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, 2000 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. 13,530,842 Class A Common
Shares and 7,633,916 Class B Common Shares were outstanding as of September 1,
2000.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at July 31,
2000 (unaudited) and October 31, 1999 3
Consolidated Statements of Income for the three
and nine months ended July 31, 2000 and 1999
(unaudited) 5
Consolidated Statements of Stockholders' Equity
for the nine months ended July 31, 2000
(unaudited) 6
Consolidated Statements of Cash Flows
for the nine months ended July 31, 2000
and 1999 (unaudited) 7
Notes to Consolidated Financial
Statements (unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 19
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 23
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
July 31, October 31,
ASSETS 2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
Homebuilding:
Cash and cash equivalents....................... $ 19,268 $ 17,163
----------- -----------
Inventories - At the lower of cost or fair
value:
Sold and unsold homes and lots under
development.................................. 530,101 475,196
Land and land options held for future
development or sale......................... 86,325 52,034
----------- -----------
Total Inventories........................... 616,426 527,230
----------- -----------
Receivables, deposits, and notes................ 38,949 30,675
----------- -----------
Property, plant, and equipment - net............ 34,553 26,500
----------- -----------
Senior residential rental properties - net....... 10,372 10,650
----------- -----------
Prepaid expenses and other assets............... 64,186 56,753
----------- -----------
Total Homebuilding.......................... 783,754 668,971
----------- -----------
Financial Services:
Cash and cash equivalents....................... 1,540 2,202
Mortgage loans held for sale.................... 45,210 33,158
Other assets.................................... 2,178 1,563
----------- -----------
Total Financial Services.................... 48,928 36,923
----------- -----------
Collateralized Mortgage Financing:
Collateral for bonds payable.................... 4,306 5,006
Other assets.................................... 255 238
----------- -----------
Total Collateralized Mortgage Financing..... 4,561 5,244
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits........................................ 4,275 1,723
----------- -----------
Total Assets...................................... $841,518 $712,861
=========== ===========
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 2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
Homebuilding:
Nonrecourse land mortgages........................ $ 12,609 $ 6,407
Accounts payable and other liabilities............ 73,640 73,989
Customers' deposits............................... 37,149 25,647
Nonrecourse mortgages secured by operating
properties...................................... 3,577 3,662
----------- -----------
Total Homebuilding............................ 126,975 109,705
----------- -----------
Financial Services:
Accounts payable and other liabilities............ 1,731 1,218
Mortgage warehouse line of credit................. 40,211 30,034
----------- -----------
Total Financial Services...................... 41,942 31,252
----------- -----------
Collateralized Mortgage Financing:
Bonds collateralized by mortgages receivable...... 3,147 3,699
----------- -----------
Total Collateralized Mortgage Financing....... 3,147 3,699
----------- -----------
Notes Payable:
Revolving credit agreement........................ 166,275 70,125
Senior Notes...................................... 150,000 150,000
Subordinated notes................................ 100,000 100,000
Accrued interest.................................. 6,782 11,654
----------- -----------
Total Notes Payable........................... 423,057 331,779
----------- -----------
Total Liabilities............................. 595,121 476,435
----------- -----------
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 17,259,257 shares
(including 3,550,345 shares in July 2000 and
2,710,274 shares in October 1999 held
in Treasury).................................... 172 172
Common Stock,Class B,$.01 par value-authorized
13,000,000 shares; issued 7,981,396 shares
(both years include 345,874 shares held in
Treasury)....................................... 79 79
Paid in Capital................................... 45,862 45,856
Retained Earnings................................. 228,258 213,257
Treasury Stock - at cost.......................... (27,974) (22,938)
----------- -----------
Total Stockholders' Equity.................... 246,397 236,426
----------- -----------
Total Liabilities and Stockholders' Equity.......... $841,518 $712,861
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Homebuilding:
Sale of homes...................... $278,004 $227,071 $763,177 $621,094
Land sales and other revenues...... 2,208 3,552 7,651 11,447
--------- --------- --------- ---------
Total Homebuilding............... 280,212 230,623 770,828 632,541
Financial Services................... 4,664 5,616 12,859 15,428
Collateralized Mortgage Financing.... 106 47 332 322
--------- --------- --------- ---------
Total Revenues................... 284,982 236,286 784,019 648,291
--------- --------- --------- ---------
Expenses:
Homebuilding:
Cost of sales...................... 220,967 179,957 614,574 494,581
Selling, general and administrative 25,803 20,542 76,495 56,460
Inventory impairment loss.......... 1,003 1,232 1,517 1,633
--------- --------- --------- ---------
Total Homebuilding............... 247,773 201,731 692,586 552,674
--------- --------- --------- ---------
Financial Services................... 4,555 5,257 13,999 14,358
--------- --------- --------- ---------
Collateralized Mortgage Financing.... 92 68 283 341
--------- --------- --------- ---------
Corporate General and Administrative. 10,000 8,016 24,361 20,869
--------- --------- --------- ---------
Interest............................. 8,802 6,849 24,256 21,237
--------- --------- --------- ---------
Other Operations..................... 1,502 295 6,048 2,095
--------- --------- --------- ---------
Total Expenses................... 272,724 222,216 761,533 611,574
--------- --------- --------- ---------
Income Before Income Taxes and
Extraordinary Loss................... 12,258 14,070 22,486 36,717
--------- --------- --------- ---------
State and Federal Income Taxes:
State................................ (36) 1,554 423 4,382
Federal.............................. 4,203 4,038 7,062 10,277
--------- --------- --------- ---------
Total Taxes........................ 4,167 5,592 7,485 14,659
--------- --------- --------- ---------
Extraordinary Loss From Extinguishment
Of Debt, Net of Income Taxes......... (868) (868)
--------- --------- --------- ---------
Net Income............................. $ 8,091 $ 7,610 $ 15,001 $ 21,190
========= ========= ========= =========
Per Share Data:
Basic:
Income Per Common Share Before
Extraordinary Loss................. $ 0.37 $ 0.40 $ 0.68 $ 1.04
Extraordinary Loss................... (.04) (.04)
--------- --------- --------- ---------
Net Income........................... $ 0.37 $ 0.36 $ 0.68 $ 1.00
========= ========= ========= =========
Weighted Average Number of Common
Shares Outstanding.................. 21,904 20,979 22,089 21,274
========= ========= ========= =========
Assuming Dilution:
Income Per Common Share Before
Extraordinary Loss................. $ 0.37 $ 0.40 $ 0.68 $ 1.03
Extraordinary Loss................... (.04) (.04)
--------- --------- --------- ---------
Net Income........................... $ 0.37 $ 0.36 $ 0.68 $ 0.99
========= ========= ========= =========
Weighted Average Number of Common
Shares Outstanding................. 21,949 21,206 22,158 21,491
========= ========= ========= =========
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, 1999. 14,508,168 $ 172 7,651,209 $ 79 $45,856 $213,257 $(22,938) $236,426
Acquisitions.............. (488) (488)
Stock option plan......... 346 346
Stock bonus plan.......... 25,128 148 148
Conversion of Class B to
Class A Common Stock.... 15,687 (15,687)
Treasury stock purchases.. (840,071) (5,036) (5,036)
Net Income................ 15,001 15,001
----------- ------ ----------- ------ ------- -------- -------- --------
(Unaudited)
Balance, July 31, 2000.... 13,708,912 172 7,635,522 79 45,862 228,258 (27,974) 246,397
=========== ====== =========== ====== ======= ======== ======== ========
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,
---------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income.......................................... $ 15,001 $ 21,190
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation.................................... 4,933 3,750
Gain (loss) on sale and retirement of property
and assets.................................... (231) 527
Extraordinary loss from extinguishment of debt,
net of income taxes........................... 868
Deferred income taxes........................... 919 2,472
Impairment losses............................... 1,517 1,633
Decrease (increase) in assets:
Mortgage notes receivable..................... (11,227) 29,117
Receivables, prepaids and other assets........ (16,722) (7,712)
Inventories................................... (90,713) (59,998)
Increase (decrease) in liabilities:
State and Federal income taxes................ (3,471) 588
Customers' deposits........................... 11,902 (1,076)
Interest and other accrued liabilities........ (7,272) (902)
Post development completion costs............. (1,028) (574)
Accounts payable.............................. 3,191 (3,791)
---------- ----------
Net cash (used in) operating activities..... (93,201) (13,908)
---------- ----------
Cash Flows From Investing Activities:
Net Proceeds from sale of property and assets....... 1,019 18,009
Purchase of property,equipment and other fixed
assets............................................ (13,238) (10,453)
Acquisition of homebuilding companies............... (488)
Investment in and advances to unconsolidated
affiliates........................................ 85
---------- ----------
Net cash (used in) provided by investing....
activities. (12,707) 7,641
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 988,015 523,617
Proceeds from senior debt........................... 150,000
Principal payments on mortgages and notes........... (876,122) (614,758)
Principal payments on subordinated debt............. (46,301)
Purchase of treasury stock.......................... (5,036) (5,323)
Proceeds from sale of stock and employee stock plan. 494 58
---------- ----------
Net cash provided by financing activities... 107,351 7,293
---------- ----------
Net Increase In Cash.................................. 1,443 1,026
Cash Balance and Cash Equivalents Balance,
Beginning Of Period................................. 19,365 15,554
---------- ----------
Cash Balance and Cash Equivalents Balance,
End Of Period..................................... $ 20,808 $ 16,580
========== ==========
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, 1999
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. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates
and these differences could have a significant impact on the financial
statements. 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,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Dollars in Thousands)
Interest Capitalized at
Beginning of Period........ $ 23,632 $ 21,017 $ 21,966 $ 25,545
Plus Interest Incurred(1)(3). 10,779 6,376 28,093 17,705
Less Interest Expensed(3).... 8,802 6,849 24,256 21,237
Less Impairment Write-off.... 194
Less Sale of Assets......... (242) 1,227
-------- -------- -------- --------
Interest Capitalized at
End of Period (2) (3)..... $ 25,609 $ 20,786 $ 25,609 $20,786
======== ======== ======== ========
(1) Data does not include interest incurred by our mortgage and finance
subsidiaries.
(2) Data 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, and interest incurred and
expensed on operating properties and senior residential rental
properties.
3. Homebuilding accumulated depreciation at July 31, 2000 and October 31,
1999 amounted to $21,062,000 and $19,550,000, respectively. Rental property
accumulated depreciation at July 31, 2000 and October 31, 1999 amounted to
$2,195,000 and $2,211,000, respectively.
4. In accordance with "Financial Accounting Standards No. 121 ("FAS 121")
"Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to
Be Disposed of", we record 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, 1999
developed lots in a substantially completed community in New York with a
carrying amount of $2,895,000, including approval, engineering and capitalized
interest, were written down $1,232,000 to its fair value. During the three
months ended April 30, 1999 we also recorded a $401,000 impairment loss on land
in Florida. In addition, from time to time, we will write off certain
residential land options including approval, engineering and capitalized
interest costs for land management decided not to purchase. We wrote off such
costs in the amount of $835,000 in New Jersey and $168,000 in North Carolina
during the three months ended July 31, 2000 and $514,000 in California during
the three months ended April 30, 2000. Residential inventory FAS 121 impairment
losses and option write offs are reported in the Consolidated Statements of
Income as "Homebuilding-Inventory Impairment Loss."
5. We are involved from time to time in litigation arising in the ordinary
course of business, none of which is expected to have a material adverse effect
on us. As of July 31, 2000 and October 31, 1999, respectively, we are obligated
under various performance letters of credit amounting to $4,324,000 and
$4,091,000.
6. Our credit facility was amended as of February 22, 2000. Pursuant to
the Amendment, our credit line increased to $375,000,000 and was extended
through July 2003. Interest is payable monthly and at various rates of either
the prime rate plus .25% or Libor plus 1.70%.
7. We have entered into an agreement to acquire Washington Homes, Inc.
headquartered in Maryland for a total purchase price of approximately $77.4
million. The transaction is expected to close following regulatory and
shareholder approvals and customary closing conditions.
8. Hovnanian Enterprises, Inc., the parent company (the "Parent" or
"Company") is the issuer of publicly traded common stock. One of its wholly
owned subsidiaries, K. Hovnanian Enterprises, Inc., (the "Subsidiary Issuer")
was the issuer of certain Senior Notes on May 4, 1999.
The Subsidiary Issuer acts as a finance and management entity that as of
July 31, 2000 had issued and outstanding approximately $100,000,000 of
subordinated notes, $150,000,000 senior notes and a revolving credit agreement
with an outstanding balance of $166,275,000. The subordinated notes, senior
notes, and the revolving credit agreement are fully and unconditionally
guaranteed by the Parent.
Each of the wholly owned subsidiaries of the Parent (collectively the
"Guarantor Subsidiaries"), with the exception of four subsidiaries formerly
engaged in the issuance of collateralized mortgage obligations, a mortgage
lending subsidiary, a subsidiary holding and licensing the "K. Hovnanian" trade
name and a subsidiary engaged in homebuilding activity in Poland (collectively
the "Non-guarantor Subsidiaries"), have guaranteed fully and unconditionally, on
a joint and several basis, the obligation to pay principal and interest under
the revolving credit agreement of the Subsidiary Issuer.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries we have included the accompanying consolidated condensed
financial statements. Management does not believe that separate financial
statements of the Guarantor Subsidiaries are material to investors. Therefore,
separate financial statement and other disclosures concerning the Guarantor
Subsidiaries are not presented.
The following consolidating condensed financial information present the
results of operations, financial position and cash flows of (i) the Parent (ii)
the Subsidiary Issuer (iii) the Guarantor Subsidiaries of the Parent (iv) the
Non-guarantor Subsidiaries of the Parent and (v) the eliminations to arrive at
the information for Hovnanian Enterprises, Inc. on a consolidated basis.
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED BALANCE SHEET
JULY 31, 2000
(Thousands of Dollars)
<CAPTION>
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Homebuilding...................... $ (168) $ 55,346 $ 721,337 $ 7,239 $ $ 783,754
Financial Services and CMO........ 918 52,571 53,489
Income Taxes (Payables)Receivables 45 (732) 7,074 (2,112) 4,275
Investments in and amounts due to
and from consolidated
subsidiaries.................... 246,520 375,892 (413,613) (3,504) (205,295)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets...................... $246,397 $ 430,506 $ 315,716 $ 54,194 $(205,295) $ 841,518
======== ========== ========== ============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding...................... $ $ 8,056 $ 117,873 $ 1,046 $ $ 126,975
Financial Services and CMO........ 418 44,671 45,089
Notes Payable..................... 422,814 243 423,057
Stockholders' Equity.............. 246,397 (364) 197,182 8,477 (205,295) 246,397
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity.......................... $246,397 $ 430,506 $ 315,716 $ 54,194 $(205,295) $ 841,518
======== ========== ========== ============ ========== ==========
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 1999
(Thousands of Dollars)
<CAPTION>
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Homebuilding.......................$ 53 $ 34,735 $ 630,074 $ 4,109 $ $ 668,971
Financial Services and CMO......... (4,807) 46,974 42,167
Income Taxes (Payables)Receivables. (4,303) (374) 8,562 (2,162) 1,723
Investments in and amounts due to
and from consolidated
subsidiaries..................... 240,676 304,811 (305,942) 2,252 (241,797)
-------- --------- ---------- ------------ --------- ----------
Total Assets.......................$236,426 $339,172 $ 327,887 $ 51,173 $(241,797) $ 712,861
======== ========= ========== ============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Homebuilding.......................$ $ 7,060 $ 102,282 $ 363 $ $ 109,705
Financial Services and CMO......... 495 34,456 34,951
Notes Payable...................... 331,491 288 331,779
Stockholders' Equity............... 236,426 621 224,822 16,354 (241,797) 236,426
-------- --------- ---------- ------------- --------- ----------
Total Liabilities and Stockholders'
Equity...........................$236,426 $339,172 $ 327,887 $ 51,173 $(241,797) $ 712,861
======== ========= ========== ============ ========== ==========
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2000
(Thousands of Dollars)
<CAPTION>
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Homebuilding.....................$ $ 129 $ 279,175 $ 7,045 $(6,137) $ 280,212
Financial Services and CMO....... 1,667 3,103 4,770
Intercompany Charges............. 28,607 (716) (27,891)
Equity In Pretax Income of
Consolidated Subsidiaries...... 12,258 (12,258)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ $12,258 $ 28,736 $ 280,126 $ 10,148 $(46,286) $ 284,982
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 28,293 264,886 191 (25,293) 268,077
Financial Services and CMO....... 1,233 3,482 (68) 4,647
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 28,293 266,119 3,673 (25,361) 272,724
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 12,258 443 14,007 6,475 (20,925) 12,258
State and Federal Income Taxes..... 4,167 277 4,626 2,298 (7,201) 4,167
------- ---------- ---------- ------------ ---------- ----------
Net Income ....................... $ 8,091 $ 166 $ 9,381 $ 4,177 $(13,724) $ 8,091
======= ========== ========== ============ ========== ==========
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1999
(Thousands of Dollars)
<CAPTION>
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Homebuilding.....................$ (159) $ 598 $ 229,067 $ 5,866 $ (4,749) $ 230,623
Financial Services and CMO....... 967 4,696 5,663
Intercompany Charges............. 24,562 (1,635) (22,927)
Equity In Pretax Income of
Consolidated Subsidiaries...... 12,893 (12,893)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ $12,734 $ 25,160 $ 228,399 $ 10,562 $ (40,569) $ 236,286
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 23,694 213,791 682 (21,276) 216,891
Financial Services and CMO....... 681 4,777 (133) 5,325
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 23,694 214,472 5,459 (21,409) 222,216
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 12,734 1,466 13,927 5,103 (19,160) 14,070
State and Federal Income Taxes..... 5,124 468 5,238 1,668 (6,906) 5,592
Extraordinary Loss................. (868) (868)
------- ---------- ---------- ------------ ---------- ----------
Net Income.........................$ 7,610 $ 130 $ 8,689 $ 3,435 $ (12,254) $ 7,610
======= ========== ========== ============ ========== ==========
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 2000
(Thousands of Dollars)
<CAPTION>
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Homebuilding.....................$ $ 352 $ 768,247 $ 13,487 $ (11,258) $ 770,828
Financial Services and CMO....... 4,418 8,773 13,191
Intercompany Charges............. 76,513 3,282 (79,795)
Equity In Pretax Income of
Consolidated Subsidiaries...... 22,486 (22,486)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ $22,486 $ 76,865 $ 775,947 $ 22,260 $(113,539) $ 784,019
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 75,853 735,145 864 (64,611) 747,251
Financial Services and CMO....... 3,543 11,026 (287) 14,282
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 75,853 738,688 11,890 (64,898) 761,533
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 22,486 1,012 37,259 10,370 (48,641) 22,486
State and Federal Income Taxes..... 7,485 516 12,459 3,664 (16,639) 7,485
------- ---------- ---------- ------------ ---------- ----------
Net Income.........................$15,001 $ 496 $ 24,800 $ 6,706 $ (32,002) $ 15,001
======= ========== ========== ============ ========== ==========
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 1999
(Thousands of Dollars)
<CAPTION>
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Homebuilding.....................$ (159) $ 627 $ 629,986 $ 15,400 $ (13,313) $ 632,541
Financial Services and CMO....... 2,578 13,172 15,750
Intercompany Charges............. 66,402 349 (66,751)
Equity In Pretax Income of
Consolidated Subsidiaries...... 35,540 (35,540)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ $35,381 $ 67,029 $ 632,913 $ 28,572 $(115,604) $ 648,291
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 65,834 587,500 2,049 (58,508) 596,875
Financial Services and CMO....... 1,853 13,200 (354) 14,699
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 65,834 589,353 15,249 (58,862) 611,574
------- ---------- ---------- ------------ ---------- ----------
Income Before Income Taxes......... 35,381 1,195 43,560 13,323 (56,742) 36,717
State and Federal Income Taxes..... 14,191 468 16,490 5,178 (21,668) 14,659
Extraordinary Loss................. (868) (868)
------- ---------- ---------- ------------ ---------- ----------
Net Income.........................$21,190 $ (141) $ 27,070 $ 8,145 $ (35,074) $ 21,190
======= ========== ========== ============ ========== ==========
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2000
(Thousands of Dollars)
<CAPTION>
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income.........................$ 15,001 $ 496 $ 24,800 $ 6,706 $ (32,002) $ 15,001
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... (4,328) 67,821 (182,850) (20,847) 32,002 (108,202)
-------- --------- ---------- ------------ ---------- ----------
Net Cash (Used In) Provided By
Operating Activities........... 10,673 68,317 (158,050) (14,141) (93,201)
Net Cash (Used In)
Investing Activities............... (6) (11,020) (1,679) (2) (12,707)
Net Cash Provided By(Used In)
Financing Activities............... (5,036) 96,150 6,612 9,625 107,351
Intercompany Investing and Financing
Activities - Net................... (5,844) (147,594) 147,682 5,756
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash and
Cash Equivalents................... (213) 5,853 (5,435) 1,238 1,443
Cash and Cash Equivalents Balance,
Beginning of Period................ 46 (5,395) 24,608 106 19,365
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ (167) $ 458 $ 19,173 $ 1,344 $ $ 20,808
======== ========= ========== ============ ========== ==========
</TABLE>
<TABLE>
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 1999
(Thousands of Dollars)
<CAPTION>
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income.........................$ 21,190 $ (141) $ 27,070 $ 8,145 $ (35,074) $ 21,190
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 2,367 (4,030) (79,679) 11,170 35,074 (35,098)
-------- --------- ---------- ------------ ---------- ----------
Net Cash (Used In) Provided By
Operating Activities........... 23,557 (4,171) (52,609) 19,315 (13,908)
Net Cash Provided By (Used In)
Investing Activities............... (1,909) 9,071 479 7,641
Net Cash Provided By(Used In)
Financing Activities............... (5,265) 36,551 1,222 (25,215) 7,293
Intercompany Investing and Financing
Activities - Net................... (18,242) (16,975) 31,925 3,292
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash and
Cash Equivalents................... 50 13,496 (10,391) (2,129) 1,026
Cash and Cash Equivalents Balance,
Beginning of Period................ 14 (9,660) 23,023 2,177 15,554
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 64 $ 3,836 $ 12,632 $ 48 $ $ 16,580
======== ========= ========== ============ ========== ==========
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Our uses for cash during the nine months ended July 31, 2000 were for
operating expenses, seasonal increases in housing inventories, construction,
income taxes, interest, and the repurchase of common stock. We provided for our
cash requirements from outside borrowings, including the issuance of
$150,000,000 senior indebtedness and the revolving credit facility, housing and
land sales, financial service fees, and other revenues. We believe that these
sources of cash are sufficient to finance our working capital requirements and
other needs.
In March 2000 the Board of Directors authorized a revision to our stock
repurchase program to purchase up to 4 million shares of Class A Common Stock.
This authorization expires on December 31, 2000. As of July 31, 2000, 3,204,471
shares have been repurchased under this program, of which 840,071 shares were
purchased during the nine months ended July 31, 2000.
Our bank borrowings are made pursuant to a revolving credit agreement (the
"Agreement") that provides a revolving credit line of up to $375,000,000 (the
"Revolving Credit Facility") through July 2003. Interest is payable monthly and
at various rates of either prime plus .25% or Libor plus 1.70%. We believe that
we will be able either to extend the Agreement beyond July 2003 or negotiate a
replacement facility, but there can be no assurance of such extension or
replacement facility. We currently are in compliance and intend to maintain
compliance with our covenants under the Agreement. As of July 31, 2000,
borrowings under the agreement were $166,275,000.
The subordinated indebtedness issued by us and outstanding as of July 31,
2000 was $100,000,000 9 3/4% Subordinated Notes due June 2005. The senior
indebtedness issued by us and outstanding as of July 31, 2000 was $150,000,000 9
1/8% Senior Notes due May 2009.
Our 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 our subsidiaries. As of July 31, 2000, the aggregate principal amount
of all such borrowings was $43,358,000.
Total inventory increased $89,196,000 during the nine months ended July 31,
2000. The increase was primarily due to significant anticipated openings of a
number of communities in the Northeast Region and California and our expansion
in Maryland. Substantially all homes under construction or completed and
included in inventory at July 31, 2000 are expected to be closed during the next
twelve months. Most inventory completed or under development is financed
through our revolving credit facility and subordinated indebtedness.
The following table summarizes housing lots in our 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, 2000......... 118 17,018 5,159 2,226 9,633
October 31, 1999...... 110 19,963 6,899 1,844 11,220
(1) Includes 101 and 96 lots under option at July 31, 2000 and October 31, 1999,
respectively.
(2) Of the total home lots available, 739 and 599 were under construction or
complete (including 84 and 76 models and sales offices), 5,426 and 7,057 were
under option, and 148 and 216 were financed through purchase money mortgages at
July 31, 2000 and October 31, 1999, respectively.
In addition, at July 31, 2000 and October 31, 1999, respectively, in
substantially completed or suspended communities, we owned or had under option
67 and 94 home lots. We also control 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, 2000 we controlled such land
to build 15,044 proposed homes, compared to 13,573 homes at October 31, 1999.
The following table summarizes our started or completed unsold homes in
active, substantially complete and suspended communities:
July 31, October 31,
2000 1999
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 128 40 168 114 31 145
North Carolina...... 88 7 95 129 -- 129
Florida............. 5 -- 5 5 -- 5
Metro D.C........... 6 7 13 13 9 22
California.......... 123 27 150 53 10 63
Texas............... 251 4 255 225 28 253
Poland.............. 70 -- 70 14 -- 14
------ ------ ----- ------ ------ -----
Total 671 85 756 553 78 631
====== ====== ===== ====== ====== =====
Financial Services - Mortgage loans held for sale consist of residential
mortgages receivable of which $44,898,000 and $32,844,000 at July 31, 2000 and
October 31, 1999, 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 us. We 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, we have incurred minimal
credit losses. Collateral Mortgage Financing - Collateral for bonds payable
consist of collateralized mortgages receivable which are pledged against non-
recourse collateralized mortgage obligations.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2000 COMPARED
TO THE THREE AND NINE MONTHS ENDED JULY 31, 1999
Our operations consist primarily of residential housing development and
sales in our Northeast Region (comprised of New Jersey, southern New York State
and eastern Pennsylvania), North Carolina, southeastern Florida, Metro D. C.
(northern Virginia and Maryland), southwestern California, Texas, and Poland.
Our Texas operations are the result of the acquisition of a Texas homebuilder on
October 1, 1999. In addition, we provide financial services to our homebuilding
customers and third parties.
Important indicators of our future results are recently signed contracts
and home contract backlog for future deliveries. Our 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,
----------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(Dollars in Thousands)
Northeast Region(1):
Dollars............. $398,815 $316,170 $357,359 $242,597
Homes............... 1,506 1,379 1,308 1,012
North Carolina:
Dollars............. $ 93,210 $114,862 $ 46,276 $ 65,889
Homes............... 501 600 243 327
Florida:
Dollars............. $ 17,665 $ 25,051 $ 14,573 $ 14,805
Homes............... 69 112 56 66
Metro D.C.:
Dollars............. $ 62,052 $ 41,616 $ 50,107 $ 37,766
Homes............... 241 182 205 170
California:
Dollars............. $117,303 $ 79,740 $ 52,640 $ 33,639
Homes............... 369 380 123 148
Texas:
Dollars............. $141,209 -- $ 61,272 --
Homes............... 693 -- 286 --
Poland:
Dollars............. $ 1,625 $ 654 $ 1,781 $ 294
Homes............... 47 6 49 2
Totals:
Dollars............. $831,879 $578,093 $584,008 $394,990
Homes............... 3,426 2,659 2,270 1,725
(1) Nine months ended July 31, 2000 includes $42,257,000 total sales and 141
homes and $51,522,000 total contract backlog and 143 homes from a New Jersey
homebuilder acquired on August 7, 1999.
Total Revenues:
Revenues for the three months ended July 31, 2000 increased $48.7 million
or 20.6%, compared to the same period last year. This was the result of a $50.9
million increase in revenues from the sale of homes. This increase was
partially offset by a $1.3 million decrease in land sales and other homebuilding
revenues and a $0.9 million decrease in financial services revenues.
Revenues for the nine months ended July 31, 2000 increased $135.7 million
or 20.9%, compared to the same period last year. This was the result of a
$142.1 million increase in revenues from the sale of homes. This increase was
partially offset by a $3.8 million decrease in land sales and other homebuilding
revenues, and a $2.6 million decrease in financial services revenues.
Homebuilding:
Revenues from the sale of homes increased $50.9 million or 22.4% during the
three months ended July 31, 2000, and increased $142.1 million or 22.9% during
the nine months ended July 31, 2000 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,
------------------- -------------------
2000 1999 2000 1999
--------- -------- -------- --------
(Dollars in Thousands)
Northeast Region(1):
Housing Revenues..... $131,668 $142,503 $372,652 $395,687
Homes Delivered...... 452 539 1,323 1,499
North Carolina:
Housing Revenues..... $ 33,319 $ 38,269 $ 91,580 $ 97,902
Homes Delivered...... 167 205 465 508
Florida:
Housing Revenues..... $ 3,310 $ 9,690 $ 12,896 $ 27,554
Homes Delivered...... 13 41 50 119
Metro D. C.:
Housing Revenues..... $ 13,901 $ 11,400 $ 47,205 $ 29,952
Homes Delivered...... 54 46 185 127
California:
Housing Revenues..... $ 48,055 $ 24,792 $104,004 $ 68,651
Homes Delivered...... 164 120 375 351
Texas:
Housing Revenues..... $ 47,318 -- $134,106 --
Homes Delivered...... 228 -- 668 --
Poland:
Housing Revenues..... $ 433 $ 417 $ 734 $ 1,348
Homes Delivered...... 8 2 11 11
Totals:
Housing Revenues..... $278,004 $227,071 $763,177 $621,094
Homes Delivered...... 1,086 953 3,077 2,615
(1) Three and nine months ended July 31, 2000 includes $10,482,000 and
$41,398,000 housing revenues and 32 and 121 homes from a New Jersey
homebuilder acquired on August 7, 1999.
The increase in the number of homes delivered and housing revenues compared
to the prior year was primarily due to the acquisition of a Texas homebuilding
company and an increase of three communities in the Metro DC market and an
increase in the average home price in California. These increases were
partially offset by decreases in the Northeast Region, North Carolina, and
Florida. The decrease in deliveries and related revenue in the Northeast Region
is due to fewer selling communities in the third and fourth quarters of fiscal
1999, resulting in fewer deliveries during the first nine months of fiscal 2000.
In North Carolina, the decrease is due to a highly competitive market and in
Florida the decrease is due to the closing of our Florida operations.
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,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Dollars in Thousands)
Sale of Homes................ $278,004 $227,071 $763,177 $621,094
Cost of Sales................ 220,000 178,089 612,006 487,423
-------- -------- -------- --------
Housing Gross Margin......... $ 58,004 $ 48,982 $151,171 $133,671
======== ======== ======== ========
Gross Margin Percentage...... 20.9% 21.6% 19.8% 21.5%
Cost of Sales expenses as a percentage of home sales revenues are presented
below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Sale of Homes................ 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of Sales:
Housing, land &
development costs.... 71.2 70.4 71.9 70.4
Commissions............ 2.2 2.0 2.3 2.0
Financing concessions.. 0.8 0.8 0.9 0.8
Overheads.............. 4.9 5.2 5.1 5.3
-------- -------- -------- --------
Total Cost of Sales.......... 79.1 78.4 80.2 78.5
-------- -------- -------- --------
Gross Margin................. 20.9% 21.6% 19.8% 21.5%
======== ======== ======== ========
We sell 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 our other markets. For the three and nine months ended July
31, 2000 our gross margin percentage decreased 0.7% and 1.7%, respectively,
compared to the same periods last year. This can be attributed to a decrease of
deliveries in the Northeast Region amounting to 48.8% for the nine months ended
July 31, 2000 compared to 63.7% for the same period in 1999. In addition, we
had more deliveries in our new Texas market where they report lower margins.
Selling, general, and administrative costs as a percentage of total
homebuilding revenues increased to 9.2% for the three months ended July 31, 2000
from 8.9% for the prior year's three months, and increased to 9.9% for the nine
months ended July 31, 2000 from 8.9% for the prior year's nine months. Such
expenses increased during the three and nine months ended July 31, 2000 by $5.3
million and $20.0 million, respectively, compared to the same periods last year.
The overall percentage and dollar increases in selling, general and
administrative is principally due to an increase of 47% in contracts and a 52%
increase in deliveries in California, an increase in our Northeast Region due to
the addition of a New Jersey homebuilder which operates independently, and the
addition of Texas.
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,
------------------ -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Land and Lot Sales................ $ 1,328 $ 1,974 $ 3,144 $ 7,508
Cost of Sales..................... 966 1,868 2,568 7,158
-------- -------- -------- --------
Land and Lot Sales Gross Margin... 362 106 576 350
Interest Expense.................. 111 94 350 836
-------- -------- -------- --------
Land and Lot Sales Profit (Loss)
Before Tax...................... $ 251 $ 12 $ 226 $ (486)
======== ======== ======== ========
Land and lot sales are incidental to our 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 our
homebuyers, as well as from third parties, selling such mortgages in the
secondary market, and title insurance activities. For the three months ended
July 31, 2000 financial services provided a $0.1 million pretax profit compared
to a profit of $0.4 million for the same period in 1999. For the nine months
ended July 31, 2000 financial services resulted in a $1.1 million loss before
income taxes compared to a profit of $1.1 million for the same period in 1999.
Our mortgage banking goals are to improve profitability by increasing the
capture rate of our homebuyers and expanding our business to include
originations from unrelated third parties.
Collateralized Mortgage Financing
In the years prior to February 29, 1988 we pledged mortgage loans
originated by our mortgage banking subsidiaries against collateralized mortgage
obligations ("CMO's"). Subsequently we discontinued our 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, we have also sold a
portion of our CMO pledged mortgages.
Corporate General and Administrative
Corporate general and administrative expenses include the operations at our
headquarters in Red Bank, New Jersey. Such expenses include our executive
offices, information services, human resources, corporate accounting, training,
treasury, process redesign, internal audit, national purchasing, product
development, and administration of insurance, quality, and safety. As a
percentage of total revenues, such expenses increased to 3.5% for the three
months ended July 31, 2000 from 3.4% for the prior year's three months. For the
nine months ended July 31, 2000 such expenses decreased to 3.1% from 3.2% for
the prior year nine months due to increased housing revenues. Corporate general
and administrative expenses increased $2.0 million and $3.5 million during the
three and nine months ended July 31, 2000 compared to the same periods last
year. These increases are primarily attributed to increased process redesign
costs associated with the design and development of streamlined business
processes associated with the implementation of SAP, our new enterprise wide
fully integrated software package and increased depreciation expense related to
capitalized process redesign costs in prior years.
Interest
Interest expense includes housing and land and lot interest. Interest
expense is broken down as follows:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
Sale of Homes.............. $ 8,691 $ 6,755 $24,011 $20,401
Land and Lot Sales......... 111 94 350 836
-------- -------- -------- --------
Total...................... $ 8,802 $ 6,849 $24,361 $21,237
======== ======== ======== ========
Housing interest as a percentage of sale of homes revenues amounted to 3.1%
for the three and nine months ended July 31, 2000, respectively, and 2.9% and
3.1% for the three and nine months ended July 31, 1999, respectively.
Other Operations
Other operations consist primarily of miscellaneous residential housing
operations expenses, amortization of senior and subordinated note issuance
expenses, amortization of goodwill from homebuilding company acquisitions,
earnout payments from homebuilding company acquisitions, and corporate owned
life insurance loan interest.
Total Taxes
Total taxes as a percentage of income before taxes amounted to
approximately 33.3% and 39.9% for the nine months ended July 31, 2000 and 1999,
respectively. The decrease in this percentage from 1999 to 2000 is primarily
attributed to lower state taxes. 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 as an
offset against future taxable income. If for some reason the combination of
future years income (or loss) combined with the reversal of the timing
differences results in a loss, such losses can be carried back to prior years to
recover the deferred tax assets. As a result, management is confident such
deferred tax assets are recoverable regardless of future income.
Extraordinary Loss
On June 7, 1999, we redeemed $45,449,000 11 1/4% Subordinated Notes due
2002 at a price of 101.875% of par which resulted in an extraordinary loss of
$868,000 net of income taxes of $468,000.
Inflation
Inflation has a long-term effect on us because increasing costs of land,
materials and labor result in increasing sale prices of our homes. In general,
these price increases have been commensurate with the general rate of inflation
in our housing market and have not had a significant adverse effect on the sale
of our 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 we sell homes, we have not found this risk to be a
significant problem.
Inflation has a lesser short-term effect on us because we generally
negotiate fixed price contracts with our subcontractors and material suppliers
for the construction of our 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 57% of our total costs and expenses.
Forward Looking Statements
All statements in this Form 10-Q that are not historical facts should be
considered "forward-looking statements" within the meaning of the Private
Securities Litigation Act of 1995. Such statements involve known and unknown
risks, uncertainties and other factors that may cause actual results to differ
materially. Such risks, uncertainties and other factors include, but are not
limited to, changes in general economic conditions, fluctuations in interest
rates, increases in raw materials and labor costs, levels of competition, and
other factors described in detail in our Form 10-K for the year ended October
31, 1999.
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 12, 2000 /S/J. LARRY SORSBY
J. Larry Sorsby,
Senior Vice President,
Treasurer and
Chief Financial Officer
DATE: September 12, 2000 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
