UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10Q
[ X ] Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For quarterly period ended APRIL 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Commission file number 1-8551
Hovnanian Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-1851059
(State or other jurisdiction or (I.R.S. Employer
incorporation or organization) Identification No.)
l0 Highway 35, P.O. Box 500, Red Bank, N. J. 07701
(Address of principal executive offices)
732-747-7800
(Registrant's telephone number, including area code)
Same
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Sections l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 14,065,557 Class A Common
Shares and 7,715,259 Class B Common Shares were outstanding as of May 29, 1998.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at April 30,
1998 (unaudited) and October 31, 1997 3
Consolidated Statements of Income for the three
and six months ended April 30, 1998 and 1997
(unaudited) 5
Consolidated Statements of Stockholders' Equity
for the six months ended April 30, 1998
(unaudited) 6
Consolidated Statements of Cash Flows for
the six months ended April 30, 1998
and 1997 (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 4. Submission of Matters to a Vote of Security
Holders 19
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 20
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
April 30, October 31,
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Homebuilding:
Cash and cash equivalents....................... $ 9,807 $ 7,952
----------- -----------
Inventories - At cost, not in excess of fair
value:
Sold and unsold homes and lots under
development.................................. 378,503 363,592
Land and land options held for future
development or sale......................... 35,596 46,801
----------- -----------
Total Inventories........................... 414,099 410,393
----------- -----------
Receivables, deposits, and notes................ 43,503 35,723
----------- -----------
Property, plant, and equipment - net............ 17,434 18,027
----------- -----------
Prepaid expenses and other assets............... 35,370 36,708
----------- -----------
Total Homebuilding.......................... 520,213 508,803
----------- -----------
Financial Services:
Cash and cash equivalents....................... 1,479 2,598
Mortgage loans held for sale.................... 44,322 48,382
Other assets.................................... 2,736 2,518
----------- -----------
Total Financial Services.................... 48,537 53,498
----------- -----------
Investment Properties:
Held for sale:
Rental property - net......................... 4,777 23,920
Land and improvements......................... 19,214 15,026
Other assets.................................. 128 1,397
Held for investment:
Rental property - net......................... `10,980 11,412
Other assets.................................. 1,378 1,835
----------- -----------
Total Investment Properties................. 36,477 53,590
----------- -----------
Collateralized Mortgage Financing:
Collateral for bonds payable.................... 6,883 7,999
Other assets.................................... 574 627
----------- -----------
Total Collateralized Mortgage Financing..... 7,457 8,626
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits........................................ 12,222 12,565
----------- -----------
Total Assets...................................... $624,906 $637,082
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
April 30, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
----------- -----------
<S> <C> <C>
Homebuilding:
Nonrecourse land mortgages........................ $ 17,324 $ 20,625
Accounts payable and other liabilities............ 38,696 45,521
Customers' deposits............................... 22,482 22,422
Nonrecourse mortgages secured by operating
properties...................................... 3,782 3,830
----------- -----------
Total Homebuilding............................ 82,284 92,398
----------- -----------
Financial Services:
Accounts payable and other liabilities............ 1,432 1,522
Mortgage warehouse line of credit................. 39,974 45,823
----------- -----------
Total Financial Services...................... 41,406 47,345
----------- -----------
Investment Properties:
Accounts payable and other liabilities............ 1,751 502
Nonrecourse mortgages secured by rental property.. 5,669 19,241
----------- -----------
Total Investment Properties................... 7,420 19,743
----------- -----------
Collateralized Mortgage Financing:
Accounts payable and other liabilities............ 10 10
Bonds collateralized by mortgages receivable...... 6,695 7,855
----------- -----------
Total Collateralized Mortgage Financing....... 6,705 7,865
----------- -----------
Notes Payable:
Revolving credit agreement........................ 101,425 95,000
Subordinated notes................................ 190,000 190,000
Accrued interest.................................. 5,858 5,969
----------- -----------
Total Notes Payable........................... 297,283 290,969
----------- -----------
Total Liabilities............................. 435,098 458,320
----------- -----------
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 15,765,353 shares
(including 1,594,274 shares held in Treasury)... 157 156
Common Stock,Class B,$.01 par value-authorized
13,000,000 shares; issued 8,069,782 shares
(including 345,874 shares held in Treasury)..... 80 81
Paid in Capital................................... 34,512 33,935
Retained Earnings................................. 168,705 157,779
Treasury Stock - at cost.......................... (13,646) (13,189)
----------- -----------
Total Stockholders' Equity.................... 189,808 178,762
----------- -----------
Total Liabilities and Stockholders' Equity.......... $624,906 $637,082
=========== ===========
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 Six Months Ended
April 30, April 30,
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Homebuilding:
Sale of homes...................... $203,567 $136,235 $407,624 $251,350
Land sales and other revenues...... 3,854 2,895 6,339 3,855
--------- --------- --------- ---------
Total Homebuilding............... 207,421 139,130 413,963 255,205
Financial Services................... 4,140 1,928 7,702 3,786
Investment Properties................ 609 2,261 4,253 4,488
Collateralized Mortgage Financing.... 150 207 362 400
--------- --------- --------- ---------
Total Revenues................... 212,320 143,526 426,280 263,879
--------- --------- --------- ---------
Expenses:
Homebuilding:
Cost of sales...................... 170,806 117,695 340,606 217,912
Selling, general and administrative 15,858 11,821 31,515 21,717
Inventory impairment loss.......... 359 13,475 1,948 13,475
--------- --------- --------- ---------
Total Homebuilding............... 187,023 142,991 374,069 253,104
--------- --------- --------- ---------
Financial Services................... 3,580 2,408 6,791 4,800
--------- --------- --------- ---------
Investment Properties:
Operations......................... 753 1,642 1,876 3,204
Provisions for impairment loss..... 14,446 14,446
--------- --------- --------- ---------
Total Investment Properties...... 753 16,088 1,876 17,650
--------- --------- --------- ---------
Collateralized Mortgage Financing.... 157 224 359 471
--------- --------- --------- ---------
Corporate General and Administration. 4,779 3,283 9,140 6,877
--------- --------- --------- ---------
Interest............................. 7,990 8,016 16,466 13,508
--------- --------- --------- ---------
Other Operations..................... 428 443 951 1,251
--------- --------- --------- ---------
Total Expenses................... 204,710 173,453 409,652 297,661
--------- --------- --------- ---------
Income (Loss) Before Income Taxes...... 7,610 (29,927) 16,628 (33,782)
--------- --------- --------- ---------
State and Federal Income Taxes:
State................................ 596 (123) 1,244 242
Federal.............................. 2,001 (10,662) 4,458 (13,108)
--------- --------- --------- ---------
Total Taxes........................ 2,597 (10,785) 5,702 (12,866)
--------- --------- --------- ---------
Net Income (Loss)...................... $ 5,013 $(19,142) $ 10,926 $(20,916)
========= ========= ========= =========
Basic and Diluted Earnings (Loss) Per
Common Share........................ $ 0.23 $ (0.83) $ 0.50 $ (0.91)
========= ========= ========= =========
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, 1997. 14,097,841 $156 7,754,812 $81 $33,935 $157,779 ($13,189) $178,762
Sale of Common Stock under
employee stock option
plan.................... 106,334 577 577
Conversion of Class B to
Class A Common Stock.... 30,904 1 (30,904) (1)
Treasury stock purchases.. (64,000) (457) (457)
Net Income................ 10,926 10,926
----------- ------ ----------- ------ ------- -------- -------- --------
Balance, April 30, 1998... 14,171,079 $157 7,723,908 $80 $34,512 $168,705 ($13,646) $189,808
=========== ====== =========== ====== ======= ======== ======== ========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Six Months Ended
April 30,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss)................................... $ 10,926 $ (20,916)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation.................................... 1,936 2,928
(Gain)loss on sale and retirement of property
and assets.................................... (2,690) (92)
Deferred income taxes........................... 2,336 (8,784)
Provision to reduce inventory to net
realizable value.............................. 1,948 27,921
Decrease (increase) in assets:
Escrow cash................................... (472) 2,619
Receivables, prepaids and other assets........ (7,453) (17,335)
Mortgage notes receivable..................... 5,819 38,028
Inventories................................... (5,654) (74,471)
Increase (decrease) in liabilities:
State and Federal income taxes................ (1,992) (11,378)
Customers' deposits........................... 179 11,952
Interest and other accrued liabilities........ (2,490) (1,265)
Post development completion costs............. 1,349 (4,213)
Accounts payable.............................. (4,739) (10,271)
---------- ----------
Net cash provided by (used) in operating
activities................................ (997) (65,277)
---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of property and assets........... 22,119 -
Purchase of property................................ (1,230) (1,580)
Investment in and advances to unconsolidated
affiliates........................................ 403 49
Investment in income producing properties........... (4,188) (7,647)
---------- ----------
Net cash provided by (used) in investing
activities................................ 17,104 (9,178)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 280,003 485,153
Principal payments on mortgages and notes........... (297,525) (409,123)
Principal payments on subordinated debt............. - (10,000)
Investment in mortgage notes receivable............. 1,166 535
Purchase of treasury stock.......................... (457) (1,526)
Proceeds from sale of stock......................... 577 -
---------- ----------
Net cash provided by (used) in financing
activities................................ (16,236) 65,039
---------- ----------
Net Increase (Decrease) In Cash....................... (129) (9,416)
Cash Balance, Beginning Of Period..................... 8,065 15,323
---------- ----------
Cash Balance, End Of Period.......................... $ 7,936 $ 5,907
========== ==========
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, 1997
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 Six Months Ended
April 30, April 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Dollars in Thousands)
Interest Incurred (1):
Residential (3)........... $ 6,656 $ 7,108 $ 13,298 $ 13,692
Commercial(4)............. 485 1,296 1,164 2,613
-------- -------- -------- --------
Total Incurred.......... $ 7,141 $ 8,404 $ 14,462 $ 16,305
======== ======== ======== ========
Interest Expensed:
Residential (3)........... $ 7,505 $ 6,720 $ 15,302 $ 10,895
Commercial (4)............ 485 1,296 1,164 2,613
-------- -------- -------- --------
Total Expensed......... $ 7,990 $ 8,016 $ 16,466 $ 13,508
======== ======== ======== ========
Interest Capitalized at
Beginning of Period....... $ 30,695 $ 41,551 $ 35,950 $ 39,152
Plus Interest Incurred...... 7,141 8,404 14,462 16,305
Less Interest Expensed...... 7,990 8,016 16,466 13,508
Less Charges to Reserves.... - 92 - 102
Less Impairment Adjustments. - 945 460 945
Less Sale of Assets......... - - 3,640 -
-------- -------- -------- --------
Interest Capitalized at
End of Period............. $ 29,846 $ 40,902 $ 29,846 $ 40,902
======== ======== ======== ========
Interest Capitalized at
End of Period (5):
Residential(3)............ $ 27,340 $ 33,772 $ 27,340 $ 33,772
Commercial(2)............. 2,506 7,130 2,506 7,130
-------- -------- -------- --------
Total Capitalized....... $ 29,846 $ 40,902 $ 29,846 $ 40,902
======== ======== ======== ========
(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 and
when land is not under active development.
(4) Represents interest allocated to or incurred on long term debt for
investment properties and charged to interest expense.
(5) Commercial interest includes $831,000 reported at October 31, 1996 as
capitalized residential interest. This reclassification is a result of
the transfer of land and related capitalized interest from homebuilding
to investment properties.
3. Homebuilding accumulated depreciation at April 30, 1998 and October
31, 1997 amounted to $16,829,000 and $15,338,000, respectively. Rental
property accumulated depreciation at April 30, 1998 and October 31, 1997
amounted to $3,097,000 and $10,450,000, respectively.
4. In accordance with FAS 121, the Company records impairment losses on
inventories related to communities under development when events and
circumstances indicate that they may be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than their related carrying
amounts. At April 30, 1997 inventory with a carrying amount of $27,510,000 was
written down to its fair value. The total amount of this writedown was
$8,714,000. This was principally attributed to a $5,364,000 writedown of the
Company's investment in Florida communities. This writedown was based upon
management's decision to reduce its investment in Florida by accelerating sales
through the reduction of sales prices and offering pricing concessions. The
remainder of the writedown at April 30, 1997 was attributable to one community
in New Jersey and one in Pennsylvania. The FAS 121 calculations were based on
the Company's evaluation of the expected revenue less costs to complete
including interest and selling costs. In addition, the Company, from time to
time, will write off certain residential land options including approval,
engineering and capitalized interest costs for properties management decides
not to purchase. The Company wrote off such costs on two properties in New
Jersey amounting to $1,589,000 and $359,000 during the three months ended
January 31, 1998 and April 30, 1998, respectively. During the three months
ended April 30, 1997 the Company wrote off $4,761,000 on two properties in New
Jersey and one in Pennsylvania. Residential inventory FAS 121 impairment losses
and option write offs are reported on the Consolidated Statements of Income as
"Homebuilding-Inventory Impairment Loss."
At April 30, 1997 the Company decided to exit the investment properties
business. As a result, all commercial properties were no longer held for use,
but held for sale. This resulted in FAS 121 impairment losses on certain
investment properties. The impairment losses were the result of the properties
carrying amounts exceeding their fair value less selling costs. At April 30,
1997, properties with a carrying amount of $33,820,000 were written down to
their fair value. The total amount of this writedown was $12,690,000. At
April 30, 1997 the Company also recorded a $1,756,000 write-off of a
commercial land option including approval, engineering and capitalized
interest costs. The writedowns and write-offs for the quarter ended April
30, 1997 were attributable to commercial properties in both New Jersey and
Florida. Investment property FAS 121 impairment losses and option write offs
are reported on the Consolidated Statements of Income as "Investment
Properties - Provisions for Impairment Loss."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The Company's uses for cash during the six months ended April 30, 1998 were
for operating expenses, increases in housing inventories, construction, income
taxes, interest, and the repurchase of common stock. The Company provided for
its cash requirements from the revolving credit facility, sales of commercial
properties, 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.
In December 1996 the Board of Directors authorized a stock repurchase
program to purchase up to 2 million shares of Class A Common Stock. As of
April 30, 1998, 1,248,400 shares were repurchased under this program.
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 2000. Interest
is payable monthly and at various rates of either prime plus 1/8% or Libor
plus 1.625%. The Company believes that it will be able either to extend the
Agreement beyond March 2000 or negotiate a replacement facility, but there
can be no assurance of such extension or replacement facility. The Company
currently is in compliance and intends to maintain compliance with its
covenants under the Agreement. As of April 30, 1998, borrowings under the
Agreement were $101,425,000.
The aggregate principal amount of subordinated indebtedness issued by the
Company and outstanding as of April 30, 1998 was $190,000,000. Annual sinking
fund payments of $10,000,000 and $20,000,000 are required in April 2000 and
2001, respectively, 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 April 30, 1998, the
aggregate principal amount of all such borrowings was $46,669,000.
The book value of the Company's residential inventories, rental
condominiums, and commercial properties completed and under development amounted
to the following:
April 30, October 31,
1998 1997
------------ ------------
Residential real estate inventory.......... $414,099,000 $410,393,000
Residential rental property................ 10,980,000 11,412,000
------------ ------------
Total Residential Real Estate............ 425,079,000 421,805,000
Commercial properties...................... 23,991,000 38,946,000
------------ ------------
Combined Total........................... $449,070,000 $460,751,000
============ ============
Total residential real estate increased $3,274,000 during the six months
ended April 30, 1998 primarily as a result of a small inventory increase of
$3,706,000. Substantially all residential homes under construction or
completed and included in real estate inventory at April 30, 1998 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 (including Poland):
(1) (2)
Homes Contracted Remaining
Commun- Approved Deliv- Not Home Sites
ities Lots ered Delivered Available
------- -------- ------ ---------- ----------
April 30, 1998........ 75 15,812 6,573 1,863 7,376
October 31, 1997...... 88 16,252 5,817 1,846 8,589
(1) Includes 77 and 24 lots under option at April 30, 1998 and October 31, 1997,
respectively.
(2) Of the total home lots available, 450 and 579 were under construction or
complete (including 43 and 101 models and sales offices), 3,065 and 3,968 were
under option, and 578 and 762 were financed through purchase money mortgages at
April 30, 1998 and October 31, 1997, respectively.
In addition, at April 30, 1998 and October 31, 1997, respectively, in
substantially completed or suspended communities, the Company owned or had
under option 231 and 254 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 April 30,
1998 the Company controlled such land to build 11,645 proposed homes, compared
to 9,736 homes at October 31, 1997.
The following table summarizes the Company's started or completed unsold
homes in active, substantially complete and suspended communities:
April 30, October 31,
1998 1997
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 196 13 209 279 63 342
North Carolina...... 82 - 82 83 -- 83
Florida............. 36 7 43 47 11 58
Virginia............ 15 6 21 16 10 26
California.......... 56 16 72 60 16 76
Poland.............. 29 1 30 10 2 12
------ ------ ----- ------ ------ -----
Total 414 43 457 495 102 597
====== ====== ===== ====== ====== =====
The Company's commercial properties represent investments in commercial and
retail facilities completed or under development (see "Investment Properties"
under "Results of Operations"). At April 30, 1998, the Company had long-term
non-recourse financing aggregating $5,669,000 on one commercial facility, a
decrease of $13,572,000 from October 31, 1997, due to the sale of four
facilities. The book value of the four facilities was $19,585,000 which was
the primary reason commercial facilities declined during the six months ended
April 30, 1998.
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 $43,650,000 and
$47,660,000 at April 30, 1998 and October 31, 1997, 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 SIX MONTHS ENDED APRIL 30, 1998
COMPARED TO THE THREE AND SIX MONTHS ENDED APRIL 30, 1997
The Company's operations consist primarily of residential housing
development and sales in its Northeast Region (comprising of New Jersey,
southern New York State and eastern Pennsylvania), North Carolina, southeastern
Florida, northern Virginia, southern California and Poland. In addition, the
Company develops and operates commercial properties as long-term investments in
New Jersey, and, to a lesser extent, Florida, but is exiting this business (see
"Investment Properties" below).
Historically, the Company's first six months produces the least amount of
deliveries for the year. The Company's management has made a concerted effort
to change this trend using new management tools to focus on delivery evenness
and through a new incentive plan. As a result, the first six months produced
slightly less than 50% of the Company's estimated deliveries for fiscal 1998
compared to 35% in the first six months of fiscal 1997. By increasing
deliveries from 1,318 in 1997 to 1,942 in 1998 the Company substantially
increased net income from its housing operations. Management is working hard to
continue this trend and is trying to ensure future quarters will show similar
delivery evenness.
Important indicators of the future results of the Company are recently
signed contracts and home contract backlog for future deliveries. The Company's
sales contracts and homes in contract (using base sales prices) by market area
is set forth below:
Sales Contracts for the
Three Months Ended Contract Backlog
April 30, as of April 30,
----------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Dollars............. $286,896 $211,384 $312,662 $286,424
Homes............... 1,309 1,099 1,359 1,401
North Carolina:
Dollars............. $ 59,893 $ 67,494 $ 51,920 $ 62,851
Homes............... 328 366 272 333
Florida:
Dollars............. $ 16,433 $ 31,107 $ 18,050 $ 39,276
Homes............... 87 185 94 222
Virginia:
Dollars............. $ 13,449 $ 7,757 $ 11,025 $ 5,764
Homes............... 50 37 39 27
California:
Dollars............. $ 28,304 $ 38,651 $ 14,626 $ 16,317
Homes............... 154 191 79 85
Poland:
Dollars............. $ 1,609 $ 2,075 $ 2,600 $ 3,088
Homes............... 20 28 35 42
Totals:
Dollars............. $406,584 $358,468 $410,883 $413,720
Homes............... 1,948 1,906 1,878 2,110
Total Revenues:
Revenues for the three months ended April 30, 1998 increased $68.8 million
or 47.9%, compared to the same period last year. This was the result of a
$67.3 million increase in revenues from the sale of homes, a $1.0 million
increase in land sales and other homebuilding revenues and a $2.2 million
increase in financial services revenues. The increases were partially
offset by a $1.7 million decrease in investment properties revenues.
Revenues for the six months ended April 30, 1998 increased $162.4 million
or 61.5%, compared to the same period last year. This was the result of a
$156.3 million increase in revenues from the sale of homes, a $2.5 million
increase in land sales and other homebuilding revenues, and a $3.9 million
increase in financial services revenues. The increases were partially offset by
a $0.3 million decrease in investment properties revenues.
Homebuilding:
Revenues from the sale of homes increased $67.3 million or 49.4% during
the three months ended April 30, 1998, and increased $156.3 million or 62.2%
during the six months ended April 30, 1998, 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 Six Months Ended
April 30, April 30,
------------------- ------------------
1998 1997 1998 1997
--------- -------- -------- --------
(Dollars in Thousands)
Northeast Region:
Housing Revenues..... $136,133 $ 70,678 $275,144 $134,118
Homes Delivered...... 597 345 1,237 675
North Carolina:
Housing Revenues..... $ 28,264 $ 26,341 $ 53,940 $ 48,383
Homes Delivered...... 153 139 288 266
Florida:
Housing Revenues..... $ 15,254 $ 17,042 $ 24,766 $ 30,870
Homes Delivered...... 90 101 143 180
Virginia:
Housing Revenues..... $ 4,843 $ 3,018 $ 10,961 $ 6,425
Homes Delivered...... 18 16 38 34
California:
Housing Revenues..... $ 17,613 $ 18,489 $ 40,734 $ 30,822
Homes Delivered...... 95 95 212 152
Poland:
Housing Revenues..... $ 1,460 $ 667 $ 2,079 $ 732
Homes Delivered...... 17 10 24 11
Totals:
Housing Revenues..... $203,567 $136,235 $407,624 $251,350
Homes Delivered...... 970 706 1,942 1,318
The increase in the number of homes delivered was due to the Company's
efforts to even out deliveries during the year as noted above. The Company was
most successful in achieving evenness in its Northeast Region and California.
In Florida, deliveries declined since the Company cut back its operations due to
a dissatisfaction with its performance.
During the first and second quarters of fiscal 1998 the Company has
written off approval, engineering and capitalized interest costs associated
with two options in New Jersey amounting to $1,589,000 and $359,000,
respectively. The Company did not exercise the options because of changes in
local market conditions and it was having difficulties obtaining government
approvals.
During the second quarter of fiscal 1997 the Company recorded impairment
losses and wrote off option costs amounting to $8,714,000 and $4,761,000,
respectively. See "Notes to Consolidated Financial Statements - Note 4" for an
additional explanation.
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 Six Months Ended
April 30, April 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Dollars in Thousands)
Sale of Homes................ $203,567 $136,235 $407,624 $251,350
Cost of Sales................ 169,220 116,522 337,748 216,305
-------- -------- -------- --------
Housing Gross Margin......... $ 34,374 $ 19,731 $ 69,876 $ 35,045
======== ======== ======== ========
Gross Margin Percentage...... 16.9% 14.4% 17.1% 13.9%
Cost of Sales expenses as a percentage of home sales revenues are presented
below:
Three Months Ended Six Months Ended
April 30, April 30,
------------------- -------- --------
1998 1997 1998 1997
-------- -------- -------- --------
Sale of Homes................ 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of Sales:
Housing, land &
development costs.... 75.5% 76.9% 75.0% 76.9%
Commissions............ 1.9% 2.0% 1.9% 2.0%
Financing concessions.. 0.7% 0.9% 0.7% 0.9%
Overheads.............. 5.0% 5.8% 5.3% 6.3%
-------- -------- -------- --------
Total Cost of Sales.......... 83.1% 85.6% 82.9% 86.1%
-------- -------- -------- --------
Gross Margin................. 16.9% 14.4% 17.1% 13.9%
======== ======== ======== ========
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, gross margin percentages
are higher in the Northeast Region compared to the Company's other markets. For
the three and six months ended April 30, 1998 the Company's gross margin
increased 2.5% and 3.2%, respectively, compared to the same periods last year.
This can be attributed to a higher percentage of Northeast Region deliveries
amounting to 67% in both the three and six months ended April 30, 1998
compared to 52% and 53% for the same periods in 1997. In addition, except
for Florida, gross margins were higher in all the Company's U. S. markets.
Higher margins are also attributed to the Company's housing markets being
generally strong, permitting selective price increases and reduced selling
incentives; positive effects from process redesign and quality programs; and
an increased percentage of deliveries from better performing communities.
Selling, general, and administrative expenses as a percentage of total
homebuilding revenues, decreased to 7.6% for the three and six months ended
April 30, 1998 from 8.5% for the prior year three and six months. Such expenses
increased during the three and six months ended April 30, 1998 $4.0 million and
$9.8 million, respectively, compared to the same periods last year. The
percentage decrease and dollar increase in selling, general and administrative
is principally due to increased deliveries.
Land Sales and Other Revenues:
Land sales and other revenues consist primarily of land and lot sales. A
breakout of land and lot sales is set forth below:
Three Months Ended Six Months Ended
April 30, April 30,
------------------ -------- --------
1998 1997 1998 1997
-------- -------- -------- --------
Land and Lot Sales................ $ 1,766 $ 1,352 $ 3,363 $ 1,896
Cost of Sales..................... 1,586 1,173 2,858 1,607
-------- -------- -------- --------
Land and Lot Sales Gross Margin... 180 179 505 289
Interest Expense.................. 159 134 317 237
-------- -------- -------- --------
Land and Lot Sales Profit Before
Tax............................. $ 21 $ 45 $ 188 $ 52
======== ======== ======== ========
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.
Financial Services
Financial services consist primarily of originating mortgages from sales of
the Company's homes, and selling such mortgages in the secondary market and
title insurance activities. For the three and six months ended April 30, 1998
financial services provided a $0.6 million and $0.9 million pretax profit,
respectively, compared to losses of $0.5 million and $1.0 million for the same
periods in 1997. This was a direct result of the Company's mortgage banking and
title subsidiaries originating a higher volume of mortgages and title policies,
respectively, due to the housing operations increased volume. The Company
recently initiated efforts to originate mortgages from unrelated third parties
and expects these third party loans to increase as a percentage of the Company's
total loan volume over the next few years.
Investment Properties
Investment Properties consist of rental properties, property management,
and gains or losses from the sale of such property. At the end of the second
quarter of 1997 the Company announced that it was planning an orderly exit from
the investment properties business. The Company is selling its investment
properties (except for the two senior citizen rental communities) and during the
first quarter of 1998 sold four facilities. At April 30, 1998 the Company has
one retail facility remaining and is a 50% partner in a joint venture also
owning a retail facility. Both are under contract and expected to close prior
to the end of fiscal 1998. In addition the Company has various parcels of land
approved for commercial development. The Company has contracts on all parcels
and expects to close all sales by October 31, 1998.
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, as a result of bonds becoming callable, the Company has also
sold a portion of its CMO pledged mortgages.
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. As a percentage of total
revenues such expenses amounted to 2.3% for both the three months ended April
30, 1998 and 1997. For the six months ended April 30, 1998 such expenses
decreased to 2.1% from 2.6% for the prior year six months. Corporate general
and administration expenses increased $1.5 million and $2.3 million during the
three and six months ended April 30, 1998 compared to the same periods last
year. These increases are primarily attributed to increased bonus accruals
based on 1998 projected increase in Return on Equity, increased depreciation
from the amortization of capitalized process redesign costs in prior years and
increased process redesign costs in 1998.
The Company has assessed and formulated a plan to resolve any year 2000
issues. The plan includes internal and external resources. The Company does
not anticipate this plan to have a material impact on future earnings and is
expected to be completed by the end of fiscal 1999.
Interest
Interest expense includes housing, land and lot, and rental properties
interest. Interest expense is broken down as follows:
Three Months Ended Six Months Ended
April 30, April 30,
------------------ -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Sale of Homes.............. $ 7,346 $ 6,586 $ 14,985 $ 10,658
Land and Lot Sales......... 159 134 317 237
Rental Properties.......... 485 1,296 1,164 2,613
-------- -------- -------- ---------
Total...................... $ 7,990 $ 8,016 $ 16,466 $ 13,508
======== ======== ======== =========
Housing interest as a percentage of sale of homes revenues amounted to 3.6%
and 3.7% for the three and six months ended April 30, 1998, respectively,
compared to 4.8% and 4.3% for the three and six months ended April 30, 1997,
respectively. The decrease in the percentage for the three and six months ended
April 30, 1998 was primarily the result of the Company's lower levels of debt
while at the same time increasing deliveries.
Other Operations
Other operations consist primarily of miscellaneous residential housing
operations expenses, amortization of prepaid subordinated note issuance expenses
and corporate owned life insurance loan interest.
Total Taxes
Total taxes as a percentage of income before taxes amounted to
approximately 34% for the three and six months ended April 30, 1998. Due to
losses in fiscal 1997, the Company recorded tax credits. Deferred federal and
state income tax assets primarily represent the deferred tax benefits arising
from temporary differences between book and tax income which will be recognized
in future years.
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 56% of the Company's total costs and expenses.
Item 4. Submisstion to Matters to a Vote of Security Holders
The Company held its annual stockholders meeting on April 14, 1998 at 10:30
a.m. in the Board Room of the American Stock Exchange, 13th floor, 86 Trinity
Place, New York, New York. The following matters were voted at the meeting:
. Election of all Directors to hold office until the next Annual Meeting
of Stockholders. The elected Directors were:
.. Kevork S. Hovnanian
.. Ara K. Hovnanian
.. Paul W. Buchanan
.. Arthur Greenbaum
.. Desmond P. McDonald
.. Peter S. Reinhart
.. J. Larry Sorsby
.. Stephen D. Weinroth
. Ratification of selection of Ernst & Young, LLP as certified independent
accountants for fiscal year ending October 31, 1998.
.. Votes For 87,034,211
.. Votes Against 60,226
.. Abstain 24,044
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: June 5, 1998 /S/J. LARRY SORSBY
J. Larry Sorsby,
Senior Vice President,
Treasurer and
Chief Financial Officer
DATE: June 5, 1998 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
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