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 JULY 31, 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. 14,057,485 Class A Common
Shares and 7,699,835 Class B Common Shares were outstanding as of August 25,
1998.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at July 31,
1998 (unaudited) and October 31, 1997 3
Consolidated Statements of Income for the three
and nine months ended July 31, 1998 and 1997
(unaudited) 5
Consolidated Statements of Stockholders' Equity
for the nine months ended July 31, 1998
(unaudited) 6
Consolidated Statements of Cash Flows
for the nine months ended July 31, 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 10
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 20
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
July 31, October 31,
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Homebuilding:
Cash and cash equivalents....................... $ 13,663 $ 7,952
----------- -----------
Inventories - At cost, not in excess of fair
value:
Sold and unsold homes and lots under
development.................................. 365,556 363,592
Land and land options held for future
development or sale......................... 50,742 46,801
----------- -----------
Total Inventories........................... 416,298 410,393
----------- -----------
Receivables, deposits, and notes................ 41,244 35,723
----------- -----------
Property, plant, and equipment - net............ 17,155 18,027
----------- -----------
Prepaid expenses and other assets............... 35,347 36,708
----------- -----------
Total Homebuilding.......................... 523,707 508,803
----------- -----------
Financial Services:
Cash and cash equivalents....................... 1,426 2,598
Mortgage loans held for sale.................... 59,825 48,382
Other assets.................................... 3,306 2,518
----------- -----------
Total Financial Services.................... 64,557 53,498
----------- -----------
Investment Properties:
Held for sale:
Rental property - net......................... 4,790 23,920
Land and improvements......................... 19,953 15,026
Other assets.................................. 36 1,397
Held for investment:
Rental property - net......................... 10,888 11,412
Other assets.................................. 860 1,835
----------- -----------
Total Investment Properties................. 36,527 53,590
----------- -----------
Collateralized Mortgage Financing:
Collateral for bonds payable.................... 6,296 7,999
Other assets.................................... 336 627
----------- -----------
Total Collateralized Mortgage Financing..... 6,632 8,626
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits........................................ 5,642 12,565
----------- -----------
Total Assets...................................... $637,065 $637,082
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
July 31, October 31,
1998 1997
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding:
Nonrecourse land mortgages........................ $ 14,941 $ 20,625
Accounts payable and other liabilities............ 45,559 45,521
Customers' deposits............................... 25,649 22,422
Nonrecourse mortgages secured by operating
properties...................................... 3,757 3,830
----------- -----------
Total Homebuilding............................ 89,906 92,398
----------- -----------
Financial Services:
Accounts payable and other liabilities............ 1,574 1,522
Mortgage warehouse line of credit................. 54,908 45,823
----------- -----------
Total Financial Services...................... 56,482 47,345
----------- -----------
Investment Properties:
Accounts payable and other liabilities............ 2,093 502
Nonrecourse mortgages secured by rental property.. 5,648 19,241
----------- -----------
Total Investment Properties................... 7,741 19,743
----------- -----------
Collateralized Mortgage Financing:
Accounts payable and other liabilities............ 23 10
Bonds collateralized by mortgages receivable...... 5,873 7,855
----------- -----------
Total Collateralized Mortgage Financing....... 5,896 7,865
----------- -----------
Notes Payable:
Revolving credit agreement........................ 86,000 95,000
Subordinated notes................................ 190,000 190,000
Accrued interest.................................. 4,742 5,969
----------- -----------
Total Notes Payable........................... 280,742 290,969
----------- -----------
Total Liabilities............................. 440,767 458,320
----------- -----------
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 15,797,146 shares
(including 1,740,274 shares held in Treasury)... 157 156
Common Stock,Class B,$.01 par value-authorized
13,000,000 shares; issued 8,046,322 shares
(including 345,874 shares held in Treasury)..... 80 81
Paid in Capital................................... 34,561 33,935
Retained Earnings................................. 176,418 157,779
Treasury Stock - at cost.......................... (14,918) (13,189)
----------- -----------
Total Stockholders' Equity.................... 196,298 178,762
----------- -----------
Total Liabilities and Stockholders' Equity.......... $637,065 $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 Nine Months Ended
July 31, July 31,
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Homebuilding:
Sale of homes...................... $237,900 $186,684 $645,524 $438,034
Land sales and other revenues...... 1,954 13,502 8,293 17,357
--------- --------- --------- ---------
Total Homebuilding............... 239,854 200,186 653,817 455,391
Financial Services................... 5,562 2,577 13,264 6,363
Investment Properties................ 2,530 2,091 6,783 6,579
Collateralized Mortgage Financing.... 179 253 541 653
--------- --------- --------- ---------
Total Revenues................... 248,125 205,107 674,405 468,986
--------- --------- --------- ---------
Expenses:
Homebuilding:
Cost of sales...................... 196,024 163,716 536,630 381,628
Selling, general and administrative 17,530 16,346 49,045 38,063
Inventory impairment loss.......... 1,550 3,498 13,475
--------- --------- --------- ---------
Total Homebuilding............... 215,104 180,062 589,173 433,166
--------- --------- --------- ---------
Financial Services................... 4,837 2,474 11,628 7,274
--------- --------- --------- ---------
Investment Properties:
Operations......................... 787 1,291 2,663 4,495
Provision for impairment loss...... 14,446
--------- --------- --------- ---------
Total Investment Properties...... 787 1,291 2,663 18,941
--------- --------- --------- ---------
Collateralized Mortgage Financing.... 181 208 540 679
--------- --------- --------- ---------
Corporate General and Administration. 5,543 3,228 14,683 10,105
--------- --------- --------- ---------
Interest............................. 8,773 8,572 25,239 22,080
--------- --------- --------- ---------
Other Operations..................... 510 270 1,461 1,521
--------- --------- --------- ---------
Total Expenses................... 235,735 196,105 645,387 493,766
--------- --------- --------- ---------
Income (Loss) Before Income Taxes...... 12,390 9,002 29,018 (24,780)
--------- --------- --------- ---------
State and Federal Income Taxes:
State................................ 982 748 2,226 990
Federal.............................. 3,695 2,034 8,153 (11,074)
--------- --------- --------- ---------
Total Taxes........................ 4,677 2,782 10,379 (10,084)
--------- --------- --------- ---------
Net Income (Loss)...................... $ 7,713 $ 6,220 $ 18,639 $(14,696)
========= ========= ========= =========
Basic and Diluted Earnings (Loss)
Per Common Share..................... $ 0.35 $ 0.27 $ 0.85 $ (0.64)
========= ========= ========= =========
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............. 114,667 626 626
Conversion of Class B to
Class A Common Stock.... 54,364 1 (54,364) (1)
Treasury stock purchases.. (210,000) (1,729) (1,729)
Net Income................ 18,639 18,639
----------- ------ ----------- ------ ------- -------- -------- --------
Balance, July 31, 1998.... 14,056,872 $157 7,700,448 $80 $34,561 $176,418 $ 14,918 $196,298
=========== ====== =========== ====== ======= ======== ======== ========
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,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss)................................... $ 18,639 $ (14,696)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation.................................... 2,936 3,848
(Gain) loss on sale and retirement of property
and assets.................................... (2,678) 124
Deferred income taxes........................... 1,623 (2,986)
Impairment losses............................... 3,498 27,921
Decrease (increase) in assets:
Escrow cash................................... (747) 2,739
Receivables, prepaids and other assets........ (4,536) (20,187)
Mortgage notes receivable..................... (9,541) 29,678
Inventories................................... (9,403) (105,281)
Increase (decrease) in liabilities:
State and Federal income taxes................ 5,301 (13,883)
Customers' deposits........................... 3,319 14,451
Interest and other accrued liabilities........ (974) (1,582)
Post development completion costs............. 1,840 (4,341)
Accounts payable.............................. (490) (5,231)
---------- ----------
Net cash provided by (used) in operating
activities................................ 8,787 (89,426)
---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of property and assets........... 22,134 224
Purchase of property................................ (2,128) (2,593)
Investment in and advances to unconsolidated
affiliates........................................ 473 195
Investment in income producing properties........... (4,927) (8,027)
---------- ----------
Net cash provided by (used) in investing
activities................................ 15,552 (10,201)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 432,627 990,429
Principal payments on mortgages and notes........... (453,891) (884,624)
Principal payments on subordinated debt............. (10,000)
Investment in mortgage notes receivable............. 1,756 918
Purchase of treasury stock.......................... (1,729) (4,630)
Proceeds from sale of stock......................... 626
---------- ----------
Net cash provided by (used) in financing
activities................................ (20,611) 92,093
---------- ----------
Net Increase (Decrease) In Cash....................... 3,728 (7,534)
Cash Balance, Beginning Of Period..................... 8,065 15,323
---------- ----------
Cash Balance, End Of Period.......................... $ 11,793 $ 7,789
========== ==========
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 Nine Months Ended
July 31, July 31,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Dollars in Thousands)
Interest Incurred (1):
Residential (3)........... $ 6,789 $ 6,950 $ 20,087 $ 20,642
Commercial(4)............. 680 1,346 1,844 3,959
-------- -------- -------- --------
Total Incurred.......... $ 7,469 $ 8,296 $ 21,931 $ 24,601
======== ======== ======== ========
Interest Expensed:
Residential (3)........... $ 8,093 $ 7,226 $ 23,395 $ 18,121
Commercial (4)............ 680 1,346 1,844 3,959
-------- -------- -------- --------
Total Expensed......... $ 8,773 $ 8,572 $ 25,239 $ 22,080
======== ======== ======== ========
Interest Capitalized at
Beginning of Period....... $ 29,846 $ 40,902 $ 35,950 $ 39,152
Plus Interest Incurred...... 7,469 8,296 21,931 24,601
Less Interest Expensed...... 8,773 8,572 25,239 22,080
Less Charges to Reserves.... 7 109
Less Impairment Adjustments. 460 945
Less Sale of Assets......... 3,640
-------- -------- -------- --------
Interest Capitalized at
End of Period............. $ 28,542 $ 40,619 $ 28,542 $ 40,619
======== ======== ======== ========
Interest Capitalized at
End of Period (5):
Residential(3)............ $ 26,036 $ 33,489 $ 26,036 $ 33,489
Commercial(2)............. 2,506 7,130 2,506 7,130
-------- -------- -------- --------
Total Capitalized....... $ 28,542 $ 40,619 $ 28,542 $ 40,619
======== ======== ======== ========
(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 land is not under active
development and when homes are delivered.
(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 July 31, 1998 and October 31,
1997 amounted to $14,237,000 and $15,338,000, respectively. Rental property
accumulated depreciation at July 31, 1998 and October 31, 1997 amounted to
$3,189,000 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. As of July 31, 1998 inventory in New Jersey with a carrying amount of
$2,536,000 was written down $1,550,000 to its fair value. The Company has
decided to sell this New Jersey property through lot sales and has decreased
lot prices to speed up liquidation. As of July 31, 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 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 decided 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
propeties in New Jersey and one in Pennsylvania. Residential innventory 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 from 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 a result of the
properties carrying amounts exceeding their fair value less selling costs. As
of 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. These 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 write offs are reported on
the Consolidated Statements of Income as "Investment Properties - Provisions
for Impairment Loss."
5. The cash balances used in the nine months ended July 31, 1998 column of
the Consolidated Statements of Cash Flows consist of the following:
Ending Beginning
Balance Balance
July 31, October 31,
1998 1997
----------- -----------
(In Thousands)
Homebuilding............................... $ 10,187 $ 5,128
Financial Services......................... 1,088 2,351
Investment Properties...................... 518 586
----------- -----------
Total................................... $ 11,793 $ 8,065
=========== ===========
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, 1998 were
for operating expenses, seasonal 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, sale 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
August 31, 1998, 1,394,400 shares have been 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
$280,000,000 (the "Revolving Credit Facility") through July 2001. Interest is
payable monthly and at various rates of either prime or Libor plus 1.45%. The
Company recently extended the Agreement one year and reduced interest rates
from prime plus 1/8% or Libor plus 1.625%. The Company believes that it will be
able either to extend the Agreement beyond July 2001 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 July 31, 1998,
borrowings under the Agreement were $86,000,000.
The aggregate principal amount of subordinated indebtedness issued by the
Company and outstanding as of July 31, 1998 was $190,000,000. During the nine
months ended July 31, 1997, the Company reduced its subordinated debt by
$10,000,000. 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 July 31, 1998, the
aggregate principal amount of all such borrowings was $60,781,000.
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,
1998 1997
------------ ------------
Residential real estate inventory.......... $416,298,000 $410,393,000
Residential rental property................ 10,888,000 11,412,000
------------ ------------
Total Residential Real Estate............ 427,186,000 421,805,000
Commercial properties...................... 24,743,000 38,946,000
------------ ------------
Combined Total........................... $451,929,000 $460,751,000
============ ============
Total residential real estate increased $5,381,000 during the nine months
ended July 31, 1998 primarily as a result of an inventory increase of
$5,905,000. Substantially all residential homes under construction or
completed and included in real estate inventory at July 31, 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
------- -------- ------ ---------- ----------
July 31, 1998......... 79 16,373 6,822 1,819 7,732
October 31, 1997...... 88 16,252 5,817 1,846 8,589
(1) Includes 75 and 24 lots under option at July 31, 1998 and October 31, 1997,
respectively.
(2) Of the total home lots available, 458 and 579 were under construction or
complete (including 50 and 101 models and sales offices), 3,752 and 3,968 were
under option, and 435 and 762 were financed through purchase money mortgages
at July 31, 1998 and October 31, 1997, respectively.
In addition, at July 31, 1998 and October 31, 1997, respectively, in
substantially completed or suspended communities, the Company owned or had under
option 299 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
July 31, 1998 the Company controlled such land to build 12,149 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:
July 31, October 31,
1998 1997
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 160 9 169 279 63 342
North Carolina...... 113 113 83 83
Florida............. 27 6 33 47 11 58
Virginia............ 24 12 36 16 10 26
California.......... 67 22 89 60 16 76
Poland.............. 21 1 22 10 2 12
------ ------ ----- ------ ------ -----
Total 412 50 462 495 102 597
====== ====== ===== ====== ====== =====
The Company's commercial properties represent investments in commercial and
retail facilities completed or under development (see "Investment Properties"
under "Results of Operations"). At July 31, 1998, the Company had long-term
non-recourse financing aggregating $5,648,000 on one commercial facility, a
decrease from $19,241,000 at October 31, 1997, primarily 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 nine months
ended July 31, 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 $59,156,000 and
$47,660,000 at July 31, 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 NINE MONTHS ENDED JULY 31, 1998
COMPARED TO THE THREE AND NINE MONTHS ENDED JULY 31, 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, southwestern 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 nine months produced
slightly less than 75% of the Company's estimated deliveries for fiscal 1998
compared to 60% in the first nine months of fiscal 1997. By increasing
deliveries from 2,246 for the first nine months of 1997 to 3,027 for the first
nine months of 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
Nine Months Ended Contract Backlog
July 31, as of July 31,
----------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Dollars............. $411,040 $336,244 $294,385 $305,365
Homes............... 1,847 1,748 1,218 1,507
North Carolina:
Dollars............. $ 93,195 $ 97,833 $ 50,623 $ 57,957
Homes............... 504 535 260 302
Florida:
Dollars............. $ 25,936 $ 46,403 $ 19,813 $ 41,201
Homes............... 135 281 98 238
Virginia:
Dollars............. $ 28,714 $ 11,518 $ 29,632 $ 6,927
Homes............... 114 51 127 27
California:
Dollars............. $ 53,706 $ 61,436 $ 21,688 $ 24,234
Homes............... 313 327 134 144
Poland:
Dollars............. $ 2,125 $ 2,511 $ 1,591 $ 2,543
Homes............... 26 33 19 33
Totals:
Dollars............. $614,716 $555,945 $417,732 $438,227
Homes............... 2,939 2,975 1,856 2,251
Total Revenues:
Revenues for the three months ended July 31, 1998 increased $43.0 million
or 21.0%, compared to the same period last year. This was the result of a
$51.2 million increase in revenues from the sale of homes, a $3.0 million
increase in financial services revenues, and a $0.4 million increase in
investment properties revenues. The increases were partially offset by a
$11.5 million decrease in land sales and other homebuilding revenues, and a
$0.1 million decrease in collateralized mortgage financing revenues.
Revenues for the nine months ended July 31, 1998 increased $205.4 million
or 43.8%, compared to the same period last year. This was the result of a
$207.5 million increase in revenues from the sale of homes, a $6.9 million
increase in financial services revenues, and a $0.2 million increase in
investment properties revenues. This increase was patially offset by a $9.1
million decrease in land sales and other homebuilding revenues, and a $0.1
million decrease in collateralized mortgage financing revenues.
Homebuilding:
Revenues from the sale of homes increased $51.2 million or 27.4% during
the three months ended July 31, 1998, and increased $207.5 million or 47.4%
during the nine months ended July 31, 1998 compared to the same periods 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,
------------------- -------------------
1998 1997 1998 1997
--------- -------- -------- --------
(Dollars in Thousands)
Northeast Region:
Housing Revenues..... $162,847 $118,186 $437,991 $252,303
Homes Delivered...... 679 543 1,916 1,218
North Carolina:
Housing Revenues..... $ 34,655 $ 35,293 $ 88,595 $ 83,676
Homes Delivered...... 188 200 476 466
Florida:
Housing Revenues..... $ 8,111 $ 14,325 $ 32,877 $ 45,195
Homes Delivered...... 44 80 187 260
Virginia:
Housing Revenues..... $ 11,256 $ 2,759 $ 22,217 $ 9,184
Homes Delivered...... 46 14 84 48
California:
Housing Revenues..... $ 18,832 $ 15,113 $ 59,566 $ 45,935
Homes Delivered...... 104 77 316 229
Poland:
Housing Revenues..... $ 2,199 $ 1,008 $ 4,278 $ 1,741
Homes Delivered...... 24 14 48 25
Totals:
Housing Revenues..... $237,900 $186,684 $645,524 $438,034
Homes Delivered...... 1,085 928 3,027 2,246
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. In Virginia
deliveries are up significantly due the the Company's acquisition of a small
builder on May 1, 1998. In Florida, deliveries declined since the Company cut
back its operations due to a dissatisfaction with its performance.
During the third quarter of fiscal 1998 the Company recorded an impairment
loss of $1,550,000, reducing a New Jersey property to its fair value. 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
additional explanation.
Cost of sales includes expenses for housing and land and lot sales. A
breakout of such expenses for housing sales and housing gross margin is set
forth below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Dollars in Thousands)
Sale of Homes................ $237,900 $186,684 $645,524 $438,034
Cost of Sales................ 194,898 154,701 532,646 371,006
-------- -------- -------- --------
Housing Gross Margin......... $ 43,002 $ 31,983 $112,878 $ 67,028
======== ======== ======== ========
Gross Margin Percentage...... 18.1% 17.1% 17.5% 15.3%
Cost of Sales expenses as a percentage of home sales revenues are presented
below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Sale of Homes................ 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of Sales:
Housing, land &
development costs.... 74.2 74.7 74.7 75.9
Commissions............ 1.9 2.0 1.9 2.0
Financing concessions.. 0.7 0.7 0.7 0.9
Overheads.............. 5.1 5.5 5.2 5.9
-------- -------- -------- --------
Total Cost of Sales.......... 81.9 82.9 82.5 84.7
-------- -------- -------- --------
Gross Margin................. 18.1% 17.1% 17.5% 15.3%
======== ======== ======== ========
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 on 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 nine months ended July 31, 1998 the Company's gross margin
increased 1.0% and 2.2%, respectively, compared to the same periods last year.
This can be attributed to higher gross margins being achieved in each of the
Company's markets except Florida. Additionally, the gross margin benefited
from a higher percentage of deliveries from the Northeast Region amounting to
68% in both the three and nine months ended July 31, 1998 compared to 63% and
58% for the same periods in 1997. 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 resedign
and quality programs; and an increased percentage of deliveries from better
performing communities.
Selling, general, and administrative costs as a percentage of total
homebuilding revenues decreased to 7.3% for the three months ended July 31,
1998 from 8.2% for the prior year's three months, and decreased to 7.5% for the
nine months ended July 31, 1998 from 8.4% for the prior year's nine months.
Such expenses increased during the three and nine months ended July 31, 1998
$1.2 million and $11.0 million, respectively, compared to the same periods last
year. The percentage decrease and dollar increase in selling, general and
administrative expenses 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 Nine Months Ended
July 31, July 31,
------------------ -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Land and Lot Sales................ $ 954 $ 12,749 $ 4,317 $ 14,645
Cost of Sales..................... 1,126 9,015 3,984 10,622
-------- -------- -------- --------
Land and Lot Sales Gross Margin... (172) 3,734 333 4,023
Interest Expense.................. 96 423 413 660
-------- -------- -------- --------
Land and Lot Sales Profit Before
Tax............................. $ (268) $ 3,311 $ (80) $ 3,363
======== ======== ======== ========
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 the
Company's homebuyers, as well as from third parties, selling such mortgages in
the secondary market, and title insurance activities. For the three and nine
months ended July 31, 1998 financial services provided a $0.7 million and $1.6
million pretax profit, respectively, compared to a profit of $0.1 million and a
loss of $0.9 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 properties. 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 and in the third quarter sold its
50% investment in a retail facility. At July 31, 1998 the Company has one
retail facility remaining which is 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 increased to 2.2% for the three months ended July 31,
1998 from 1.6% for the prior year's three months. Corporate general and
administration expenses increased $2.3 million and $4.6 million during the
three and nine months ended July 31, 1998 compared to the same periods last
year. These increases are primarily attributed to increased bonus accruals
based on a 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.
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,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
Sale of Homes.............. $ 7,997 $ 6,803 $ 22,982 $17,461
Land and Lot Sales......... 96 423 413 660
Rental Properties.......... 680 1,346 1,844 3,959
-------- -------- -------- --------
Total...................... $ 8,773 $ 8,572 $ 25,239 $22,080
======== ======== ======== ========
Housing interest as a percentage of sale of homes revenues amounted to 3.4%
and 3.6% for the three and nine months ended July 31, 1998, respectively, and
3.6% and 4.0% for the three and nine months ended July 31, 1997, respectively.
The decrease in the percentage for the three and nine months ended July 31, 1998
was primarily the result of the Company's lower debt levels.
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 36% for both the three and nine months ended July 31, 1998. Due
to the 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.
Year 2000 Issues
The Company has assessed and formulated a plan to resolve, its information
technology ("IT") and non-IT system year 2000 issues. The Company has
designated a full-time year 2000 project leader, engaged consultants to review
and evaluate its plan, identified Company IT and non-IT noncompliant systems and
is in the process of evaluating subcontractors and suppliers state of readiness.
The Company's plan has prioritized its efforts on its software systems and
computer hardware equipment. The Company expects to have substantially all
critical IT software year 2000 capable and tested by June 30, 1999. All other
Company IT and non-IT systems are not considered critical to Company operations
and if noncapable for year 2000 would only be an inconvenience. The Company
does not anticipate the costs of implementation of its plan to have a material
impact on future earnings.
The Company is concerned about the readiness of its subcontractors and
suppliers. The Company is in the process of communicating with these third
parties. If the Company finds third parties whose lack of readiness as to year
2000 issues would have a substantial impact on the Company's operations, the
Company will look to replace such subcontractors and suppliers. In most cases,
the Company uses more than one subcontractor and supplier so it believes
finding replacements will not be difficult.
The Company believes it is on track to solve its year 2000 issues. It does
not believe it will have material lost revenues due to the year 2000 issues.
Based on the above it sees no need to develop a worst-case year 2000 scenario.
However, the Company is in the process of developing year 2000 contingency
plans.
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.
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 9, 1998 /S/J. LARRY SORSBY
J. Larry Sorsby,
Senior Vice President,
Treasurer and
Chief Financial Officer
DATE: September 9, 1998 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
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