-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P9U7gA1qiED9K5ntyQWmUq8h56sZx1lkENaOvjksj2isFY/585OgpcJFFUYVvBpv ZDoPxlFrEyRPktF2cQae1A== 0000357294-99-000008.txt : 19990615 0000357294-99-000008.hdr.sgml : 19990615 ACCESSION NUMBER: 0000357294-99-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990611 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOVNANIAN ENTERPRISES INC CENTRAL INDEX KEY: 0000357294 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 221851059 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08551 FILM NUMBER: 99645177 BUSINESS ADDRESS: STREET 1: 10 HWY 35 STREET 2: PO BOX 500 CITY: RED BANK STATE: NJ ZIP: 07701 BUSINESS PHONE: 9087477800 MAIL ADDRESS: STREET 1: 10 HWY 35 PO BOX 500 STREET 2: 10 HWY 35 PO BOX 500 CITY: RED BANK STATE: NJ ZIP: 07701 10-Q 1 FORM 10Q 04/30/99 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10Q [ X ] Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For quarterly period ended APRIL 30, 1999 or [ ] Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 Commission file number 1-8551 Hovnanian Enterprises, Inc. (Exact name of registrant as specified in its charter) Delaware 22-1851059 (State or other jurisdiction or (I.R.S. Employer incorporation or organization) Identification No.) l0 Highway 35, P.O. Box 500, Red Bank, N. J. 07701 (Address of principal executive offices) 732-747-7800 (Registrant's telephone number, including area code) Same (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Sections l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 13,307,799 Class A Common Shares and 7,631,121 Class B Common Shares were outstanding as of June 4, 1999. HOVNANIAN ENTERPRISES, INC. FORM 10Q INDEX PAGE NUMBER PART I. Financial Information Item l. Consolidated Financial Statements: Consolidated Balance Sheets at April 30, 1999 (unaudited) and October 31, 1998 3 Consolidated Statements of Income for the three and six months ended April 30, 1999 and 1998 (unaudited) 5 Consolidated Statements of Stockholders' Equity for the six months ended April 30, 1999 (unaudited) 6 Consolidated Statements of Cash Flows for the six months ended April 30, 1999 and 1998 (unaudited) 7 Notes to Consolidated Financial Statements (unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 PART II. Other Information Item 6(b). Exhibit 27 - Financial Data Schedules Item 6(c). No reports on Form 8K have been filed during the quarter for which this report is filed. Signatures 28 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands)
April 30, October 31, ASSETS 1999 1998 ----------- ----------- Homebuilding: Cash and cash equivalents....................... $ 7,915 $ 13,306 ----------- ----------- Inventories - At cost, not in excess of fair value: Sold and unsold homes and lots under development.................................. 354,320 332,225 Land and land options held for future development or sale......................... 41,225 43,508 ----------- ----------- Total Inventories........................... 395,545 375,733 ----------- ----------- Receivables, deposits, and notes................ 40,635 29,490 ----------- ----------- Property, plant, and equipment - net............ 20,680 16,831 ----------- ----------- Prepaid expenses and other assets............... 31,692 32,650 ----------- ----------- Total Homebuilding.......................... 496,467 468,010 ----------- ----------- Financial Services: Cash and cash equivalents....................... 3,119 1,486 Mortgage loans held for sale.................... 46,750 71,611 Other assets.................................... 2,314 3,717 ----------- ----------- Total Financial Services.................... 52,183 76,814 ----------- ----------- Investment Properties: Held for sale: Land and improvements......................... 107 17,832 Other assets.................................. 788 295 Held for investment: Cash.......................................... 762 Rental property - net......................... 10,775 10,794 Other assets.................................. 1,090 868 ----------- ----------- Total Investment Properties................. 12,760 30,551 ----------- ----------- Collateralized Mortgage Financing: Collateral for bonds payable.................... 5,863 5,970 Other assets.................................... 307 426 ----------- ----------- Total Collateralized Mortgage Financing..... 6,170 6,396 ----------- ----------- Income Taxes Receivable - Including deferred tax benefits........................................ 4,701 7,331 ----------- ----------- Total Assets...................................... $572,281 $589,102 =========== =========== See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands)
April 30, October 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998 ----------- ----------- Homebuilding: Nonrecourse land mortgages........................ $ 6,533 $ 11,846 Accounts payable and other liabilities............ 40,695 53,765 Customers' deposits............................... 22,468 23,857 Nonrecourse mortgages secured by operating properties...................................... 3,716 3,770 ----------- ----------- Total Homebuilding............................ 73,412 93,238 ----------- ----------- Financial Services: Accounts payable and other liabilities............ 2,182 2,422 Mortgage warehouse line of credit................. 43,877 66,666 ----------- ----------- Total Financial Services...................... 46,059 69,088 ----------- ----------- Investment Properties: Accounts payable and other liabilities............ 1,224 1,373 ----------- ----------- Total Investment Properties................... 1,224 1,373 ----------- ----------- Collateralized Mortgage Financing: Accounts payable and other liabilities............ 6 Bonds collateralized by mortgages receivable...... 4,574 5,652 ----------- ----------- Total Collateralized Mortgage Financing....... 4,574 5,658 ----------- ----------- Notes Payable: Revolving credit agreement........................ 84,675 68,000 Subordinated notes................................ 145,449 145,449 Accrued interest.................................. 5,725 4,904 ----------- ----------- Total Notes Payable........................... 235,849 218,353 ----------- ----------- Total Liabilities............................. 361,118 387,710 ----------- ----------- Stockholders' Equity: Preferred Stock,$.01 par value-authorized 100,000 shares; none issued Common Stock,Class A,$.01 par value-authorized 87,000,000 shares; issued 15,834,002 shares (including 2,413,274 shares held in Treasury)... 158 157 Common Stock,Class B,$.01 par value-authorized 13,000,000 shares; issued 8,014,466 shares (including 345,874 shares held in Treasury)..... 79 80 Paid in Capital................................... 34,590 34,561 Retained Earnings................................. 196,762 183,182 Treasury Stock - at cost.......................... (20,426) (16,588) ----------- ----------- Total Stockholders' Equity.................... 211,163 201,392 ----------- ----------- Total Liabilities and Stockholders' Equity.......... $572,281 $589,102 =========== =========== See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Per Share Data)
Three Months Ended Six Months Ended April 30, April 30, ------------------- ------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Revenues: Homebuilding: Sale of homes...................... $199,138 $203,567 $394,023 $407,624 Land sales and other revenues...... 5,454 3,854 7,895 6,339 --------- --------- --------- --------- Total Homebuilding............... 204,592 207,421 401,918 413,963 Financial Services................... 4,154 4,140 9,812 7,702 Investment Properties................ 424 609 783 4,253 Collateralized Mortgage Financing.... 139 150 275 362 --------- --------- --------- --------- Total Revenues................... 209,309 212,320 412,788 426,280 --------- --------- --------- --------- Expenses: Homebuilding: Cost of sales...................... 159,037 170,806 314,624 340,606 Selling, general and administrative 18,586 15,858 36,120 31,515 Inventory impairment loss.......... 401 359 401 1,948 --------- --------- --------- --------- Total Homebuilding............... 178,024 187,023 351,145 374,069 --------- --------- --------- --------- Financial Services................... 3,859 3,580 9,101 6,791 --------- --------- --------- --------- Investment Properties................ 322 753 1,101 1,876 --------- --------- --------- --------- Collateralized Mortgage Financing.... 142 157 273 359 --------- --------- --------- --------- Corporate General and Administration. 6,418 4,779 12,853 9,140 --------- --------- --------- --------- Interest............................. 7,346 7,990 14,388 16,466 --------- --------- --------- --------- Other Operations..................... 729 428 1,280 951 --------- --------- --------- --------- Total Expenses................... 196,840 204,710 390,141 409,652 --------- --------- --------- --------- Income Before Income Taxes............. 12,469 7,610 22,647 16,628 --------- --------- --------- --------- State and Federal Income Taxes: State................................ 1,340 596 2,828 1,244 Federal.............................. 3,677 2,001 6,239 4,458 --------- --------- --------- --------- Total Taxes........................ 5,017 2,597 9,067 5,702 --------- --------- --------- --------- Net Income............................. $ 7,452 $ 5,013 $ 13,580 $ 10,926 ========= ========= ========= ========= Per Share Data: Basic: Income per common share.............. $ 0.35 $ 0.23 $ 0.63 $ 0.50 Weighted average number of common shares outstanding................. 21,266 21,848 21,391 21,841 Assuming dilution: Income per common share.............. 0.35 0.23 0.63 0.50 Weighted average number of common shares outstanding................ 21,488 22,042 21,611 22,047 See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars In Thousands)
A Common Stock B Common Stock ------------------- ------------------- Shares Shares Issued and Issued and Paid-In Retained Treasury Outstanding Amount Outstanding Amount Capital Earnings Stock Total ----------- ------ ----------- ------ ------- -------- -------- -------- Balance, October 31, 1998 13,865,923 $157 7,694,297 $80 $34,561 $183,182 ($16,588) $201,392 Sale of Common Stock under employee stock option plan.................... 5,000 29 29 Conversion of Class B to Class A Common Stock.... 25,705 1 (25,705) (1) Treasury stock purchases.. (475,900) (3,838) (3,838) Net Income................ 13,580 13,580 ----------- ------ ----------- ------ ------- -------- -------- -------- Balance, April 30, 1999... 13,420,728 $158 7,668,592 $79 $34,590 $196,762 ($20,426) $211,163 =========== ====== =========== ====== ======= ======== ======== ======== See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
Six Months Ended April 30, --------------------- 1999 1998 ---------- ---------- Cash Flows From Operating Activities: Net Income.......................................... $ 13,580 $ 10,926 Adjustments to reconcile net income to net cash used in operating activities: Depreciation.................................... 2,428 1,936 Loss (gain) on sale and retirement of property and assets.................................... 520 (2,690) Deferred income taxes........................... 2,493 2,336 Impairment losses............................... 401 1,948 Decrease (increase) in assets: Receivables, prepaids and other assets.......... (10,967) (7,453) Mortgage notes receivable..................... 26,365 5,819 Inventories................................... (21,250) (5,654) Increase (decrease) in liabilities: State and Federal income taxes................ 137 (1,992) Customers' deposits........................... (1,065) 179 Interest and other accrued liabilities........ (3,268) (2,490) Post development completion costs............. (807) 1,349 Accounts payable.............................. (8,892) (4,739) ---------- ---------- Net cash (used) in operating activities..... (325) (525) ---------- ---------- Cash Flows From Investing Activities: Proceeds from sale of property and assets........... 19,099 22,119 Purchase of property................................ (6,013) (1,230) Investment in and advances to unconsolidated affiliates........................................ (4) 403 Investment in income producing properties........... (1,016) (4,188) ---------- ---------- Net cash provided by investing activities... 12,066 17,104 ---------- ---------- Cash Flows From Financing Activities: Proceeds from mortgages and notes................... 323,253 280,003 Principal payments on mortgages and notes........... (335,812) (297,525) Investment in mortgage notes receivable............. 107 1,166 Purchase of treasury stock.......................... (3,838) (457) Proceeds from sale of stock......................... 29 577 ---------- ---------- Net cash (used) in financing activities..... (16,261) (16,236) ---------- ---------- Net (Decrease) Increase In Cash....................... (4,520) 343 Cash and Cash Equivalent Balance, Beginning Of Period. 15,554 11,313 ---------- ---------- Cash and Cash Equivalent and Balance, End Of Period... $ 11,034 $ 11,656 ========== ========== See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED 1. The consolidated financial statements, except for the October 31, 1998 consolidated balance sheets, have been prepared without audit. In the opinion of management, all adjustments for interim periods presented have been made, which include only normal recurring accruals and deferrals necessary for a fair presentation of consolidated financial position, results of operations, and changes in cash flows. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and these differences could have a significant impact on the financial statements. Results for the interim periods are not necessarily indicative of the results which might be expected for a full year. 2. Interest costs incurred, expensed and capitalized were: Three Months Ended Six Months Ended April 30, April 30, ------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- (Dollars in Thousands) Interest Incurred (1): Residential (3)........... $ 5,985 $ 6,656 $10,684 $ 13,298 Commercial(4)............. 289 485 645 1,164 -------- -------- -------- -------- Total Incurred.......... $ 6,274 $ 7,141 $11,329 $ 14,462 ======== ======== ======== ======== Interest Expensed: Residential (3)........... $ 7,057 $ 7,505 $13,743 $ 15,302 Commercial (4)............ 289 485 645 1,164 -------- -------- -------- -------- Total Expensed......... $ 7,346 $ 7,990 $14,388 $ 16,466 ======== ======== ======== ======== Interest Capitalized at Beginning of Period....... $ 22,089 $ 30,695 $25,545 $ 35,950 Plus Interest Incurred...... 6,274 7,141 11,329 14,462 Less Interest Expensed...... 7,346 7,990 14,388 16,466 Less Inventory Write-off.... 460 Less Sale of Assets......... 1,469 3,640 -------- -------- -------- -------- Interest Capitalized at End of Period............. $21,017 $ 29,846 $ 21,017 $ 29,846 ======== ======== ======== ======== Interest Capitalized at End of Period: Residential(3)............ $ 20,809 $ 27,340 $ 20,809 $ 27,340 Commercial(2)............. 208 2,506 208 2,506 -------- -------- -------- -------- Total Capitalized....... $ 21,017 $ 29,846 $ 21,017 $ 29,846 ======== ======== ======== ======== (1) Does not include interest incurred by the Company's mortgage and finance subsidiaries. (2) Does not include a reduction for depreciation. (3) Represents acquisition interest for construction, land and development costs which is charged to interest expense when homes are delivered and when land is not under active development. (4) Represents interest allocated to or incurred on long term debt for investment properties and charged to interest expense. 3. Homebuilding accumulated depreciation at April 30, 1999 and October 31, 1998 amounted to $17,128,000 and $15,088,000, respectively. Rental property accumulated depreciation at April 30, 1999 and October 31, 1998 amounted to $2,011,000 and $1,826,000, respectively. 4. During the six months ended April 30, 1999 the Company recorded a $401,000 impairment loss associated with an option in Florida including approval, engineering and capitalized interest. The Company wrote off costs on two properties in New Jersey amounting to $1,589,000 and $359,000 during the three months ended January 31, 1998 and April 30, 1998, respectively. Residential inventory FAS 121 impairment losses and option write-offs are reported on the Consolidated Statements of Income as "Homebuilding - Inventory Impairment Loss." 5. The Company is involved from time to time in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on the Company. As of April 30, 1999 and 1998, respectively, the Company is obligated under various performance letters of credit amounting to $7,079,000 and $9,768,000. 6. On May 4, 1999, the Company issued $150,000,000 9 1/8% Senior Notes due in 2009. The proceeds were used to reduce the outstanding balance on the Company's "Revolving Credit Facility" to zero for general corporate purposes, and on June 7, 1999, to redeem the remaining $45,449,000 11 1/4% Subordinated Notes due 2002. The early retirement of these notes will result in an extraordinary loss of $869,000 net of income taxes of $468,000. 7. Financial Information of Subsidiary Issuer and Subsidiary Guarantors. Hovnanian Enterprises, Inc., the parent company (the "Parent" or "Company") is the issuer of publicly traded common stock. One of its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc., (the "Subsidiary Issuer") was the issuer of certain Senior Notes on May 4, 1999. The Subsidiary Issuer acts as a finance and management entity that as of April 30, 1999 had issued and outstanding approximately $145,449,000 of subordinated notes and a revolving credit agreement with an outstanding balance of $84,675,000. Both the subordinated notes and the revolving credit agreement are fully and unconditionally guaranteed by the Parent. Each of the wholly owned subsidiaries of the Parent (collectively the "Guarantor Subsidiaries"), with the exception of four subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, a mortgage lending subsidiary, a subsidiary holding and licensing the "K. Hovnanian" trade name and a subsidiary engaged in homebuilding activity in Poland (collectively the "Non-guarantor Subsidiaries"), have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under the revolving credit agreement of the Subsidiary Issuer. Additionally the Parent has provided full, unconditional and joint and several guarantees to the Senior Notes. The Guarantor Subsidiaries may also provide similar guarantees to the Subsidiary Issuer. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries the Company has included the accompanying consolidated condensed financial statements based on our understanding of the Securities and Exchange Commission's interpretation and application of Rule 3-10 of the Securities and Exchange Commission's Regulations S-X and Staff Accounting Bulletin 53. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate financial statement and other disclosures concerning the Guarantor Subsidiaries are not presented. The following consolidating condensed financial information present the results of operations, financial position and cash flows of (i) the Parent (ii) the Subsidiary Issuer (iii) the Guarantor Subsidiaries of the Parent (iv) the Non-guarantor Subsidiaries of the Parent and (v) the eliminations to arrive at the information for Hovnanian Enterprises, Inc. on a consolidated basis. HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED BALANCE SHEET APRIL 30, 1999 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---------- ---------- ASSETS Homebuilding: Cash and cash equivalents........$ 46 $ (236) $ 8,022 $ 83 $ $ 7,915 Inventories...................... 393,156 2,389 395,545 Receivables, deposits, and notes. 3,331 37,304 40,635 Property, plant, and equipment... 12,515 8,129 36 20,680 Prepaid expenses and other assets 437 9,839 21,398 18 31,692 -------- ---------- ---------- ------------ ---------- ---------- Total Homebuilding............. 483 25,449 468,009 2,526 496,467 -------- ---------- ---------- ------------ ---------- ---------- Financial Services................. 1,387 50,796 52,183 -------- ---------- ---------- ------------ ---------- ---------- Investment Properties: Held for sale.................... 895 895 Held for investment.............. 11,865 11,865 -------- ---------- ---------- ------------ ---------- ---------- Total Investment Properties.... 12,760 12,760 -------- ---------- ---------- ------------ ---------- ---------- Collateralized Mortgage Financing.. 6,170 6,170 -------- ---------- ---------- ------------ ---------- ---------- Income Taxes Receivables-Including deferred tax benefits............ (1,074) 481 7,000 (1,706) 4,701 -------- ---------- ---------- ------------ ---------- ---------- Investments in and amounts due to and from consolidated subsidiaries..................... 211,754 213,261 (242,379) 13,548 (196,184) -------- ---------- ---------- ------------ ---------- ---------- Total Assets.......................$211,163 $ 239,191 $ 246,777 $ 71,334 $(196,184) $ 572,281 ======== ========== ========== ============ ========== ========== LIABILITIES Homebuilding: Accounts payable and other liabilities....................$ $ 3,395 $ 37,093 $ 207 $ $ 40,695 Customers' deposits.............. 22,234 234 22,468 Nonrecourse mortgages............ 10,249 10,249 -------- ---------- ---------- ------------ ---------- ---------- Total Homebuilding............. 3,395 69,576 441 73,412 -------- ---------- ---------- ---------------------- ---------- Financial Services................. 535 45,524 46,059 Investment Properties.............. 1,224 1,224 Collateralized Mortgage Financing.. 4,574 4,574 Notes Payable...................... 235,702 147 235,849 -------- ---------- ---------- ------------ ---------- ---------- Total Liabilities.............. 239,097 71,482 50,539 361,118 -------- ---------- ---------- ------------ ---------- ---------- STOCKHOLDERS' EQUITY............... 211,163 94 175,295 20,795 (196,184) 211,163 -------- ---------- ---------- ------------ ---------- ---------- Total Liabilities and Stockholders' Equity...........................$211,163 $ 239,191 $ 246,777 $ 71,334 $(196,184) $ 572,281 ======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Continued) CONSOLIDATING CONDENSED BALANCE SHEET OCTOBER 31, 1998 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ ---------- --------- ASSETS Homebuilding: Cash and cash equivalents........$ 14 $ (9,660) $ 21,732 $ 1,220 $ $ 13,306 Inventories...................... 373,364 2,369 375,733 Receivables, deposits, and notes. 2,618 26,872 29,490 Property, plant, and equipment... 10,180 6,627 24 16,831 Prepaid expenses and other assets 187 9,931 22,530 2 32,650 -------- --------- ---------- ------------ - --------- ---------- Total Homebuilding............. 201 13,069 451,125 3,615 468,010 -------- --------- ---------- ------------ ---------- ---------- Financial Services................. 1,461 75,353 76,814 -------- --------- ---------- ------------ ---------- ---------- Investment Properties: Held for sale.................... 18,127 18,127 Held for investment.............. 12,424 12,424 -------- --------- ---------- ------------ ---------- ---------- Total Investment Properties.... 30,551 30,551 -------- --------- ---------- ------------ ---------- ---------- Collateralized Mortgage Financing.. 6,396 6,396 -------- --------- ---------- ------------ ---------- ---------- Income Taxes Receivables-Including deferred tax benefits............ 41 382 8,419 (1,511) 7,331 -------- --------- ---------- ------------ ---------- ---------- Investments in and amounts due to and from consolidated subsidiaries..................... 201,150 210,648 (236,457) 7,941 (183,282) -------- --------- ---------- ------------ ---------- ---------- Total Assets.......................$201,392 $224,099 $ 255,099 $ 91,794 $(183,282) $ 589,102 ======== ========= ========== ============ ========== ========== LIABILITIES Homebuilding: Accounts payable and other liabilities....................$ $ 5,908 $ 47,636 $ 221 $ $ 53,765 Customers' deposits.............. 23,367 490 23,857 Nonrecourse mortgages............ 15,616 15,616 -------- --------- ---------- ------------ ---------- ---------- Total Homebuilding............. 5,908 86,619 711 93,238 -------- --------- ---------- ------------ ---------- ---------- Financial Services................. 677 68,411 69,088 Investment Properties.............. 1,373 1,373 Collateralized Mortgage Financing.. 5,658 5,658 Notes Payable...................... 218,182 171 218,353 -------- --------- ---------- ------------ ---------- ---------- Total Liabilities.............. 224,090 88,840 74,780 387,710 -------- --------- ---------- ------------ ---------- ---------- STOCKHOLDERS' EQUITY............... 201,392 9 166,259 17,014 (183,282) 201,392 -------- --------- ---------- ------------ ---------- ---------- Total Liabilities and Stockholders' Equity...........................$201,392 $224,099 $ 255,099 $ 91,794 $(183,282) $ 589,102 -------- --------- ---------- ------------ ---------- ---------- Total Liabilities and Stockholders' Equity...........................$201,392 $224,099 $ 255,099 $ 91,794 $(183,282) $ 589,102 ======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Continued) CONSOLIDATING CONDENSED STATEMENT OF INCOME THREE MONTHS ENDED APRIL 30, 1999 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- Revenues: Homebuilding.....................$ $ (57) $ 204,635 $ 5,273 $ (5,259) $ 204,592 Financial Services............... 791 3,363 4,154 Investment Properties............ 711 (287) 424 Collateralized Mortgage Financing 139 139 Intercompany Charges............. 20,944 1,335 (22,279) Equity In Pretax Income of Consolidated Subsidiaries...... 12,469 (12,469) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ 12,469 20,887 207,472 8,775 (40,294) 209,309 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 183,031 243 (5,250) 178,024 Financial Services............... 682 3,401 (224) 3,859 Investment Properties............ 490 (168) 322 Collateralized Mortgage Financing 142 142 Corporate General and Administration................. 6,241 279 (102) 6,418 Interest......................... 14,504 7,251 95 (14,504) 7,346 Other Operations................. 430 292 7 729 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 21,175 192,025 3,888 (20,248) 196,840 ------- ---------- ---------- ------------ ---------- ---------- Income (Loss) Before Income Taxes.. 12,469 (288) 15,447 4,887 (20,046) 12,469 State and Federal Income Taxes..... 5,017 5,631 2,065 (7,696) 5,017 ------- ---------- ---------- ------------ ---------- ---------- Net Income (Loss)..................$ 7,452 $ (288) $ 9,816 $ 2,822 $ (12,350) $ 7,452 ======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Continued) CONSOLIDATING CONDENSED STATEMENT OF INCOME THREE MONTHS ENDED APRIL 30, 1998 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- Revenues: Homebuilding.....................$ $ 450 205,457 $ 5,965 $ (4,451) $ 207,421 Financial Services............... 939 3,201 4,140 Investment Properties............ 878 (269) 609 Collateralized Mortgage Financing 150 150 Intercompany Charges............. 20,307 1,661 (21,968) Equity In Pretax Income of Consolidated Subsidiaries...... 7,610 (7,610) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ 7,610 20,757 208,935 9,316 (34,298) 212,320 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 190,090 1,386 (4,453) 187,023 Financial Services............... 609 3,008 (37) 3,580 Investment Properties............ 1,022 (269) 753 Collateralized Mortgage Financing 157 157 Corporate General and Administration................. 4,546 239 (6) 4,779 Interest......................... 15,298 7,961 29 (15,298) 7,990 Other Operations................. 352 69 7 428 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 20,196 199,990 4,587 (20,063) 204,710 ------- ---------- ---------- ------------ ---------- ---------- Income (Loss) Before Income Taxes.. 7,610 561 8,945 4,729 (14,235) 7,610 State and Federal Income Taxes..... 2,597 3,027 1,854 (4,881) 2,597 ------- ---------- ---------- ------------ ---------- ---------- Net Income (Loss)..................$ 5,013 $ 561 $ 5,918 $ 2,875 $ (9,354) $ 5,013 ======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Continued) CONSOLIDATING CONDENSED STATEMENT OF INCOME SIX MONTHS ENDED APRIL 30, 1999 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- Revenues: Homebuilding.....................$ $ 29 $ 400,919 $ 9,534 $ (8,564) $ 401,918 Financial Services............... 1,611 8,201 9,812 Investment Properties............ 1,344 (561) 783 Collateralized Mortgage Financing 275 275 Intercompany Charges............. 41,840 1,984 (43,824) Equity In Pretax Income of Consolidated Subsidiaries...... 22,647 (22,647) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ 22,647 41,869 405,858 18,010 (75,596) 412,788 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 358,523 1,168 (8,546) 351,145 Financial Services............... 1,172 8,150 (221) 9,101 Investment Properties............ 1,521 (420) 1,101 Collateralized Mortgage Financing 273 273 Corporate General and Administration................. 12,538 456 (141) 12,853 Interest......................... 28,686 14,196 192 (28,686) 14,388 Other Operations................. 916 357 7 1,280 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 42,140 376,225 9,790 (38,014) 390,141 ------- ---------- ---------- ------------ ---------- ---------- Income (Loss) Before Income Taxes.. 22,647 (271) 29,633 8,220 (37,582) 22,647 State and Federal Income Taxes..... 9,067 11,252 3,510 (14,762) 9,067 ------- ---------- ---------- ------------ ---------- ---------- Net Income (Loss)..................$13,580 $ (271) $ 18,381 $ 4,710 $ (22,820) $ 13,580 ======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Continued) CONSOLIDATING CONDENSED STATEMENT OF INCOME SIX MONTHS ENDED APRIL 30, 1998 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- Revenues: Homebuilding.....................$ $ 497 $ 411,301 $ 10,690 $ (8,525) $ 413,963 Financial Services............... 1,800 5,902 7,702 Investment Properties............ 4,788 (535) 4,253 Collateralized Mortgage Financing 362 362 Intercompany Charges............. 40,483 3,469 (43,952) Equity In Pretax Income of Consolidated Subsidiaries...... 16,628 (16,628) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ 16,628 40,980 421,358 16,954 (69,640) 426,280 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 380,589 1,997 (8,517) 374,069 Financial Services............... 1,228 5,692 (129) 6,791 Investment Properties............ 2,337 (461) 1,876 Collateralized Mortgage Financing 359 359 Corporate General and Administration................. 8,790 422 (72) 9,140 Interest......................... 30,586 16,410 56 (30,586) 16,466 Other Operations................. 777 167 7 951 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 40,153 401,153 8,111 (39,765) 409,652 ------- ---------- ---------- ------------ ---------- ---------- Income (Loss) Before Income Taxes.. 16,628 827 20,205 8,843 (29,875) 16,628 State and Federal Income Taxes..... 5,702 7,195 3,449 (10,644) 5,702 ------- ---------- ---------- ------------ ---------- ---------- Net Income (Loss)..................$10,926 $ 827 $ 13,010 $ 5,394 $ (19,231) $ 10,926 ======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (Continued) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS SIX MONTHS ENDED APRIL 30, 1999 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ ---------- ---------- Cash Flows From Operating Activities: Net Income (loss)..................$ 13,580 $ (271) $ 18,381 $ 4,710 $ (22,820) $ 13,580 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities... 865 (3,931) (59,077) 25,418 22,820 (13,905) -------- --------- ---------- ------------ ---------- ---------- Net Cash Provided By (Used In) Operating Activities........... 14,445 (4,202) (40,696) 30,128 (325) Net Cash Provided by (Used In) Investing Activities............... (436) 12,587 (85) 12,066 Net Cash Provided By(Used In) Financing Activities............... (3,809) 16,675 (5,260) (23,867) (16,261) Intercompany Investing and Financing Activities - Net................... (10,604) (2,613) 18,824 (5,607) -------- --------- ---------- ------------ ---------- ---------- Net Increase (Decrease) In Cash...... 32 9,424 (14,545) 569 (4,520) Cash and Cash Equivalent Balance, Beginning of Period................ 14 (9,660) 23,023 2,177 15,554 -------- --------- ---------- ------------ ---------- ---------- Cash and Cash Equivalent Balance, End of Period......................$ 46 $ (236) $ 8,478 $ 2,746 $ $ 11,034 ======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS SIX MONTHS ENDED APRIL 30, 1998 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ ---------- ---------- Cash Flows From Operating Activities: Net Income (loss)..................$ 10,926 $ 827 $ 13,010 $ 5,394 $ (19,231) $ 10,926 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities... (1,796) (815) (12,440) (15,631) 19,231 (11,451) -------- --------- ---------- ------------ ---------- ---------- Net Cash Provided By (Used In) Operating Activities........... 9,130 12 570 (10,237) (525) Net Cash Provided by (Used In) Investing Activities............... (755) 18,009 (150) 17,104 Net Cash (Used In) Provided By Financing Activities............... 120 6,425 (15,772) (7,009) (16,236) Intercompany Investing and Financing Activities - Net................... (9,250) 174 (6,978) 16,054 -------- --------- ---------- ------------ ---------- ---------- Net Increase (Decrease) In Cash...... 5,856 (4,171) (1,342) 343 Cash and Cash Equivalent Balance, Beginning of Period................ 10 (5,485) 13,857 2,931 11,313 -------- --------- ---------- ------------ ---------- ---------- Cash and Cash Equivalent Balance, End of Period......................$ 10 $ 371 $ 9,686 $ 1,589 $ $ 11,656 ======== ========= ========== ============ ========== ==========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY The Company's uses for cash during the six months ended April 30, 1999 were for operating expenses, increases in housing inventories, construction, income taxes, interest, and the repurchase of common stock. The Company provided for its cash requirements from the revolving credit facility, sales of commercial properties, and from housing and other revenues. The Company believes that these sources of cash are sufficient to finance its working capital requirements and other needs. In December 1998 the Board of Directors authorized a stock repurchase program to purchase up to 3 million shares of Class A Common Stock. This authorization expires on December 31, 2000. As of April 30, 1999, 2,067,400 shares were repurchased under this program of which 475,900 shares were purchased during the six months ended April 30, 1999. The Company's bank borrowings are made pursuant to a revolving credit agreement (the "Agreement") that provides a revolving credit line of up to $280,000,000 (the "Revolving Credit Facility") through July 2001. Interest is payable monthly and at various rates of either prime or Libor plus 1.45%. The Company believes that it will be able either to extend the Agreement beyond July 2001 or negotiate a replacement facility, but there can be no assurance of such extension or replacement facility. The Company currently is in compliance and intends to maintain compliance with its covenants under the Agreement. As of April 30, 1999, borrowings under the Agreement were $84,675,000. The subordinated indebtedness issued by the Company and outstanding as of April 30, 1999 was $100,000,000 9 3/4% Subordinated Notes due June 2005 and $45,449,000 11 1/4% Subordinated Notes due April 2002. On May 4, 1999, the Company issued $150,000,000 9 1/8% Senior Notes due in 2009. On June 7, 1999, the Company redeemed the remaining $45,449,000 principal amount 11 1/4% Subordinated Notes. The remaining proceeds were used to reduce the outstanding balance on the Company's "Revolving Credit Facility" to zero and for general corporate purposes. The Company's mortgage banking subsidiary borrows under a bank warehousing arrangement. Other finance subsidiaries formerly borrowed from a multi-builder owned financial corporation and a builder owned financial corporation to finance mortgage backed securities, but in fiscal 1988 decided to cease further borrowing from multi-builder and builder owned financial corporations. These non-recourse borrowings have been generally secured by mortgage loans originated by one of the Company's subsidiaries. As of April 30, 1999, the aggregate principal amount of all such borrowings was $48,451,000. The book value of the Company's residential inventories, rental condominiums, and commercial properties completed and under development amounted to the following: April 30, October 31, 1999 1998 ------------ ------------ Residential real estate inventory.......... $395,545,000 $375,733,000 Senior residential rental property......... 10,775,000 10,794,000 ------------ ------------ Total Residential Real Estate............ 406,320,000 386,527,000 Commercial properties...................... 107,000 17,832,000 ------------ ------------ Combined Total........................... $406,427,000 $404,359,000 ============ ============ Substantially all residential homes under construction or completed and included in real estate inventory at April 30, 1999 are expected to be closed during the next twelve months. Most residential real estate completed or under development is financed through the Company's line of credit, senior notes and subordinated indebtedness. The following table summarizes housing lots in the Company's active selling communities under development (including Poland): (1) (2) Homes Contracted Remaining Commun- Approved Deliv- Not Home Sites ities Lots ered Delivered Available ------- -------- ------ ---------- ---------- April 30, 1999........ 72 17,542 6,674 1,718 9,150 October 31, 1998...... 84 17,020 6,553 1,672 8,795 (1) Includes 12 and 8 lots under option at April 30, 1999 and October 31, 1998, respectively. (2) Of the total home lots available, 330 and 460 were under construction or complete (including 43 and 54 models and sales offices), 5,384 and 4,570 were under option, and 233 and 330 were financed through purchase money mortgages at April 30, 1999 and October 31, 1998, respectively. In addition, at April 30, 1999 and October 31, 1998, respectively, in substantially completed or suspended communities, the Company owned or had under option 144 and 283 home lots. The Company also controls a supply of land primarily through options for future development. This land is consistent with anticipated home building requirements in its housing markets. At April 30, 1999 the Company controlled such land to build 11,398 proposed homes, compared to 10,963 homes at October 31, 1998. The following table summarizes the Company's started or completed unsold homes in active, substantially complete and suspended communities: April 30, October 31, 1999 1998 ----------------------- ----------------------- Unsold Unsold Homes Models Total Homes Models Total ------ ------ ----- ------ ------ ----- Northeast Region.... 117 15 132 180 16 196 North Carolina...... 104 - 104 93 - 93 Florida............. 9 1 10 24 6 30 Virginia............ 10 7 17 23 11 34 California.......... 55 20 75 78 21 99 Poland.............. 6 - 6 11 - 11 ------ ------ ----- ------ ------ ----- Total 301 43 344 409 54 463 ====== ====== ===== ====== ====== ===== During fiscal 1997 the Company announced it was planning an orderly exit from the business of owning investment properties. During the first quarter of fiscal 1999 the Company sold three land parcels which reduced such properties $17,725,000. At April 30, 1999 the Company had remaining one small investment property. Collateral Mortgage Financing - Collateral for bonds payable consist of collateralized mortgages receivable which are pledged against non-recourse collateralized mortgage obligations. Financial Services - Mortgage loans held for sale consist of residential mortgages receivable of which $46,144,000 and $71,002,000 at April 30, 1999 and October 31, 1998, respectively, are being temporarily warehoused and awaiting sale in the secondary mortgage market. The balance of such mortgages is being held as an investment by the Company. The Company may incur risk with respect to mortgages that are delinquent, but only to the extent the losses are not covered by mortgage insurance or resale value of the house. Historically, the Company has incurred minimal credit losses. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 1999 COMPARED TO THE THREE AND SIX MONTHS ENDED APRIL 30, 1998 The Company's operations consist primarily of residential housing development and sales in its Northeast Region (comprising of New Jersey, southern New York State and eastern Pennsylvania), North Carolina, southeastern Florida, northern Virginia, southern California and Poland. The Company is expanding into Maryland and expects to begin selling homes in its fourth quarter of fiscal 1999. In addition, the Company provides financial services to its homebuilding customers and third parties. Important indicators of the future results of the Company are recently signed contracts and home contract backlog for future deliveries. The Company's sales contracts and homes in contract (using base sales prices) by market area is set forth below: Sales Contracts for the Six Months Ended Contract Backlog April 30, as of April 30, ----------------------- -------------------- 1999 1998 1999 1998 --------- --------- --------- --------- (Dollars in Thousands) Northeast Region: Dollars............. $205,087 $286,896 $256,033 $312,662 Homes............... 886 1,309 1,058 1,359 North Carolina: Dollars............. $ 81,784 $ 59,893 $ 71,044 $ 51,920 Homes............... 416 328 348 272 Florida: Dollars............. $ 20,580 $ 16,433 $ 19,262 $ 18,050 Homes............... 92 87 87 94 Virginia: Dollars............. $ 27,278 $ 13,449 $ 34,815 $ 11,025 Homes............... 122 50 156 39 California: Dollars............. $ 41,952 $ 28,304 $ 20,001 $ 14,626 Homes............... 217 154 105 79 Poland: Dollars............. $ 482 $ 1,609 $ 428 $ 2,600 Homes............... 5 20 3 35 Totals: Dollars............. $377,163 $406,584 $401,583 $410,883 Homes............... 1,738 1,948 1,757 1,878 Total Revenues: Revenues for the three months ended April 30, 1999 decreased $3.0 million or 1.4%, compared to the same period last year. This was the result of a $4.4 million decrease in revenues from the sale of homes, and a $0.2 decrease in investment properties revenues. The decreases were partially offset by a $1.6 million increase in land sales and other homebuilding revenues. Revenues for the six months ended April 30, 1999 decreased $13.5 million or 3.2%, compared to the same period last year. This was the result of a $13.6 million decrease in revenues from the sale of homes, a $3.5 million decrease in investment properties revenues, and a $0.1 million decrease in collateralized mortgage financing revenues. The decreases were partially offset by a $1.6 million increase in land sales and other homebuilding revenues and a $2.1 million increase in financial services revenues. Homebuilding: Revenues from the sale of homes decreased $4.4 million or 2.2% during the three months ended April 30, 1999, and decreased $13.6 million or 3.3% during the six months ended April 30, 1999, compared to the same period last year. Revenues from sales of homes are recorded at the time each home is delivered and title and possession have been transferred to the buyer. Information on homes delivered by market area is set forth below: Three Months Ended Six Months Ended April 30, April 30, ------------------- ------------------ 1999 1998 1999 1998 --------- -------- -------- -------- (Dollars in Thousands) Northeast Region: Housing Revenues..... $126,500 $136,133 $253,184 $275,144 Homes Delivered...... 482 597 960 1,237 North Carolina: Housing Revenues..... $ 30,553 $ 28,264 $ 59,633 $ 53,940 Homes Delivered...... 149 153 303 288 Florida: Housing Revenues..... $ 9,531 $ 15,254 $ 17,864 $ 24,766 Homes Delivered...... 40 90 78 143 Virginia: Housing Revenues..... $ 6,005 $ 4,843 $ 18,552 $ 10,961 Homes Delivered...... 27 18 81 38 California: Housing Revenues..... $ 26,548 $ 17,613 $ 43,859 $ 40,734 Homes Delivered...... 128 95 231 212 Poland: Housing Revenues..... $ - $ 1,460 $ 931 $ 2,079 Homes Delivered...... - 17 9 24 Totals: Housing Revenues..... $199,138 $203,567 $394,023 $407,624 Homes Delivered...... 826 970 1,662 1,942 The 14.8% and 14.4% decrease in the number of homes delivered for the three and six months ended April 30, 1999, respectively, compared to the same periods last year, were primarily due to the decreases in the Company's Northeast Region. The decrease in deliveries in the Northeast Region was primarily due to a reduced number of communities during the three and six months ended April 30, 1999, compared to the same period last year. The decrease in housing revenues was only 2.2% and 3.3% during the three and six months ended April 30, 1999, respectively, compared to the same periods last year. The decrease in housing revenues was not as great as the decrease in the number of homes delivered due to higher average home prices. Average home prices increased to $237,078 compared to $209,899 during the six months ended April 30, 1999 and 1998, respectively. Cost of sales include expenses for housing and land and lot sales. A breakout of such expenses for housing sales and housing gross margin is set forth below: Three Months Ended Six Months Ended April 30, April 30, ------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- (Dollars in Thousands) Sale of Homes................ $199,138 $203,567 $394,023 $407,624 Cost of Sales................ 155,085 169,220 309,334 337,748 -------- -------- -------- -------- Housing Gross Margin......... $ 44,053 $ 34,374 $ 84,689 $ 69,876 ======== ======== ======== ======== Gross Margin Percentage...... 22.1% 16.9% 21.5% 17.1% Cost of Sales expenses as a percentage of home sales revenues are presented below: Three Months Ended Six Months Ended April 30, April 30, ------------------- -------- -------- 1999 1998 1999 1998 -------- -------- -------- -------- Sale of Homes................ 100.0% 100.0% 100.0% 100.0% -------- -------- -------- -------- Cost of Sales: Housing, land & development costs.... 69.9% 75.5% 70.4% 75.0% Commissions............ 1.9% 1.9% 1.9% 1.9% Financing concessions.. 0.7% 0.7% 0.8% 0.7% Overheads.............. 5.4% 5.0% 5.4% 5.3% -------- -------- -------- -------- Total Cost of Sales.......... 77.9% 83.1% 78.5% 82.9% -------- -------- -------- -------- Gross Margin................. 22.1% 16.9% 21.5% 17.1% ======== ======== ======== ======== The Company sells a variety of home types in various local communities, each yielding a different gross margin. As a result, depending on the mix of both communities and of home types delivered, consolidated quarterly gross margin will fluctuate up or down and may not be representative of the consolidated gross margin for the year. In addition, gross margin percentages are higher in the Northeast Region compared to the Company's other markets. For the three and six months ended April 30, 1999 the Company's gross margin increased 5.2% and 4.4%, respectively, compared to the same periods last year. This can be attributed to higher gross margins being achieved in each of the Company's markets. Higher gross margins are primarily attributed to positive effects from process redesign and quality programs that reduced housing and land development costs, selective price increases or reduced selling incentives in the Company's stronger markets, and an increased percentage of deliveries from the better performing communities. Selling, general, and administrative expenses as a percentage of total homebuilding revenues, increased to 9.0% for the three and six months ended April 30, 1999 from 7.6% for the prior year three and six months. Such expenses increased during the three and six months ended April 30, 1999 $2.7 million and $4.6 million, respectively, compared to the same periods last year. The overall percentage and dollar increases in selling, general and administrative is principally due to decreased deliveries and increases in administrative costs primarily in the Company's Northeast Region, North Carolina, and California. Land Sales and Other Revenues: Land sales and other revenues consist primarily of land and lot sales. A breakout of land and lot sales is set forth below: Three Months Ended Six Months Ended April 30, April 30, ------------------ ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Land and Lot Sales................ $ 4,207 $ 1,766 $ 5,534 $ 3,363 Cost of Sales..................... 3,952 1,586 5,290 2,858 -------- -------- -------- -------- Land and Lot Sales Gross Margin... 255 180 244 505 Interest Expense.................. 609 159 742 317 -------- -------- -------- -------- Land and Lot Sales Profit (Loss) Before Tax...................... $ (354) $ 21 $ (498) $ 188 ======== ======== ======== ======== Land and lot sales are incidental to the Company's residential housing operations and are expected to continue in the future but may significantly fluctuate up or down. Financial Services Financial services consist primarily of originating mortgages from sales of the Company's homes, and selling such mortgages in the secondary market and title insurance activities. For the three and six months ended April 30, 1999 financial services provided a $0.3 million and $0.7 million pretax profit, respectively, compared to a profit of $0.6 million and $0.9 million for the same periods in 1998. The Company's mortgage banking goals are to improve profitability by increasing the capture rate of its homebuyers and expanding its business to include originations from unrelated third parties. The Company has initiated efforts to originate mortgages from unrelated third parties and expects these third party loans to increase as a percentage of the Company's total loan volume over the next few years. Investment Properties Investment Properties consisted of rental properties, property management, and gains or losses from the sale of such property. At the end of the second quarter of 1997 the Company announced that it was planning an orderly exit from the investment properties business. During the three months ended January 31, 1999 the Company sold three land parcels for a total sales price of $20.8 million and recorded a loss before income taxes of $0.5 million. At April 30, 1999 all commercial facilities and land (except for one small parcel) have been liquidated. The Company is retaining two senior citizen residential rental communities. Collateralized Mortgage Financing In the years prior to February 29, 1988 the Company pledged mortgage loans originated by its mortgage banking subsidiaries against collateralized mortgage obligations ("CMO's"). Subsequently the Company discontinued its CMO program. As a result, CMO operations are diminishing as pledged loans are decreasing through principal amortization and loan payoffs, and related bonds are reduced. In recent years, as a result of bonds becoming callable, the Company has also sold a portion of its CMO pledged mortgages. Corporate General and Administrative Corporate general and administration expenses include the operations at the Company's headquarters in Red Bank, New Jersey. Such expenses include the Company's executive offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, and administration of insurance, quality, and safety. As a percentage of total revenues such expenses increased to 3.1% for the three months ended April 30, 1999 from 2.3% for the prior year three months. For the six months ended April 30, 1999 such expenses increased to 3.1% from 2.1% for the prior year six months. Corporate general and administration expenses increased $1.6 million and $3.7 million during the three and six months ended April 30, 1999 compared to the same periods last year. These increases are primarily attributed to increased process redesign costs associated with the design and development of streamlined business processes associated with the implementation of SAP, our new enterprise wide fully integrated software package and increased depreciation expense related to capitalized process redesign costs in prior years. Interest Interest expense includes housing, land and lot, and rental properties interest. Interest expense is broken down as follows: Three Months Ended Six Months Ended April 30, April 30, ------------------ ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Sale of Homes.............. $ 6,448 $ 7,346 $ 13,001 $ 14,985 Land and Lot Sales......... 609 159 742 317 Rental Properties.......... 289 485 645 1,164 -------- -------- -------- -------- Total...................... $ 7,346 $ 7,990 $ 14,388 $ 16,466 ======== ======== ======== ======== Housing interest as a percentage of sale of homes revenues amounted to 3.2% and 3.3% for the three and six months ended April 30, 1999, respectively, compared to 3.6% and 3.7% for the three and six months ended April 30, 1998, respectively. The decrease in the percentage for the three and six months ended April 30, 1999 was primarily the result of the Company's lower debt levels. Lower debt levels are attributed to debt reductions resulting from cash generated by the liquidation of investment properties and income from fiscal 1998. Other Operations Other operations consist primarily of miscellaneous residential housing operations expenses, amortization of prepaid subordinated note issuance expenses and corporate owned life insurance loan interest. Total Taxes Total taxes as a percentage of income before taxes amounted to approximately 40.0% and 34.2% for the six months ended April 30, 1999 and 1998, respectively. The increase in this percentage from 1998 to 1999 is primarily attributed to higher state taxes and the elimination of certain federal tax benefits associated with the Company's corporate owned life insurance. Deferred federal and state income tax assets primarily represent the deferred tax benefits arising from temporary differences between book and tax income which will be recognized in future years. Year 2000 Issues The Company has assessed and formulated a plan to resolve its information technology ("IT") and non-IT system year 2000 issues. The Company has designated a full-time year 2000 project leader, engaged consultants to review and evaluate its plan, completed the identification of Company IT and non-IT noncompliant systems and evaluated subcontractors' and suppliers' state of readiness. The Company's plan has prioritized its efforts on its software systems and computer hardware equipment. The Company has upgraded, fixed or retired 95% of its noncompliant systems. The Company expects to have substantially all critical IT software year 2000 capable and tested by June 30, 1999. All other Company IT and non-IT systems are not considered critical to Company operations, and if non-capable for year 2000, would only be an inconvenience. The Company does not anticipate the costs of implementation of its plan to have a material impact on future earnings and is expected to be funded through operations. The Company is concerned about the readiness of its subcontractors and suppliers. The Company has communicated with 100% of these third parties. The Company has been informed that 70% of the subcontractors and suppliers are year 2000 compliant, 30% are expected to be compliant by September 30, 1999. If any of the third parties are not year 2000 compliant by September 30, 1999 and such third parties would have a substantial impact on the Company's operations, the Company will look to replace such subcontractors and suppliers. In most cases, the Company uses more than one subcontractor and supplier so it believes finding replacements will not be difficult. The Company believes it is on track to solve its year 2000 issues. It does not believe it will have material lost revenues due to the year 2000 issues. Based on the above, it sees no need to develop a worst-case year 2000 scenario. However, the Company is in the process of developing year 2000 contingency plans which are approximately 80% complete. Inflation Inflation has a long-term effect on the Company because increasing costs of land, materials and labor result in increasing sale prices of its homes. In general, these price increases have been commensurate with the general rate of inflation in the Company's housing market and have not had a significant adverse effect on the sale of the Company's homes. A significant risk faced by the housing industry generally is that rising house costs, including land and interest costs, will substantially outpace increases in the income of potential purchasers. In recent years, in the price ranges in which it sells homes, the Company has not found this risk to be a significant problem. Inflation has a lesser short-term effect on the Company because the Company generally negotiates fixed price contracts with its subcontractors and material suppliers for the construction of its homes. These prices usually are applicable for a specified number of residential buildings or for a time period of between four to twelve months. Construction costs for residential buildings represent approximately 56% of the Company's total costs and expenses. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK On May 4, 1999, the Company issued $150,000,000 9 1/8 % Senior Notes due in 2009. Such transaction was conducted under market conditions and falls within the parameters of the Company's strategy for managing its market risk. The proceeds were used to reduce the outstanding balance on the Company's "Revolving Credit Facility" to zero, for general corporate purposes, and on June 7, 1999 to redeem the remaining $45,449,000 11 1/4% Subordinated Notes due 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOVNANIAN ENTERPRISES, INC. (Registrant) DATE: June 11, 1999 /S/J. LARRY SORSBY J. Larry Sorsby, Senior Vice President, Treasurer and Chief Financial Officer DATE: June 11, 1999 /S/PAUL W. BUCHANAN Paul W. Buchanan, Senior Vice President Corporate Controller EX-27 2 FINANCIAL DATA SCHEDULES
5 1000 6-MOS OCT-31-1999 APR-30-1999 11,034 0 40,635 0 395,545 534,068 37,808 17,128 572,281 207,379 153,739 237 0 0 210,926 572,281 399,557 412,566 314,624 375,531 0 0 14,388 22,647 9,067 13,580 0 0 0 13,580 0.63 0.63
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