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 JANUARY 31, 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. 13,647,087 Class A Common
Shares and 7,675,333 Class B Common Shares were outstanding as of March 5, 1999.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at January 31,
1999 (unaudited) and October 31, 1998 3
Consolidated Statements of Income for the three
months ended January 31, 1999 and 1998
(unaudited) 5
Consolidated Statements of Stockholders' Equity
for the three months ended January 31, 1999
(unaudited) 6
Consolidated Statements of Cash Flows for
the three months ended January 31, 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 9
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security
Holders 18
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 19
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
January 31, October 31,
ASSETS 1999 1998
----------- -----------
Homebuilding:
Cash and cash equivalents....................... $ 12,095 $ 13,306
----------- -----------
Inventories - At cost, not in excess of fair
value:
Sold and unsold homes and lots under
development.................................. 364,716 332,225
Land and land options held for future
development or sale......................... 35,325 43,508
----------- -----------
Total Inventories........................... 400,041 375,733
----------- -----------
Receivables, deposits, and notes................ 42,396 29,490
----------- -----------
Property, plant, and equipment - net............ 17,317 16,831
----------- -----------
Prepaid expenses and other assets............... 31,774 32,650
----------- -----------
Total Homebuilding.......................... 503,623 468,010
----------- -----------
Financial Services:
Cash and cash equivalents....................... 1,768 1,486
Mortgage loans held for sale.................... 62,502 71,611
Other assets.................................... 3,672 3,717
----------- -----------
Total Financial Services.................... 67,942 76,814
----------- -----------
Investment Properties:
Held for sale:
Rental property - net.........................
Land and improvements......................... 107 17,832
Other assets.................................. 946 295
Held for investment:
Cash.......................................... 509 762
Rental property - net......................... 10,873 10,794
Other assets.................................. 977 868
----------- -----------
Total Investment Properties................. 13,412 30,551
----------- -----------
Collateralized Mortgage Financing:
Collateral for bonds payable.................... 5,902 5,970
Other assets.................................... 438 426
----------- -----------
Total Collateralized Mortgage Financing..... 6,340 6,396
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits........................................ 5,769 7,331
----------- -----------
Total Assets...................................... $597,086 $589,102
=========== ===========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
January 31, October 31,
1999 1998
----------- -----------
LIABILITIES AND STOCKHOLDERS'EQUITY
Homebuilding:
Nonrecourse land mortgages........................ $ 8,192 $ 11,846
Accounts payable and other liabilities............ 47,811 53,765
Customers' deposits............................... 21,765 23,857
Nonrecourse mortgages secured by operating
properties...................................... 3,743 3,770
----------- -----------
Total Homebuilding............................ 81,511 93,238
----------- -----------
Financial Services:
Accounts payable and other liabilities............ 1,677 2,422
Mortgage warehouse line of credit................. 59,119 66,666
----------- -----------
Total Financial Services...................... 60,796 69,088
----------- -----------
Investment Properties:
Accounts payable and other liabilities............ 1,360 1,373
----------- -----------
Total Investment Properties................... 1,360 1,373
----------- -----------
Collateralized Mortgage Financing:
Accounts payable and other liabilities............ 17 6
Bonds collateralized by mortgages receivable...... 5,582 5,652
----------- -----------
Total Collateralized Mortgage Financing....... 5,599 5,658
----------- -----------
Notes Payable:
Revolving credit agreement........................ 92,225 68,000
Subordinated notes................................ 145,449 145,449
Accrued interest.................................. 4,122 4,904
----------- -----------
Total Notes Payable........................... 241,796 218,353
----------- -----------
Total Liabilities............................. 391,062 387,710
----------- -----------
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 15,822,964 shares
(including 2,118,274 shares in January 1999
and 1,937,374 in October 1998 held in Treasury). 158 157
Common Stock,Class B,$.01 par value-authorized
13,000,000 shares; issued 8,025,504 shares
(including 345,874 shares held in Treasury)..... 79 80
Paid in Capital................................... 34,590 34,561
Retained Earnings................................. 189,310 183,182
Treasury Stock - at cost.......................... (18,113) (16,588)
----------- -----------
Total Stockholders' Equity.................... 206,024 201,392
----------- -----------
Total Liabilities and Stockholders' Equity.......... $597,086 $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
January 31,
-------------------
1999 1998
--------- ---------
Revenues:
Homebuilding:
Sale of homes...................... $194,885 $204,057
Land sales and other revenues...... 2,441 2,485
--------- ---------
Total Homebuilding............... 197,326 206,542
Financial Services................... 5,658 3,562
Investment Properties................ 359 3,644
Collateralized Mortgage Financing.... 136 212
--------- ---------
Total Revenues................... 203,479 213,960
--------- ---------
Expenses:
Homebuilding:
Cost of sales...................... 155,587 169,800
Selling, general and administrative 17,534 15,657
Inventory write-off................ 1,589
--------- ---------
Total Homebuilding............... 173,121 187,046
--------- ---------
Financial Services................... 5,242 3,211
--------- ---------
Investment Properties................ 779 1,123
--------- ---------
Collateralized Mortgage Financing.... 131 202
--------- ---------
Corporate General and Administration. 6,435 4,361
--------- ---------
Interest............................. 7,042 8,476
--------- ---------
Other Operations..................... 551 523
--------- ---------
Total Expenses................... 193,301 204,942
--------- ---------
Income Before Income Taxes............. 10,178 9,018
--------- ---------
State and Federal Income Taxes:
State................................ 1,488 648
Federal.............................. 2,562 2,457
--------- ---------
Total Taxes........................ 4,050 3,105
--------- ---------
Net Income............................. $ 6,128 $ 5,913
========= =========
Per Share Data:
Basic:
Income per common share.............. $ 0.28 $ 0.27
Weighted average number of common
shares outstanding................. 21,512 21,834
Assuming dilution:
Income per common share.............. 0.28 0.27
Weighted average number of common
Shares outstanding................. 21,725 21,985
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.... 14,667 1 (14,667) (1) -
Treasury stock purchases.. (180,900) (1,525) (1,525)
Net Income................ 6,128 6,128
----------- ------ ----------- ------ ------- -------- -------- --------
Balance, January 31, 1999. 13,704,690 $158 7,679,630 $79 $34,590 $189,310 ($18,113) $206,024
=========== ====== =========== ====== ======= ======== ======== ========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
January 31,
---------------------
1999 1998
---------- ----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 6,128 $ 5,913
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation.................................... 1,200 917
Loss (gain) on sale and retirement of property
and assets.................................... 393 (2,682)
Deferred income taxes........................... 2,617 1,720
Impairment losses............................... 1,589
Decrease (increase) in assets:
Receivables, prepaids and other assets........ (12,964) (14,419)
Mortgage notes receivable..................... 9,289 21,517
Inventories................................... (25,345) (289)
Increase (decrease) in liabilities:
State and Federal income taxes................ (1,055) 5
Customers' deposits........................... (2,199) (1,031)
Interest and other accrued liabilities........ (3,689) (1,490)
Post development completion costs............. (608) (603)
Accounts payable.............................. (3,078) (6,679)
---------- ----------
Net cash (used in) provided by operating
activities................................ (29,311) 4,468
---------- ----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets....... 19,226 23,078
Purchase of property................................ (1,576) (477)
Investment in and advances to unconsolidated
affiliates........................................ (4) 393
Investment in income producing properties........... (1,016) (4,672)
---------- ----------
Net cash provided by investing
activities................................ 16,630 18,322
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 179,965 129,564
Principal payments on mortgages and notes........... (167,040) (152,730)
Investment in mortgage notes receivable............. 70 587
Purchase of treasury stock.......................... (1,525) (457)
Proceeds from sale of stock......................... 29
---------- ----------
Net cash provided by (used in) financing
activities................................ 11,499 (23,036)
---------- ----------
Net Increase (Decrease) In Cash....................... (1,182) (246)
Cash and Cash Equivalent and Balance, Beginning
Of Period........................................... 15,554 11,313
---------- ----------
Cash and Cash Equivalent and Balance, End Of Period... $ 14,372 $ 11,067
========== ==========
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
January 31,
-------------------
1999 1998
-------- --------
(Dollars in Thousands)
Interest Incurred (1):
Residential (3)........... $ 4,699 $ 6,642
Commercial(4)............. 356 679
-------- --------
Total Incurred.......... $ 5,055 $ 7,321
======== ========
Interest Expensed:
Residential (3)........... $ 6,686 $ 7,797
Commercial (4)............ 356 679
-------- --------
Total Expensed......... $ 7,042 $ 8,476
======== ========
Interest Capitalized at
Beginning of Period....... $ 25,545 $ 35,950
Plus Interest Incurred...... 5,055 7,321
Less Interest Expensed...... 7,042 8,476
Less Inventory Write-Off.... - 460
Less Sale of Assets......... 1,469 3,640
-------- --------
Interest Capitalized at
End of Period............. $ 22,089 $ 30,695
======== ========
Interest Capitalized at
End of Period:
Residential(3)............ $ 21,881 $ 28,189
Commercial(2)............. 208 2,506
-------- --------
Total Capitalized....... $ 22,089 $ 30,695
======== ========
(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 January 31, 1999 and October
31, 1998 amounted to $16,083,000 and $15,088,000, respectively. Rental property
accumulated depreciation at January 31, 1999 and October 31, 1998 amounted to
$1,909,000 and $1,826,000, respectively.
4. During the three months ended January 31, 1998 the Company has written
off the costs associated with an option in New Jersey including approval,
engineering and capitalized interest. The write off amounted to
$1,589,000 and is reported on the Consolidated Statements of Income as
"Homebuilding - Inventory Write-Off."
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 January 31, 1999 and 1998, respectively,
the Company is obligated under various performance letters of credit amounting
to $6,868,000 and $9,240,000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The Company's uses for cash during the three months ended January 31, 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, housing
and land sales, sales of commercial properties, financial service fees, 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 January 31, 1999, 1,772,400
shares were repurchased under this program of which 180,900 were purchased
during the three months ended January 31, 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 the prime rate 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 January 31, 1999, borrowings under the Agreement were
$92,225,000.
The aggregate principal amount of subordinated indebtedness issued by the
Company and outstanding as of January 31, 1999 was $145,449,000. Payments of
$45,449,000 and $100,000,000 are 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 January 31, 1999, the aggregate
principal amount of all such borrowings was
$64,701,000.
The book value of the Company's residential inventories, rental
condominiums, and commercial properties completed and under development amounted
to the following:
January 31, October 31,
1999 1998
------------ ------------
Residential real estate inventory.......... $400,041,000 $375,733,000
Senior residential rental property......... 10,873,000 10,794,000
------------ ------------
Total Residential Real Estate............ 410,914,000 386,527,000
Commercial properties...................... 107,000 17,832,000
------------ ------------
Combined Total........................... $411,021,000 $404,359,000
============ ============
Total residential real estate increased $24,387,000 during the three months
ended January 31, 1999 primarily as a result of an inventory increase of
$24,308,000. Substantially all residential homes under construction or
completed and included in real estate inventory at January 31, 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
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
------- -------- ------ ---------- ----------
January 31, 1999...... 75 17,303 6,036 1,557 9,710
October 31, 1998...... 84 17,020 6,553 1,672 8,795
(1) Includes 29 and 8 lots under option at January 31, 1999 and October 31,
1998, respectively.
(2) Of the total home lots available, 422 and 460 were under construction or
complete (including 47 and 54 models and sales offices), 4,863 and 4,570 were
under option, and 288 and 330 were financed through purchase money mortgages at
January 31, 1999 and October 31, 1998, respectively.
In addition, at January 31, 1999 and October 31, 1998, respectively, in
substantially completed or suspended communities, the Company owned or had under
option 145 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 January 31,
1999 the Company controlled such land to build 10,899 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:
January 31, October 31,
1999 1998
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 175 10 185 180 16 196
North Carolina...... 108 -- 108 93 -- 93
Florida............. 16 6 22 24 6 30
Virginia............ 11 9 20 23 11 34
California.......... 72 22 94 78 21 99
Poland.............. 6 -- 6 11 -- 11
------ ------ ----- ------ ------ -----
Total 388 47 435 409 54 463
====== ====== ===== ====== ====== =====
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 $61,895,000 and
$71,002,000 at January 31, 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 MONTHS ENDED JANUARY 31, 1999 COMPARED TO
THE THREE MONTHS ENDED JANUARY 31, 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. 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
Three Months Ended Contract Backlog
January 31, as of January 31,
----------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Dollars............. $ 90,163 $ 98,814 $250,181 $242,604
Homes............... 402 488 1,056 1,135
North Carolina:
Dollars............. $ 31,111 $ 23,903 $ 50,899 $ 44,136
Homes............... 150 133 231 230
Florida:
Dollars............. $ 11,530 $ 7,802 $ 18,655 $ 24,164
Homes............... 53 43 88 140
Virginia:
Dollars............. $ 11,077 $ 3,866 $ 24,621 $ 5,967
Homes............... 50 15 111 22
California:
Dollars............. $ 17,817 $ 18,769 $ 21,659 $ 22,115
Homes............... 94 93 110 113
Poland:
Dollars............. $ 482 $ 1,277 $ 428 $ 3,673
Homes............... 5 16 3 48
Totals:
Dollars............. $162,180 $154,431 $366,443 $342,659
Homes............... 754 788 1,599 1,688
Total Revenues:
Revenues for the three months ended January 31, 1999 decreased $10.5
million or 4.9%, compared to the same period last year. This was the result of
a $9.2 million decrease in revenues from the sale of homes, a $0.1 million
decrease in land sales and other homebuilding revenues, and a $3.3 million
decrease in investment properties revenues. These decreases were partially
offset by a $2.1 million increase in financial services revenues.
Homebuilding:
Revenues from the sale of homes decreased $9.2 million or 4.5% during the
three months ended January 31, 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
January 31,
-------------------
1999 1998
--------- --------
(Dollars in Thousands)
Northeast Region:
Housing Revenues..... $126,683 $139,011
Homes Delivered...... 478 640
North Carolina:
Housing Revenues..... $ 29,080 $ 25,676
Homes Delivered...... 154 135
Florida:
Housing Revenues..... $ 8,333 $ 9,512
Homes Delivered...... 38 53
Virginia:
Housing Revenues..... $ 12,547 $ 6,118
Homes Delivered...... 54 20
California:
Housing Revenues..... $ 17,311 $ 23,121
Homes Delivered...... 103 117
Poland:
Housing Revenues..... $ 931 $ 619
Homes Delivered...... 9 7
Totals:
Housing Revenues..... $194,885 $204,057
Homes Delivered...... 836 972
The 14.0% decrease in the number of homes delivered compared to the prior
year was 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 months ended January 31, 1999 compared to
the same period last year. This decline is temporary as the Northeast region
has new communities opening later this year. The decrease in housing revenues
was only 4.5% compared to the prior 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 $233,117 in 1999 compared
to $209,935 in 1998. This increase was primarily due to the Northeast Region
where the Company is delivering homes in some newer, expensive communities. In
addition, in all of its markets, the Company is selling more options resulting
in higher prices.
Cost of sales includes expenses for housing and land and lot sales. A
breakout of such expenses for housing sales and housing gross margin is set
forth below:
Three Months Ended
January 31,
-------------------
1999 1998
-------- --------
(Dollars in Thousands)
Sale of Homes................ $194,885 $204,057
Cost of Sales................ 154,249 168,528
-------- --------
Housing Gross Margin......... $ 40,636 $ 35,529
======== ========
Gross Margin Percentage...... 20.9% 17.4%
Cost of Sales expenses as a percentage of home sales revenues are presented
below:
Three Months Ended
January 31,
-------------------
1999 1998
-------- --------
Sale of Homes................ 100.0% 100.0%
-------- --------
Cost of Sales:
Housing, land &
development costs.... 70.9% 74.4%
Commissions............ 2.0% 1.8%
Financing concessions.. 0.8% 0.7%
Overheads.............. 5.4% 5.7%
-------- --------
Total Cost of Sales.......... 79.1% 82.6%
-------- --------
Gross Margin................. 20.9% 17.4%
======== ========
The Company sells a variety of home types in various local communities,
each yielding a different gross margin. As a result, depending on the mix of
both communities and of home types delivered, consolidated quarterly gross
margin will fluctuate up or down and may not be representative of the
consolidated gross margin for the year. In addition, gross margin percentages
are higher in the Northeast Region compared to the Company's other markets. For
the three months ended January 31, 1999 the Company's gross margin increased
3.5% compared to the same period last year. This can be attributed to higher
gross margins being achieved in each of the Company's markets except North
Carolina, which was flat. 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 8.9% for the three months ended January 31,
1999 from 7.6% for the prior year three months. Such expenses increased during
the three months ended January 31, 1999 $1.9 million compared to the same period
last year. The overall percentage and dollar increases in selling, general and
administrative is due to decreased deliveries and increases in administrative
costs primarily in the Company's Northeast Region, California, and Virginia.
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
January 31,
------------------
1999 1998
-------- --------
Land and Lot Sales................ $ 1,327 $ 1,597
Cost of Sales..................... 1,338 1,272
-------- --------
Land and Lot Sales Gross Margin... (11) 325
Interest Expense.................. 133 158
-------- --------
Land and Lot Sales Profit Before
Tax............................. $ (144) $ 167
======== ========
Land and lot sales are incidental to the Company's residential housing
operations and are expected to continue in the future but may significantly
fluctuate up or down.
Financial Services
Financial services consist primarily of originating mortgages from the
Company's homebuyers, as well as from third parties, selling such mortgages in
the secondary market and title insurance activities. For the three months ended
January 31, 1999 financial services provided a $0.4 million pretax profit
compared to a profit of $0.4 million 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 January
31, 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 administrative expenses includes the operations at
the Company's headquarters in Red Bank, New Jersey. Such expenses include the
Company's executive offices, information services, human resources, corporate
accounting, training, treasury, process redesign, internal audit, and
administration of insurance, quality, and safety. As a percentage of total
revenues such expenses increased to 3.2% for the three months ended January 31,
1999 from 2.0% for the prior year three months. Corporate general and
administrative expenses increased $2.1 million during the three months ended
January 31, 1999 compared to the same period last year. This increase is
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 of 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
January 31,
------------------
1999 1998
-------- --------
Sale of Homes.............. $ 6,553 $ 7,638
Land and Lot Sales......... 133 158
Rental Properties.......... 356 680
-------- --------
Total...................... $ 7,042 $ 8,476
======== ========
Housing interest as a percentage of sale of homes revenues amounted to 3.4%
for the three months ended January 31, 1999 compared to 3.8% for the three
months ended January 31, 1998. The decrease in the percentage for the three
months ended January 31, 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 39.8% and 34.4% for the three months ended January 31, 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
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
non-compliant 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 critical non-compliant systems and expects to have the
remaining 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 on 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 50% of the subcontractors and suppliers are year 2000
compliant, 35% are expected to be compliant by June 30, 1999 and the remaining
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.
Item 4. Submission to Matters to a Vote of Security Holders
The Company held its annual stockholders meeting on March 5, 1999 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
.. Desmond P. McDonald
.. Peter S. Reinhart
.. J. Larry Sorsby
.. Stephen D. Weinroth
. Ratification of selection of Ernst & Young, LLP as certified independent
accountants for fiscal year ending October 31, 1999.
.. Votes For 84,894,504
.. Votes Against 96,946
.. Abstain 30,462
. Approval of the Company's Stock Incentive Plan.
.. Votes For 81,582,715
.. Votes Against 1,188,270
.. Abstain 49,935
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: March 11, 1999 /S/J. LARRY SORSBY
J. Larry Sorsby,
Senior Vice President,
Treasurer and
Chief Financial Officer
DATE: March 11, 1999 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller