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, 1996 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 principle 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. 15,112,362 Class A Common
Shares and 7,924,691 Class B Common Shares were outstanding as of May 31, 1996.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at April 30,
1996 (unaudited) and October 31, 1995 3
Consolidated Statements of Income for the
three and six months ended April 30, 1996
and 1995 (unaudited) 5
Consolidated Statements of Stockholders' Equity
for the six months ended April 30, 1996
(unaudited) 6
Consolidated Statements of Cash Flows
for the six months ended April 30,
1996 and 1995 (unaudited) 7
Notes to Consolidated Financial
Statements (unaudited) 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
PART II. Other Information
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 6(a). Exhibit 10(a) - Third Amentment to Credit
Agreement dated June 4, 1996 among
K. Hovnanian Enterprises, Inc., Hovnanian
Enterprises, Inc., Certain Subsidiaries Thereof,
Midlantic Bank,N.A., Chemical Bank, Meridian
Bank, NationsBank,N.A., First National Bank of
Boston, Bank of America Illinois, First National
Bank of Chicago, Comerica Bank, and Credit Lyonnais.
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 17
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
April 30, October 31,
ASSETS 1996 1995
----------- -----------
Homebuilding:
Cash and cash equivalents....................... $ 9,073 $ 14,147
----------- -----------
Inventories - At cost, not in excess of fair
value:
Sold and unsold homes and lots under
development.................................. 386,725 345,410
Land and land options held for future
development or sale......................... 63,963 59,003
----------- -----------
Total Inventories........................... 450,688 404,413
----------- -----------
Receivables, deposits, and notes................ 36,269 27,782
----------- -----------
Property, plant, and equipment - net............ 16,483 14,644
----------- -----------
Prepaid expenses and other assets............... 42,444 26,422
----------- -----------
Total Homebuilding.......................... 554,957 487,408
----------- -----------
Financial Services:
Cash and cash equivalents....................... 555 1,306
Mortgage loans held for sale.................... 22,190 46,621
Other assets.................................... 1,374 1,940
----------- -----------
Total Financial Services.................... 24,119 49,867
----------- -----------
Investment Properties:
Rental property - net........................... 52,846 63,310
Property under development or held for future
development................................... 13,537 11,368
Other assets.................................... 11,807 3,795
Investment in and advances to unconsolidated
joint venture................................. 337 3,804
----------- -----------
Total Investment Properties................. 78,527 82,277
----------- -----------
Collateralized Mortgage Financing:
Collateral for bonds payable.................... 16,720 18,184
Other assets.................................... 1,084 1,281
----------- -----------
Total Collateralized Mortgage Financing..... 17,804 19,465
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits........................................ 7,323 6,361
----------- -----------
Total Assets...................................... $682,730 $645,378
=========== ===========
<FN>
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
April 30, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
----------- -----------
Homebuilding:
Nonrecourse land mortgages......................... $ 25,541 $ 25,046
Accounts payable and other liabilities............. 28,141 48,619
Customers' deposits................................ 17,830 11,626
Nonrecourse mortgages secured by operating property 3,961 4,003
----------- -----------
Total Homebuilding............................. 75,473 89,294
----------- -----------
Financial Services:
Accounts payable and other liabilities............. 460 1,043
Mortgage warehouse line of credit.................. 19,906 41,855
----------- -----------
Total Financial Services....................... 20,366 42,898
----------- -----------
Investment Properties:
Accounts payable and other liabilities............. 768 1,105
Nonrecourse mortgages secured by rental property... 31,286 31,490
----------- -----------
Total Investment Properties.................... 32,054 32,595
----------- -----------
Collateralized Mortgage Financing:
Accounts payable and other liabilities............. 12 14
Bonds collateralized by mortgages receivable....... 16,282 17,880
----------- -----------
Total Collateralized Mortgage Financing........ 16,294 17,894
----------- -----------
Notes Payable:
Revolving credit agreement......................... 154,825 80,650
Subordinated notes................................. 200,000 200,000
Accrued interest................................... 5,635 5,712
----------- -----------
Total Notes Payable............................ 360,460 286,362
----------- -----------
Total Liabilities.............................. 504,647 469,043
----------- -----------
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 15,444,011 shares
(including 345,874 shares held in Treasury)...... 154 154
Common Stock,Class B,$.01 par value-authorized
13,000,000 shares; issued 8,284,790 shares
(including 345,874 shares held in Treasury)...... 83 83
Paid in Capital.................................... 33,935 33,935
Retained Earnings.................................. 149,210 147,462
Treasury Stock - at cost........................... (5,299) (5,299)
----------- -----------
Total Stockholders' Equity..................... 178,083 176,335
----------- -----------
Total Liabilities and Stockholders' Equity........... $682,730 $645,378
=========== ===========
<FN>
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,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Revenues:
Homebuilding:
Sale of homes....................... $143,504 $139,607 $252,074 $257,281
Land sales and other revenues....... 5,194 3,618 7,654 7,295
--------- --------- --------- ---------
Total Homebuilding................ 148,698 143,225 259,728 264,576
Financial Services.................... 1,329 1,685 2,450 2,824
Investment Properties................. 2,009 1,920 6,550 4,486
Collateralized Mortgage Financing..... 428 454 875 994
--------- --------- --------- ---------
Total Revenues.................... 152,464 147,284 269,603 272,880
--------- --------- --------- ---------
Expenses:
Homebuilding:
Cost of sales....................... 115,516 113,618 203,811 208,610
Selling, general and administrative. 19,460 17,622 33,472 33,256
--------- --------- --------- ---------
Total Homebuilding................ 134,976 131,240 237,283 241,866
Financial Services.................... 1,769 2,104 3,583 4,111
Investment Properties................. 1,703 1,521 3,417 2,975
Collateralized Mortgage Financing..... 446 542 921 1,056
Corporate General and Administration.. 3,553 3,126 7,196 6,225
Interest.............................. 6,796 6,511 12,396 1,426
Other operations...................... 1,638 1,507 2,908 3,700
--------- --------- --------- ---------
Total Expenses.................... 150,881 146,551 267,704 271,359
--------- --------- --------- ---------
Income Before Income Taxes.............. 1,583 733 1,899 1,521
--------- --------- --------- ---------
State and Federal Income Taxes:
State................................. 296 339 836 506
Federal............................... 39 (285) (685) (398)
--------- --------- --------- ---------
Total Taxes......................... 335 54 151 108
--------- --------- --------- ---------
Net Income.............................. $ 1,248 $ 679 $ 1,748 $ 1,413
========= ========= ========= =========
Earnings Per Common Share............... $ 0.05 $ 0.03 $ 0.08 $ 0.06
========= ========= ========= =========
<FN>
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, 1995... 15,038,483 $154 7,998,570 $83 $33,935 $147,462 $(5,299) $176,335
Conversion of Class B to
Class A Common Stock...... 59,654 (59,654)
Net Income.................. 1,748 1,748
----------- -------- ----------- -------- ------- --------- --------- --------
Balance, April 30, 1996..... 15,098,137 $154 7,938,916 $83 $33,935 $149,210 $(5,299) $178,083
=========== ======== =========== ======== ======= ========= ========= ========
<FN>
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
April 30,
----------------------
1996 1995
---------- ----------
Cash Flows From Operating Activities:
Net Income............................................. $ 1,748 $ 1,413
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation....................................... 2,488 2,031
Gain on sale and retirement of property
and assets....................................... (1,952) (21)
Deferred income taxes.............................. 2,466 3,028
Decrease (increase) in assets:
Escrow cash...................................... (2,675) (725)
Receivables, prepaids and other assets........... (16,858) (19,004)
Mortgage notes receivable........................ 17,121 6,956
Inventories...................................... (46,275) (64,522)
Increase (decrease) in liabilities:
State and Federal income taxes................... (3,429) (3,378)
Customers' deposits.............................. 6,335 5,178
Interest and other accrued liabilities........... (7,266) (2,572)
Post development completion costs................ (126) (1,969)
Accounts payable................................. (14,215) (8,012)
---------- ----------
Net cash used in operating activities.......... (62,638) (81,597)
---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of property and assets.............. 2,238 1,046
Investment in property and assets...................... (3,195) (3,230)
Investment in and advances to unconsolidated affiliates 3,642 238
Investment in income producing properties.............. (823) 1,417
---------- ----------
Net cash provided (used) by investing activities 1,862 (529)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes...................... 559,398 599,195
Principal payments on mortgages and notes.............. (508,521) (527,579)
Investment in mortgage notes receivable................ 1,694 1,900
Proceeds from sale of stock............................ 77
---------- ----------
Net cash provided by financing activities...... 52,571 73,593
---------- ----------
Net Decrease In Cash..................................... (8,205) (8,533)
Cash Balance, Beginning Of Period........................ 11,914 14,537
---------- ----------
Cash Balance, End Of Period.............................. $ 3,709 $ 6,004
========== ==========
<FN>
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, 1995
consolidated balance sheets, have been prepared without audit. In the opinion
of management, all adjustments for interim periods presented have been made,
which include only normal recurring accruals and deferrals necessary for a fair
presentation of consolidated financial position, results of operations, and
changes in cash flows. Results for the interim periods are not necessarily
indicative of the results which might be expected for a full year.
2. Interest costs incurred, expensed and capitalized were:
Three Months Ended Six Months Ended
April 30, April 30,
------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
(Dollars in Thousands)
Interest Incurred (1):
Residential (3)............. $ 7,587 $ 7,279 $ 14,672 $ 14,268
Commercial(4)............... 1,391 1,472 2,901 2,672
-------- -------- -------- --------
Total Incurred............ $ 8,978 $ 8,751 $ 17,573 $ 16,940
======== ======== ======== ========
Interest Expensed:
Residential (3)............. $ 5,405 $ 5,082 $ 9,495 $ 8,832
Commercial (4).............. 1,391 1,429 2,901 2,594
-------- -------- -------- --------
Total Expensed........... $ 6,796 $ 6,511 $ 12,396 $ 11,426
======== ======== ======== ========
Interest Capitalized at
Beginning of Period......... $ 39,030 $ 32,172 $ 36,182 $ 28,948
Plus Interest Incurred........ 8,978 8,751 17,573 16,940
Less Interest Expensed........ 6,796 6,511 12,396 11,426
Less Charges to Reserves...... 104 198 251 248
-------- -------- -------- --------
Interest Capitalized at
End of Period .............. $ 41,108 $ 34,214 $ 41,108 $ 34,214
======== ======== ======== ========
Interest Capitalized at
End of Period (5):
Residential(3).............. $ 34,610 $ 28,024 $ 34,610 $ 28,024
Commercial(2)............... 6,498 6,190 6,498 6,190
-------- -------- -------- --------
Total Capitalized......... $ 41,108 $ 34,214 $ 41,108 $ 34,214
======== ======== ======== ========
(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.
(4) Represents interest allocated to or incurred on long term debt for
investment properties and charged to interest expense.
(5) Capitalized commercial interest at April 30, 1995 includes $139,000
reported at October 31, 1994 as capitalized residential interest. This
reclassification was the result of the transfer of a senior citizen
rental facility from inventory.
3. Homebuilding accumulated depreciation at April 30, 1996 and October 31,
1995 amounted to $13,922,000 and $13,731,000, respectively. Rental property
accumulated depreciation at April 30, 1996 and October 31, 1995 amounted to
$10,031,000 and $9,440,000, respectively.
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, 1996 were
for operating expenses, seasonal increases in housing inventories, construction,
income taxes, and interest. 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.
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 1999. Interest is
payable monthly and at various rates of either prime plus 1/4% or Libor plus
1.75%. The Company currently is in compliance and intends to maintain
compliance with its covenants under the Agreement. As of April 30, 1996,
borrowings under the Agreement were $154,825,000.
The aggregate principal amount of subordinated indebtedness issued by the
Company and outstanding as of April 30, 1996 was $200,000,000. Annual sinking
fund payments of $20,000,000 are required in April 2000 and 2001 with additional
payments of $60,000,000 and $100,000,000 due in April 2002 and June 2005,
respectively.
The Company's mortgage banking subsidiary borrows under a bank warehousing
arrangement. Other finance subsidiaries formerly borrowed from a multi-builder
owned financial corporation and a builder owned financial corporation to finance
mortgage backed securities, but in fiscal 1988 decided to cease further
borrowing from multi-builder and builder owned financial corporations. These
non-recourse borrowings have been generally secured by mortgage loans originated
by one of the Company's subsidiaries. As of April 30, 1996, the aggregate
principal amount of all such borrowings was $36,188,000.
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,
1996 1995
------------ ------------
Residential real estate inventory.......... $450,688,000 $404,413,000
Residential rental property................ 12,611,000 12,381,000
------------ ------------
Total Residential Real Estate............ 463,299,000 416,794,000
Commercial properties...................... 53,772,000 62,297,000
------------ ------------
Combined Total........................... $517,071,000 $479,091,000
============ ============
Total residential real estate increased $46,505,000 during the six months
ended April 30, 1996 primarily as a result of an inventory increase of
$46,275,000. The increase in residential real estate inventory was primarily
due to the Company's seasonal increase in construction activities for deliveries
later this year. Substantially all residential homes under construction or
completed and included in real estate inventory at April 30, 1996 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:
(1) (2)
Homes Contracted Remaining
Commun- Approved Deliv- Not Home Sites
ities Lots ered Delivered Available
------- -------- ------ ---------- ---------
April 30, 1996..... 82 14,567 4,944 2,147 7,476
October 31, 1995... 92 14,767 4,743 1,426 8,598
(1) Includes 54 and 97 lots under option at April 30, 1996 and October 31, 1995,
respectively.
(2) Of the total home lots available, 528 and 420 were under construction or
complete (including 119 and 119 models and sales offices) and 1,622 and 2,353
were under option at April 30, 1996 and October 31, 1995, respectively.
In addition, at April 30, 1996 and October 31, 1995, respectively, in
substantially completed or suspended developments the Company owned or had under
option 427 and 323 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,
1996 the Company controlled such land to build 13,355 proposed homes, compared
to 12,637 homes at October 31, 1995.
The Company's commercial properties represent long-term investments in
commercial and retail facilities completed or under development (see "Investment
Properties" under "Results of Operations"). When individual facilities are
completed and substantially leased, the Company will have the ability to obtain
long-term financing on such properties. At April 30, 1996, the Company had
long-term non-recourse financing aggregating $31,286,000 on six
commercial facilities, a decrease from October 31, 1995, due to $204,000 in
principal amortization. In January, 1996 the Company sold a retail center
with a book value of $8,022,000 at October 31, 1995. The sale of
this center and depreciation were the primary causes for the $8,525,000
decrease in commercial properties.
The collateralized mortgages receivable are pledged against non-recourse
collateralized mortgage obligations. Residential mortgages receivable amounting
to $21,469,000 and $45,669,000 at April 30, 1996 and October 31, 1995,
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, 1996 COMPARED
TO THE THREE AND SIX MONTHS ENDED APRIL 30, 1995
The Company's operations consist primarily of residential housing
development and sales in its Northeast Region (comprising primarily of New
Jersey and eastern Pennsylvania), North Carolina, southeastern Florida, metro
Washington, D.C. (northern Virginia), and southwestern California. In addition,
the Company develops and operates commercial properties as long-term investments
in New Jersey, and, to a lesser extent, Florida.
Historically, the Company's first six months of a year produces
significantly fewer deliveries than the last six months of a year. This was
true for the six months ended April 30, 1995 and management believes will be
true for the six months ended April 30, 1996. As a result, net income for the
last six months of fiscal 1996 will be significantly greater than the first six
months.
An important indicator of the future results is the Company's contract
backlog and recently signed contracts. At April 30, 1996 the Company's home
contract backlog for future delivery was 2,221 homes, with an aggregate sales
value of $400.9 million, compared to 2,197 homes, with an aggregate sales value
of $387.8 million at the same time last year. For the six months ended April
30, 1996 net contracts signed amounted to $363.4 million or 2,102 homes,
compared to $316.3 million or 1,909 homes for the same period last year. The
increases in contract backlog and net contracts signed were primarily
attributable to the Company's Florida, California, and North Carolina markets.
Total Revenues:
Revenues for the three months ended April 30, 1996 increased $5.2 million
or 3.5%, compared to the same period last year. This was a result of increased
revenues from the sale of homes of $3.9 million, a $0.1 million increase in
investment properties revenues, a $1.6 million increase in land sales and other
homebuilding revenues. These increases were partially offset by a $0.4 million
decrease in financial services revenues.
Revenues for the six months ended April 30, 1996 decreased $3.3 million or
1.2%, compared to the same period last year. This was a result of decreased
revenues from sale of homes of $5.2 million, a $0.4 million decrease in
financial services revenues, and a $0.1 million decrease in collateralized
mortgage financing revenues. These decreases were partially offset by a $0.4
million increase in land sales and other homebuilding revenues and a $2.0
million increase in investment properties.
Homebuilding:
Sale of homes revenues increased $3.9 million or 2.8% during the three
months ended April 30, 1996 and decreased $5.2 million or 2.0% during the six
months ended April 30, 1996 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 Six Months Ended
April 30, April 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
(Dollars in Thousands)
Northeast Region:
Housing Revenues..... $ 81,950 $ 89,536 $137,315 $162,410
Homes Delivered...... 402 508 682 903
North Carolina:
Housing Revenues..... $ 24,445 $ 23,083 $ 45,507 $ 44,667
Homes Delivered...... 148 148 272 283
Florida:
Housing Revenues..... $ 20,890 $ 13,931 $ 38,768 $ 29,848
Homes Delivered...... 132 95 249 199
Metro Washington, D.C.:
Housing Revenues..... $ 3,200 $ 9,021 $ 7,597 $ 13,907
Homes Delivered...... 12 52 33 77
California:
Housing Revenues..... $ 13,019 $ 3,166 $ 22,887 $ 5,260
Homes Delivered...... 69 16 121 27
Other:
Housing Revenues..... -- $ 870 -- $ 1,189
Homes Delivered...... -- 27 -- 33
Totals:
Housing Revenues..... $143,504 $139,607 $252,074 $257,281
Homes Delivered...... 763 846 1,357 1,522
The decreased number of homes delivered for the three and six months ended
April 30, 1996 (compared to the prior year) was primarily due to the decreases
in the Company's Northeast Region and Metro Washington D. C. Due to an
unusually difficult winter in the Northeast Region, home construction was
delayed. In Metro Washington, D.C. the Company has cut back its operations due
to a highly competitive market. The number of home deliveries declined 10.8%
for the six months ended April 30, 1996 (compared to the prior year). Housing
revenues decreased only $5.2 million or 2.0% during this period. This smaller
decline is because average sales prices have increased. In the Northeast Region
one reason average sales prices are increasing is because of the Company's
product mix of more detached single family homes and larger townhouses with
garages designed for the move-up buyer. In North Carolina, average sales prices
increased primarily due to the addition of higher priced communities. In Metro
Washington, D.C. average sales prices increased because there was a higher
percentage of single family detached homes delivered. In Florida average sales
prices increased as a result of the addition of new, higher priced communities.
In California average prices decreased due to reduced home prices because of
increased competition.
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,
--------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ----------
(Dollars in Thousands)
Sale of Homes................$143,504 $139,607 $252,074 $257,281
Cost of Sales................ 112,597 112,121 199,888 206,707
--------- --------- --------- ---------
Housing Gross Margin.........$ 30,907 $ 27,486 $ 52,186 $ 50,574
========= ========= ========= =========
Gross Margin Percentage...... 21.5% 19.7% 20.7% 19.7%
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. During the three months ended April 30,
1996 the Company received an insurance settlement amounting to $1.6 million for
roof repairs incurred in prior years. Excluding this amount the consolidated
gross margin for the three and six months ended April 30, 1996 would have been
20.4% and 20.1%, respectively. Gross margins in each of the Company's markets
increased at a greater percentage than the consolidated gross margin (after the
above adjustment) from the prior year. The smaller increase for the
consolidated gross margin was primarily due to a change in geographic product
mix with 54.5% of the home deliveries for the six months ended April 30, 1996
coming from the Northeast Region where gross margins are higher, compared to
63.1% for the same period last year.
Selling, general, and administrative expenses increased $1.8 million during
the three months ended April 30, 1996 and increased $0.2 million during the six
months ended April 30, 1996 compared to the same periods last year. As a
percentage of home sale revenues such expenses increased to 13.6% and 13.3% for
the three and six months ended April 30, 1996, respectively, from 12.6% and
12.9% for the prior year. The increase in selling, general, and administrative
expenses is primarily due to increased homeowner mortgage financing costs and
property taxes, offset partially by reduced selling salaries and commissions.
Financing costs are up due to a higher percentage of deliveries in markets where
it is traditional for the seller to pay such costs. Property taxes are up,
primarily in California where inventories have increased significantly over last
year and property taxes are generally higher.
Land Sales and Other Revenues:
Land sales and other revenues consist primarily of land and lot sales,
title insurance activities, interest income, contract deposit forfeitures, and
California housing management operations.
A breakout of land and lot sales is set forth below:
Three Months Ended Six Months Ended
April 30, April 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
Land and Lot Sales................ $ 3,476 $ 1,999 $ 4,669 $ 3,306
Cost of Sales..................... 2,919 1,497 3,923 1,903
-------- -------- -------- --------
Land and Lot Sales Gross Margin... $ 557 $ 502 $ 746 $ 1,403
======== ======== ======== ========
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.
In May 1994, the Company purchased a homebuilding and management company in
California. Although no new management contracts are being obtained, the
existing contracts resulted in $0.8 million of revenues for the six months ended
April 30, 1995 compared to zero for the six months ended April 30, 1996.
Included in Other Operations (see below) are expenses associated with the
California homebuilding management operations.
Financial Services
Financial services consist primarily of originating mortgages from sales of
the Company's homes, and selling such mortgages in the secondary market.
Approximately 34% and 30% of the Company's homebuyers obtained mortgages
originated by the Company's wholly-owned mortgage banking subsidiaries during
the years ended October 31, 1995 and 1994, respectively. For the six months
ended April 30, 1996 and 1995 substantially all of the financial services losses
were the result of reduced volume and low interest rate spreads, due to
increased competition. Most servicing rights on new mortgages originated by the
Company will be sold as the loans are closed.
Investment Properties
Investment Properties consist of rental properties, property management,
and gains or losses from sale of such property. At April 30, 1996, 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 $2.1 million. Investment Properties expenses do not
include interest expense which is reported below under "Interest."
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, the Company has sold CMO pledged mortgages. The cost of such
sales and the write-off of unamortized issuance expenses has resulted in losses.
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 increased $0.4 and $1.0 million during the three and six
months ended April 30, 1996 compared to the same periods last year, or 13.7% and
15.6%. As a percentage of total revenues such expenses were 2.3% and 2.7% for
the three and six months ended April 30, 1996 compared to 2.1% and 2.3% for the
same periods last year. The increase was primarily the result of a one-time
insurance adjustment expensed at Corporate and increased depreciation on
recently acquired computer equipment for all Company locations.
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,
------------------ -------------------
1996 1995 1996 1995
-------- -------- -------- --------
Sale of Homes.................. $ 5,149 $ 5,030 $ 9,199 $ 8,757
Land and Lot Sales............. 256 52 296 75
Rental Properties.............. 1,391 1,429 2,901 2,594
-------- -------- -------- --------
Total.......................... $ 6,796 $ 6,511 $ 12,396 $ 11,426
======== ======== ======== ========
Housing interest as a percentage of sale of homes revenues amounted to 3.6% and
3.6% for the three and six months ended April 30, 1996 and 3.6% and 3.4% for the
three and six months ended April 30, 1995.
Other Operations
Other operations consist primarily of title insurance activities,
miscellaneous residential housing operations expenses, amortization of prepaid
subordinated note issuance expenses, corporate owned life insurance loan
interest, and California housing management operations (see "Land Sales and
Other Revenues" above). During the six months ended April 30, 1995 other
expenses included California homebuilding management expenses and amortization
of purchased management contracts totaling $1.1 million.
Total Taxes
Total taxes as a percentage of income before income taxes amounted to 8.0%
for the six months ended April 30, 1996 compared to 7.1% for the six months
ended April 30, 1995. Deferred federal and state income tax assets primarily
represents 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.
Item 4. Submission to Matters to a Vote of Security Holders
The Company held its annual stockholders meeting on April 17. 1996 at 10:30
a.m. in the Board Room of the American Stock Exchange, 13th floor, 86 Trinity
Place, New York, New York. The following matters were voted at the meeting:
. Election of all Directors to hold office until the next Annual Meeting
of Stockholders. The elected Directors were:
.. Kevork S. Hovnanian
.. Ara K. Hovnanian
.. Paul W. Buchanan
.. Arthur Greenbaum
.. Timothy P. Mason
.. Desmond P. McDonald
.. Peter S. Reinhart
.. John J. Schimpf
.. Stephen D. Weinroth
. Ratification of selection of Ernst & Young LLP as certified independent
accountants for fiscal year ending October 31, 1996.
.. Votes For 76,962,467
.. Votes Against 51,709
.. Abstain 27,876
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 10, 1996 /S/KEVORK S. HOVNANIAN
Kevork S. Hovnanian,
Chairman of the Board and
Chief Executive Officer
DATE: June 10, 1996 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller