UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10Q
[ X ] Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For quarterly period ended APRIL 30, 1999 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. 13,307,799 Class A Common
Shares and 7,631,121 Class B Common Shares were outstanding as of June 4, 1999.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at April 30,
1999 (unaudited) and October 31, 1998 3
Consolidated Statements of Income for the three
and six months ended April 30, 1999 and 1998
(unaudited) 5
Consolidated Statements of Stockholders' Equity
for the six months ended April 30, 1999
(unaudited) 6
Consolidated Statements of Cash Flows for
the six months ended April 30, 1999
and 1998 (unaudited) 7
Notes to Consolidated Financial
Statements (unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 18
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 28
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
April 30, October 31,
ASSETS 1999 1998
----------- -----------
Homebuilding:
Cash and cash equivalents....................... $ 7,915 $ 13,306
----------- -----------
Inventories - At cost, not in excess of fair
value:
Sold and unsold homes and lots under
development.................................. 354,320 332,225
Land and land options held for future
development or sale......................... 41,225 43,508
----------- -----------
Total Inventories........................... 395,545 375,733
----------- -----------
Receivables, deposits, and notes................ 40,635 29,490
----------- -----------
Property, plant, and equipment - net............ 20,680 16,831
----------- -----------
Prepaid expenses and other assets............... 31,692 32,650
----------- -----------
Total Homebuilding.......................... 496,467 468,010
----------- -----------
Financial Services:
Cash and cash equivalents....................... 3,119 1,486
Mortgage loans held for sale.................... 46,750 71,611
Other assets.................................... 2,314 3,717
----------- -----------
Total Financial Services.................... 52,183 76,814
----------- -----------
Investment Properties:
Held for sale:
Land and improvements......................... 107 17,832
Other assets.................................. 788 295
Held for investment:
Cash.......................................... 762
Rental property - net......................... 10,775 10,794
Other assets.................................. 1,090 868
----------- -----------
Total Investment Properties................. 12,760 30,551
----------- -----------
Collateralized Mortgage Financing:
Collateral for bonds payable.................... 5,863 5,970
Other assets.................................... 307 426
----------- -----------
Total Collateralized Mortgage Financing..... 6,170 6,396
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits........................................ 4,701 7,331
----------- -----------
Total Assets...................................... $572,281 $589,102
=========== ===========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
April 30, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
----------- -----------
Homebuilding:
Nonrecourse land mortgages........................ $ 6,533 $ 11,846
Accounts payable and other liabilities............ 40,695 53,765
Customers' deposits............................... 22,468 23,857
Nonrecourse mortgages secured by operating
properties...................................... 3,716 3,770
----------- -----------
Total Homebuilding............................ 73,412 93,238
----------- -----------
Financial Services:
Accounts payable and other liabilities............ 2,182 2,422
Mortgage warehouse line of credit................. 43,877 66,666
----------- -----------
Total Financial Services...................... 46,059 69,088
----------- -----------
Investment Properties:
Accounts payable and other liabilities............ 1,224 1,373
----------- -----------
Total Investment Properties................... 1,224 1,373
----------- -----------
Collateralized Mortgage Financing:
Accounts payable and other liabilities............ 6
Bonds collateralized by mortgages receivable...... 4,574 5,652
----------- -----------
Total Collateralized Mortgage Financing....... 4,574 5,658
----------- -----------
Notes Payable:
Revolving credit agreement........................ 84,675 68,000
Subordinated notes................................ 145,449 145,449
Accrued interest.................................. 5,725 4,904
----------- -----------
Total Notes Payable........................... 235,849 218,353
----------- -----------
Total Liabilities............................. 361,118 387,710
----------- -----------
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 15,834,002 shares
(including 2,413,274 shares held in Treasury)... 158 157
Common Stock,Class B,$.01 par value-authorized
13,000,000 shares; issued 8,014,466 shares
(including 345,874 shares held in Treasury)..... 79 80
Paid in Capital................................... 34,590 34,561
Retained Earnings................................. 196,762 183,182
Treasury Stock - at cost.......................... (20,426) (16,588)
----------- -----------
Total Stockholders' Equity.................... 211,163 201,392
----------- -----------
Total Liabilities and Stockholders' Equity.......... $572,281 $589,102
=========== ===========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
Three Months Ended Six Months Ended
April 30, April 30,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues:
Homebuilding:
Sale of homes...................... $199,138 $203,567 $394,023 $407,624
Land sales and other revenues...... 5,454 3,854 7,895 6,339
--------- --------- --------- ---------
Total Homebuilding............... 204,592 207,421 401,918 413,963
Financial Services................... 4,154 4,140 9,812 7,702
Investment Properties................ 424 609 783 4,253
Collateralized Mortgage Financing.... 139 150 275 362
--------- --------- --------- ---------
Total Revenues................... 209,309 212,320 412,788 426,280
--------- --------- --------- ---------
Expenses:
Homebuilding:
Cost of sales...................... 159,037 170,806 314,624 340,606
Selling, general and administrative 18,586 15,858 36,120 31,515
Inventory impairment loss.......... 401 359 401 1,948
--------- --------- --------- ---------
Total Homebuilding............... 178,024 187,023 351,145 374,069
--------- --------- --------- ---------
Financial Services................... 3,859 3,580 9,101 6,791
--------- --------- --------- ---------
Investment Properties................ 322 753 1,101 1,876
--------- --------- --------- ---------
Collateralized Mortgage Financing.... 142 157 273 359
--------- --------- --------- ---------
Corporate General and Administration. 6,418 4,779 12,853 9,140
--------- --------- --------- ---------
Interest............................. 7,346 7,990 14,388 16,466
--------- --------- --------- ---------
Other Operations..................... 729 428 1,280 951
--------- --------- --------- ---------
Total Expenses................... 196,840 204,710 390,141 409,652
--------- --------- --------- ---------
Income Before Income Taxes............. 12,469 7,610 22,647 16,628
--------- --------- --------- ---------
State and Federal Income Taxes:
State................................ 1,340 596 2,828 1,244
Federal.............................. 3,677 2,001 6,239 4,458
--------- --------- --------- ---------
Total Taxes........................ 5,017 2,597 9,067 5,702
--------- --------- --------- ---------
Net Income............................. $ 7,452 $ 5,013 $ 13,580 $ 10,926
========= ========= ========= =========
Per Share Data:
Basic:
Income per common share.............. $ 0.35 $ 0.23 $ 0.63 $ 0.50
Weighted average number of common
shares outstanding................. 21,266 21,848 21,391 21,841
Assuming dilution:
Income per common share.............. 0.35 0.23 0.63 0.50
Weighted average number of common
shares outstanding................ 21,488 22,042 21,611 22,047
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, 1998 13,865,923 $157 7,694,297 $80 $34,561 $183,182 ($16,588) $201,392
Sale of Common Stock under
employee stock option
plan.................... 5,000 29 29
Conversion of Class B to
Class A Common Stock.... 25,705 1 (25,705) (1)
Treasury stock purchases.. (475,900) (3,838) (3,838)
Net Income................ 13,580 13,580
----------- ------ ----------- ------ ------- -------- -------- --------
Balance, April 30, 1999... 13,420,728 $158 7,668,592 $79 $34,590 $196,762 ($20,426) $211,163
=========== ====== =========== ====== ======= ======== ======== ========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
April 30,
---------------------
1999 1998
---------- ----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 13,580 $ 10,926
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation.................................... 2,428 1,936
Loss (gain) on sale and retirement of property
and assets.................................... 520 (2,690)
Deferred income taxes........................... 2,493 2,336
Impairment losses............................... 401 1,948
Decrease (increase) in assets:
Receivables, prepaids and other assets.......... (10,967) (7,453)
Mortgage notes receivable..................... 26,365 5,819
Inventories................................... (21,250) (5,654)
Increase (decrease) in liabilities:
State and Federal income taxes................ 137 (1,992)
Customers' deposits........................... (1,065) 179
Interest and other accrued liabilities........ (3,268) (2,490)
Post development completion costs............. (807) 1,349
Accounts payable.............................. (8,892) (4,739)
---------- ----------
Net cash (used) in operating activities..... (325) (525)
---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of property and assets........... 19,099 22,119
Purchase of property................................ (6,013) (1,230)
Investment in and advances to unconsolidated
affiliates........................................ (4) 403
Investment in income producing properties........... (1,016) (4,188)
---------- ----------
Net cash provided by investing activities... 12,066 17,104
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 323,253 280,003
Principal payments on mortgages and notes........... (335,812) (297,525)
Investment in mortgage notes receivable............. 107 1,166
Purchase of treasury stock.......................... (3,838) (457)
Proceeds from sale of stock......................... 29 577
---------- ----------
Net cash (used) in financing activities..... (16,261) (16,236)
---------- ----------
Net (Decrease) Increase In Cash....................... (4,520) 343
Cash and Cash Equivalent Balance, Beginning Of Period. 15,554 11,313
---------- ----------
Cash and Cash Equivalent and Balance, End Of Period... $ 11,034 $ 11,656
========== ==========
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, 1998
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 Six Months Ended
April 30, April 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in Thousands)
Interest Incurred (1):
Residential (3)........... $ 5,985 $ 6,656 $10,684 $ 13,298
Commercial(4)............. 289 485 645 1,164
-------- -------- -------- --------
Total Incurred.......... $ 6,274 $ 7,141 $11,329 $ 14,462
======== ======== ======== ========
Interest Expensed:
Residential (3)........... $ 7,057 $ 7,505 $13,743 $ 15,302
Commercial (4)............ 289 485 645 1,164
-------- -------- -------- --------
Total Expensed......... $ 7,346 $ 7,990 $14,388 $ 16,466
======== ======== ======== ========
Interest Capitalized at
Beginning of Period....... $ 22,089 $ 30,695 $25,545 $ 35,950
Plus Interest Incurred...... 6,274 7,141 11,329 14,462
Less Interest Expensed...... 7,346 7,990 14,388 16,466
Less Inventory Write-off.... 460
Less Sale of Assets......... 1,469 3,640
-------- -------- -------- --------
Interest Capitalized at
End of Period............. $21,017 $ 29,846 $ 21,017 $ 29,846
======== ======== ======== ========
Interest Capitalized at
End of Period:
Residential(3)............ $ 20,809 $ 27,340 $ 20,809 $ 27,340
Commercial(2)............. 208 2,506 208 2,506
-------- -------- -------- --------
Total Capitalized....... $ 21,017 $ 29,846 $ 21,017 $ 29,846
======== ======== ======== ========
(1) Does not include interest incurred by the Company's mortgage and finance
subsidiaries.
(2) Does not include a reduction for depreciation.
(3) Represents acquisition interest for construction, land and development
costs which is charged to interest expense when homes are delivered and
when land is not under active development.
(4) Represents interest allocated to or incurred on long term debt for
investment properties and charged to interest expense.
3. Homebuilding accumulated depreciation at April 30, 1999 and October 31,
1998 amounted to $17,128,000 and $15,088,000, respectively. Rental property
accumulated depreciation at April 30, 1999 and October 31, 1998 amounted to
$2,011,000 and $1,826,000, respectively.
4. During the six months ended April 30, 1999 the Company recorded a
$401,000 impairment loss associated with an option in Florida including
approval, engineering and capitalized interest. The Company wrote off costs on
two properties in New Jersey amounting to $1,589,000 and $359,000 during the
three months ended January 31, 1998 and April 30, 1998, respectively.
Residential inventory FAS 121 impairment losses and option write-offs are
reported on the Consolidated Statements of Income as "Homebuilding - Inventory
Impairment Loss."
5. The Company is 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 the Company. As of April 30, 1999 and 1998, respectively, the
Company is obligated under various performance letters of credit amounting to
$7,079,000 and $9,768,000.
6. On May 4, 1999, the Company issued $150,000,000 9 1/8% Senior Notes due
in 2009. The proceeds were used to reduce the outstanding balance on the
Company's "Revolving Credit Facility" to zero for general corporate purposes,
and on June 7, 1999, to redeem the remaining $45,449,000 11 1/4% Subordinated
Notes due 2002. The early retirement of these notes will result in an
extraordinary loss of $869,000 net of income taxes of $468,000.
7. Financial Information of Subsidiary Issuer and Subsidiary Guarantors.
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
April 30, 1999 had issued and outstanding approximately $145,449,000 of
subordinated notes and a revolving credit agreement with an outstanding balance
of $84,675,000. Both the subordinated 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.
Additionally the Parent has provided full, unconditional and joint and
several guarantees to the Senior Notes. The Guarantor Subsidiaries may also
provide similar guarantees to the Subsidiary Issuer.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries the Company has included the accompanying consolidated
condensed financial statements based on our understanding of the Securities and
Exchange Commission's interpretation and application of Rule 3-10 of the
Securities and Exchange Commission's Regulations S-X and Staff Accounting
Bulletin 53. 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.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED BALANCE SHEET
APRIL 30, 1999
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
ASSETS
Homebuilding:
Cash and cash equivalents........$ 46 $ (236) $ 8,022 $ 83 $ $ 7,915
Inventories...................... 393,156 2,389 395,545
Receivables, deposits, and notes. 3,331 37,304 40,635
Property, plant, and equipment... 12,515 8,129 36 20,680
Prepaid expenses and other assets 437 9,839 21,398 18 31,692
-------- ---------- ---------- ------------ ---------- ----------
Total Homebuilding............. 483 25,449 468,009 2,526 496,467
-------- ---------- ---------- ------------ ---------- ----------
Financial Services................. 1,387 50,796 52,183
-------- ---------- ---------- ------------ ---------- ----------
Investment Properties:
Held for sale.................... 895 895
Held for investment.............. 11,865 11,865
-------- ---------- ---------- ------------ ---------- ----------
Total Investment Properties.... 12,760 12,760
-------- ---------- ---------- ------------ ---------- ----------
Collateralized Mortgage Financing.. 6,170 6,170
-------- ---------- ---------- ------------ ---------- ----------
Income Taxes Receivables-Including
deferred tax benefits............ (1,074) 481 7,000 (1,706) 4,701
-------- ---------- ---------- ------------ ---------- ----------
Investments in and amounts due to
and from consolidated
subsidiaries..................... 211,754 213,261 (242,379) 13,548 (196,184)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$211,163 $ 239,191 $ 246,777 $ 71,334 $(196,184) $ 572,281
======== ========== ========== ============ ========== ==========
LIABILITIES
Homebuilding:
Accounts payable and other
liabilities....................$ $ 3,395 $ 37,093 $ 207 $ $ 40,695
Customers' deposits.............. 22,234 234 22,468
Nonrecourse mortgages............ 10,249 10,249
-------- ---------- ---------- ------------ ---------- ----------
Total Homebuilding............. 3,395 69,576 441 73,412
-------- ---------- ---------- ---------------------- ----------
Financial Services................. 535 45,524 46,059
Investment Properties.............. 1,224 1,224
Collateralized Mortgage Financing.. 4,574 4,574
Notes Payable...................... 235,702 147 235,849
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities.............. 239,097 71,482 50,539 361,118
-------- ---------- ---------- ------------ ---------- ----------
STOCKHOLDERS' EQUITY............... 211,163 94 175,295 20,795 (196,184) 211,163
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$211,163 $ 239,191 $ 246,777 $ 71,334 $(196,184) $ 572,281
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Continued)
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 1998
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ---------
ASSETS
Homebuilding:
Cash and cash equivalents........$ 14 $ (9,660) $ 21,732 $ 1,220 $ $ 13,306
Inventories...................... 373,364 2,369 375,733
Receivables, deposits, and notes. 2,618 26,872 29,490
Property, plant, and equipment... 10,180 6,627 24 16,831
Prepaid expenses and other assets 187 9,931 22,530 2 32,650
-------- --------- ---------- ------------ - --------- ----------
Total Homebuilding............. 201 13,069 451,125 3,615 468,010
-------- --------- ---------- ------------ ---------- ----------
Financial Services................. 1,461 75,353 76,814
-------- --------- ---------- ------------ ---------- ----------
Investment Properties:
Held for sale.................... 18,127 18,127
Held for investment.............. 12,424 12,424
-------- --------- ---------- ------------ ---------- ----------
Total Investment Properties.... 30,551 30,551
-------- --------- ---------- ------------ ---------- ----------
Collateralized Mortgage Financing.. 6,396 6,396
-------- --------- ---------- ------------ ---------- ----------
Income Taxes Receivables-Including
deferred tax benefits............ 41 382 8,419 (1,511) 7,331
-------- --------- ---------- ------------ ---------- ----------
Investments in and amounts due to
and from consolidated
subsidiaries..................... 201,150 210,648 (236,457) 7,941 (183,282)
-------- --------- ---------- ------------ ---------- ----------
Total Assets.......................$201,392 $224,099 $ 255,099 $ 91,794 $(183,282) $ 589,102
======== ========= ========== ============ ========== ==========
LIABILITIES
Homebuilding:
Accounts payable and other
liabilities....................$ $ 5,908 $ 47,636 $ 221 $ $ 53,765
Customers' deposits.............. 23,367 490 23,857
Nonrecourse mortgages............ 15,616 15,616
-------- --------- ---------- ------------ ---------- ----------
Total Homebuilding............. 5,908 86,619 711 93,238
-------- --------- ---------- ------------ ---------- ----------
Financial Services................. 677 68,411 69,088
Investment Properties.............. 1,373 1,373
Collateralized Mortgage Financing.. 5,658 5,658
Notes Payable...................... 218,182 171 218,353
-------- --------- ---------- ------------ ---------- ----------
Total Liabilities.............. 224,090 88,840 74,780 387,710
-------- --------- ---------- ------------ ---------- ----------
STOCKHOLDERS' EQUITY............... 201,392 9 166,259 17,014 (183,282) 201,392
-------- --------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$201,392 $224,099 $ 255,099 $ 91,794 $(183,282) $ 589,102
-------- --------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$201,392 $224,099 $ 255,099 $ 91,794 $(183,282) $ 589,102
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Continued)
CONSOLIDATING CONDENSED STATEMENT OF INCOME
THREE MONTHS ENDED APRIL 30, 1999
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ (57) $ 204,635 $ 5,273 $ (5,259) $ 204,592
Financial Services............... 791 3,363 4,154
Investment Properties............ 711 (287) 424
Collateralized Mortgage Financing 139 139
Intercompany Charges............. 20,944 1,335 (22,279)
Equity In Pretax Income of
Consolidated Subsidiaries...... 12,469 (12,469)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 12,469 20,887 207,472 8,775 (40,294) 209,309
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 183,031 243 (5,250) 178,024
Financial Services............... 682 3,401 (224) 3,859
Investment Properties............ 490 (168) 322
Collateralized Mortgage Financing 142 142
Corporate General and
Administration................. 6,241 279 (102) 6,418
Interest......................... 14,504 7,251 95 (14,504) 7,346
Other Operations................. 430 292 7 729
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 21,175 192,025 3,888 (20,248) 196,840
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 12,469 (288) 15,447 4,887 (20,046) 12,469
State and Federal Income Taxes..... 5,017 5,631 2,065 (7,696) 5,017
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$ 7,452 $ (288) $ 9,816 $ 2,822 $ (12,350) $ 7,452
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Continued)
CONSOLIDATING CONDENSED STATEMENT OF INCOME
THREE MONTHS ENDED APRIL 30, 1998
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 450 205,457 $ 5,965 $ (4,451) $ 207,421
Financial Services............... 939 3,201 4,140
Investment Properties............ 878 (269) 609
Collateralized Mortgage Financing 150 150
Intercompany Charges............. 20,307 1,661 (21,968)
Equity In Pretax Income of
Consolidated Subsidiaries...... 7,610 (7,610)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 7,610 20,757 208,935 9,316 (34,298) 212,320
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 190,090 1,386 (4,453) 187,023
Financial Services............... 609 3,008 (37) 3,580
Investment Properties............ 1,022 (269) 753
Collateralized Mortgage Financing 157 157
Corporate General and
Administration................. 4,546 239 (6) 4,779
Interest......................... 15,298 7,961 29 (15,298) 7,990
Other Operations................. 352 69 7 428
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 20,196 199,990 4,587 (20,063) 204,710
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 7,610 561 8,945 4,729 (14,235) 7,610
State and Federal Income Taxes..... 2,597 3,027 1,854 (4,881) 2,597
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$ 5,013 $ 561 $ 5,918 $ 2,875 $ (9,354) $ 5,013
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Continued)
CONSOLIDATING CONDENSED STATEMENT OF INCOME
SIX MONTHS ENDED APRIL 30, 1999
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 29 $ 400,919 $ 9,534 $ (8,564) $ 401,918
Financial Services............... 1,611 8,201 9,812
Investment Properties............ 1,344 (561) 783
Collateralized Mortgage Financing 275 275
Intercompany Charges............. 41,840 1,984 (43,824)
Equity In Pretax Income of
Consolidated Subsidiaries...... 22,647 (22,647)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 22,647 41,869 405,858 18,010 (75,596) 412,788
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 358,523 1,168 (8,546) 351,145
Financial Services............... 1,172 8,150 (221) 9,101
Investment Properties............ 1,521 (420) 1,101
Collateralized Mortgage Financing 273 273
Corporate General and
Administration................. 12,538 456 (141) 12,853
Interest......................... 28,686 14,196 192 (28,686) 14,388
Other Operations................. 916 357 7 1,280
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 42,140 376,225 9,790 (38,014) 390,141
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 22,647 (271) 29,633 8,220 (37,582) 22,647
State and Federal Income Taxes..... 9,067 11,252 3,510 (14,762) 9,067
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$13,580 $ (271) $ 18,381 $ 4,710 $ (22,820) $ 13,580
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Continued)
CONSOLIDATING CONDENSED STATEMENT OF INCOME
SIX MONTHS ENDED APRIL 30, 1998
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 497 $ 411,301 $ 10,690 $ (8,525) $ 413,963
Financial Services............... 1,800 5,902 7,702
Investment Properties............ 4,788 (535) 4,253
Collateralized Mortgage Financing 362 362
Intercompany Charges............. 40,483 3,469 (43,952)
Equity In Pretax Income of
Consolidated Subsidiaries...... 16,628 (16,628)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 16,628 40,980 421,358 16,954 (69,640) 426,280
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 380,589 1,997 (8,517) 374,069
Financial Services............... 1,228 5,692 (129) 6,791
Investment Properties............ 2,337 (461) 1,876
Collateralized Mortgage Financing 359 359
Corporate General and
Administration................. 8,790 422 (72) 9,140
Interest......................... 30,586 16,410 56 (30,586) 16,466
Other Operations................. 777 167 7 951
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 40,153 401,153 8,111 (39,765) 409,652
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 16,628 827 20,205 8,843 (29,875) 16,628
State and Federal Income Taxes..... 5,702 7,195 3,449 (10,644) 5,702
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$10,926 $ 827 $ 13,010 $ 5,394 $ (19,231) $ 10,926
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 1999
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income (loss)..................$ 13,580 $ (271) $ 18,381 $ 4,710 $ (22,820) $ 13,580
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities... 865 (3,931) (59,077) 25,418 22,820 (13,905)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 14,445 (4,202) (40,696) 30,128 (325)
Net Cash Provided by (Used In)
Investing Activities............... (436) 12,587 (85) 12,066
Net Cash Provided By(Used In)
Financing Activities............... (3,809) 16,675 (5,260) (23,867) (16,261)
Intercompany Investing and Financing
Activities - Net................... (10,604) (2,613) 18,824 (5,607)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... 32 9,424 (14,545) 569 (4,520)
Cash and Cash Equivalent Balance,
Beginning of Period................ 14 (9,660) 23,023 2,177 15,554
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalent Balance,
End of Period......................$ 46 $ (236) $ 8,478 $ 2,746 $ $ 11,034
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 1998
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income (loss)..................$ 10,926 $ 827 $ 13,010 $ 5,394 $ (19,231) $ 10,926
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities... (1,796) (815) (12,440) (15,631) 19,231 (11,451)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 9,130 12 570 (10,237) (525)
Net Cash Provided by (Used In)
Investing Activities............... (755) 18,009 (150) 17,104
Net Cash (Used In) Provided By
Financing Activities............... 120 6,425 (15,772) (7,009) (16,236)
Intercompany Investing and Financing
Activities - Net................... (9,250) 174 (6,978) 16,054
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... 5,856 (4,171) (1,342) 343
Cash and Cash Equivalent Balance,
Beginning of Period................ 10 (5,485) 13,857 2,931 11,313
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalent Balance,
End of Period......................$ 10 $ 371 $ 9,686 $ 1,589 $ $ 11,656
======== ========= ========== ============ ========== ==========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The Company's uses for cash during the six months ended April 30, 1999 were
for operating expenses, increases in housing inventories, construction, income
taxes, interest, and the repurchase of common stock. The Company provided for
its cash requirements from the revolving credit facility, sales of commercial
properties, and from housing and other revenues. The Company believes that
these sources of cash are sufficient to finance its working capital requirements
and other needs.
In December 1998 the Board of Directors authorized a stock repurchase
program to purchase up to 3 million shares of Class A Common Stock. This
authorization expires on December 31, 2000. As of April 30, 1999, 2,067,400
shares were repurchased under this program of which 475,900 shares were
purchased during the six months ended April 30, 1999.
The Company's bank borrowings are made pursuant to a revolving credit
agreement (the "Agreement") that provides a revolving credit line of up to
$280,000,000 (the "Revolving Credit Facility") through July 2001. Interest is
payable monthly and at various rates of either prime or Libor plus 1.45%. The
Company believes that it will be able either to extend the Agreement beyond July
2001 or negotiate a replacement facility, but there can be no assurance of such
extension or replacement facility. The Company currently is in compliance and
intends to maintain compliance with its covenants under the Agreement. As of
April 30, 1999, borrowings under the Agreement were $84,675,000.
The subordinated indebtedness issued by the Company and outstanding as of
April 30, 1999 was $100,000,000 9 3/4% Subordinated Notes due June 2005 and
$45,449,000 11 1/4% Subordinated Notes due April 2002. On May 4, 1999, the
Company issued $150,000,000 9 1/8% Senior Notes due in 2009. On June 7, 1999,
the Company redeemed the remaining $45,449,000 principal amount 11 1/4%
Subordinated Notes. The remaining proceeds were used to reduce the outstanding
balance on the Company's "Revolving Credit Facility" to zero and for general
corporate purposes.
The Company's mortgage banking subsidiary borrows under a bank warehousing
arrangement. Other finance subsidiaries formerly borrowed from a multi-builder
owned financial corporation and a builder owned financial corporation to finance
mortgage backed securities, but in fiscal 1988 decided to cease further
borrowing from multi-builder and builder owned financial corporations. These
non-recourse borrowings have been generally secured by mortgage loans originated
by one of the Company's subsidiaries. As of April 30, 1999, the aggregate
principal amount of all such borrowings was $48,451,000.
The book value of the Company's residential inventories, rental
condominiums, and commercial properties completed and under development amounted
to the following:
April 30, October 31,
1999 1998
------------ ------------
Residential real estate inventory.......... $395,545,000 $375,733,000
Senior residential rental property......... 10,775,000 10,794,000
------------ ------------
Total Residential Real Estate............ 406,320,000 386,527,000
Commercial properties...................... 107,000 17,832,000
------------ ------------
Combined Total........................... $406,427,000 $404,359,000
============ ============
Substantially all residential homes under construction or completed and
included in real estate inventory at April 30, 1999 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, senior notes and
subordinated indebtedness.
The following table summarizes housing lots in the Company's active selling
communities under development (including Poland):
(1) (2)
Homes Contracted Remaining
Commun- Approved Deliv- Not Home Sites
ities Lots ered Delivered Available
------- -------- ------ ---------- ----------
April 30, 1999........ 72 17,542 6,674 1,718 9,150
October 31, 1998...... 84 17,020 6,553 1,672 8,795
(1) Includes 12 and 8 lots under option at April 30, 1999 and October 31, 1998,
respectively.
(2) Of the total home lots available, 330 and 460 were under construction or
complete (including 43 and 54 models and sales offices), 5,384 and 4,570 were
under option, and 233 and 330 were financed through purchase money mortgages at
April 30, 1999 and October 31, 1998, respectively.
In addition, at April 30, 1999 and October 31, 1998, respectively, in
substantially completed or suspended communities, the Company owned or had under
option 144 and 283 home lots. The Company also controls a supply of land
primarily through options for future development. This land is consistent with
anticipated home building requirements in its housing markets. At April 30,
1999 the Company controlled such land to build 11,398 proposed homes, compared
to 10,963 homes at October 31, 1998.
The following table summarizes the Company's started or completed unsold
homes in active, substantially complete and suspended communities:
April 30, October 31,
1999 1998
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 117 15 132 180 16 196
North Carolina...... 104 - 104 93 - 93
Florida............. 9 1 10 24 6 30
Virginia............ 10 7 17 23 11 34
California.......... 55 20 75 78 21 99
Poland.............. 6 - 6 11 - 11
------ ------ ----- ------ ------ -----
Total 301 43 344 409 54 463
====== ====== ===== ====== ====== =====
During fiscal 1997 the Company announced it was planning an orderly exit
from the business of owning investment properties. During the first quarter of
fiscal 1999 the Company sold three land parcels which reduced such properties
$17,725,000. At April 30, 1999 the Company had remaining one small investment
property.
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 $46,144,000 and
$71,002,000 at April 30, 1999 and October 31, 1998, respectively, are being
temporarily warehoused and awaiting sale in the secondary mortgage market. The
balance of such mortgages is being held as an investment by the Company. The
Company may incur risk with respect to mortgages that are delinquent, but only
to the extent the losses are not covered by mortgage insurance or resale value
of the house. Historically, the Company has incurred minimal credit losses.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 1999 COMPARED
TO THE THREE AND SIX MONTHS ENDED APRIL 30, 1998
The Company's operations consist primarily of residential housing
development and sales in its Northeast Region (comprising of New Jersey,
southern New York State and eastern Pennsylvania), North Carolina, southeastern
Florida, northern Virginia, southern California and Poland. The Company is
expanding into Maryland and expects to begin selling homes in its fourth quarter
of fiscal 1999. In addition, the Company provides financial services to its
homebuilding customers and third parties.
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
Six Months Ended Contract Backlog
April 30, as of April 30,
----------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Dollars............. $205,087 $286,896 $256,033 $312,662
Homes............... 886 1,309 1,058 1,359
North Carolina:
Dollars............. $ 81,784 $ 59,893 $ 71,044 $ 51,920
Homes............... 416 328 348 272
Florida:
Dollars............. $ 20,580 $ 16,433 $ 19,262 $ 18,050
Homes............... 92 87 87 94
Virginia:
Dollars............. $ 27,278 $ 13,449 $ 34,815 $ 11,025
Homes............... 122 50 156 39
California:
Dollars............. $ 41,952 $ 28,304 $ 20,001 $ 14,626
Homes............... 217 154 105 79
Poland:
Dollars............. $ 482 $ 1,609 $ 428 $ 2,600
Homes............... 5 20 3 35
Totals:
Dollars............. $377,163 $406,584 $401,583 $410,883
Homes............... 1,738 1,948 1,757 1,878
Total Revenues:
Revenues for the three months ended April 30, 1999 decreased $3.0 million
or 1.4%, compared to the same period last year. This was the result of a $4.4
million decrease in revenues from the sale of homes, and a $0.2 decrease in
investment properties revenues. The decreases were partially offset by a $1.6
million increase in land sales and other homebuilding revenues.
Revenues for the six months ended April 30, 1999 decreased $13.5 million or
3.2%, compared to the same period last year. This was the result of a $13.6
million decrease in revenues from the sale of homes, a $3.5 million decrease in
investment properties revenues, and a $0.1 million decrease in collateralized
mortgage financing revenues. The decreases were partially offset by a $1.6
million increase in land sales and other homebuilding revenues and a $2.1
million increase in financial services revenues.
Homebuilding:
Revenues from the sale of homes decreased $4.4 million or 2.2% during the
three months ended April 30, 1999, and decreased $13.6 million or 3.3% during
the six months ended April 30, 1999, compared to the same period last year.
Revenues from sales of homes are recorded at the time each home is delivered and
title and possession have been transferred to the buyer.
Information on homes delivered by market area is set forth below:
Three Months Ended Six Months Ended
April 30, April 30,
------------------- ------------------
1999 1998 1999 1998
--------- -------- -------- --------
(Dollars in Thousands)
Northeast Region:
Housing Revenues..... $126,500 $136,133 $253,184 $275,144
Homes Delivered...... 482 597 960 1,237
North Carolina:
Housing Revenues..... $ 30,553 $ 28,264 $ 59,633 $ 53,940
Homes Delivered...... 149 153 303 288
Florida:
Housing Revenues..... $ 9,531 $ 15,254 $ 17,864 $ 24,766
Homes Delivered...... 40 90 78 143
Virginia:
Housing Revenues..... $ 6,005 $ 4,843 $ 18,552 $ 10,961
Homes Delivered...... 27 18 81 38
California:
Housing Revenues..... $ 26,548 $ 17,613 $ 43,859 $ 40,734
Homes Delivered...... 128 95 231 212
Poland:
Housing Revenues..... $ - $ 1,460 $ 931 $ 2,079
Homes Delivered...... - 17 9 24
Totals:
Housing Revenues..... $199,138 $203,567 $394,023 $407,624
Homes Delivered...... 826 970 1,662 1,942
The 14.8% and 14.4% decrease in the number of homes delivered for the three
and six months ended April 30, 1999, respectively, compared to the same periods
last year, were primarily due to the decreases in the Company's Northeast
Region. The decrease in deliveries in the Northeast Region was primarily due to
a reduced number of communities during the three and six months ended April 30,
1999, compared to the same period last year. The decrease in housing revenues
was only 2.2% and 3.3% during the three and six months ended April 30, 1999,
respectively, compared to the same periods last year. The decrease in housing
revenues was not as great as the decrease in the number of homes delivered due
to higher average home prices. Average home prices increased to $237,078
compared to $209,899 during the six months ended April 30, 1999 and 1998,
respectively.
Cost of sales include expenses for housing and land and lot sales. A
breakout of such expenses for housing sales and housing gross margin is set
forth below:
Three Months Ended Six Months Ended
April 30, April 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in Thousands)
Sale of Homes................ $199,138 $203,567 $394,023 $407,624
Cost of Sales................ 155,085 169,220 309,334 337,748
-------- -------- -------- --------
Housing Gross Margin......... $ 44,053 $ 34,374 $ 84,689 $ 69,876
======== ======== ======== ========
Gross Margin Percentage...... 22.1% 16.9% 21.5% 17.1%
Cost of Sales expenses as a percentage of home sales revenues are presented
below:
Three Months Ended Six Months Ended
April 30, April 30,
------------------- -------- --------
1999 1998 1999 1998
-------- -------- -------- --------
Sale of Homes................ 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of Sales:
Housing, land &
development costs.... 69.9% 75.5% 70.4% 75.0%
Commissions............ 1.9% 1.9% 1.9% 1.9%
Financing concessions.. 0.7% 0.7% 0.8% 0.7%
Overheads.............. 5.4% 5.0% 5.4% 5.3%
-------- -------- -------- --------
Total Cost of Sales.......... 77.9% 83.1% 78.5% 82.9%
-------- -------- -------- --------
Gross Margin................. 22.1% 16.9% 21.5% 17.1%
======== ======== ======== ========
The Company sells a variety of home types in various local communities,
each yielding a different gross margin. As a result, depending on the mix of
both communities and of home types delivered, consolidated quarterly gross
margin will fluctuate up or down and may not be representative of the
consolidated gross margin for the year. In addition, gross margin percentages
are higher in the Northeast Region compared to the Company's other markets. For
the three and six months ended April 30, 1999 the Company's gross margin
increased 5.2% and 4.4%, respectively, compared to the same periods last year.
This can be attributed to higher gross margins being achieved in each of the
Company's markets. Higher gross margins are primarily attributed to positive
effects from process redesign and quality programs that reduced housing and land
development costs, selective price increases or reduced selling incentives in
the Company's stronger markets, and an increased percentage of deliveries from
the better performing communities.
Selling, general, and administrative expenses as a percentage of total
homebuilding revenues, increased to 9.0% for the three and six months ended
April 30, 1999 from 7.6% for the prior year three and six months. Such expenses
increased during the three and six months ended April 30, 1999 $2.7 million and
$4.6 million, respectively, compared to the same periods last year. The overall
percentage and dollar increases in selling, general and administrative is
principally due to decreased deliveries and increases in administrative costs
primarily in the Company's Northeast Region, North Carolina, and California.
Land Sales and Other Revenues:
Land sales and other revenues consist primarily of land and lot sales. A
breakout of land and lot sales is set forth below:
Three Months Ended Six Months Ended
April 30, April 30,
------------------ -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Land and Lot Sales................ $ 4,207 $ 1,766 $ 5,534 $ 3,363
Cost of Sales..................... 3,952 1,586 5,290 2,858
-------- -------- -------- --------
Land and Lot Sales Gross Margin... 255 180 244 505
Interest Expense.................. 609 159 742 317
-------- -------- -------- --------
Land and Lot Sales Profit (Loss)
Before Tax...................... $ (354) $ 21 $ (498) $ 188
======== ======== ======== ========
Land and lot sales are incidental to the Company's residential housing
operations and are expected to continue in the future but may significantly
fluctuate up or down.
Financial Services
Financial services consist primarily of originating mortgages from sales of
the Company's homes, and selling such mortgages in the secondary market and
title insurance activities. For the three and six months ended April 30, 1999
financial services provided a $0.3 million and $0.7 million pretax profit,
respectively, compared to a profit of $0.6 million and $0.9 million for the same
periods in 1998. The Company's mortgage banking goals are to improve
profitability by increasing the capture rate of its homebuyers and expanding its
business to include originations from unrelated third parties. The Company has
initiated efforts to originate mortgages from unrelated third parties and
expects these third party loans to increase as a percentage of the Company's
total loan volume over the next few years.
Investment Properties
Investment Properties consisted of rental properties, property management,
and gains or losses from the sale of such property. At the end of the second
quarter of 1997 the Company announced that it was planning an orderly exit from
the investment properties business. During the three months ended January 31,
1999 the Company sold three land parcels for a total sales price of $20.8
million and recorded a loss before income taxes of $0.5 million. At April 30,
1999 all commercial facilities and land (except for one small parcel) have been
liquidated. The Company is retaining two senior citizen residential rental
communities.
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 include the operations at the
Company's headquarters in Red Bank, New Jersey. Such expenses include the
Company's executive offices, information services, human resources, corporate
accounting, training, treasury, process redesign, internal audit, and
administration of insurance, quality, and safety. As a percentage of total
revenues such expenses increased to 3.1% for the three months ended April 30,
1999 from 2.3% for the prior year three months. For the six months ended April
30, 1999 such expenses increased to 3.1% from 2.1% for the prior year six
months. Corporate general and administration expenses increased $1.6 million
and $3.7 million during the three and six months ended April 30, 1999 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, land and lot, and rental properties
interest. Interest expense is broken down as follows:
Three Months Ended Six Months Ended
April 30, April 30,
------------------ -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Sale of Homes.............. $ 6,448 $ 7,346 $ 13,001 $ 14,985
Land and Lot Sales......... 609 159 742 317
Rental Properties.......... 289 485 645 1,164
-------- -------- -------- --------
Total...................... $ 7,346 $ 7,990 $ 14,388 $ 16,466
======== ======== ======== ========
Housing interest as a percentage of sale of homes revenues amounted to 3.2%
and 3.3% for the three and six months ended April 30, 1999, respectively,
compared to 3.6% and 3.7% for the three and six months ended April 30, 1998,
respectively. The decrease in the percentage for the three and six months ended
April 30, 1999 was primarily the result of the Company's lower debt levels.
Lower debt levels are attributed to debt reductions resulting from cash
generated by the liquidation of investment properties and income from fiscal
1998.
Other Operations
Other operations consist primarily of miscellaneous residential housing
operations expenses, amortization of prepaid subordinated note issuance expenses
and corporate owned life insurance loan interest.
Total Taxes
Total taxes as a percentage of income before taxes amounted to
approximately 40.0% and 34.2% for the six months ended April 30, 1999 and 1998,
respectively. The increase in this percentage from 1998 to 1999 is primarily
attributed to higher state taxes and the elimination of certain federal tax
benefits associated with the Company's corporate owned life insurance. Deferred
federal and state income tax assets primarily represent the deferred tax
benefits arising from temporary differences between book and tax income which
will be recognized in future years.
Year 2000 Issues
The Company has assessed and formulated a plan to resolve its information
technology ("IT") and non-IT system year 2000 issues. The Company has
designated a full-time year 2000 project leader, engaged consultants to review
and evaluate its plan, completed the identification of Company IT and non-IT
noncompliant systems and evaluated subcontractors' and suppliers' state of
readiness. The Company's plan has prioritized its efforts on its software
systems and computer hardware equipment. The Company has upgraded, fixed or
retired 95% of its noncompliant systems. The Company expects to have
substantially all critical IT software year 2000 capable and tested by June 30,
1999. All other Company IT and non-IT systems are not considered critical to
Company operations, and if non-capable for year 2000, would only be an
inconvenience. The Company does not anticipate the costs of implementation of
its plan to have a material impact on future earnings and is expected to be
funded through operations.
The Company is concerned about the readiness of its subcontractors and
suppliers. The Company has communicated with 100% of these third parties. The
Company has been informed that 70% of the subcontractors and suppliers are year
2000 compliant, 30% are expected to be compliant by September 30, 1999. If any
of the third parties are not year 2000 compliant by September 30, 1999 and such
third parties would have a substantial impact on the Company's operations, the
Company will look to replace such subcontractors and suppliers. In most cases,
the Company uses more than one subcontractor and supplier so it believes finding
replacements will not be difficult.
The Company believes it is on track to solve its year 2000 issues. It does
not believe it will have material lost revenues due to the year 2000 issues.
Based on the above, it sees no need to develop a worst-case year 2000 scenario.
However, the Company is in the process of developing year 2000 contingency plans
which are approximately 80% complete.
Inflation
Inflation has a long-term effect on the Company because increasing costs of
land, materials and labor result in increasing sale prices of its homes. In
general, these price increases have been commensurate with the general rate of
inflation in the Company's housing market and have not had a significant adverse
effect on the sale of the Company's homes. A significant risk faced by the
housing industry generally is that rising house costs, including land and
interest costs, will substantially outpace increases in the income of potential
purchasers. In recent years, in the price ranges in which it sells homes, the
Company has not found this risk to be a significant problem.
Inflation has a lesser short-term effect on the Company because the Company
generally negotiates fixed price contracts with its subcontractors and material
suppliers for the construction of its homes. These prices usually are
applicable for a specified number of residential buildings or for a time period
of between four to twelve months. Construction costs for residential buildings
represent approximately 56% of the Company's total costs and expenses.
QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
On May 4, 1999, the Company issued $150,000,000 9 1/8 % Senior Notes due in
2009. Such transaction was conducted under market conditions and falls within
the parameters of the Company's strategy for managing its market risk. The
proceeds were used to reduce the outstanding balance on the Company's "Revolving
Credit Facility" to zero, for general corporate purposes, and on June 7, 1999
to redeem the remaining $45,449,000 11 1/4% Subordinated Notes due 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOVNANIAN ENTERPRISES, INC.
(Registrant)
DATE: June 11, 1999 /S/J. LARRY SORSBY
J. Larry Sorsby,
Senior Vice President,
Treasurer and
Chief Financial Officer
DATE: June 11, 1999 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller
5
1000
6-MOS
OCT-31-1999
APR-30-1999
11,034
0
40,635
0
395,545
534,068
37,808
17,128
572,281
207,379
153,739
237
0
0
210,926
572,281
399,557
412,566
314,624
375,531
0
0
14,388
22,647
9,067
13,580
0
0
0
13,580
0.63
0.63
