UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10Q
[ X ] Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For quarterly period ended JULY 31, 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. 14,268,780 Class A Common
Shares and 7,654,994 Class B Common Shares were outstanding as of September 3,
1999.
HOVNANIAN ENTERPRISES, INC.
FORM 10Q
INDEX
PAGE NUMBER
PART I. Financial Information
Item l. Consolidated Financial Statements:
Consolidated Balance Sheets at July 31,
1999 (unaudited) and October 31, 1998 3
Consolidated Statements of Income for the three
and nine months ended July 31, 1999 and 1998
(unaudited) 5
Consolidated Statements of Stockholders' Equity
for the nine months ended July 31, 1999
(unaudited) 6
Consolidated Statements of Cash Flows
for the nine months ended July 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 19
PART II. Other Information
Item 6(a). Exhibit 10(a) Amendment to Amended and Restated
Credit Agreement
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 29
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
July 31, October 31,
ASSETS 1999 1998
----------- -----------
Homebuilding:
Cash and cash equivalents....................... $ 13,326 $ 13,306
----------- -----------
Inventories - At cost, not in excess of fair
value:
Sold and unsold homes and lots under
development.................................. 354,260 332,225
Land and land options held for future
development or sale......................... 78,801 43,508
----------- -----------
Total Inventories........................... 433,061 375,733
----------- -----------
Receivables, deposits, and notes................ 33,721 29,490
----------- -----------
Property, plant, and equipment - net............ 23,863 16,831
----------- -----------
Prepaid expenses and other assets............... 35,202 32,650
----------- -----------
Total Homebuilding.......................... 539,173 468,010
----------- -----------
Financial Services:
Cash and cash equivalents....................... 3,254 1,486
Mortgage loans held for sale.................... 44,715 71,611
Other assets.................................... 2,114 3,717
----------- -----------
Total Financial Services.................... 50,083 76,814
----------- -----------
Investment Properties:
Held for sale:
Land and improvements......................... 107 17,832
Other assets.................................. 672 295
Held for investment:
Cash.......................................... 762
Rental property - net......................... 10,747 10,794
Other assets.................................. 1,084 868
----------- -----------
Total Investment Properties................. 12,610 30,551
----------- -----------
Collateralized Mortgage Financing:
Collateral for bonds payable.................... 5,349 5,970
Other assets.................................... 140 426
----------- -----------
Total Collateralized Mortgage Financing..... 5,489 6,396
----------- -----------
Income Taxes Receivable - Including deferred tax
benefits........................................ 4,739 7,331
----------- -----------
Total Assets...................................... $612,094 $589,102
=========== ===========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
July 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
----------- -----------
Homebuilding:
Nonrecourse land mortgages........................ $ 14,002 $ 11,846
Accounts payable and other liabilities............ 49,216 53,765
Customers' deposits............................... 22,585 23,857
Nonrecourse mortgages secured by operating
properties...................................... 3,688 3,770
----------- -----------
Total Homebuilding............................ 89,491 93,238
----------- -----------
Financial Services:
Accounts payable and other liabilities............ 2,042 2,422
Mortgage warehouse line of credit................. 43,131 66,666
----------- -----------
Total Financial Services...................... 45,173 69,088
----------- -----------
Investment Properties:
Accounts payable and other liabilities............ 1,063 1,373
----------- -----------
Total Investment Properties................... 1,063 1,373
----------- -----------
Collateralized Mortgage Financing:
Accounts payable and other liabilities............ 15 6
Bonds collateralized by mortgages receivable...... 3,972 5,652
----------- -----------
Total Collateralized Mortgage Financing....... 3,987 5,658
----------- -----------
Notes Payable:
Revolving credit agreement........................ 68,000
Senior Notes...................................... 150,000
Subordinated notes................................ 100,000 145,449
Accrued interest.................................. 5,063 4,904
----------- -----------
Total Notes Payable........................... 255,063 218,353
----------- -----------
Total Liabilities............................. 394,777 387,710
----------- -----------
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 15,848,256 shares
(including 2,590,374 shares held in Treasury)... 158 157
Common Stock,Class B,$.01 par value-authorized
13,000,000 shares; issued 8,005,212 shares
(including 345,874 shares held in Treasury)..... 79 80
Paid in Capital................................... 34,619 34,561
Retained Earnings................................. 204,372 183,182
Treasury Stock - at cost.......................... (21,911) (16,588)
----------- -----------
Total Stockholders' Equity.................... 217,317 201,392
----------- -----------
Total Liabilities and Stockholders' Equity.......... $612,094 $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 Nine Months Ended
July 31, July 31,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues:
Homebuilding:
Sale of homes...................... $227,071 $237,900 $621,094 $645,524
Land sales and other revenues...... 3,552 1,954 11,447 8,293
--------- --------- --------- ---------
Total Homebuilding............... 230,623 239,854 632,541 653,817
Financial Services................... 5,616 5,562 15,428 13,264
Investment Properties................ 385 2,530 1,168 6,783
Collateralized Mortgage Financing.... 47 179 322 541
--------- --------- --------- ---------
Total Revenues................... 236,671 248,125 649,459 674,405
--------- --------- --------- ---------
Expenses:
Homebuilding:
Cost of sales...................... 179,957 196,024 494,581 536,630
Selling, general and administrative 20,690 17,530 56,810 49,045
Inventory impairment loss.......... 1,232 1,550 1,633 3,498
--------- --------- --------- ---------
Total Homebuilding............... 201,879 215,104 553,024 589,173
--------- --------- --------- ---------
Financial Services................... 5,257 4,837 14,358 11,628
--------- --------- --------- ---------
Investment Properties................ 123 787 1,224 2,663
--------- --------- --------- ---------
Collateralized Mortgage Financing.... 68 181 341 540
--------- --------- --------- ---------
Corporate General and Administrative. 8,016 5,543 20,869 14,683
--------- --------- --------- ---------
Interest............................. 6,849 8,773 21,237 25,239
--------- --------- --------- ---------
Other Operations..................... 409 510 1,689 1,461
--------- --------- --------- ---------
Total Expenses................... 222,601 235,735 612,742 645,387
--------- --------- --------- ---------
Income Before Income Taxes and
Extraordinary Loss................... 14,070 12,390 36,717 29,018
--------- --------- --------- ---------
State and Federal Income Taxes:
State................................ 1,554 982 4,382 2,226
Federal.............................. 4,038 3,695 10,277 8,153
--------- --------- --------- ---------
Total Taxes........................ 5,592 4,677 14,659 10,379
--------- --------- --------- ---------
Extraordinary Loss From Extinguishment
Of Debt, Net of Income Taxes......... (868) (868)
--------- --------- --------- ---------
Net Income............................. $ 7,610 $ 7,713 $ 21,190 $ 18,639
========= ========= ========= =========
Per Share Data:
Basic:
Income Per Common Share Before
Extraordinary Loss................. $ 0.40 $ 0.35 $ 1.04 $ 0.85
Extraordinary Loss................... (.04) (.04)
--------- --------- --------- ---------
Net Income........................... $ 0.36 $ 0.35 $ 1.00 $ 0.85
========= ========= ========= =========
Weighted Average Number of Common
Shares Outstanding.................. 20,979 21,785 21,274 21,822
Assuming Dilution:
Income Per Common Share Before
Extraordinary Loss................. $ 0.40 $ 0.35 $ 1.03 $ 0.84
Extraordinary Loss................... (.04) (.04)
--------- --------- --------- ---------
Net Income........................... $ 0.36 $ 0.35 $ 0.99 $ 0.84
========= ========= ========= =========
Weighted Average Number of Common
Shares Outstanding................. 21,206 22,107 21,491 22,103
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............. 10,000 58 58
Conversion of Class B to
Class A Common Stock.... 34,959 1 (34,959) (1)
Treasury stock purchases.. (653,000) (5,323) (5,323)
Net Income................ 21,190 21,190
----------- ------ ----------- ------ ------- -------- -------- --------
Balance, July 31, 1999.... 13,257,882 $158 7,659,338 $79 $34,619 $204,372 $(21,911) $217,317
=========== ====== =========== ====== ======= ======== ======== ========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
July 31,
---------------------
1999 1998
---------- ----------
Cash Flows From Operating Activities:
Net Income.......................................... $ 21,190 $ 18,639
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation.................................... 3,750 2,936
Loss (gain) on sale and retirement of property
and assets.................................... 527 (2,678)
Extraordinary loss from extinguishment of debt,
net of income taxes........................... 868
Deferred income taxes........................... 2,472 1,623
Impairment losses............................... 1,633 3,498
Decrease (increase) in assets:
Receivables, prepaids and other assets........ (7,712) (4,536)
Mortgage notes receivable..................... 28,496 (9,541)
Inventories................................... (59,998) (9,403)
Increase (decrease) in liabilities:
State and Federal income taxes................ 588 5,301
Customers' deposits........................... (1,076) 3,319
Interest and other accrued liabilities........ (902) (974)
Post development completion costs............. (574) 1,840
Accounts payable.............................. (3,791) (490)
---------- ----------
Net cash (used) in provided by operating
activities................................ (14,529) 9,534
---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of property and assets........... 18,850 22,134
Purchase of property................................ (10,453) (2,128)
Investment in and advances to unconsolidated
affiliates........................................ 85 473
Investment in income producing properties........... (841) (4,927)
---------- ----------
Net cash provided by investing activities... 7,641 15,552
---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes................... 523,617 432,627
Proceeds from senior debt........................... 150,000
Principal payments on mortgages and notes........... (614,758) (453,891)
Principal payments on subordinated debt............. (46,301)
Investment in mortgage notes receivable............. 621 1,756
Purchase of treasury stock.......................... (5,323) (1,729)
Proceeds from sale of stock......................... 58 626
---------- ----------
Net cash provided by (used) in financing
activities................................ 7,914 (20,611)
---------- ----------
Net Increase In Cash.................................. 1,026 4,475
Cash Balance, Beginning Of Period..................... 15,554 11,313
---------- ----------
Cash Balance, End Of Period.......................... $ 16,580 $ 15,788
========== ==========
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 Nine Months Ended
July 31, July 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in Thousands)
Interest Incurred (1):
Residential (3)........... $ 6,110 $ 6,789 16,794 $ 20,087
Commercial(4)............. 266 680 911 1,844
-------- -------- -------- --------
Total Incurred.......... $ 6,376 $ 7,469 17,705 $ 21,931
======== ======== ======== ========
Interest Expensed:
Residential (3)........... $ 6,583 $ 8,093 20,326 $ 23,395
Commercial (4)............ 266 680 911 1,844
-------- -------- -------- --------
Total Expensed......... $ 6,849 $ 8,773 21,237 $ 25,239
======== ======== ======== ========
Interest Capitalized at
Beginning of Period....... $ 21,017 $ 29,846 25,545 $ 35,950
Plus Interest Incurred...... 6,376 7,469 17,705 21,931
Less Interest Expensed...... 6,849 8,773 21,237 25,239
Less Impairment Write Off... 460
Less Sale of Assets......... (242) 1,227 3,640
-------- -------- -------- --------
Interest Capitalized at
End of Period............. $ 20,786 $ 28,542 20,786 $ 28,542
======== ======== ======== ========
Interest Capitalized at
End of Period:
Residential(3)............ $ 20,336 $ 26,036 $ 20,336 $ 26,036
Commercial(2)............. 450 2,506 450 2,506
-------- -------- -------- --------
Total Capitalized....... $ 20,786 $ 28,542 $ 20,786 $ 28,542
======== ======== ======== ========
(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 July 31, 1999 and October 31,
1998 amounted to $18,235,000 and $15,088,000, respectively. Rental property
accumulated depreciation at July 31, 1999 and October 31, 1998 amounted to
$2,111,000 and $1,826,000, respectively.
4. In accordance with FAS 121, the Company records impairment losses on
inventories related to communities under development when events and
circumstances indicate that they may be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than their related carrying
amounts. As of July 31, 1999 developed lots in a substantially completed
community in New York with a carrying amount of $2,895,000, including approval,
engineering and capitalized interest, were written down $1,232,000 to its fair
value. The Company is contracted to sell substantially all of the lots in the
fourth quarter ended October 31, 1999. During the three months ended April 30,
1999 the Company also recorded a $401,000 impairment loss on land in Florida.
As of July 31, 1998 inventory in New Jersey with a carrying amount of $2,536,000
was written down $1,550,000 to its fair value. In addition, the Company, from
time to time, will write off certain residential land options including
approval, engineering and capitalized interest costs for properties management
decided not to purchase. The Company wrote off such 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 July 31, 1999 and 1998, respectively, the
Company is obligated under various performance letters of credit amounting to
$6,781,000 and $10,727,000.
6. On May 4, 1999, the Company issued $150,000,000 principal amount of 9
1/8% Senior Notes due May 1, 2009. Interest is payable semi-annually. 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 resulted in an extraordinary loss of $868,000
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
July 31, 1999 had issued and outstanding approximately $100,000,000 of
subordinated notes and a revolving credit agreement with an outstanding balance
of zero. 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 which aggregate $150,000,000 as of July
31, 1999. The Guarantor Subsidiaries may also provide similar guarantees to the
Subsidiary Issuer.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries the Company has included the accompanying consolidated
condensed financial statements based on our understanding of the Securities and
Exchange Commission's interpretation and application of Rule 3-10 of the
Securities and Exchange Commission's Regulations S-X and Staff Accounting
Bulletin 53. Management does not believe that separate financial statements of
the Guarantor Subsidiaries are material to investors. Therefore, separate
financial statement and other disclosures concerning the Guarantor Subsidiaries
are not presented.
The following consolidating condensed financial information present the
results of operations, financial position and cash flows of (i) the Parent (ii)
the Subsidiary Issuer (iii) the Guarantor Subsidiaries of the Parent (iv) the
Non-guarantor Subsidiaries of the Parent and (v) the eliminations to arrive at
the information for Hovnanian Enterprises, Inc. on a consolidated basis.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED BALANCE SHEET
JULY 31, 1999
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
ASSETS
Homebuilding:
Cash and cash equivalents........$ 64 $ 3,836 $ 9,378 $ 48 $ $ 13,326
Inventories...................... 430,036 3,025 433,061
Receivables, deposits, and notes. 3,215 30,506 33,721
Property, plant, and equipment... 15,577 8,245 41 23,863
Prepaid expenses and other assets 12,888 22,284 30 35,202
-------- ---------- ---------- ------------ ---------- ----------
Total Homebuilding............. 64 35,516 500,449 3,144 539,173
-------- ---------- ---------- ------------ ---------- ----------
Financial Services................. 1,363 48,720 50,083
-------- ---------- ---------- ------------ ---------- ----------
Investment Properties:
Held for sale.................... 779 779
Held for investment.............. 11,831 11,831
-------- ---------- ---------- ------------ ---------- ----------
Total Investment Properties.... 12,610 12,610
-------- ---------- ---------- ------------ ---------- ----------
Collateralized Mortgage Financing.. 5,489 5,489
-------- ---------- ---------- ------------ ---------- ----------
Income Taxes Receivables........... (2,139) (149) 9,094 (2,067) 4,739
-------- ---------- ---------- ------------ ---------- ----------
Investments in and amounts due to
and from consolidated
subsidiaries..................... 219,392 232,670 (251,814) 4,649 (204,897)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$217,317 $ 268,037 $ 271,702 $ 59,935 $(204,897) $ 612,094
======== ========== ========== ============ ========== ==========
LIABILITIES
Homebuilding:
Accounts payable and other
liabilities....................$ $ 12,981 $ 36,045 $ 190 $ $ 49,216
Customers' deposits.............. 22,419 166 22,585
Nonrecourse mortgages............ 17,690 17,690
-------- ---------- ---------- ------------ ---------- ----------
Total Homebuilding............. 12,981 76,154 356 89,491
-------- ---------- ---------- ------------ ---------- ----------
Financial Services................. 554 44,619 45,173
Investment Properties.............. 1,063 1,063
Collateralized Mortgage Financing.. 3,987 3,987
Notes Payable...................... 255,047 16 255,063
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities.............. 268,028 77,787 48,962 394,777
-------- ---------- ---------- ------------ ---------- ----------
STOCKHOLDERS' EQUITY............... 217,317 9 193,915 10,973 (204,897) 217,317
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$217,317 $ 268,037 $ 271,702 $ 59,935 $(204,897) $ 612,094
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
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
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1999
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ (159) $ 598 $ 229,067 $ 5,866 $ (4,749) $ 230,623
Financial Services............... 967 4,649 5,616
Investment Properties............ 670 (285) 385
Collateralized Mortgage Financing 47 47
Intercompany Charges............. 24,562 (1,635) (22,927)
Equity In Pretax Income of
Consolidated Subsidiaries......(12,893) (12,893)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 12,734 25,160 229,069 10,562 (40,854) 236,671
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 206,352 621 (5,094) 201,879
Financial Services............... 681 4,709 (133) 5,257
Investment Properties............ 395 (272) 123
Collateralized Mortgage Financing 68 68
Corporate General and
Administration................. 7,500 529 (13) 8,016
Interest......................... 15,828 7,146 57 (16,182) 6,849
Other Operations................. 366 39 4 409
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 23,694 215,142 5,459 (21,694) 222,601
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 12,734 1,466 13,927 5,103 (19,160) 14,070
State and Federal Income Taxes..... 5,124 468 5,238 1,668 (6,906) 5,592
Extraordinary Loss................. (868) (868)
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$ 7,610 $ (130) $ 8,689 $ 3,435 $ (12,254) $ 7,610
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1998
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 100 $ 237,573 $ 7,318 $ (5,137) $ 239,854
Financial Services............... 971 4,591 5,562
Investment Properties............ 2,797 (267) 2,530
Collateralized Mortgage Financing 179 179
Intercompany Charges............. 21,879 548 (22,427)
Equity In Pretax Income of
Consolidated Subsidiaries...... 12,390 (12,390)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 12,390 21,979 241,889 12,088 (40,221) 248,125
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 217,774 2,286 (4,956) 215,104
Financial Services............... 716 4,269 (148) 4,837
Investment Properties............ 903 (116) 787
Collateralized Mortgage Financing 181 181
Corporate General and
Administration................. 5,442 194 (93) 5,543
Interest......................... 15,735 8,806 128 (15,896) 8,773
Other Operations................. 454 52 4 510
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 21,631 228,445 6,868 (21,209) 235,735
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 12,390 348 13,444 5,220 (19,012) 12,390
State and Federal Income Taxes..... 4,677 4,687 2,044 (6,731) 4,677
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$ 7,713 $ 348 $ 8,757 $ 3,176 $ (12,281) $ 7,713
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 1999
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ (159) $ 627 $ 629,986 $ 15,400 $ (13,313) $ 632,541
Financial Services............... 2,578 12,850 15,428
Investment Properties............ 2,014 (846) 1,168
Collateralized Mortgage Financing 322 322
Intercompany Charges............. 66,402 349 (66,751)
Equity In Pretax Income of
Consolidated Subsidiaries...... 35,540 (35,540)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 35,381 67,029 634,927 28,572 (116,450) 649,459
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 564,875 1,789 (13,640) 553,024
Financial Services............... 1,853 12,859 (354) 14,358
Investment Properties............ 1,916 (692) 1,224
Collateralized Mortgage Financing 341 341
Corporate General and
Administration................. 20,038 985 (154) 20,869
Interest......................... 44,514 21,342 249 (44,868) 21,237
Other Operations................. 1,282 396 11 1,689
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 65,834 591,367 15,249 (59,708) 612,742
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 35,381 1,195 43,560 13,323 (56,742) 36,717
State and Federal Income Taxes..... 14,191 468 16,490 5,178 (21,668) 14,659
Extraordinary Loss................. (868) (868)
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$21,190 $ (141) $ 27,070 $ 8,145 $(35,074) $ 21,190
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 1998
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 597 $ 648,874 $ 18,008 $ (13,662) $ 653,817
Financial Services............... 2,771 10,493 13,264
Investment Properties............ 7,585 (802) 6,783
Collateralized Mortgage Financing 541 541
Intercompany Charges............. 62,362 4,017 (66,379)
Equity In Pretax Income of
Consolidated Subsidiaries...... 29,018 (29,018)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 29,018 69,959 663,247 29,042 (109,861) 674,405
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 598,363 4,283 (13,473) 589,173
Financial Services............... 1,944 9,961 (277) 11,628
Investment Properties............ 3,240 (577) 2,663
Collateralized Mortgage Financing 540 540
Corporate General and
Administration................. 14,232 616 (165) 14,683
Interest......................... 46,321 25,216 184 (46,482) 25,239
Other Operations................. 1,231 219 11 1,461
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 61,784 629,598 14,979 (60,974) 645,387
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 29,018 1,175 33,649 14,063 (48,887) 29,018
State and Federal Income Taxes..... 10,379 11,882 5,493 (17,375) 10,379
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$18,639 $ 1,175 $ 21,767 $ 8,570 $ (31,512) $ 18,639
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 1999
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income (loss)..................$ 21,190 $ (141) $ 27,070 $ 8,145 $ (35,074) $ 21,190
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities... 2,367 (4,030) (81,151) 11,170 35,074 (36,571)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 23,557 (4,171) (54,081) 19,315 (15,381)
Net Cash Provided by (Used In)
Investing Activities............... (1,909) 9,071 479 7,641
Net Cash Provided By(Used In)
Financing Activities............... (5,265) 36,551 2,695 (25,215) 8,776
Intercompany Investing and Financing
Activities - Net................... (18,242) (16,975) 31,925 3,292
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... 50 13,496 (10,390) (2,129) 1,026
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......................$ 64 $ 3,836 $ 12,633 $ 48 $ $ 16,580
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 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)..................$ 18,639 $ 1,175 $ 21,767 $ 8,570 $ (31,512) $ 18,639
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities... 5,596 (2,127) (13,371) (30,715) 31,512 (9,105)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 24,235 (952) 8,396 (22,145) 9,534
Net Cash Provided by (Used In)
Investing Activities............... (1,279) 17,276 (445) 15,552
Net Cash Provided By(Used In)
Financing Activities............... (1,105) (9,000) (17,609) 7,103 (20,611)
Intercompany Investing and Financing
Activities - Net................... (23,129) 18,663 (8,432) 12,898
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... 1 7,432 (369) (2,589) 4,475
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......................$ 11 $ 1,947 $ 13,488 $ 342 $ $ 15,788
======== ========= ========== ============ ========== ==========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The Company's uses for cash during the nine months ended July 31, 1999 were
for operating expenses, increases in housing inventories, construction, income
taxes, interest, the paydown of subordinated debt and the repurchase of common
stock. The Company provided for its cash requirements from outside borrowings,
including the issuance of $150,000,000 senior indebtedness and 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 July 31, 1999, 2,244,500
shares have been repurchased under this program, of which 653,000 shares were
purchased during the nine months ended July 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
$275,000,000 (the "Revolving Credit Facility") through July 2002. 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
2002 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.
The subordinated indebtedness issued by the Company and outstanding as of
July 31, 1999 was $100,000,000 9 3/4% Subordinated Notes due June 2005. 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% Subordinate Notes due April 2002. The early retirement of these notes
resulted in an extraordinary loss of $868,000 net of income taxes of $468,000.
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 July 31, 1999, the aggregate
principal amount of all such borrowings was $47,103,000.
The book value of the Company's residential inventories, rental
condominiums, and commercial properties completed and under development amounted
to the following:
July 31, October 31,
1999 1998
------------ ------------
Residential real estate inventory.......... $433,061,000 $375,733,000
Residential rental property................ 10,747,000 10,794,000
------------ ------------
Total Residential Real Estate............ 443,808,000 386,527,000
Commercial properties...................... 107,000 17,832,000
------------ ------------
Combined Total........................... $443,915,000 $404,359,000
============ ============
The increase in residential real estate inventory during the nine months
ended July 31, 1999 was primarily the result of increased communities in
California. Substantially all residential homes under construction or completed
and included in real estate inventory at July 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 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
------- -------- ------ ---------- ----------
July 31, 1999......... 73 18,021 6,834 1,694 9,493
October 31, 1998...... 84 17,020 6,553 1,672 8,795
(1) Includes 12 and 8 lots under option at July 31, 1999 and October 31, 1998,
respectively.
(2) Of the total home lots available, 429 and 460 were under construction or
complete (including 59 and 54 models and sales offices), 5,543 and 4,570 were
under option, and 284 and 330 were financed through purchase money mortgages at
July 31, 1999 and October 31, 1998, respectively.
In addition, at July 31, 1999 and October 31, 1998, respectively, in
substantially completed or suspended communities, the Company owned or had under
option 62 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 July 31, 1999
the Company controlled such land to build 12,490 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:
July 31, October 31,
1999 1998
----------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ----- ------ ------ -----
Northeast Region.... 121 24 145 180 16 196
North Carolina...... 149 -- 149 93 -- 93
Florida............. 8 -- 8 24 6 30
Maryland............ 6 2 8 -- -- --
Virginia............ 18 7 25 23 11 34
California.......... 50 26 76 78 21 99
Poland.............. 27 -- 27 11 -- 11
------ ------ ----- ------ ------ -----
Total 379 59 438 409 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 July 31, 1999 the Company had remaining one small investment
property.
Collateral Mortgage Financing - Collateral for bonds payable consists 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 $44,109,000 and
$71,002,000 at July 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 AND NINE MONTHS ENDED JULY 31, 1999 COMPARED
TO THE THREE AND NINE MONTHS ENDED JULY 31, 1998
The Company's operations consist primarily of residential housing
development and sales in its Northeast Region (comprised of New Jersey, southern
New York State and eastern Pennsylvania), North Carolina, southeastern Florida,
northern Virginia, southwestern 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
Nine Months Ended Contract Backlog
July 31, as of July 31,
----------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Dollars............. $316,170 $411,040 $242,597 $294,385
Homes............... 1,379 1,847 1,012 1,218
North Carolina:
Dollars............. $114,862 $ 93,195 $ 65,889 $ 50,623
Homes............... 600 504 327 260
Florida:
Dollars............. $ 25,051 $ 25,936 $ 14,805 $ 19,813
Homes............... 112 135 66 98
Virginia:
Dollars............. $ 41,616 $ 28,714 $ 37,766 $ 29,632
Homes............... 182 114 170 127
California:
Dollars............. $ 79,740 $ 53,706 $ 33,639 $ 21,688
Homes............... 380 313 148 134
Poland:
Dollars............. $ 654 $ 2,125 $ 294 $ 1,591
Homes............... 6 26 2 19
Totals:
Dollars............. $578,093 $614,716 $394,990 $417,732
Homes............... 2,659 2,939 1,725 1,856
Total Revenues:
Revenues for the three months ended July 31, 1999 decreased $11.4 million
or 4.6%, compared to the same period last year. This was the result of a $10.8
million decrease in revenues from the sale of homes, a $2.1 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.
Revenues for the nine months ended July 31, 1999 decreased $24.9 million or
3.7%, compared to the same period last year. This was the result of a $24.4
million decrease in revenues from the sale of homes, a $5.6 million decrease in
investment properties revenues, and a $0.2 million decrease in collateralized
mortgage financing revenues. The decreases were partially offset by a $3.1
million increase in land sales and other homebuilding revenues, and a $2.2
million increase in financial services revenues.
Homebuilding:
Revenues from the sale of homes decreased $10.8 million or 4.6% during the
three months ended July 31, 1999, and decreased $24.4 million or 3.8% during the
nine months ended July 31, 1999 compared to the same periods last year.
Revenues from sales of homes are recorded at the time each home is delivered and
title and possession have been transferred to the buyer.
Information on homes delivered by market area is set forth below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
1999 1998 1999 1998
--------- -------- -------- --------
(Dollars in Thousands)
Northeast Region:
Housing Revenues..... $142,503 $162,847 $395,687 $437,991
Homes Delivered...... 539 679 1,499 1,916
North Carolina:
Housing Revenues..... $ 38,269 $ 34,655 $ 97,902 $ 88,595
Homes Delivered...... 205 188 508 476
Florida:
Housing Revenues..... $ 9,690 $ 8,111 $ 27,554 $ 32,877
Homes Delivered...... 41 44 119 187
Virginia:
Housing Revenues..... $ 11,400 $ 11,256 $ 29,952 $ 22,217
Homes Delivered...... 46 46 127 84
California:
Housing Revenues..... $ 24,792 $ 18,832 $ 68,651 $ 59,566
Homes Delivered...... 120 104 351 316
Poland:
Housing Revenues..... $ 417 $ 2,199 $ 1,348 $ 4,278
Homes Delivered...... 2 24 11 48
Totals:
Housing Revenues..... $227,071 $237,900 $621,094 $645,524
Homes Delivered...... 953 1,085 2,615 3,027
The 12.2% and 13.6% decreases in the number of homes delivered for the
three and nine months ended July 31, 1999, respectively, compared to the same
periods last year, were primarily due to the decreases in Florida and Northeast
Region which were somewhat offset by increases in North Carolina, Virginia and
California. In Florida, deliveries declined since the Company cut back its
operations due to dissatisfaction with its performance. The decrease in
deliveries in the Northeast Region was primarily due to a reduced number of
communities during the three and nine months ended July 31, 1999, compared to
the same periods last year. The increases in North Carolina, Virginia and
California were primarily due to the Company's attempts to increase its presence
in these markets by opening more communities. The decrease in housing revenues
was 4.6% and 3.8% during the three and nine months ended July 31, 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 $237,512
compared to $213,255 during the nine months ended July 31, 1999 and 1998,
respectively.
Cost of sales includes expenses for housing and land and lot sales. A
breakout of such expenses for housing sales and housing gross margin is set
forth below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in Thousands)
Sale of Homes................ $227,071 $237,900 $621,094 $645,524
Cost of Sales................ 178,089 194,898 487,423 532,646
-------- -------- -------- --------
Housing Gross Margin......... $ 48,982 $ 43,002 $133,671 $112,878
======== ======== ======== ========
Gross Margin Percentage...... 21.6% 18.1% 21.5% 17.5%
Cost of Sales expenses as a percentage of home sales revenues are presented
below:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Sale of Homes................ 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of Sales:
Housing, land &
development costs.... 70.4 74.2 70.4 74.7
Commissions............ 2.0 1.9 2.0 1.9
Financing concessions.. 0.8 0.7 0.8 0.7
Overheads.............. 5.2 5.1 5.3 5.2
-------- -------- -------- --------
Total Cost of Sales.......... 78.4 81.9 78.5 82.5
-------- -------- -------- --------
Gross Margin................. 21.6% 18.1% 21.5% 17.5%
======== ======== ======== ========
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 on home types delivered, consolidated quarterly gross
margin will fluctuate up or down and may not be representative of the
consolidated gross margin for the year. In addition, gross margin percentages
are higher in the Northeast Region compared to the Company's other markets. For
the three and nine months ended July 31, 1999 the Company's gross margin
percentage increased 3.5% and 4.0%, 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 costs as a percentage of total
homebuilding revenues increased to 9.0% for the three months ended July 31, 1999
from 7.3% for the prior year's three months, and increased to 9.0% for the nine
months ended July 31, 1999 from 7.5% for the prior year's nine months. Such
expenses increased during the three and nine months ended July 31, 1999 $3.2
million and $7.8 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 Nine Months Ended
July 31, July 31,
------------------ -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Land and Lot Sales................ $ 1,974 $ 954 $ 7,508 $ 4,317
Cost of Sales..................... 1,868 1,126 7,158 3,984
-------- -------- -------- --------
Land and Lot Sales Gross Margin... 106 (172) 350 333
Interest Expense.................. 94 96 836 413
-------- -------- -------- --------
Land and Lot Sales Profit Before
Tax............................. $ 12 $ (268) $ (486) $ (80)
======== ======== ======== ========
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 and nine
months ended July 31, 1999 financial services provided a $0.4 million and $1.1
million pretax profit, respectively, compared to a profit of $0.7 million and
$1.6 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 properties. 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 July 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 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 3.4% for the three months ended July 31,
1999 from 2.2% for the prior year's three months. For the nine months ended
July 31, 1999 such expenses increased to 3.2% from 2.2% for the prior year nine
months. Corporate general and administrative expenses increased $2.5 million
and $6.2 million during the three and nine months ended July 31, 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 Nine Months Ended
July 31, July 31,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Sale of Homes.............. $ 6,489 $ 7,997 19,490 $22,982
Land and Lot Sales......... 94 96 836 413
Rental Properties.......... 266 680 911 1,844
-------- -------- -------- --------
Total...................... $ 6,849 $ 8,773 21,237 $25,239
======== ======== ======== ========
Housing interest as a percentage of sale of homes revenues amounted to 2.9%
and 3.1% for the three and nine months ended July 31, 1999, respectively, and
3.4% and 3.6% for the three and nine months ended July 31, 1998, respectively.
The decrease in the percentage for the three and nine months ended July 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 39.9% and 35.8% for the nine months ended July 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.
Extraordinary Loss
On June 7, 1999, the Company redeemed $45,449,000 11 1/4% Subordinated
Notes due 2002 at a price of 101.875% of par which resulted in an extraordinary
loss of $868,000 net of income taxes of $468,000.
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 98% of its noncompliant systems. 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 85% of the subcontractors and suppliers are year
2000 compliant, and the remaining 15% 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 90% 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: September 13, 1999 /S/J.LARRY SORSBY
J. Larry Sorsby,
Senior Vice President,
Treasurer and
Chief Financial Officer
DATE: September 13, 1999 /S/PAUL W. BUCHANAN
Paul W. Buchanan,
Senior Vice President
Corporate Controller