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, 1997 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)
908-747-7800
(Registrant's telephone number, including area code)
Same
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Sections l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 14,521,465 Class A Common
Shares and 7,765,788 Class B Common Shares were outstanding as of August 29,
1997.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at July 31,
1997 (unaudited) and October 31, 1996 3
Consolidated Statements of Income for the three
and nine months ended July 31, 1997 and 1996
(unaudited) 5
Consolidated Statements of Stockholders' Equity
for the nine months ended July 31, 1997
(unaudited) 6
Consolidated Statements of Cash Flows
for the nine months ended July 31, 1997
and 1996 (unaudited) 7
Notes to Consolidated Financial
Statements (unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
PART II. Other Information
Item 6(b). Exhibit 27 - Financial Data Schedules
Item 6(c). No reports on Form 8K have been filed during
the quarter for which this report is filed.
Signatures 20
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
July 31, October 31,
ASSETS 1997 1996
----------- -----------
Homebuilding:
Cash and cash equivalents....................... $ 9,058 $ 16,535
----------- -----------
Inventories - At cost, not in excess of fair
value:
Sold and unsold homes and lots under
development.................................. 421,047 314,630
Land and land options held for future
development or sale......................... 47,066 61,677
----------- -----------
Total Inventories........................... 468,113 376,307
----------- -----------
Receivables, deposits, and notes................ 44,543 26,442
----------- -----------
Property, plant, and equipment - net............ 18,403 18,251
----------- -----------
Prepaid expenses and other assets............... 41,739 31,939
----------- -----------
Total Homebuilding.......................... 581,856 469,474
----------- -----------
Financial Services:
Cash and cash equivalents....................... 1,157 4,196
Mortgage loans held for sale.................... 21,818 57,812
Other assets.................................... 1,900 3,217
----------- -----------
Total Financial Services.................... 24,875 65,225
----------- -----------
Investment Properties:
Held for sale:
Rental property - net......................... 33,994
Land and improvements......................... 11,954
Other assets.................................. 1,510
Held for investment:
Rental property - net......................... 11,447 51,892
Land, improvements and land option............ 13,502
Other assets.................................. 1,774 3,292
----------- -----------
Total Investment Properties................. 60,679 68,686
----------- -----------
Collateralized Mortgage Financing:
Collateral for bonds payable.................... 8,566 9,478
Other assets.................................... 370 576
----------- -----------
Total Collateralized Mortgage Financing..... 8,936 10,054
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits........................................ 17,541 672
----------- -----------
Total Assets...................................... $693,887 $614,111
=========== ===========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
July 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
----------- -----------
Homebuilding:
Nonrecourse land mortgages........................ $ 23,674 $ 25,151
Accounts payable and other liabilities............ 35,385 45,146
Customers' deposits............................... 26,520 12,371
Nonrecourse mortgages secured by operating
properties...................................... 3,853 3,918
----------- -----------
Total Homebuilding............................ 89,432 86,586
----------- -----------
Financial Services:
Accounts payable and other liabilities............ 998 1,631
Mortgage warehouse line of credit................. 19,921 55,196
----------- -----------
Total Financial Services...................... 20,919 56,827
----------- -----------
Investment Properties:
Accounts payable and other liabilities............ 1,083 721
Nonrecourse mortgages secured by rental property.. 30,729 31,071
----------- -----------
Total Investment Properties................... 31,812 31,792
----------- -----------
Collateralized Mortgage Financing:
Accounts payable and other liabilities............ 10 11
Bonds collateralized by mortgages receivable...... 8,159 9,231
----------- -----------
Total Collateralized Mortgage Financing....... 8,169 9,242
----------- -----------
Notes Payable:
Revolving credit agreement........................ 174,050 30,000
Subordinated notes................................ 190,000 200,000
Accrued interest.................................. 5,209 6,042
----------- -----------
Total Notes Payable........................... 369,259 236,042
----------- -----------
Total Liabilities............................. 519,591 420,489
----------- -----------
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 15,601,117 shares
(including 1,095,674 shares held in Treasury)... 156 155
Common Stock,Class B,$.01 par value-authorized
13,000,000 shares; issued 8,127,684 shares
(including 345,874 shares held in Treasury)..... 81 82
Paid in Capital................................... 33,935 33,935
Retained Earnings................................. 150,053 164,749
Treasury Stock - at cost.......................... (9,929) (5,299)
----------- -----------
Total Stockholders' Equity.................... 174,296 193,622
----------- -----------
Total Liabilities and Stockholders' Equity.......... $693,887 $614,111
=========== ===========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues:
Homebuilding:
Sale of homes...................... $186,684 $187,128 $438,034 $439,202
Land sales and other revenues...... 13,502 2,940 17,357 9,376
--------- --------- --------- ---------
Total Homebuilding............... 200,186 190,068 455,391 448,578
Financial Services................... 2,577 2,690 6,363 6,358
Investment Properties................ 2,091 2,240 6,579 8,790
Collateralized Mortgage Financing.... 253 814 653 1,689
--------- --------- --------- ---------
Total Revenues................... 205,107 195,812 468,986 465,415
--------- --------- --------- ---------
Expenses:
Homebuilding:
Cost of sales...................... 163,716 159,571 381,628 376,794
Selling, general and administrative 16,346 14,447 38,063 34,507
Inventory impairment loss.......... - 559 13,475 559
--------- --------- --------- ---------
Total Homebuilding............... 180,062 174,577 433,166 411,860
--------- --------- --------- ---------
Financial Services................... 2,474 2,578 7,274 7,359
--------- --------- --------- ---------
Investment Properties:
Operations......................... 1,291 1,310 4,495 4,727
Provision for impairment loss...... 14,446
--------- --------- --------- ---------
Total Investment Properties...... 1,291 1,310 18,941 4,727
--------- --------- --------- ---------
Collateralized Mortgage Financing.... 208 764 679 1,685
--------- --------- --------- ---------
Corporate General and Administration. 3,228 3,179 10,105 10,375
--------- --------- --------- ---------
Interest............................. 8,572 7,963 22,080 20,359
--------- --------- --------- ---------
Other Operations..................... 270 909 1,521 2,619
--------- --------- --------- ---------
Total Expenses................... 196,105 191,280 493,766 458,984
--------- --------- --------- ---------
Income (Loss) Before Income Taxes...... 9,002 4,532 (24,780) 6,431
--------- --------- --------- ---------
State and Federal Income Taxes:
State................................ 748 759 990 1,595
Federal.............................. 2,034 663 (11,074) (22)
--------- --------- --------- ---------
Total Taxes........................ 2,782 1,422 (10,084) 1,573
--------- --------- --------- ---------
Net Income (Loss)...................... $ 6,220 $ 3,110 $(14,696) $ 4,858
========= ========= ========= =========
Earnings (Loss) Per Common Share....... $ 0.27 $ 0.13 $ (0.64) $ 0.21
========= ========= ========= =========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars In Thousands)
A Common Stock B Common Stock
------------------- -------------------
Shares Shares
Issued and Issued and Paid-In Retained Treasury
Outstanding Amount Outstanding Amount Capital Earnings Stock Total
----------- ------ ----------- ------ ------- -------- -------- --------
Balance, October 31, 1996. 15,135,348 $155 7,901,705 $82 $33,935 $164,749 $(5,299) $193,622
Conversion of Class B to
Class A Common Stock.... 119,895 1 (119,895) (1)
Net Income................ (14,696) (14,696)
Treasury stock purchases.. (749,800) (4,630) (4,630)
----------- ------ ----------- ------ ------- -------- -------- --------
Balance, July 31, 1997.... 14,505,443 $156 7,781,810 $81 $33,935 $150,053 $(9,929) $174,296
=========== ====== =========== ====== ======= ======== ======== ========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
July 31,
---------------------
1997 1996
---------- ----------
Cash Flows From Operating Activities:
Net Income (Loss)................................... $ (14,696) $ 4,858
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation.................................... 3,848 3,747
Gain(loss) on sale and retirement of property
and assets.................................... 124 (2,130)
Deferred income taxes........................... (2,986) 3,548
Impairment losses............................... 27,921 559
Decrease (increase) in assets:
Escrow cash................................... 2,739 (20)
Receivables, prepaids and other assets........ (20,187) (20,068)
Mortgage notes receivable..................... 29,678 18,418
Inventories................................... (105,281) (58,648)
Increase (decrease) in liabilities:
State and Federal income taxes................ (13,883) (3,609)
Customers' deposits........................... 14,451 6,861
Interest and other accrued liabilities........ (1,582) (5,712)
Post development completion costs............. (4,341) 1,675
Accounts payable.............................. (5,231) (11,436)
---------- ----------
Net cash used in operating activities....... (89,426) (61,957)
---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of property and assets........... 224 10,032
Purchase of property................................ (2,593) (3,914)
Investment in and advances to unconsolidated
affiliates........................................ 195 3,625
Investment in income producing properties........... (8,027) (2,071)
---------- ----------
Net cash provided by (used) in investing
activities................................ (10,201) 7,672
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 990,429 846,319
Principal payments on mortgages and notes........... (884,624) (805,035)
Principal payments on subordinated debt............. (10,000)
Investment in mortgage notes receivable............. 918 7,555
Purchase of treasury stock.......................... (4,630)
---------- ----------
Net cash provided by financing activities... 92,093 48,839
---------- ----------
Net Decrease In Cash.................................. (7,534) (5,446)
Cash Balance, Beginning Of Period..................... 15,323 11,914
---------- ----------
Cash Balance, End Of Period.......................... $ 7,789 $ 6,468
========== ==========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. The consolidated financial statements, except for the October 31, 1996
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. Certain expenses which had been previously reported as selling, general
and administration were reclassified to cost of sales. These costs include
sales commissions, buyer concessions, the amortization of prepaid selling
expenses, property taxes and condominium association subsidies. The amount
reclassified for the three and nine months ended July 31, 1996 was $9,084,000
and $22,496,000, respectively. In addition, the revenues and expenses of the
Company's title division have been reclassified out of homebuilding and other
operations, respectively, into the financial services section of the
consolidated statements of income. The amount of title revenues and expenses
reclassified for the three months ended July 31, 1996 was $743,000 and $589,000,
respectively, and for the nine months ended July 31, 1996 was $1,961,000 and
$1,787,000, respectively.
3. Interest costs incurred, expensed and capitalized were:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Dollars in Thousands)
Interest Incurred (1):
Residential (3)........... $ 6,950 $ 8,093 $ 20,642 $ 22,765
Commercial(4)............. 1,346 1,300 3,959 4,201
-------- -------- -------- --------
Total Incurred.......... $ 8,296 $ 9,393 $ 24,601 $ 26,966
======== ======== ======== ========
Interest Expensed:
Residential (3)........... $ 7,226 $ 6,663 $ 18,121 $ 16,158
Commercial (4)............ 1,346 1,300 3,959 4,201
-------- -------- -------- --------
Total Expensed......... $ 8,572 $ 7,963 $ 22,080 $ 20,359
======== ======== ======== ========
Interest Capitalized at
Beginning of Period....... $ 40,902 $ 41,108 $ 39,152 $ 36,182
Plus Interest Incurred...... 8,296 9,393 24,601 26,966
Less Interest Expensed...... 8,572 7,963 22,080 20,359
Less Charges to Reserves.... 7 222 109 473
Less Impairment Adjustments. 945
-------- -------- -------- --------
Interest Capitalized at
End of Period............. $ 40,619 $ 42,316 $ 40,619 $ 42,316
======== ======== ======== ========
Interest Capitalized at
End of Period (5):
Residential(3)............ $ 33,489 $ 35,818 $ 33,489 $ 35,818
Commercial(2)............. 7,130 6,498 7,130 6,498
-------- -------- -------- --------
Total Capitalized....... $ 40,619 $ 42,316 $ 40,619 $ 42,316
======== ======== ======== ========
(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 $832,000 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.
4. Homebuilding accumulated depreciation at July 31, 1997 and October 31,
1996 amounted to $15,052,000 and $14,970,000, respectively. Rental property
accumulated depreciation at July 31, 1997 and October 31, 1996 amounted to
$12,523,000 and $11,108,000, respectively.
5. 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, 1997 certain inventory with a carrying amount of
$27,510,000 was written down $8,714,000 to its fair value. This writedown is
principally attributed to a $5,364,000 writedown of the Company's investment in
Florida communities. Management decided to reduce its investment in Florida by
accelerating sales through sales price reductions and pricing concessions. The
remainder of the writedown 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 the community
including interest and selling costs. In addition, the Company also recorded a
$4,761,000 write-off of certain residential land options including approval,
engineering and capitalized interest costs for two properties in New Jersey and
one in Pennsylvania.
At the end of the second quarter the Company decided to exit from the
investment properties business. As a result, all commercial properties are no
longer held for use, but are 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 July 31, 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. 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 were attributable to commercial properties in
both New Jersey and Florida.
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, 1997 were
for operating expenses, seasonal increases in housing inventories, construction,
income taxes, interest, the reduction of subordinated notes, and the repurchase
of common stock. The Company provided for its cash requirements from the
revolving credit facility, land purchase notes, and from housing and other
revenues. The Company believes that these sources of cash are sufficient to
finance its working capital requirements and other needs.
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 29, 1997, 749,800 shares were repurchased under this program.
The Company's bank borrowings are made pursuant to a revolving credit
agreement (the "Agreement") that provides a revolving credit line of up to
$245,000,000 (the "Revolving Credit Facility") through March 2000. Interest is
payable monthly and at various rates of either prime plus 1/8% or Libor plus
1.625%. The Company recently extended the Agreement one year and believes that
it will be able either to extend the Agreement beyond March 2000 or negotiate a
replacement facility, but there can be no assurance of such extension or
replacement facility. The Company currently is in compliance and intends to
maintain compliance with its covenants under the Agreement. As of July 31,
1997, borrowings under the Agreement were $174,050,000.
The aggregate principal amount of subordinated indebtedness issued by the
Company and outstanding as of July 31, 1997 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, 1997, the aggregate
principal amount of all such borrowings was $28,080,000.
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,
1997 1996
------------ ------------
Residential real estate inventory.......... $468,113,000 $376,307,000
Residential rental property................ 11,449,000 12,190,000
------------ ------------
Total Residential Real Estate............ 479,562,000 388,497,000
Commercial properties...................... 45,946,000 53,204,000
------------ ------------
Combined Total........................... $525,508,000 $441,701,000
============ ============
Total residential real estate increased $91,806,000 during the nine months
ended July 31, 1997 primarily as a result of an inventory increase of
$112,424,000, which was partially offset by the reallocation of land and
approval costs to commercial properties (see below), the writedown of certain
communities under development or land held for sale, and the write-off of
optioned parcels of land and related approval, engineering and capitalized
interest costs. See "Notes to Consolidated Financial Statements - Note 5." The
increase in residential real estate inventory was primarily due to the Company's
seasonal increase in construction activities for deliveries in the fourth
quarter. Substantially all residential homes under construction or completed
and included in real estate inventory at July 31, 1997 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, 1997......... 87 16,994 5,547 2,212 9,235
October 31, 1996...... 85 12,942 4,613 1,479 6,850
(1) Includes 50 and 274 lots under option at July 31, 1997 and October 31, 1996,
respectively.
(2) Of the total home lots available, 627 and 528 were under construction or
complete (including 110 and 106 models and sales offices), 3,721 and 1,762 were
under option, and 1,020 and 1,280 were financed through purchase money mortgages
at July 31, 1997 and October 31, 1996, respectively.
In addition, at July 31, 1997 and October 31, 1996, respectively, in
substantially completed or suspended communities, the Company owned or had under
option 484 and 448 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, 1997
the Company controlled such land to build 8,713 proposed homes, compared to
13,083 homes at October 31, 1996.
The following table summarizes the Company's started or completed unsold
homes in active, substantially complete and suspended communities:
July 31, October 31,
1997 1996
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 278 67 345 242 71 313
North Carolina...... 90 -- 90 68 -- 68
Florida............. 45 9 54 51 10 61
Virginia............ 12 10 22 18 3 21
California.......... 54 22 76 67 24 91
Poland.............. 38 2 40 2 2 4
------ ------ ----- ------ ------ -----
Total 517 110 627 448 110 558
====== ====== ===== ====== ====== =====
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, 1997, the Company had long-term
non-recourse financing aggregating $30,729,000 on six commercial facilities, a
decrease from October 31, 1996, due to $342,000 in principal amortization. The
decrease in commercial properties of $7,258,000 is primarily the result of the
writedown of certain facilities and land held for sale to fair value and the
write-off of an optioned parcel of land and related approval, engineering and
capitalized interest costs totaling $14,446,000. The writedowns and write-off
were partially offset by the reallocation of land and approval costs on a multi-
use parcel of land. As a result of the reallocation, $7,143,000 was added to
investment properties under development from homebuilding land held for future
development. See "Notes to Consolidated Financial Statements - Note 5."
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 $21,108,000 and
$57,095,000 at July 31, 1997 and October 31, 1996, 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, 1997 COMPARED
TO THE THREE AND NINE MONTHS ENDED JULY 31, 1996
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).
At October 31, 1996, the Company reclassified certain expenses previously
reported as selling, general and administration to cost of sales. These costs
include sales commissions, buyer concessions, the amortization of prepaid
selling expenses, property taxes and condominium association subsidies. The
amount of reclassifications for the three and nine months ended July 31, 1996
was $9,084,000 and $22,496,000, respectively. In addition, the Company
reclassified its title revenues previously reported as other homebuilding
revenues to financial services revenues, and title expenses from other operation
expenses to financial service expenses. The amount of title revenues and
expenses reclassified for the three months ended July 31, 1996 was $743,000 and
$589,000, respectively, and for the nine months ended July 31, 1996 was
$1,961,000 and $1,787,000, respectively.
Historically, the Company's first six months of the year have produced
substantially fewer deliveries than the last six months. In the third quarter
deliveries increase with a disproportionate number of deliveries coming in the
fourth quarter. This was true in fiscal 1996 when the Company delivered 33% of
its homes during the first six months, 25% in the third quarter and 42% in the
fourth quarter. Management believes this will be true for fiscal 1997. During
the past few years the Company has been able to produce a profit on this lower
volume during the first six months. That was not the case for the first six
months of fiscal 1997. In the third quarter of fiscal 1997 the Company produced
a profit primarily resulting from increased deliveries, higher gross margins and
two land sales. For the nine months ended July 31, 1997 the Company still has a
loss which is the result of the writedown of certain assets to their fair
values, and the write-off of four options and related approval, engineering and
capitalized interest costs. See "Notes to Consolidated Financial Statements -
Note 5." Due to the writedowns and write-offs, management believes the Company
may not be profitable in fiscal 1997. Management feels operating profits before
these adjustments will approximate fiscal 1996 results.
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,
----------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Dollars............. $336,244 $298,294 $305,365 $243,020
Homes............... 1,748 1,662 1,507 1,281
North Carolina:
Dollars............. $ 97,833 $ 94,215 $ 57,957 $ 58,779
Homes............... 535 557 302 339
Florida:
Dollars............. $ 46,403 $ 79,986 $ 41,201 $ 59,609
Homes............... 281 528 238 383
Virginia:
Dollars............. $ 11,518 $ 11,533 $ 6,927 $ 7,802
Homes............... 51 59 27 38
California:
Dollars............. $ 61,436 $ 42,552 $ 24,234 $ 17,236
Homes............... 327 224 144 87
Poland:
Dollars............. $ 2,511 $ 437 $ 2,543 $ 437
Homes............... 33 6 33 6
Totals:
Dollars............. $555,945 $527,017 $438,227 $386,883
Homes............... 2,975 3,036 2,251 2,134
Reduced sales contracts and below average return on investment in the
Florida Division have resulted in Management's decision to decrease the
Company's investment in this division by approximately $25.0 million. As a
result, certain communities were written down due to reduced sales prices and
increased buyer concessions to accelerate sales. In addition, other idle
property was written down since it will be offered for sale and not developed.
See "Notes to Consolidated Financial Statements - Note 5."
Total Revenues:
Revenues for the three months ended July 31, 1997 increased $9.3 million or
4.7%, compared to the same period last year. This was the result of a $10.6
million increase in land sales and other homebuilding revenues, which was
partially offset by a $0.4 million decrease in revenues from the sale of homes,
a $0.1 million decrease in financial services revenues, a $0.2 million decrease
in investment properties revenues, and a $0.6 million decrease in collateralized
mortgage financing revenues.
Revenues for the nine months ended July 31, 1997 increased $3.6 million or
0.7%, compared to the same period last year. This was the result of an $8.0
million increase in land sales and other homebuilding revenues, which was
partially offset by a $1.2 million decrease in revenues from the sale of homes,
a $2.2 million decrease in investment properties revenues, and a $1.0 million
decrease in collateralized mortgage financing revenues.
Homebuilding:
Revenues from the sale of homes decreased $0.4 million or 0.2% during the
three months ended July 31, 1997, and decreased $1.2 million or 0.3% during the
nine months ended July 31, 1997 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,
------------------- ------------------
1997 1996 1997 1996
--------- -------- -------- --------
(Dollars in Thousands)
Northeast Region:
Housing Revenues..... $118,186 $112,665 $252,303 $249,980
Homes Delivered...... 543 584 1,218 1,266
North Carolina:
Housing Revenues..... $ 35,293 $ 33,506 $ 83,676 $ 79,013
Homes Delivered...... 200 199 466 471
Florida:
Housing Revenues..... $ 14,325 $ 21,407 $ 45,195 $ 60,175
Homes Delivered...... 80 139 260 388
Virginia:
Housing Revenues..... $ 2,759 $ 3,614 $ 9,184 $ 11,211
Homes Delivered...... 14 16 48 49
California:
Housing Revenues..... $ 15,113 $ 15,936 $ 45,935 $ 38,823
Homes Delivered...... 77 83 229 204
Poland:
Housing Revenues..... $ 1,008 - $ 1,741 -
Homes Delivered...... 14 - 25 -
Totals:
Housing Revenues..... $186,684 $187,128 $438,034 $439,202
Homes Delivered...... 928 1,021 2,246 2,378
The decreased number of homes delivered for the three and nine months ended
July 31, 1997, compared to the prior year, was primarily due to the decreases in
the Company's Northeast Region and Florida offset somewhat by increases in
California and the addition of Poland. Due to the timing of the opening of new
communities in the Northeast Region, fewer homes were delivered during the three
months ended July 31, 1997. In Florida, the Company entered the year with a
lower backlog of sales contracts at November 1, 1996 than at November 1, 1995.
A lower backlog coupled with significantly fewer Florida sales contracts due to
a highly competitive market resulted in fewer deliveries.
During the second quarter the Company had written down certain residential
communities, and written off certain residential land options including
approval, engineering and capitalized interest costs. The writedowns and write-
offs amounted to $13,475,000. In Florida the Company's return on investment has
been unsatisfactory. As a result, the Company decided to reduce its investment
in Florida by $25.0 million. To do so on an accelerated basis, it reduced
prices and offered pricing concessions in all Florida residential communities.
The Company also decided to sell all inactive properties in Florida. In the
Northeast Region the Company changed the product type to be constructed on a
parcel of land it owns. Also in the Northeast the Company decided to sell an
optioned property instead of developing it. The result of the above decisions
was a reduction in fair values below carrying amounts and, in accordance with
FAS 121, the Company recorded an impairment loss on the related inventories.
See "Notes to Consolidated Financial Statements - Note 5." The Northeast Region
also wrote off three option properties and related approval, engineering and
capitalized interest costs. In two cases the Company decided to drop the option
due to environmental problems. The third option was dropped because the
community's proforma profitability did not produce an adequate return on
investment commensurate with the risk.
Cost of sales include expenses for housing and land and lot sales. A
breakout of such expenses for housing sales and housing gross margin is set
forth below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Dollars in Thousands)
Sale of Homes................ $186,684 $187,128 $438,034 $439,202
Cost of Sales................ 154,701 157,826 371,006 371,126
-------- -------- -------- --------
Housing Gross Margin......... $ 31,983 $ 29,302 $ 67,028 $ 68,076
======== ======== ======== ========
Gross Margin Percentage...... 17.1% 15.7% 15.3% 15.4%
Cost of Sales expenses as a percentage of home sales revenues are presented
below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
Sale of Homes................ 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of Sales:
Housing, land &
development costs.... 74.7 75.9 75.9 75.6
Commissions............ 2.0 1.9 2.0 1.8
Financing concessions.. .7 1.0 .9 1.0
Overheads.............. 5.5 5.5 5.9 6.2
-------- -------- -------- --------
Total Cost of Sales.......... 82.9 84.3 84.7 84.6
-------- -------- -------- --------
Gross Margin................. 17.1% 15.7% 15.3% 15.4%
======== ======== ======== ========
The Company sells a variety of home types in various local communities,
each yielding a different gross margin. As a result, depending on the mix of
both communities and of home types delivered, consolidated quarterly gross
margin will fluctuate up or down and may not be representative of the
consolidated gross margin for the year. In addition, gross margin percentages
are higher in the Northeast Region compared to the Company's other markets. For
the three months ended July 31, 1997 the Company's gross margin increased 1.4%
compared to the same period last year. This can be attributed to higher gross
margins in the Northeast Region and California which were partially offset by
lower margins in Florida and North Carolina. For the nine months ended July 31,
1997, the Company's gross margin decreased 0.1% compared to the same period last
year. This small decline is the net of margin decreases in Florida and North
Carolina offset by a higher margin in California. In the Northeast Region
margins are unchanged for the nine months. In California the three and nine
month margins are up primarily due to increased demand resulting in price
increases and fewer discounts and the introduction of new higher margined
communities. In Florida, the gross margin is lower due to increased pricing
concessions to accelerate sales. North Carolina's lower gross margin is
primarily attributed to a change in product mix, increased lot costs and
concessions on started unsold homes. The geographic product mix between the
Northeast Region and other states was almost unchanged for the three and nine
months ended July 31, 1997, compared to the same periods last year.
Selling, general, and administrative expenses increased during the three
and nine months ended July 31, 1997 $1.9 million and $3.6 million, respectively,
compared to the same periods last year. As a percentage of total homebuilding
revenues, such expenses increased to 8.2% for the three months ended July 31,
1997 from 7.6% for the prior year three months, and increased to 8.4% for the
nine months ended July 31, 1997 from 7.7% for the prior year nine months. The
dollar and percentage increase in selling, general and administrative expenses
is principally due to increased general and administrative expenses in the
Northeast Region.
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,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
Land and Lot Sales................ $12,749 $ 1,727 $14,645 $ 6,396
Cost of Sales..................... 9,015 1,745 10,622 5,668
-------- -------- -------- --------
Land and Lot Sales Gross Margin... $ 3,734 $ (18) $ 4,023 $ 728
======== ======== ======== ========
Land and lot sales are incidental to the Company's residential housing
operations and are expected to continue in the future but may significantly
fluctuate up or down.
Financial Services
Financial services consist primarily of originating mortgages from sales of
the Company's homes, and selling such mortgages in the secondary market. In
addition, title insurance activities have been reclassified from other housing
operations to financial services, as noted above. For the nine months ended
July 31, 1997 compared to the nine months ended July 31, 1996, the loss
resulting from financial services decreased by $0.1 million. This was a direct
result of the Company's wholly-owned mortgage banking subsidiary originating
mortgages at a lower cost, as well as higher interest rate spreads.
Investment Properties
Investment Properties consist of rental properties, property management,
and gains or losses from the sale of such property. At July 31, 1997, the
Company owned and was leasing two office buildings, three office/warehouse
facilities, two retail centers, and two senior citizen rental communities in New
Jersey. During the first quarter of fiscal 1996 the Company sold a retail
center and reported a pretax profit of $1.9 million. Investment Properties
expenses do not include interest expense which is reported below under
"Interest."
At the end of the second quarter the Company announced that it was planning
an orderly exit from the investment properties business. The Company plans to
sell its investment properties (except for the two senior citizen rental
communities) which after the elimination of debt will net approximately $35.0
million to be redeployed in its residential homebuilding business. Management
believes redeployment of this capital will enhance future profitability of the
Company. In accordance with FAS 121, the Company reevaluated such properties as
held for sale. Since certain investment properties' carrying amounts exceeded
the fair value less selling costs, an impairment loss was recorded against the
related asset. These writedowns were in New Jersey and Florida. See "Notes to
Consolidated Financial Statements - Note 5." In New Jersey the Company also
wrote off an option and related approval, engineering and capitalized interest
costs. The writedowns and write-offs of investment properties amounted to
$14,446,000.
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. Corporate general and
administration expenses were almost unchanged for both the three and nine months
ended July 31, 1997 compared to the same periods last year. As a percentage of
total revenues such expenses were approximately 2.2% for both the nine months
ended July 31, 1997 and 1996.
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,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
Sale of Homes.............. $ 6,803 $ 6,339 $17,461 $15,538
Land and Lot Sales......... 423 324 660 620
Rental Properties.......... 1,346 1,300 3,959 4,201
-------- -------- -------- --------
Total...................... $ 8,572 $ 7,963 $22,080 $20,359
======== ======== ======== ========
Housing interest as a percentage of sale of homes revenues amounted to 3.6%
and 4.0% for the three and nine months ended July 31, 1997, respectively, and
3.4% and 3.6% for the three and nine months ended July 31, 1996, respectively.
The increase in the percentage for the three and nine months ended July 31, 1997
was primarily the result of the Company discontinuing the capitalization of
interest on communities in planning which are not under active development. As
a result, interest expense increased approximately $1.5 million for the nine
months ended July 31, 1997.
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. The Company's title operation
expenses have been reclassified to financial services.
Total Taxes
Total taxes as a percentage of income before taxes amounted to
approximately 31% for both the three months ended July 31, 1997 and 1996. Due
to the loss for the nine months ended July 31, 1997 net tax credits were accrued
amounting to $10.1 million. Deferred federal and state income tax assets
primarily represent the deferred tax benefits arising from temporary differences
between book and tax income which will be recognized in future years.
Inflation
Inflation has a long-term effect on the Company because increasing costs of
land, materials and labor result in increasing sale prices of its homes. In
general, these price increases have been commensurate with the general rate of
inflation in the Company's housing market and have not had a significant adverse
effect on the sale of the Company's homes. A significant risk faced by the
housing industry generally is that rising house costs, including land and
interest costs, will substantially outpace increases in the income of potential
purchasers. In recent years, in the price ranges in which it sells homes, the
Company has not found this risk to be a significant problem.
Inflation has a lesser short-term effect on the Company because the Company
generally negotiates fixed price contracts with its subcontractors and material
suppliers for the construction of its homes. These prices usually are
applicable for a specified number of residential buildings or for a time period
of between four to twelve months. Construction costs for residential buildings
represent approximately 51% of the Company's total costs and expenses.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOVNANIAN ENTERPRISES, INC.
(Registrant)
DATE: September 10, 1997 /S/J. LARRY SORSBY
J. Larry Sorsby,
Senior Vice President,
Treasurer and
Chief Financial Officer
DATE: September 10, 1997 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
5
1000
9-MOS
OCT-31-1997
JUL-31-1997
10,215
0
44,543
0
468,113
608,013
33,455
15,052
693,887
286,850
232,741
237
0
0
174,059
693,887
452,679
468,986
381,628
471,686
0
0
22,080
(24,780)
(10,084)
(14,696)
0
0
0
(14,696)
(0.64)
(0.64)
