
Housing Revenues..... $ 15,936 $ 5,902 $ 38,823 $ 11,162
Homes Delivered...... 83 28 204 55
Other:
Housing Revenues..... -- $ -- -- $ 1,189
Homes Delivered...... -- -- -- 33
Totals:
Housing Revenues..... $187,128 $163,375 $439,202 $420,656
Homes Delivered...... 1,021 980 2,378 2,502
The number of home deliveries declined 5.0% for the nine months ended July
31, 1996 (compared to the prior year). The decreased number of homes delivered
for the nine months ended July 31, 1996 (compared to the prior year) was
primarily due to the decreases in the Company's Northeast Region and Metro
Washington D. C. which were partially offset by increases in Florida and
California. Due to an unusually difficult winter in the Northeast Region, home
construction was delayed. In Metro Washington, D.C. the Company has cut back
its operations due to a highly competitive market. Housing revenues increased
$18.5 million or 4.4% during this period. This is because average sales prices
have increased. In the Northeast Region one reason average sales prices are
increasing is because of the Company's product mix of more detached single
family homes and larger townhouses with garages designed for the move-up buyer.
In North Carolina, average sales prices increased primarily due to the addition
of higher priced communities. In Metro Washington, D.C. average sales prices
increased because there was a higher percentage of single family detached homes
delivered. In Florida average sales prices increased as a result of the addition
of new, higher priced communities. In California average prices decreased due
to changes in product mix and reduced home prices because of increased
competition.
For the three months ended July 31, 1996 (compared to the prior year) the
number of homes delivered increased 4.2% and housing revenues increased 14.5%.
The delivery increases in North Carolina, Florida, and California were mostly
offset by reduced deliveries in the Northeast Region and Metro Washington D.C.
for the reasons noted for nine months. Housing revenues increases were also due
to the same reasons noted for the nine months.
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 Nine Months Ended
July 31, July 31,
--------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ----------
(Dollars in Thousands)
Sale of Homes................$187,128 $163,375 $439,202 $420,656
Cost of Sales................ 148,742 128,615 348,630 335,322
--------- --------- --------- ---------
Housing Gross Margin.........$ 38,386 $ 34,760 $ 90,572 $ 85,334
========= ========= ========= =========
Gross Margin Percentage...... 20.5% 21.3% 20.6% 20.3%
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, gross margin percentages
are higher in the Northeast Region compared to the Company's other markets. A
shift in the percentage of homes delivered out of the Northeast Region will
decrease the overall gross margin percentage. For the nine months ended July
31, 1996 gross margins in each of the Company's markets except Metro Washington
D.C. increased from the prior year. 56.9% of the home deliveries for the nine
months ended July 31, 1996 come from the Northeast Region compared to 62.7% for
the same period last year.
Selling, general, and administrative expenses increased $1.4 million during
the three months ended July 31, 1996 and increased $1.6 million during the nine
months ended July 31, 1996 compared to the same periods last year. As a
percentage of home sale revenues such expenses decreased to 12.6% and 13.0% for
the three and nine months ended July 31, 1996, respectively, from 13.6% and
13.2% for the prior year. The increase in the dollar amount of selling,
general, and administrative expenses is primarily due to increased homeowner
mortgage financing costs and property taxes, offset partially by reduced selling
salaries and commissions. Financing costs are up due to a higher percentage of
deliveries in markets where it is traditional for the seller to pay such costs.
Property taxes are up, primarily in California where inventories have increased
significantly over last year and property taxes are generally higher. As a
percentage of home sales revenues the decrease is due to increased home sale
revenues.
Land Sales and Other Revenues:
Land sales and other revenues consist primarily of land and lot sales,
title insurance activities, interest income, contract deposit forfeitures, and
California housing management operations.
A breakout of land and lot sales is set forth below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
Land and Lot Sales................ $ 1,727 $ 3,109 $ 6,396 $ 6,415
Cost of Sales..................... 1,745 3,558 5,668 5,461
-------- -------- -------- --------
Land and Lot Sales Gross Margin... $ (18) $ (449) $ 728 $ 954
======== ======== ======== ========
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. Although no new management contracts are being obtained, the
existing contracts resulted in $1.0 million of revenues for the nine months
ended July 31, 1995 compared to zero for the nine months ended July 31, 1996.
Included in Other Operations (see below) are expenses associated with the
California homebuilding management operations.
Financial Services
Financial services consist primarily of originating mortgages from sales of
the Company's homes, and selling such mortgages in the secondary market.
Approximately 34% and 30% of the Company's homebuyers obtained mortgages
originated by the Company's wholly-owned mortgage banking subsidiaries during
the years ended October 31, 1995 and 1994, respectively. For the nine months
ended July 31, 1996 and 1995 substantially all of the financial services losses
were the result of reduced volume and low 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. For the nine months ended July
31, 1996, due to cost cutting efforts, the Company has reduced expenses $1.0
million compared to the same period last year, while revenues only decreased
$0.3 million over the same period.
Investment Properties
Investment Properties consist of rental properties, property management,
and gains or losses from sale of such property. At July 31, 1996, the Company
owned and was leasing two office buildings, three office/warehouse facilities,
two retail centers, and two senior citizen rental communities in New Jersey.
During the first quarter of fiscal 1996 the Company sold a retail center and
reported a pretax profit of $2.0 million. 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.
During the three months ended July 31, 1996 the Company sold a portion of its
CMO pledged mortgages. The Company received a premium from these sales which
resulted in a profit after costs and the write-off of unamortized issuance
expenses.
Corporate General and Administrative
Corporate general and administration expenses includes the operations at
the Company's headquarters in Red Bank, New Jersey. Such expenses include the
Company's executive offices, information services, human resources, corporate
accounting, training, treasury, process redesign, internal audit, and
administration of insurance, quality, and safety. Corporate general and
administration expenses increased $0.4 million and $1.4 million during the three
and nine months ended July 31, 1996 compared to the same periods last year, or
13.6% and 15.0%. As a percentage of total revenues such expenses were 1.6% and
2.2% for the three and nine months ended July 31, 1996 compared to 1.6% and 2.0%
for the same periods last year. The increase was primarily the result of a one-
time insurance adjustment expensed at Corporate and increased depreciation on
recently acquired computer equipment for all Company locations.
Interest
Interest expense includes housing, land and lot, and rental properties
interest. Interest expense is broken down as follows:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ -------------------
1996 1995 1996 1995
-------- -------- -------- --------
Sale of Homes.................. $ 6,339 $ 5,347 $ 15,538 $ 14,104
Land and Lot Sales............. 324 511 620 586
Rental Properties.............. 1,300 1,356 4,201 3,950
-------- -------- -------- --------
Total.......................... $ 7,963 $ 7,214 $ 20,359 $ 18,640
======== ======== ======== ========
Housing interest as a percentage of sale of homes revenues amounted to 3.4% and
3.5% for the three and nine months ended July 31, 1996 and 3.3% and 3.4% for the
three and six months ended July 31, 1995.
Other Operations
Other operations consist 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 nine months ended July 31, 1995 other
expenses included California homebuilding management expenses and amortization
of purchased management contracts totaling $1.1 million.
Total Taxes
Total taxes as a percentage of income before income taxes amounted to 24.5%
for the nine months ended July 31, 1996 compared to 23.8% for the nine months
ended July 31, 1995. 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. 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: September 10, 1996 /S/KEVORK S. HOVNANIAN
Kevork S. Hovnanian,
Chairman of the Board and
Chief Executive Officer
DATE: September 10, 1996 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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--
--
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