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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
( X )ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the twelve months ended OCTOBER 31, 1999
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number: 1-8551
Hovnanian Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-1851059
(State or other jurisdiction of (I.R.S. Employer incorporation
or organization) Identification No.)
10 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)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- -------------------- ------------------------
Class A Common Stock, $.01 par value American Stock Exchange
per share
Securities registered pursuant to Section 12(g) of the Act - None
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 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. ( X )Yes ( ) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of the close of business on December 31, 1999, there were outstanding
14,485,551 shares of the Registrant's Class A Common Stock and 7,646,626 shares
of its Class B Common Stock. The approximate aggregate market value (based upon
the closing price on the American Stock Exchange) of these shares held by non-
affiliates of the Registrant as of December 31, 1999 was $55,533,000. (The value
of a share of Class A Common Stock is used as the value for a share of Class B
Common Stock as there is no established market for Class B Common Stock and it
is convertible into Class A Common Stock on a share-for-share basis.)
Documents Incorporated by Reference:
Part III - Those portions of registrant's definitive proxy statement to be filed
pursuant to Regulation l4A in connection with registrant's annual meeting of
shareholders to be held on March 16, 2000 which are responsive to Items l0, ll,
l2 and l3.
HOVNANIAN ENTERPRISES, INC.
FORM 10-K
TABLE OF CONTENTS
Item Page
PART I
1 and 2 Business and Properties...................... 4
3 Legal Proceedings............................15
4 Submission of Matters to a Vote of
Security Holders...........................15
Executive Officers of the Registrant.........15
PART II
5 Market for the Registrant's Common Equity
and Related Stockholder Matters............15
6 Selected Consolidated Financial Data.........16
7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................18
8 Financial Statements and Supplementary
Data.......................................34
9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure.................................34
PART III
10 Directors and Executive Officers of the
Registrant.................................35
Executive Officers of the Registrant.........35
11 Executive Compensation.......................36
12 Security Ownership of Certain Beneficial
Owners and Management......................36
13 Certain Relationships and Related
Transactions...............................36
PART IV
14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................37
SIGNATURES...................................39
PART I
ITEMS 1 AND 2 - BUSINESS AND PROPERTIES
BUSINESS OVERVIEW
We design, construct and market high quality single-family detached homes and
attached condominium apartments and townhouses in planned residential
developments in the Northeast (primarily in New Jersey, southern New York state,
and eastern Pennsylvania), North Carolina, southeastern Florida, Metro D.C.
(northern Virginia and Maryland), southern California, Texas, and Poland. We
market our homes to first-time buyers, first-time and second-time move-up
buyers, luxury buyers, active adult buyers and empty nesters. We offer a
variety of homestyles at prices ranging from $33,000 to $921,000 with an average
sales price in fiscal 1999 of $241,000. We are currently offering homes for
sale in 110 communities. Since the incorporation of our predecessor company in
1959, we have delivered in excess of 63,000 homes, including 3,768 homes in
fiscal 1999. In addition, we provide financial services (mortgage loans and
title insurance) to our homebuilding customers and third parties.
We employed approximately 1,356 full-time associates as of October 31,
1999. We were incorporated in New Jersey in 1967 and we reincorporated in
Delaware in 1982.
BUSINESS STRATEGIES, OPERATING POLICIES AND PROCEDURES
Over the past few years, our strategies have included several initiatives
to fundamentally transform the traditional practices we use to design, build and
sell homes and focus on "building better." We believe that the adoption and
implementation of processes and systems successfully used in other manufacturing
industries, such as rapid cycle times, vendor consolidation, vendor partnering
and just-in-time material procurement, will dramatically improve our business
and give us a clear advantage over our competitors. Our concentration in
selected markets is a key factor that enables us to achieve powers and economies
of scale and differentiate ourselves from most of our competitors. These
performance enhancing strategies are designed to achieve operational excellence
through the implementation of standardized and streamlined "best practice
processes."
Strategic Initiatives - To improve our homebuilding gross profit margins,
we have introduced a number of strategic initiatives, including: Partners In
Excellence, Process Redesign and Training.
Partners In Excellence, our total quality management initiative, is
intended to focus on improving the way operations are performed. It involves
all of our associates through a systematic, team-oriented approach to
improvement. It increases our profits by streamlining processes and by reducing
costly errors. We were recognized for our efforts by receiving the 1997 Gold
National Housing Quality Award from Professional Builder magazine and the NAHB
Research Center.
Process Redesign is the fundamental rethinking and radical redesign of our
processes to achieve dramatic improvements in performance. Our Process Redesign
efforts are currently focused on streamlining and standardizing all of our key
business processes. In addition, we are working to streamline our processes and
implement SAP's enterprise-wide "Enterprise Resource Package" computer software
system throughout our organization.
Training is designed to provide our associates with the knowledge,
attitudes, skill and habits necessary to succeed at their jobs. Our Training
Department regularly conducts training classes in sales, construction,
administration, and managerial skills. In addition, as Process Redesign
develops new processes, the Training Department is responsible for educating our
associates on the processes, procedures and operations.
Land Acquisition, Planning and Development - Before entering into a
contract to acquire land, we complete extensive comparative studies and analyses
which assist us in evaluating the economic feasibility of such land acquisition.
We generally follow a policy of acquiring options to purchase land for future
community developments. We attempt to acquire land with a minimum cash
investment and negotiate takedown options thereby limiting the financial
exposure to the amounts invested in property and predevelopment costs. This
policy significantly reduces the risk and generally allows us to obtain
necessary development approvals before acquisition of the land, thereby
enhancing the value of the options and the land eventually acquired.
Our option and purchase agreements are typically subject to numerous
conditions, including, but not limited to, our ability to obtain necessary
governmental approvals for the proposed community. Generally, the deposit on
the agreement will be returned to us if all approvals are not obtained, although
predevelopment costs may not be recoverable. By paying an additional,
nonrefundable deposit, we have the right to extend a significant number of our
options for varying periods of time. In all instances, we have the right to
cancel any of our land option agreements by forfeiture of our deposit on the
agreement. In such instances, we generally are not able to recover any
predevelopment costs.
Our development activities include site planning and engineering, obtaining
environmental and other regulatory approvals and constructing roads, sewer,
water and drainage facilities, and for our residential developments,
recreational facilities and other amenities. These activities are performed by
our staff, together with independent architects, consultants and contractors.
Our staff also carries out long-term planning of communities.
Design - Our residential communities are generally located in suburban
areas near major highways. The communities are designed as neighborhoods that
fit existing land characteristics. We strive to create diversity within the
overall planned community by offering a mix of homes with differing
architecture, textures and colors. Wherever possible, recreational amenities
such as a swimming pool, tennis courts, a club house and tot lots are included.
Construction - We design and supervise the development and building of our
communities. Our homes are constructed according to standardized prototypes
which are designed and engineered to provide innovative product design while
attempting to minimize costs of construction. We employ subcontractors for the
installation of site improvements and construction of homes. Agreements with
subcontractors are generally short term and provide for a fixed price for labor
and materials. We rigorously control costs through the use of a computerized
monitoring system. Because of the risks involved in speculative building, our
general policy is to construct an attached condominium or townhouse building
only after signing contracts for the sale of at least 50% of the homes in that
building. Single family detached homes in market areas other than California
and Texas are usually constructed after the signing of a contract and mortgage
approval has been obtained.
Materials and Subcontractors - We attempt to maintain efficient operations
by utilizing standardized materials available from a variety of sources. In
addition, we contract with subcontractors representing all building trades in
connection with the construction of our homes. In recent years, we have
experienced no significant construction delays due to shortages of materials or
labor. We cannot predict, however, the extent to which shortages in necessary
materials or labor may occur in the future.
Marketing and Sales - Our residential communities are sold principally
through on-site sales offices. In order to respond to our customers' needs and
trends in housing design, we rely upon our internal market research group to
analyze information gathered from, among other sources, buyer profiles, exit
interviews at model sites, focus groups and demographic data bases. We make use
of newspaper, radio, magazine, our website, billboard, video and direct mail
advertising, special promotional events, illustrated brochures, full-sized and
scale model homes in our comprehensive marketing program. In addition, we have
recently opened home design galleries in our Northeast region and in California,
which we expect will increase option sales and profitability in these markets.
We plan to open similar galleries in each of our markets.
Customer Service and Quality Control - Our associates responsible for
customer service participate in pre-closing quality control inspections as well
as responding to post-closing customer needs. Prior to closing, each home is
inspected and any necessary completion work is undertaken by us. In some of our
markets, we are enrolled in a standard limited warranty program which, in
general, provides a homebuyer with a one-year warranty for the home's materials
and workmanship, a two-year warranty for the home's heating, cooling,
ventilating, electrical and plumbing systems and a ten-year warranty for major
structural defects. All of the warranties contain standard exceptions,
including, but not limited to, damage caused by the customer.
Customer Financing - We sell our homes to customers who generally finance
their purchases through mortgages. During the year ended October 31, 1999, over
57% of our non-cash customers obtained mortgages originated by our wholly-owned
mortgage banking subsidiary, with a substantial portion of our remaining
customers obtaining mortgages from various independent lending institutions.
Mortgages originated by our wholly-owned mortgage banking subsidiary are sold in
the secondary market.
RESIDENTIAL DEVELOPMENT ACTIVITIES
Our residential development activities include evaluating and purchasing
properties, master planning, obtaining governmental approvals and constructing,
marketing and selling homes. A residential development generally includes a
number of residential buildings containing from two to twenty-four individual
homes per building and/or single family detached homes, together with amenities
such as recreational buildings, swimming pools, tennis courts and open areas.
We attempt to reduce the effect of certain risks inherent in the housing
industry through the following policies and procedures:
- Through our presence in multiple geographic markets, our goal is to reduce
the effects that housing industry cycles, seasonality and local conditions in
any one area may have on our business. In addition, we plan to achieve a
significant market presence in each of our markets in order to obtain powers and
economies of scale.
- We acquire land for future development principally through the use of land
options which need not be exercised before the completion of the regulatory
approval process. We structure these options in most cases with flexible
takedown schedules rather than with an obligation to takedown the entire parcel
upon approval. Additionally, we purchase improved lots in certain markets by
acquiring a small number of improved lots with an option on additional lots.
This allows us to minimize the economic costs and risks of carrying a large land
inventory, while maintaining our ability to commence new developments during
favorable market periods.
- In an attempt to reduce our land acquisition costs, we monitor housing
industry cycles and seek to acquire land options near the cyclical trough of
specific geographic housing cycles.
- We generally begin construction on an attached condominium or townhouse
building only after entering into contracts for the sale of at least 50% of the
homes in that building. Single family detached homes in market areas other than
California and Texas are generally started after a contract is signed and
mortgage approvals obtained. This limits the build-up of inventory of unsold
homes and the costs of maintaining and carrying that inventory.
- We offer a broad product array to provide housing to a wide range of
customers. Our customers consist of first-time buyers, first- and second-time
move-up buyers, luxury buyers, active adult buyers and empty nesters.
- We offer a wide range of customer options to satisfy individual customer
tastes. We have constructed decoration centers in our larger communities where
the customer can better see customization possibilities for their new home. We
recently opened larger regional home design galleries in New Jersey and
California. It is our expectation to open regional design galleries in each of
our major markets.
Current base prices for our homes in contract backlog at October 31, 1999
(exclusive of upgrades and options) range from $114,000 to $921,000 in its
Northeast Region, from $105,000 to $467,000 in North Carolina, from $176,000 to
$318,000 in Florida, from $145,000 to $370,000 in Metro D.C., from $129,000 to
$385,000 in California, from $99,000 to $570,000 in Texas and from $33,000 to
$166,000 in Poland. Closings generally occur and are typically reflected in
revenues from two to nine months after sales contracts are signed.
Information on homes delivered by market area is set forth below:
Year Ended
---------------------------------
October October October
31, 1999 31, 1998 31, 1997
--------- -------- --------
(Housing Revenue in Thousands)
Northeast Region(1):
Housing Revenues........ $560,586 $595,873 $445,817
Homes Delivered......... 2,063 2,530 2,128
Average Price........... $271,733 $235,522 $209,500
North Carolina:
Housing Revenues........ $145,153 $127,592 $125,242
Homes Delivered......... $ 756 687 695
Average Price........... $192,001 $185,723 $180,204
Florida:
Housing Revenues........ $ 36,566 $ 44,168 $ 74,146
Homes Delivered......... 159 241 418
Average Price........... $229,974 $183,269 $177,382
Metro D.C.:
Housing Revenues........ $ 45,493 $ 38,904 $ 14,398
Homes Delivered......... 198 152 70
Average Price........... $229,762 $255,947 $205,685
California:
Housing Revenues........ $105,941 $ 82,546 $ 69,252
Homes Delivered......... 514 457 365
Average Price........... $206,110 $180,625 $189,731
Texas:
Housing Revenues........ $ 13,184 -- --
Homes Delivered......... 66 -- --
Average Price........... $199,757 -- --
Poland:
Housing Revenues........ $ 1,630 $ 6,561 $ 2,952
Homes Delivered......... 12 71 41
Average Price........... $135,833 $ 92,408 $ 72,000
Combined Total:
Housing Revenues........ $908,553 $895,644 $731,807
Homes Delivered......... 3,768 4,138 3,717
Average Price........... $241,123 $216,443 $196,881
(1) Fiscal 1999 includes $31,961,000 housing revenues and 88 homes from a
New Jersey homebuilder acquired on August 7, 1999.
The value of our net sales contracts decreased 1.2% to $796,453,000 for the
year ended October 31, 1999 from $806,247,000 for the year ended October 31,
1998. This decrease was the net result of an 8.8% decrease in the number of
homes contracted to 3,535 in 1999 from 3,877 in 1998, which was partially offset
by an 8.3% increase in the average home base sales prices. By market, on a
dollar basis, the Northeast Region decreased 14.0% due to fewer communities
open for sale. This decrease was partially offset by a 7.9% increase in North
Carolina, a 32.8% increase in Metro D.C. and a 54.5% increase in California.
The increase in Metro D.C. was the result of a full year of sales from a small
developer acquired on May l, 1998. The increase in California was due to an
increase in the number of active selling communities. Changes in other markets
were not significant.
The following table summarizes our active communities under development
as of October 31, 1999:
(1) (2)
Contracted Remaining
Commun- Approved Homes Not Home Sites
ities Lots Delivered Delivered Available
------- -------- --------- --------- ----------
Northeast Region...... 27 9,224 3,279 1,075 4,870
North Carolina........ 30 3,718 1,317 202 2,199
Florida............... 2 900 781 37 82
Metro D.C............. 9 998 453 141 404
California............ 8 2,175 339 127 1,709
Texas................. 33 2,833 730 252 1,851
Poland................ 1 115 - 10 105
------- -------- --------- --------- ----------
Total 110 19,963 6,899 1,844 11,220
======= ======== ========= ========= ==========
(1) Includes 96 lots under option.
(2) Of the total home sites available, 599 were under construction or
completed (including 76 models and sales offices), 7,057 were under
option, and 216 were financed through purchase money mortgages.
In addition, as of October 31, 1999, in substantially completed or
suspended developments, we had 105 homes under construction or completed
including 73 homes which are under contract. We also had 66 lots without
construction (4 under contract) in these substantially completed or suspended
developments.
The following table summarizes our total started or completed unsold homes
as of October 31, 1999:
Unsold
Homes Models Total
------ ------ -----
Northeast Region.................. 114 31 145
North Carolina.................... 129 -- 129
Florida........................... 5 -- 5
Metro D.C......................... 13 9 22
California........................ 53 10 63
Texas............................. 225 28 253
Poland............................ 14 -- 14
------ ------ -----
Total 553 78 631
====== ====== =====
BACKLOG
At October 31, 1999 and October 31, 1998, we had a backlog of signed
contracts for 1,921 homes and 1,681 homes, respectively, with sales values
aggregating $460,660,000 and $381,816,000, respectively. Substantially all of
our backlog at October 31, 1999 is expected to be completed and closed within
the next nine months. At December 31, 1999 and 1998, our backlog of signed
contracts was 1,779 homes and 1,584 homes, respectively, with sales values
aggregating $429,668,000 and $359,213,000, respectively.
Sales of our homes typically are made pursuant to a standard sales
contract. This contract requires a nominal customer deposit at the time of
signing with the remainder of a 5% to 10% down payment due 30 to 60 days after
signing and provides the customer with a statutorily mandated right of
rescission for a period ranging up to 15 days after execution. The contract
may include a financing contingency, which permits the customer to cancel his
obligation in the event mortgage financing at prevailing interest rates
(including financing arranged or provided by us) is unobtainable within the
period specified in the contract. This contingency period typically is four
to eight weeks following the date of execution.
RESIDENTIAL LAND INVENTORY
It is our objective to control a supply of land, primarily through options,
consistent with anticipated homebuilding requirements in its housing markets.
Controlled land as of October 31, 1999, exclusive of communities under
development described under "Business and Properties -- Residential Development
Activities," is summarized in the following table:
Number
of Proposed Total Land
Proposed Developable Option Book
Communities Lots Price Value(1)(2)
----------- ----------- ----------- -----------
(In Thousands)
Northeast Region:
Under Option........ 40 7,104 $174,615 $ 22,632
Owned............... 3 265 9,411
-------- ----------- -----------
Total............ 43 7,369 32,043
-------- ----------- -----------
North Carolina:
Under Option........ 3 605 $ 9,884 4
Owned............... 2 208 3,303
-------- ----------- -----------
Total............ 5 813 3,307
-------- ----------- -----------
Florida:
Owned............... 3 1,033 1,264
-------- ----------- -----------
Metro D.C.:
Under Option........ 9 1,634 $ 45,994 1,305
Owned............... 2 1,041 2,740
------- ----------- -----------
Total............ 11 2,675 4,045
------- ----------- -----------
California:
Under Option........ 5 634 $123,026 8,195
------- ----------- -----------
Texas:
Under Option........ 11 469 $ 19,209 --
------- ----------- -----------
Poland:
Owned............... 1 580 3,071
------- ----------- -----------
Totals:
Under Option........ 68 10,446 32,136
Owned............... 11 3,127 19,789
-------- ----------- -----------
Combined Total........ 79 13,573 $ 51,925
======== =========== ===========
(1) Properties under option also includes costs incurred on properties not
under option but which are under investigation. For properties under option, we
paid, as of October 31, 1999, option fees and deposits aggregating approximately
$16,164,000. As of October 31, 1999, we spent an additional $15,972,000 in non-
refundable predevelopment costs on such properties.
(2) The book value of $51,925,000 is identified on the balance sheet as
"Inventories - land, land options, and cost of projects in planning."
In its Northeast Region, our objective is to control a supply of land
sufficient to meet anticipated building requirements for at least three to five
years.
In North Carolina and Metro D.C., a portion of the land we acquired was
from land developers on a lot takedown basis. In Texas we primarily acquire
improved lots from land developers. Under a typical agreement with the lot
developer, we purchase a minimal number of lots. The balance of the lots to
be purchased are covered under an option agreement or a non-recourse purchase
agreement. Due to the dwindling supply of improved lots in North Carolina and
Virginia, we are currently optioning parcels of unimproved land for development.
In California, we focused our development efforts in the southern portion
of the state. Where possible, we plan to option developed or partially
developed lots with no more than fifty to seventy-five lots to be taken down
during any twelve month period. With a dwindling supply of developed lots in
California, we are currently optioning parcels of unimproved land for
development.
CUSTOMER FINANCING
At our communities, on-site personnel facilitate sales by offering to
arrange financing for prospective customers through K. Hovnanian Mortgage, Inc.
("KHM"). Management believes that the ability to offer financing to customers
on competitive terms as a part of the sales process is an important factor in
completing sales.
KHM's business consists of providing our customers as well as unrelated
third parties with competitive financing and coordinating and expediting the
loan origination transaction through the steps of loan application, loan
approval and closing. KHM has its headquarters in Red Bank, New Jersey. It
originates loans in New Jersey, New York, Pennsylvania, North Carolina, Florida,
California, South Carolina and Illinois.
KHM, like other mortgage bankers, customarily sells nearly all of the loans
that it originates. Additionally, KHM sells virtually all of the loan servicing
rights to loans it originates. Loans are sold either individually or in pools
to GNMA, FNMA, or FHLMC or against forward commitments to institutional
investors, including banks and savings and loan associations.
KHM plans to grow its mortgage banking operations. Initially, KHM focused
on originating loans from customers who purchase homes from our affiliates.
KHM's objective is to increase the capture rate of non-cash homebuyers from the
57% rate achieved in fiscal 1999 to 70% over the next several years. KHM has
now expanded to offer its mortgage products and services to unrelated third
parties. During the year ended October 31, 1999, third party loans amounted to
48% of total mortgage closings.
RENTAL PROPERTY DEVELOPMENT ACTIVITIES AND LAND INVENTORY
We had previously diversified our business, on a limited scale, through the
development, acquisition and ownership of commercial properties, primarily in
central New Jersey, and, to a lesser extent, in Florida, but exited this
business (see "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations").
COMPETITION
Our residential business is highly competitive. We compete with numerous
real estate developers in each of the geographic areas in which we operate. Our
competition range from small local builders to larger regional and national
builders and developers, some of which have greater sales and financial
resources than us. Resale of housing and the availability of rental housing
provide additional competition. We compete primarily on the basis of
reputation, price, location, design, quality, service and amenities.
REGULATION AND ENVIRONMENTAL MATTERS
General. We are subject to various local, state and federal statutes,
ordinances, rules and regulations concerning zoning, building design,
construction and similar matters, including local regulations which impose
restrictive zoning and density requirements in order to limit the number of
homes that can eventually be built within the boundaries of a particular
locality. In addition, we are subject to registration and filing requirements
in connection with the construction, advertisement and sale of our communities
in certain states and localities in which we operate even if all necessary
government approvals have been obtained. We may also be subject to periodic
delays or may be precluded entirely from developing communities due to building
moratoriums that could be implemented in the future in the states in which we
operate. Generally, such moratoriums relate to insufficient water or sewerage
facilities or inadequate road capacity.
Environmental. We are also subject to a variety of local, state and
federal statutes, ordinances, rules and regulations concerning protection of
health and the environment ("environmental laws"). The particular environmental
laws which apply to any given community vary greatly according to the community
site, the site's environmental conditions and the present and former uses of the
site. These environmental laws may result in delays, may cause us to incur
substantial compliance and other costs, and prohibit or severely restrict
development in certain environmentally sensitive regions or areas.
The Florida Growth Management Act of 1985 became fully effective in Palm
Beach County on February 1, 1990. The act requires that infrastructure,
including roads, sewer and water lines must be in existence concurrently with
the construction of the development. If such infrastructure is not concurrently
available, then the community cannot be developed. This will have an effect on
limiting the amount of land available for development and may delay approvals of
some developments.
Fair Housing Act. In July 1985, New Jersey adopted the Fair Housing Act
which established an administrative agency to adopt criteria by which
municipalities will determine and provide for their fair share of low and
moderate income housing. This agency adopted such criteria in May 1986. Its
implementation thus far has caused some delay in approvals for some of our New
Jersey communities and may result in a reduction in the number of homes planned
for some properties.
Both prior to the enactment of the Fair Housing Act and in its
implementation thus far, municipal approvals in some of the New Jersey
municipalities in which we own land or land options required us to set aside up
to 22% of the approved homes for sale at prices affordable to persons of low and
moderate income. In order to comply with such requirements, we must sell these
homes at a loss. We attempt to reduce some of these losses through increased
density, certain cost saving construction measures and reduced land prices from
the sellers of property. Such losses are absorbed by the market priced homes in
the same developments.
State Planning Act. Pursuant to the 1985 State Planning Act, the New
Jersey State Planning Commission has adopted a State Development and
Redevelopment Plan ("State Plan"). The State Plan, if fully implemented, would
designate large portions of the state as unavailable for development or as
available for development only at low densities, and other portions of the state
for more intense development. State government agencies would be required to
make permitting decisions in accordance with the State Plan, if it is fully
implemented. The state government agencies have not yet adopted policies and
regulations to fully implement the State Plan. The Governor has issued an
Executive Order to all state agencies requiring compliance with the State Plan.
It is unclear what effect this Executive Order may have on our ability to
develop our land.
The California Environmental Quality Act (CEQA) requires that every
community comply with the CEQA. Compliance with CEQA may result in delay in
obtaining the necessary approvals for commencement of the community, a reduction
in the density permitted in the community, additional costs in developing the
community, or denial of the permits necessary to construct the community.
Conclusion. Despite our past ability to obtain necessary permits and
approvals for our communities, it can be anticipated that increasingly stringent
requirements will be imposed on developers and homebuilders in the future.
Although we cannot predict the effect of these requirements, they could result
in time-consuming and expensive compliance programs and substantial expenditures
for pollution and water quality control, which could have a material adverse
effect on us. In addition, the continued effectiveness of permits already
granted or approvals already obtained is dependent upon many factors, some of
which are beyond our control, such as changes in policies, rules and regulations
and their interpretation and application.
Company Offices. We own our corporate headquarters, a four-story, 24,000
square feet office building located in Red Bank, New Jersey, a 17,450 square
feet office building located in Winston-Salem, North Carolina, and 19,992 square
feet in a Middletown, New Jersey condominium office building. We lease office
space consisting of 101,691 square feet in various New Jersey locations, 7,460
square feet in Woodbridge, Virginia, 10,271 square feet in various North
Carolina locations, 10,271 square feet in West Palm Beach, Florida, 17,566
square feet in southern California, and 13,478 square feet in various Texas
locations.
ITEM 3 - LEGAL PROCEEDINGS
We are 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 us.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended October 31, 1999 no matters
were submitted to a vote of security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information on executive officers of the registrant is incorporated herein
from Part III, Item 10.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
The number of shares and all data presented on a per share basis in this
Form 10-K have been adjusted to give effect to all stock splits. Our Class A
Common Stock is traded on the American Stock Exchange and was held by 728
shareholders of record at December 31, 1999. There is no established public
trading market for our Class B Common Stock, which was held by 629 shareholders
of record at December 31, 1999. In order to trade Class B Common Stock, the
shares must be converted into Class A Common Stock on a one-for-one basis. The
high and low sales prices for our Class A Common Stock were as follows for each
fiscal quarter during the years ended October 31, 1999, 1998, and 1997:
Class A Common Stock
------------------------------------------------
Oct. 31, 1999 Oct. 31, 1998 Oct. 31, 1997
-------------- -------------- --------------
Quarter High Low High Low High Low
- ------- ------ ------ ------ ------ ------ ------
First........ $ 9.25 $ 7.75 $ 9.25 $ 6.50 $7.63 $5.63
Second....... $ 8.94 $ 6.81 $11.50 $ 8.56 $7.00 $6.25
Third........ $ 9.50 $ 7.88 $11.19 $ 8.50 $7.13 $5.69
Fourth....... $ 8.88 $ 6.00 $ 9.88 $ 6.00 $8.13 $6.75
On August 7, 1999 and October 1, 1999 we acquired two homebuilding
companies. As part of the purchase price 1,845,359 shares of unregistered Class
A Common Stock were issued to the sellers. 483,302 of these shares are being
held in escrow (and thus not reported as issued and outstanding at October 31,
1999). There were no underwriters associated with these transactions. These
shares were issued in private transactions in reliance upon Section 4(2) of the
Securities Act of 1933.
Certain debt instruments to which we are a party contain restrictions on
the payment of cash dividends. As a result of the most restrictive of these
provisions, approximately $35,415,000 was free of such restrictions at October
31, 1999. We have never paid dividends nor do we currently intend to pay
dividends.
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data and should be read
in conjunction with the financial statements included elsewhere in this Form 10-
K. Per common share data and weighted average number of common shares
outstanding reflect all stock splits.
Year Ended
------------------------------------------------
Summary Consolidated October October October October October
Income Statement Data 31, 1999 31, 1998 31, 1997 31, 1996 31, 1995
- ------------------------------- -------- -------- -------- -------- --------
(In Thousands Except Per Share Data)
Revenues....................... $948,287 $941,947 $784,136 $807,464 $777,745
Expenses....................... 897,670 900,655 796,260 782,458 756,091
-------- -------- -------- -------- --------
Income(loss) before income
taxes and extraordinary loss. 50,617 41,292 (12,124) 25,006 21,654
State and Federal income taxes. 19,674 15,141 (5,154) 7,719 7,526
Extraordinary loss............. (868) (748) -- -- --
-------- -------- -------- -------- --------
Net income (loss).............. $ 30,075 $ 25,403 $ (6,970) $ 17,287 $ 14,128
======== ======== ======== ======== ========
Per Share Data:
Basic::
Income (loss) before
extraordinary loss......... $ 1.45 $ 1.20 $ (0.31) $ 0.75 $ 0.61
Extraordinary loss........... (.04) (0.03) -- -- --
-------- -------- -------- -------- --------
Net income (loss)............ $ 1.41 $ 1.17 $ (0.31) $ 0.75 $ 0.61
======== ======== ======== ======== ========
Weighted average number of
common shares outstanding.. 21,404 21,781 22,409 23,037 23,032
Assuming Dilution:
Income (loss) before
extraordinary loss......... $ 1.43 $ 1.19 $ (0.31) $ 0.75 $ 0.61
Extraordinary loss........... (.04) (0.03)
-------- -------- -------- -------- --------
Net income (loss)............ $ 1.39 $ 1.16 $ (0.31) $ 0.75 $ 0.61
======== ======== ======== ======== ========
Weighted average number of
common shares outstanding.. 21,612 22,016 22,506 23,120 23,079
Summary Consolidated October October October October October
Balance Sheet Data 31, 1999 31, 1998 31, 1997 31, 1996 31, 1995
- ------------------------------- -------- -------- -------- -------- --------
Total assets................... $712,816 $589,102 $637,082 $614,111 $645,378
Mortgages and notes payable.... $110,228 $150,282 $184,519 $145,336 $183,044
Bonds collateralized by
mortgages receivable......... $ 3,699 $ 5,652 $ 7,855 $ 9,231 $ 17,880
Senior notes, participating
senior subordinated
debentures and subordinated
notes........................ $250,000 $145,449 $190,000 $200,000 $200,000
Stockholders' equity........... $236,426 $201,392 $178,762 $193,622 $176,335
RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
For purposes of computing the ratios of earnings to fixed charges and
earnings to combined fixed charges and preferred dividends, earnings consist
of earnings (loss) from continuing operations before income taxes, minority
interest, extraordinary items and cumulative effect of accounting changes, plus
fixed charges (interest charges and preferred share dividend requirements of
subsidiaries, adjusted to a pretax basis), less interest capitalized, less
preferred share dividend requirements of subsidiaries adjusted to a pretax
basis and less undistributed earnings of affiliates whose debt is not
guaranteed by us.
The following table sets forth the ratios of earnings to fixed charges and
earnings to combined fixed charges and preferred dividends for the periods
indicated:
Years Ended October 31,
--------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- ----------
Ratio of earnings to
fixed charges............ 3.0 2.6 (a) 1.6 1.4
Ratio of earnings to
combined fixed charges
and preferred stock
dividends................. 3.0 2.6 (a) 1.6 1.4
(a) No ratio is presented for the year ended October 31, 1997 as the earnings
for such
period were insufficient to cover fixed charges by $9,197,000.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Our cash uses during the twelve months ended October 31, 1999 were for
operating expenses, seasonal increases in housing inventories, construction,
income taxes, interest, the repurchase of common stock, the redemption of
subordinated indebtedness, and the acquisition of two homebuilding companies.
We provided for our cash requirements from housing and land sales, the issuance
of $150,000,000 Senior Notes, the revolving credit facility, the sale of
commercial facilities, financial service income, and other revenues. We believe
that these sources of cash are sufficient to finance our working capital
requirements and other needs.
Our net income historically does not approximate cash flow from operating
activities. The difference between net income and cash flow from operating
activities is primarily caused by changes in inventory levels, mortgage loans
and liabilities, and depreciation and impairment losses. When we are expanding
our operations, which was the case in fiscal 1999, inventory levels increase
causing cash flow from operating activities to decrease. Liabilities also
increase as inventory levels increase. The increase in liabilities partially
offsets the negative effect on cash flow from operations caused by the increase
in inventory levels. As mortgage loans increase, cash flow from operations
decreases. Conversely, as such loans decrease, cash flow from operations
increases. Depreciation and impairment losses always increase cash flow from
operating activities since they are non-cash charges to operations. We expect
to be in an expansion mode in fiscal 2000. As a result, we expect cash flow
from operations to be less than net income in fiscal 2000.
In December 1998 the Board of Directors increased the stock repurchase
program to purchase up to 3 million shares of Class A Common Stock. This
authorization expires on December 31, 2000. As of October 31, 1999, 2,364,400
shares were repurchased under this program of which 772,900 were repurchased
during the year ended October 31, 1999.
Our bank borrowings are made pursuant to a revolving credit agreement (the
"Agreement") which provides a revolving credit line and letter of credit line of
up to $275,000,000 through July 2002. Interest is payable monthly and at
various rates of either the prime rate or Libor plus 1.45%. We believe that
we 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. We currently are in compliance and intend to maintain
compliance with the covenants under the Agreement. As of October 31, 1999,
borrowings under the Agreement were $70,125,000.
The subordinated indebtedness issued by us and outstanding as of October
31, 1999 was $100,000,000 9 3/4% Subordinated Notes due June 2005. On May 4,
1999, we issued $150,000,000 9 1/8% Senior Notes due in April 2009. On June 7,
1999, we redeemed the remaining $45,449,000 principal amount 11 1/4%
Subordinated 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 our "Revolving
Credit Facility" to zero at that time and for general corporate purposes.
Our mortgage banking subsidiary borrows under a $100,000,000 bank
warehousing arrangement which expires in June 2000. 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 our
subsidiaries. As of October 31, 1999, the aggregate outstanding principal
amount of such borrowings was $33,733,000.
The book value of our inventories, rental condominiums, and commercial
properties completed and under development amounted to the following:
October 31, October 31,
1999 1998
------------ ------------
Residential real estate inventory....... $527,121,000 $375,733,000
Senior residential rental property...... 10,650,000 10,794,000
------------ ------------
Total residential real estate....... 537,771,000 386,527,000
Commercial properties................... 109,000 17,832,000
------------ ------------
Combined Total...................... $537,880,000 $404,359,000
============ ============
Total residential real estate increased $151,244,000 from October 31, 1998
to October 31, 1999 as a result of an inventory increase of $151,388,000 less
depreciation of senior residential rental property. The increase in residential
real estate inventory was primarily due to the acquisition of two homebuilding
companies during the quarter ended October 31, 1999 and increases in California
where we expect to significantly grow our business in fiscal 2000. These
increases were offset by a decrease in our Northeast Region where delivery of
homes is expected to decrease in fiscal 2000. Residential homes under
construction or completed and included in residential real estate inventory at
October 31, 1999 are expected to be closed during the next twelve months. Most
residential real estate, completed or under development, is financed through our
line of credit, senior notes and subordinated indebtedness.
We usually option property for development prior to acquisition. By
optioning property, we are only subject to the loss of a small option fee and
predevelopment costs if we choose not to exercise the option. As a result, our
commitment for major land acquisitions is kept to a minimum.
The following table summarizes housing lots included in our total
residential real estate:
Total Contracted Remaining
Home Not Lots
Lots Delivered Available
-------- ---------- ---------
October 31, 1999:
Owned.......................... 9,730 1,825 7,905
Optioned....................... 17,078 96 16,982
-------- ---------- ---------
Total........................ 26,808 1,921 24,887
======== ========== =========
October 31, 1998:
Owned.......................... 8,054 1,673 6,381
Optioned....................... 13,668 8 13,660
-------- ---------- ---------
Total........................ 21,722 1,681 20,041
======== ========== =========
The following table summarizes our started or completed unsold homes in
active, substantially completed and suspended communities:
October 31, October 31,
1999 1998
-------------------------- -------------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ------ ------ ------ ------
Northeast Region(1). 114 31 145 180 16 196
North Carolina...... 129 -- 129 93 -- 93
Florida............. 5 -- 5 24 6 30
Metro D.C........... 13 9 22 23 11 34
California.......... 53 10 63 78 21 99
Texas............... 225 28 253 -- -- --
Poland.............. 14 -- 14 11 -- 11
------ ------ ------ ------ ------ ------
Total 553 78 631 409 54 463
====== ====== ====== ====== ====== ======
(1) Includes 6 unsold homes and 2 model homes from a New Jersey homebuilder
acquired on August 7, 1999.
Prior to the second quarter of fiscal 1997, our commercial properties
represented long-term investments in commercial and retail facilities completed
or under development. At the end of the second quarter of fiscal 1997, we
announced we were planning an orderly exit from the business of owning
investment properties. During fiscal 1997 and 1998, we sold all our commercial
facilities and a 50% owned partnership sold its retail center. During fiscal
1999 we sold three land parcels. See "Results of Operations - Investment
Properties."
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 $32,844,000 and
$71,002,000 at October 31, 1999 and October 31, 1998, respectively, are being
temporarily warehoused and awaiting sale in the secondary mortgage market. The
balance of mortgage loans held for sale are being held as an investment. We 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, we have incurred minimal credit losses.
RESULTS OF OPERATIONS
Our operations consist primarily of residential housing development and
sales in our Northeast Region (comprised primarily of New Jersey, southern New
York state, and eastern Pennsylvania), in southeastern Florida, North Carolina,
Metro D. C. (northern Virginia), southern California, Texas and Poland. Our
Texas operations are the result of the acquisition of a Texas homebuilder on
October 1, 1999. In addition, we had developed and operated commercial
properties as long-term investments in New Jersey, and, to a lesser extent,
Florida, but have exited this business (see "Investment Properties" below).
During the years ended October 31, 1999, 1998, and 1997, our Northeast
Region, California Division and North Carolina Division housing operations
consistently produced operating profits. In fiscal 1999, our Metro D.C.
Division and Texas acquisition also produced profits. In 1999 and 1998,
financial services operations were profitable. In addition, in 1998 and 1997 we
earned profits from the liquidation of commercial properties. These profits
have been reduced by net losses from our other housing divisions, corporate
overhead, the writedown of certain residential inventories and commercial
properties to their estimated fair value and the write-off of optioned
properties and related approval, engineering and capitalized interest costs.
See "Notes to Consolidated Financial Statements - Note 11".
Prior to fiscal 1998, our first two quarters produced the least amount of
deliveries for the year and the fourth quarter produced the most deliveries for
the year, sometimes in excess of 40% of total homes delivered. In fiscal 1998
management made a concerted effort to change this trend using new management
tools to focus on delivery evenness and through a new quarterly bonus incentive
plan. The percentage distribution of deliveries for the last three years is as
follows:
Quarter Ended
----------------------------------------------------------
January 31 April 30 July 31 October 31 Total
---------- ---------- ---------- ---------- ----------
1999........... 22% 22% 25% 31% 100%
1998........... 24% 23% 26% 27% 100%
1997........... 16% 19% 25% 40% 100%
During the year ended October 31, 1999 a higher percentage was delivered
in the fourth quarter due to the acquisition of two homebuilding companies.
In fiscal 2000 we expect a higher percentage of deliveries later in the
fiscal year resulting from the projected flow of deliveries from recent
homebuilding company acquisitions and the timing of community grand openings
in our Northeast Region and California Division.
Total Revenues
Compared to the same prior period, revenues increased (decreased) as
follows:
Year Ended
-----------------------------
October October October
31, 1999 31, 1998 31, 1997
--------- --------- ---------
(Dollars in Thousands)
Homebuilding:
Sale of homes......................$ 12,909 $163,837 $(32,875)
Land sales and other revenues...... 1,998 (11,572) 8,371
Financial services................... 1,141 8,363 (481)
Investment properties................ (9,544) (2,646) 2,838
Collateralized mortgage financing.... (164) (171) (1,181)
--------- --------- ---------
Total change....................$ 6,340 $157,811 $(23,328)
========= ========= =========
Percent change.................... 0.7% 20.1% (2.9%)
========= ========= =========
Homebuilding
Compared to the same prior period, housing revenues increased $12.9 million
or 1.4% for the year ended October 31, 1999, after increasing $163.8 million or
22.4% for the year ended October 31, 1998, and decreasing $32.9 million or 4.3%
for the year ended October 31, 1997. Housing revenues 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:
Year Ended
---------------------------------
October October October
31, 1999 31, 1998 31, 1997
--------- --------- ---------
(Dollars in Thousands)
Northeast Region (1):
Housing Revenues............$560,586 $595,873 $445,817
Homes Delivered............. 2,063 2,530 2,128
North Carolina:
Housing Revenues............$145,153 $127,592 $125,242
Homes Delivered............. 756 687 695
Florida:
Housing Revenues............$ 36,566 $ 44,168 $ 74,146
Homes Delivered............. 159 241 418
Metro D.C.:
Housing Revenues............$ 45,493 $ 38,904 $ 14,398
Homes Delivered............. 198 152 70
California:
Housing Revenues............$ 105,941 $ 82,546 $ 69,252
Homes Delivered............. 514 457 365
Texas:
Housing Revenues............$ 13,184 -- --
Homes Delivered............. 66 -- --
Poland:
Housing Revenues............$ 1,630 $ 6,561 $ 2,952
Homes Delivered............. 12 71 41
Totals:
Housing Revenues............$ 908,553 $895,644 $731,807
Homes Delivered............. 3,768 4,138 3,717
(1) Fiscal 1999 includes $31,961,000 housing revenues and 88 homes from a New
Jersey homebuilder acquired on August 7, 1999.
The overall increase in housing revenues was the net result of increases in
average sales prices offset by decreased deliveries. The increase in average
sales prices during the year ended October 31, 1999 is primarily due to the
increases in all markets except Metro D. C. The increased average sales prices
in the Northeast Region and North Carolina were primarily attributed to the rise
in base home prices and the sale of more decorator and structural options. In
Florida, average sales prices increased as a result of fewer communities, all of
which are higher priced single family developments. In Metro D.C., average
sales prices decreased because of a change in product mix to smaller single
family homes. In California, sales prices increased due to a change in product
mix to larger, more expensive homes.
The decrease in homes delivered was primarily due to significant
decreases in the Northeast Region and Florida while the other divisions
increased deliveries slightly. The decrease in the Northeast Region was
attributable to fewer communities open for sale. We expect the Northeast
Region to stay at roughly the 2,000 home level in fiscal 2000 and then
increase in fiscal 2001 due to an increase of active selling communities.
In Florida, due to operating losses we decided to cut back operations in
fiscal 1997 and have only one active community delivering homes in fiscal
2000. All other divisions increased home deliveries in 1999 due to the
increase in the number of active selling communities. In fiscal 2000 we
expect a significant home delivery increase in California. In addition,
consolidated home deliveries will increase in fiscal 2000 due to a
full year of operations in Texas.
Unaudited quarterly housing revenues and net sales contracts using base
sales prices by market area for the years ending October 31, 1999, 1998, and
1997 are set forth below:
Quarter Ended
------------------------------------------
October July April January
31, 1999 31, 1999 30, 1999 31, 1999
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region (1)....... $164,899 $142,503 $126,501 $126,683
North Carolina............. 47,251 38,269 30,553 29,080
Florida.................... 9,012 9,690 9,531 8,333
Metro D.C.................. 15,541 11,400 6,005 12,547
California................. 37,290 24,792 26,548 17,311
Texas...................... 13,184 -- -- --
Poland..................... 282 417 -- 931
--------- --------- --------- ---------
Total.................. $287,459 $227,071 $199,138 $194,885
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region (1)....... $135,514 $111,083 $114,924 $ 90,163
North Carolina............. 25,757 33,078 50,673 31,111
Florida.................... 2,532 4,471 9,050 11,530
Metro D.C.................. 12,246 14,338 16,201 11,077
California................. 36,197 37,788 24,135 17,817
Texas...................... 5,416 -- -- --
Poland..................... 698 172 -- 482
--------- --------- --------- ---------
Total.................. $218,360 $200,930 $214,983 $162,180
========= ========= ========= =========
(1) Includes $31,961,000 housing revenues and $12,922,000 sales contracts in
the quarter ended October 31, 1999 from a New Jersey homebuilder acquired
on August 7, 1999.
Quarter Ended
------------------------------------------
October July April January
31, 1998 31, 1998 30, 1998 31, 1998
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region........... $157,882 $162,847 $136,133 $139,011
North Carolina............. 38,997 34,655 28,264 25,676
Florida.................... 11,291 8,111 15,254 9,512
Metro D.C.................. 16,687 11,256 4,843 6,118
California................. 22,980 18,832 17,613 23,121
Poland..................... 2,283 2,199 1,460 619
--------- --------- --------- ---------
Total.................. $250,120 $237,900 $203,567 $204,057
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region........... $114,144 $124,144 $188,082 $ 98,814
North Carolina............. 37,085 33,302 35,990 23,903
Florida.................... 5,385 9,503 8,631 7,802
Metro D.C.................. 11,834 15,265 9,583 3,866
California................. 21,325 25,402 9,535 18,769
Poland..................... 1,758 516 332 1,277
--------- --------- --------- ---------
Total.................. $191,531 $208,132 $252,153 $154,431
========= ========= ========= =========
Quarter Ended
------------------------------------------
October July April January
31, 1997 31, 1997 30, 1997 31, 1997
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region........... $193,513 $118,186 $ 70,678 $ 63,440
North Carolina............. 41,566 35,293 26,341 22,042
Florida.................... 28,951 14,325 17,042 13,828
Metro D.C.................. 5,214 2,759 3,018 3,407
California................. 23,317 15,113 18,489 12,333
Poland..................... 1,212 1,008 667 65
--------- --------- --------- ---------
Total.................. $293,773 $186,684 $136,235 $115,115
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region........... $134,280 $124,860 $118,840 $ 92,544
North Carolina............. 29,409 30,339 35,988 31,506
Florida.................... 11,134 15,296 21,399 9,708
Metro D. C................. 5,618 3,761 5,279 2,478
California................. 24,255 22,785 22,383 16,268
Poland..................... 2,109 436 468 1,607
--------- --------- --------- ---------
Total.................. $206,805 $197,477 $204,357 $154,111
========= ========= ========= =========
Our contract backlog using base sales prices by market area is set forth
below:
October October October
31, 1999 31, 1998 31, 1997
--------- --------- ---------
(Dollars in Thousands)
Northeast Region (1):
Total Contract Backlog........$286,149 $270,753 $266,889
Number of Homes............... 1,125 1,132 1,287
North Carolina:
Total Contract Backlog........$ 44,534 $ 48,713 $ 45,879
Number of Homes............... 207 235 232
Florida:
Total Contract Backlog........$ 8,705 $ 14,800 $ 25,315
Number of Homes............... 37 73 150
Metro D.C.:
Total Contract Backlog........$ 34,484 $ 26,083 $ 7,621
Number of Homes............... 149 115 27
California:
Total Contract Backlog........$ 34,313 $ 20,721 $ 25,636
Number of Homes............... 129 119 137
Texas:
Total Contract Backlog........$ 51,610 -- --
Number of Homes............... 261 -- --
Poland:
Total Contract Backlog........$ 865 $ 746 $ 2,974
Number of Homes............... 13 7 39
Totals:
Total Contract Backlog........$460,660 $381,816 $374,314
Number of Homes............... 1,921 1,681 1,872
Fiscal 1999 includes $38,832,000 total contract backlog and 123 number of
homes from a New Jersey homebuilder acquired on August 7, 1999.
We have written down or written off certain residential inventories $2.1,
$4.0 million, and $14.0 million during the years ended October 31, 1999, 1998,
and 1997, respectively, to their estimated fair value. See "Notes to
Consolidated Financial Statements - Note 11" for additional explanation. These
writedowns and writeoffs were incurred primarily because of lower property
values, a change in the marketing strategy to liquidate a particular property,
or the decision not to exercise an option.
During the year ended October 31, 1999 we wrote off one residential land
option including approval and engineering costs amounting to $0.3 million. We
did not exercise this option because the community's proforma profitability did
not produce an adequate return on investment commensurate with the risk. In
addition, we wrote down one land parcel in Florida, one residential community in
New York and two residential communities in North Carolina. The Florida land
parcel was written down based on recent purchase offers. The communities were
written down based on our decision to discontinue selling homes and offer the
remaining lots for sale. The result of the above decisions was a reduction in
inventory carrying amounts to fair value, resulting in a $1.8 million
impairment loss in accordance with FAS 121.
During the year ended October 31, 1998, we wrote down one Florida
residential community and one New Jersey parcel of land for sale. In the
Florida residential community, higher discounts were being offered to speed up
sales. At the New Jersey land site, lots were being contracted at prices lower
than anticipated. The result of the above decisions was a reduction in
inventory carrying amounts to fair value, resulting in a $1.9 million
impairment loss in accordance with FAS 121. We also wrote off three New
Jersey residential land options including approval, engineering and
capitalized interest costs amounting to $2.1 million. We did not exercise
these options because of changes in local market conditions and difficulties
in obtaining government approvals.
During the year ended October 31, 1997, we wrote down certain residential
communities, and wrote off certain residential land options including approval,
engineering and capitalized interest costs. In Florida, our return on
investment was unsatisfactory. As a result, we established a goal to reduce our
investment in Florida by $25.0 million. To do so on an accelerated basis, we
reduced prices and offered pricing concessions in all Florida residential
communities. We also decided to sell all inactive properties in Florida. In
the Northeast Region, we changed the product type to be constructed on a parcel
of land we own. In an active community in the Northeast Region, we incurred
unforeseen development costs. Also in the Northeast, we decided to sell an
optioned property instead of developing it. The result of the above decisions
was a reduction in fair values below carrying amounts and, in accordance with
FAS 121, we recorded an impairment loss on the related inventories. At October
31, 1997, residential inventories were reduced $9.3 million to reduce such
inventories to estimated fair value. The Northeast Region also wrote off costs
associated with three optioned properties and related approval, engineering and
capitalized interest costs amounting to $4.7 million. In two cases, we decided
not to exercise the option due to environmental problems. The third option was
not exercised because the community's proforma profitability did not produce an
adequate return on investment commensurate with the risk.
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:
Year Ended
---------------------------------
October October October
31, 1999 31, 1998 31, 1997
--------- --------- ---------
(Dollars In Thousands)
Sale of homes.............. $908,553 $895,644 $731,807
Cost of sales.............. 718,259 740,871 617,312
--------- --------- ---------
Housing gross margin....... $190,294 $154,773 $114,495
========= ========= =========
Gross margin percentage.... 20.9% 17.3% 15.6%
========= ========= =========
Cost of sales expenses as a percentage of home sales revenues are presented
below:
Year Ended
---------------------------------
October October October
31, 1999 31, 1998 31, 1997
--------- --------- ---------
Sale of homes.............. 100.0% 100.0% 100.0%
--------- --------- ---------
Cost of sales:
Housing, land and
development costs....... 71.0 74.8 76.0
Commissions.............. 2.0 1.9 2.0
Financing concessions.... 0.8 0.7 0.9
Overheads................ 5.3 5.3 5.5
--------- --------- ---------
Total cost of sales........ 79.1 82.7 84.4
--------- --------- ---------
Gross margin percentage.... 20.9% 17.3% 15.6%
========= ========= =========
We sell a variety of home types in various local communities, each yielding
a different gross margin. As a result, depending on the mix of both the
communities and of home types delivered, consolidated gross margin will
fluctuate up or down. During the year ended October 31, 1999, our gross margin
percentage increased 3.6% from the previous year. This can be attributed to
higher gross margins being achieved in each of our markets. Higher gross
margins are primarily attributed to positive effects from process redesign and
quality programs that reduced the housing and land development costs, selective
price increases or reduced selling incentives in our stronger markets, and an
increased percentage of deliveries from the better performing communities.
Another factor affecting the gross margin percentage is in the Northeast Region
gross margin percentages are higher compared to our other markets. In 1999, the
gross margin was negatively affected by a lower percentage of housing revenues
from the Northeast Region amounting to 61.7% in fiscal 1999 compared to 66.5% in
fiscal 1998. In fiscal 2000 we expect margins to remain the same or decrease
slightly. This is primarily the result of a higher percentage of deliveries
coming from outside the Northeast Region where margins are historically lower.
During the year ended October 31, 1998, gross margins increased in all our
markets compared to the prior year except Florida. The reasons for the increase
in 1998 are the same as above for 1999. In addition, deliveries increased in
the Northeast Region to 66.5% compared to the prior year of 60.9%.
Selling and general administrative expenses as a percentage of homebuilding
revenues increased to 8.8% for the year ended October 31, 1999 from 7.5% for the
year ended October 31, 1998 which had decreased from 8.2% for the year ended
October 31, 1997. The dollar amount of selling and general expenses has
increased the last two years to $81.4 million for the year ended October 31,
1999 from $67.5 million for the year ended October 31, 1998 which increased from
$62.5 million for the previous year. The overall percentage and dollar
increases in such expenses in 1999 are attributable to increases in all our
markets but primarily due to fewer deliveries in our Northeast Region and due to
Northeast Region and California administration cost increases. The percentage
decrease during the year ended October 31, 1998 was due to increased deliveries.
The dollar increase in 1998 was due to increased administration and marketing
costs.
Land Sales and Other Revenues
Land sales and other revenues consist primarily of land and lot sales,
interest income, contract deposit forfeitures, cash discounts, national contract
rebates, and corporate owned life insurance benefits.
A breakout of land and lot sales is set forth below:
Year Ended
----------------------------
October October October
31, 1999 31, 1998 31, 1997
-------- -------- --------
(In Thousands)
Land and lot sales................... $12,077 $ 8,636 $22,855
Cost of sales........................ 11,766 8,070 17,005
-------- -------- --------
Land and lot sales gross margin...... $ 311 $ 566 $ 5,850
======== ======== ========
Land and lot sales are incidental to our residential housing operations and are
expected to continue in the future but may significantly fluctuate up or down.
Financial Services
Financial services consists primarily of originating mortgages from our
homebuyers, as well as from third parties, selling such mortgages in the
secondary market, and title insurance activities. During the year ended October
31, 1999 and 1998 financial services provided a $1.0 and $2.1 million pretax
profit, respectively, up from break even in 1997. In the market areas served by
our wholly-owned mortgage banking subsidiaries, approximately 57%, 58%, and 51%
of our non-cash homebuyers obtained mortgages originated by these subsidiaries
during the years ended October 31, 1999, 1998, and 1997, respectively. Our
mortgage banking goals are to improve profitability by increasing the capture
rate of our homebuyers and expanding our business to include originations from
unrelated third parties. During the years ended October 31, 1999 and 1998,
third party loans amounted to 48% and 40%, respectively, of total mortgage
closings. Most servicing rights on new mortgages originated by us will be sold
as the loans are closed.
Investment Properties
Investment Properties consist of rental properties, property management,
and gains or losses from sale of such property. See "Capital Resources and
Liquidity" for information on our decision to sell our investment properties.
We plan to liquidate all properties except for our senior rentals. At October
31, 1999, all properties except one small land parcel had been liquidated.
During the year ended October 31, 1999 we sold three land parcels for a total
sales price of $20.8 million and recorded a net loss before income taxes of $0.5
million. During the years ended October 31, 1998 and 1997, investment property
revenues included a $6.5 million pretax gain and a $4.9 million pretax gain,
respectively, from the sale of its commercial facilities and land. Investment
properties' expenses do not include interest expense (see "Interest" below).
Collateralized Mortgage Financing
In the years prior to February 29, 1988 we pledged mortgage loans
originated by our mortgage banking subsidiaries against collateralized mortgage
obligations ("CMOs"). Subsequently, we discontinued our 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, we have also sold a
portion of our CMO pledged mortgages.
Corporate General and Administrative
Corporate general and administrative expenses includes the operations at
our headquarters in Red Bank, New Jersey. Such expenses include our 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 were
3.0%, 2.2%, and 1.9% for the years ended October 31, 1999, 1998, and 1997,
respectively. In 1999, the increase was primarily attributed to increased
expenditures for long term improvement initiatives. In 1998, the increase was
primarily attributed to increased bonus accruals (there were no bonus accruals
based on the Return on Equity incentive program in 1997), increased depreciation
from the amortization of capitalized process redesign costs in prior years and
increased expenditures for long term improvement initiatives. Our long term
improvement initiatives include total quality, process redesign (net of
capitalized expenses), and training. Such initiatives resulted in additional
expenses for the years ended October 31, 1999, 1998, and 1997 amounting to $7.5
million, $3.8 million, and $2.2 million, respectively. Beginning in fiscal year
2000 we will be required to capitalize certain computer software development
costs in accordance with SOP 98-1, "Accounting For the Costs of Computer
Software Development For or Obtained For Internal Use." We have not yet
determined the impact on net income in connection with the adoption of SOP 98-1.
Interest
Interest expense includes housing, land and lot, and rental properties
interest. Interest expense is broken down as follows:
Year Ended
-------------------------------
October October October
31, 1999 31, 1998 31, 1997
--------- --------- ---------
(In Thousands)
Sale of homes.................. $28,093 $ 31,499 $ 29,505
Land and lot sales............. 1,082 652 962
Rental properties.............. 1,168 2,272 5,308
--------- --------- ---------
Total.......................... $30,343 $ 34,423 $ 35,775
========= ========= =========
Housing interest as a percentage of sale of home revenues amounted to 3.1%,
3.5%, and 4.0% for the years ended October 31, 1999, 1998, and 1997,
respectively. The decrease in the percentage for the years ended October 31,
1999 and 1998 was primarily due to decreased levels of debt during the year
compared to the prior year. This decrease is the result of management's goal to
deleverage the Company, and debt reductions from cash generated by the
liquidation of investment properties and earnings.
Other Operations
Other operations consist primarily of miscellaneous residential housing
operations, amortization of senior and subordinated note issuance expenses,
earnout payments from homebuilding company acquisitions and corporate owned life
insurance loan interest.
Total Taxes
Total taxes as a percentage of income before income taxes amounted to 38.9%
and 36.7% for the years ended October 31, 1999 and 1998, respectively. Net tax
benefits as a percentage of the loss before income taxes amounted to 42.5% for
the year ended October 31, 1997. 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 as an
offset against future taxable income. If for some reason the combination of
future years income (or loss) combined with the reversal of the timing
differences results in a loss, such losses can be carried back to prior years to
recover the deferred tax assets. As a result, management is confident such
deferred tax assets are recoverable regardless of future income. (See "Notes to
Consolidated Financial Statements - Note 10" for an additional explanation of
taxes.)
Extraordinary Loss
On June 7, 1999, we redeemed $45,449,000 of our outstanding 11 1/4%
Subordinated Notes due 2002 at an average 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
We have fully implemented a plan to resolve our information technology
("IT") and non-IT system year 2000 issues. We designated a full-time year 2000
project leader, engaged consultants to review and evaluate our plan, completed
the identification of our IT and non-IT noncompliant systems and evaluated
subcontractors' and suppliers' state of readiness. Our plan prioritized our
efforts on our software systems and computer hardware equipment. We believe we
have upgraded, fixed or retired 100% of our critical noncompliant systems. All
other IT and non-IT systems are not considered critical to our operations, and
if noncapable for year 2000, would only be an inconvenience. The cost of
implementing the plan did not have a material impact on earnings in fiscal 1999
and was funded through operations.
We are concerned about the readiness of our subcontractors and suppliers.
We have communicated with 100% of these third parties. We have been informed
that substantially all of the subcontractors and suppliers are year 2000
compliant. Any third parties whose lack of readiness as to year 2000 issues
would have an impact on our operations are being replaced. In most cases, we
use more than one subcontractor and supplier so finding replacements was not
difficult.
We believe we have solved all significant year 2000 issues. We do not
believe we will have material lost revenues due to the year 2000 issues. Based
on the above, we did not develop a worst-case year 2000 scenario. However, we
have a year 2000 contingency plan which, if necessary, is ready to implement.
Inflation
Inflation has a long-term effect on us because increasing costs of land,
materials and labor result in increasing sales prices of our homes. In general,
these price increases have been commensurate with the general rate of inflation
in our housing markets and have not had a significant adverse effect on the sale
of our homes. A significant inflationary risk faced by the housing industry
generally is that rising housing 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 we sell homes, we have not found this
risk to be a significant problem.
Inflation has a lesser short-term effect on us because we generally
negotiate fixed price contracts with our subcontractors and material suppliers
for the construction of our 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 57% of our homebuilding cost of sales.
Item 7(A) - Quantitative and Qualitative Disclosures About Market Risk.
The primary market risk facing us is interest rate risk on our long term
debt. In connection with our mortgage operations, mortgage loans held for sale
and the associated mortgage warehouse line of credit are subject to interest
rate risk; however, such obligations reprice frequently and are short-term in
duration. In addition, we hedge the interest rate risk on mortgage loans by
obtaining forward commitments from FNMA, FHLMC, GNMA securities and private
investors. Accordingly the risk from mortgage loans is not material. We do not
hedge interest rate risk other than on mortgage loans using financial
instruments. We are also subject to foreign currency risk but this risk is not
material. The following tables set forth as of October 31, 1999 and 1998, our
long term debt obligations, principal cash flows by scheduled maturity, weighted
average interest rates and estimated fair market value ("FMV"). There have been
no significant changes in our market risk from October 31, 1998 to October 31,
1999.
As of October 31, 1999 for the
Year Ended October 31,
--------------------------------------
FMV @
2000 2001 2002 2003 2004 Thereafter Total 10/31/99
------ ------ ------ ------ ------ ---------- -------- ---------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate.......$4,999 $ 132 $ 138 $2,585 $ 74 $250,613 $258,541 $246,164
Average interest
rate........... 8.80% 7.60% 7.63% 7.04% 8.38% 9.37% 9.34% --
Variable Rate....$ 600 $ 927 -- -- -- -- $ 1,527 $ 1,527
Average interest
rate........... 6.00% 8.75% -- -- -- -- 7.67% --
As of October 31, 1998 for the
Year Ended October 31,
--------------------------------------
FMV @
1999 2000 2001 2002 2003 Thereafter Total 10/31/98
------ ------ ------ ------ ------ ---------- -------- ---------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate.......$ 115 $ 119 $ 132 $50,804 $2,581 $100,685 $154,436 $145,186
Average interest
rate........... 7.59% 7.62% 7.60% 10.70% 7.04% 9.74% 10.01% --
Variable Rate....$1,932 $ 600 926 $ -- $ -- $ -- $ 3,458 $ 3,458
Average interest
rate........... 9.22% 8.00% 8.64% -- -- -- 8.85% --
(1) Does not include bonds collateralized by mortgages receivable.
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements of Hovnanian Enterprises, Inc. and its consolidated
subsidiaries are set forth herein beginning on Page F-1.
Item 9 - CHANGES IN OR DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
During the years ended October 31, 1999, 1998, and 1997, there have not
been any changes in or disagreements with accountants on accounting and
financial disclosure.
PART III
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item l0, except as set forth below under the
heading "Executive Officers of the Registrant", is incorporated herein by
reference to our definitive proxy statement to be filed pursuant to Regulation
l4A, in connection with the Company's annual meeting of shareholders to be held
on March 16, 2000, which will involve the election of directors.
Executive Officers of the Registrant
Our executive officers are listed below and brief summaries of their
business experience and certain other information with respect to them are set
forth following the table. Each executive officer holds such office for a one
year term.
Year Started
Name Age Position With Company
Kevork S. Hovnanian 76 Chairman of the Board and l967
Director of the Company.
Ara K. Hovnanian 42 Chief Executive Officer, President 1979
and Director of the Company.
Paul W. Buchanan 49 Senior Vice President-Corporate l981
Controller and Director of the
Company.
William L. Carpitella 45 Senior Vice President,
Organizational Development 1997
Peter S. Reinhart 49 Senior Vice President and General 1978
Counsel and Director of the
Company.
John D. Roberts 37 Vice President Process Redesign 1998
J. Larry Sorsby 44 Senior Vice President, Treasurer 1988
and Chief Financial Officer and
Director of the Company
Mr. K. Hovnanian founded the predecessor of the Company in l959 (Hovnanian
Brothers, Inc.) and has served as Chairman of the Board of the Company since its
incorporation in l967. Mr. K. Hovnanian was also Chief Executive Officer of the
Company from 1967 to July 1997.
Mr. A. Hovnanian was appointed President in April 1988, after serving as
Executive Vice President from March 1983. He has also served as Chief Executive
Officer since July 1997. Mr. A. Hovnanian was elected a Director of the Company
in December l98l. Mr. A. Hovnanian is the son of Mr. K. Hovnanian.
Mr. Buchanan has been Senior Vice President-Corporate Controller since May
l990. Mr. Buchanan was elected a Director of the Company in March l982.
Mr. Carpitella joined the Company in September 1997 as Senior Vice
President, Organizational Development. Prior to joining the Company Mr.
Carpitella was Vice President, Human Resources for a division of Pulte Home
Corp. from April 1995 to August 1997. From February 1992 Mr. Carpitella was
Vice President Human Resources for Geo. J. Ball Co.
Mr. Reinhart has been Senior Vice President and General Counsel since April
1985. Mr. Reinhart was elected a Director of the Company in December l98l.
Mr. Roberts joined the Company in January 1998 as Vice President Process
Redesign. Prior to joining the Company Mr. Roberts worked for Deloitte & Touche
Consulting Group ("D & T") from August 1993. At D & T Mr. Roberts was Senior
Consultant until August 1994, then Manager until August 1995 and then Senior
Manager until he joined the Company.
Mr. Sorsby was appointed Senior Vice President, Treasurer and Chief
Financial Officer of the Company in February, 1996 after serving as Senior Vice
President-Finance/Treasurer of the Company since March 1991.
Item 11 - EXECUTIVE COMPENSATION
The information called for by Item ll is incorporated herein by reference
to our definitive proxy statement to be filed pursuant to Regulation l4A, in
connection with our annual meeting of shareholders to be held on March 16, 2000,
which will involve the election of directors.
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item l2 is incorporated herein by reference
to our definitive proxy statement to be filed pursuant to Regulation l4A, in
connection with our annual meeting of shareholders to be held on March 16, 2000,
which will involve the election of directors.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item l3 is incorporated herein by reference
to our definitive proxy statement to be filed pursuant to Regulation l4A, in
connection with our annual meeting of shareholders to be held on March 16, 2000,
which will involve the election of directors.
PART IV
Item 14 - EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
Page
Financial Statements:
Index to Consolidated Financial Statements....................... F-1
Report of Independent Auditors................................... F-2
Consolidated Balance Sheets at October 31, 1999 and 1998......... F-3
Consolidated Statements of Operations for the years ended
October 31, 1999, 1998, and 1997.............................. F-5
Consolidated Statements of Stockholders' Equity for the years
ended October 31, 1999, 1998, and 1997........................ F-6
Consolidated Statements of Cash Flows for the years ended
October 31, 1999, 1998, and 1997.............................. F-7
Notes to Consolidated Financial Statements....................... F-8
No schedules are applicable to us or have been omitted because the required
information is included in the financial statements or notes thereto.
Exhibits:
3(a) Certificate of Incorporation of the Registrant.(1)
3(b) Certificate of Amendment of Certificate of Incorporation of the
Registrant.(6)
3(c) Bylaws of the Registrant.(6)
4(a) Specimen Class A Common Stock Certificate.(6)
4(b) Specimen Class B Common Stock Certificate.(6)
4(c) Indenture dated as of May 28, 1993, relating to 9 3/4%
Subordinated Notes between Registrant and First Fidelity Bank,
National Association, New Jersey, as Trustee, including form of
9 3/4% Subordinated Note due 2005.(4)
4(d) Indenture dated as of May 4, 1999, relating to 9 1/8% Senior Notes
between the Registrant and First Fidelity Bank, including form of
9 1/8% Senior Notes due May 1, 2009.(7)
10(a) Amended and Restated Credit Agreement dated July 29, 1998 among
K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc.,
certain Subsidiaries Thereof, PNC Bank, National Association,
First Union National Bank, NationsBank, National Association,
First National Bank of Boston, Bank of America National Trust and
Savings Association, The First National Bank of Chicago, Comerica
Bank, Credit Lyonnais New York Branch and Guaranty Federal F.S.B.
10(b) Amendment to the Amended and Restated Credit Agreement (Exhibit
10(a)) dated July 13, 1999
10(c) Description of Management Bonus Arrangements.(6)
10(d) Description of Savings and Investment Retirement Plan.(1)
10(e) Stock Incentive Plan (9).
10(f) Management Agreement dated August 12, 1983 for the management of
properties by K. Hovnanian Investment Properties, Inc.(1)
10(g) Agreement dated July 8, 1981 between Hovnanian Properties of
Atlantic County, Inc. and Kevork S. Hovnanian.(2)
10(h) Management Agreement dated December 15, 1985, for the management
of properties by K. Hovnanian Investment Properties, Inc.(3)
10(i) Description of Deferred Compensation Plan.(5)
12 Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors
27 Financial Data Schedules
(1) Incorporated by reference to Exhibits to Registration
Statement (No. 2-85198) on Form S-1 of the Registrant.
(2) Incorporated by reference to Exhibits to Registration Statement
(No. 33-46064) on Form S-3 of the Registrant.
(3) Incorporated by reference to Exhibits to Annual Report on Form 10
-K for the year ended February 28, 1986 of the Registrant.
(4) Incorporated by reference to Exhibits to Registration Statement
(No. 33-61778) on Form S-3 of the Registrant.
(5) Incorporated by reference to Exhibits to Annual Report on Form 10-
K for the year ended February 28, 1990 of the Registrant.
(6) Incorporated by reference to Exhibits to Annual Report on Form 10-K
for the year ended February 28, 1994 of the Registrant.
(7) Incorporated by reference to Exhibits to Registration Statement (No.
333-75939) on Form S-3 of the Registrant.
(8) Incorporated by reference to Exhibits to Quarterly Report on Form 10Q
for the quarter ended July 31, 1999 of the Registrant.
(9) Incorporated by the Proxy Statement of the Registrant Filed on
Schedule 14A dated January 15, 1999.
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
October 31, 1999.
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) 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.
By:
/S/KEVORK S. HOVNANIAN
Kevork S. Hovnanian
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of l934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated
/S/KEVORK S. HOVNANIAN Chairman of The Board 1/13/00
Kevork S. Hovnanian and Director
/S/ARA K. HOVNANIAN Chief Executive Officer, 1/13/00
Ara K. Hovnanian President and Director
/S/PAUL W. BUCHANAN Senior Vice President 1/13/00
Paul W. Buchanan Corporate Controller and
Director
/S/PETERS. REINHART Senior Vice President and 1/13/00
Peter S. Reinhart General Counsel and Director
/S/J. LARRY SORSBY Senior Vice President, 1/13/00
J. Larry Sorsby Treasurer, Chief Financial
Officer and Director
/S/WILLIAM L. CARPITELLA Senior Vice President, 1/13/00
William L. Carpitella Organizational Development
HOVNANIAN ENTERPRISES, INC.
Index to Consolidated Financial Statements
Page
Financial Statements:
Independent Auditors' Report................................... F-2
Consolidated Balance Sheets as of October 31, 1999 and 1998.... F-3
Consolidated Statements of Operations for the Years Ended
October 31, 1999, 1998, and 1997............................... F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended October 31, 1999, 1998, and 1997......................... F-6
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1999, 1998, and 1997............................... F-7
Notes to Consolidated Financial Statements..................... F-8
No schedules have been prepared because the required information of such
schedules is not present, is not present in amounts sufficient to require
submission of the schedule or because the required information is included in
the financial statements and notes thereto.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and
Board of Directors of
Hovnanian Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Hovnanian
Enterprises, Inc. and subsidiaries as of October 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended October 31, 1999. These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Hovnanian Enterprises, Inc. and subsidiaries at October 31, 1999 and 1998 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended October 31, 1999 in conformity with
generally accepted accounting principles.
/S/Ernst & Young LLP
New York, New York
December 16, 1999
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
October 31, October 31,
ASSETS 1999 1998
------------ ------------
Homebuilding:
Cash and cash equivalents(Note 5).............. $ 17,163 $ 13,306
------------ ------------
Inventories - At the lower of cost or fair
value (Notes 7 and 11):
Sold and unsold homes and lots under
development................................ 475,196 332,225
Land and land options held for future
development or sale........................ 51,925 43,508
------------ ------------
Total Inventories.......................... 527,121 375,733
------------ ------------
Receivables, deposits, and notes (Note 12)..... 30,675 29,490
------------ ------------
Property, plant, and equipment - net (Note 4).. 26,500 16,831
------------ ------------
Prepaid expenses and other assets (Note 15).... 55,308 32,650
------------ ------------
Total Homebuilding......................... 656,767 468,010
------------ ------------
Financial Services:
Cash........................................... 2,202 1,486
Mortgage loans held for sale (Note 6).......... 33,158 71,611
Other assets................................... 1,563 3,717
------------ ------------
Total Financial Services................... 36,923 76,814
------------ ------------
Investment Properties:
Held for sale:
Land and improvements (Notes 4 and 11)....... 109 17,832
Other assets................................. 556 295
Held for investment:
Cash......................................... 762
Rental property - net (Note 4)............... 10,650 10,794
Other assets................................. 889 868
------------ ------------
Total Investment Properties................ 12,204 30,551
------------ ------------
Collateralized Mortgage Financing:
Collateral for bonds payable (Note 6).......... 5,006 5,970
Other assets................................... 238 426
------------ ------------
Total Collateralized Mortgage Financing.... 5,244 6,396
------------ ------------
Income Taxes Receivable - Including deferred tax
benefits (Note 10)............................. 1,723 7,331
------------ ------------
Total Assets..................................... $712,861 $589,102
============ ============
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
October 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------ ------------
Homebuilding:
Nonrecourse land mortgages (Note 7)............... $ 6,407 $ 11,846
Accounts payable and other liabilities............ 73,057 53,765
Customers' deposits (Note 5)...................... 25,647 23,857
Nonrecourse mortgages secured by operating
properties (Note 7)............................. 3,662 3,770
------------ ------------
Total Homebuilding............................ 108,773 93,238
------------ ------------
Financial Services:
Accounts payable and other liabilities............ 1,218 2,422
Mortgage warehouse line of credit (Notes 6 and 7). 30,034 66,666
------------ ------------
Total Financial Services...................... 31,252 69,088
------------ ------------
Investment Properties:
Accounts payable and other liabilities............ 932 1,373
------------ ------------
Total Investment Properties................... 932 1,373
------------ ------------
Collateralized Mortgage Financing:
Accounts payable and other liabilities............ 6
Bonds collateralized by mortgages
receivable (Note 6)............................. 3,699 5,652
------------ ------------
Total Collateralized Mortgage Financing....... 3,699 5,658
------------ ------------
Notes Payable:
Revolving credit agreement (Note 7)............... 70,125 68,000
Senior notes (Note 8)............................. 150,000
Subordinated notes (Note 8)....................... 100,000 145,449
Accrued interest.................................. 11,654 4,904
------------ ------------
Total Notes Payable........................... 331,779 218,353
------------ ------------
Total Liabilities............................. 476,435 387,710
------------ ------------
Commitments and Contingent Liabilities (Notes 5 and 14)
Stockholders' Equity (Notes 13 and 14):
Preferred Stock,$.01 par value-authorized 100,000
shares; none issued
Common Stock,Class A,$.01 par value-authorized
87,000,000 shares; issued 17,218,442 shares in 1999
and 15,803,297 shares in 1998 (including 2,710,274
shares in 1999 and 1,937,374 shares in 1998 held
in Treasury).................................... 172 157
Common Stock,Class B,$.01 par value
(convertible to Class A at time of sale)
-authorized 13,000,000 shares; issued 7,997,083
shares in 1999 and 8,040,171 shares in 1998
(both years include 345,874 shares held in
Treasury)....................................... 79 80
Paid in Capital................................... 45,856 34,561
Retained Earnings (Note 8)........................ 213,257 183,182
Treasury Stock - at cost.......................... (22,938) (16,588)
------------ ------------
Total Stockholders' Equity.................... 236,426 201,392
------------ ------------
Total Liabilities and Stockholders' Equity.......... $712,861 $589,102
============ ============
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
Year Ended
-------------------------------
October October October
31, 1999 31, 1998 31, 1997
--------- --------- ---------
Revenues:
Homebuilding:
Sale of homes............................. $908,553 $895,644 $731,807
Land sales and other revenues (Note 12)... 17,409 15,411 26,983
--------- --------- ---------
Total Homebuilding...................... 925,962 911,055 758,790
Financial Services.......................... 20,239 19,098 10,735
Investment Properties (Note 12)............. 1,567 11,111 13,757
Collateralized Mortgage Financing........... 519 683 854
--------- --------- ---------
Total Revenues.......................... 948,287 941,947 784,136
--------- --------- ---------
Expenses:
Homebuilding:
Cost of sales............................. 730,025 748,941 634,317
Selling, general and administrative....... 81,396 67,519 62,475
Inventory impairment loss (Note 11)....... 2,091 3,994 14,019
--------- --------- ---------
Total Homebuilding...................... 813,512 820,454 710,811
--------- --------- ---------
Financial Services.......................... 19,195 17,010 10,780
--------- --------- ---------
Investment Properties:
Operations................................ 1,772 3,395 5,909
Provision for impairment loss (Note 11)... 1,038 14,446
--------- --------- ---------
Total Investment Properties............. 1,772 4,433 20,355
--------- --------- ---------
Collateralized Mortgage Financing........... 504 672 878
--------- --------- ---------
Corporate General and Administrative(Note 3) 28,652 21,048 15,088
--------- --------- ---------
Interest.................................... 30,343 34,423 35,775
--------- --------- ---------
Other operations............................ 3,692 2,615 2,573
--------- --------- ---------
Total Expenses.......................... 897,670 900,655 796,260
--------- --------- ---------
Income(Loss)Before Income Taxes and
Extraordinary Loss.......................... 50,617 41,292 (12,124)
--------- --------- ---------
State and Federal Income Taxes:
State (Note 10)............................. 5,093 3,572 1,796
Federal (Note 10)........................... 14,581 11,569 (6,950)
--------- --------- ---------
Total Taxes............................... 19,674 15,141 (5,154)
--------- --------- ---------
Extraordinary Loss From Extinguishment of
Debt, Net of Income Taxes (Note 8).......... (868) (748)
--------- --------- ---------
Net Income (Loss)............................. $ 30,075 $ 25,403 $ (6,970)
========= ========= =========
Per Share Data:
Basic:
Income (Loss)Per Common Share Before
Extraordinary Loss...................... $ 1.45 $ 1.20 $ (0.31)
Extraordinary Loss........................ (.04) (.03)
--------- --------- ---------
Income (Loss)............................. $ 1.41 $ 1.17 $ (0.31)
========= ========= =========
Assuming Dilution:
Income (Loss)Per Common Share Before
Extraordinary Loss...................... $ 1.43 $ 1.19 $ (0.31)
Extraordinary Loss........................ (.04) (.03)
--------- --------- ---------
Income (Loss)............................. $ 1.39 $ 1.16 $ (0.31)
========= ========= =========
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, 1996... 15,135,348 $ 155 7,901,705 $ 82 $33,935 $164,749 $(5,299) $ 193,622
Conversion of Class B to
Class A common stock...... 146,893 1 (146,893) (1)
Treasury stock purchases.... (1,184,400) (7,890) (7,890)
Net Loss.................... (6,970) (6,970)
----------- ------ ----------- ------ ------- -------- --------- ---------
Balance, October 31, 1997... 14,097,841 156 7,754,812 81 33,935 157,779 (13,189) 178,762
Sale of Common Stock Under
Employee Stock Option
Plan...................... 114,667 626 626
Conversion of Class B to
Class A common stock...... 60,515 1 (60,515) (1)
Treasury stock purchases.... (407,100) (3,399) (3,399)
Net Income.................. 25,403 25,403
----------- ------ ----------- ------ ------- -------- --------- ---------
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 1 58 59
Acquisitions (Note 15)...... 1,362,057 13 11,237 11,250
Conversion of Class B to
Class A common stock...... 43,088 1 (43,088) (1)
Treasury stock purchases.... (772,900) (6,350) (6,350)
Net Income ................. 30,075 30,075
----------- ------ ----------- ------ ------- -------- --------- ---------
Balance, October 31, 1999... 14,508,168 $ 172 7,651,209 $ 79 $45,856 $213,257 $(22,938) $ 236,426
=========== ====== =========== ====== ======= ======== ========= =========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended
----------------------------------
October October October
31, 1999 31, 1998 31, 1997
---------- ---------- ----------
Cash Flows From Operating Activities:
Net Income (Loss)............................... $ 30,075 $ 25,403 $ (6,970)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation................................ 6,314 4,293 5,032
Loss (gain)on sale and retirement of
property and assets....................... 283 (6,189) (4,760)
Extraordinary loss from extinguishment of
Debt net of income taxes.................. 868 748
Deferred income taxes....................... 3,056 1,987 (4,568)
Impairment losses........................... 2,091 5,032 28,465
Decrease (increase) in assets:
Mortgage notes receivable................. 46,012 (17,343) 4,332
Receivables, prepaids and other assets.... (9,475) 6,410 (6,830)
Inventories............................... (53,592) 30,666 (48,105)
Increase (decrease) in liabilities:
State and Federal income taxes............ 3,020 3,651 (7,325)
Customers' deposits....................... (1,269) 1,490 10,007
Interest and other accrued liabilities.... 9,203 2,235 3,726
Post development completion costs......... 3,293 4,438 (8,746)
Accounts payable.......................... (4,400) 2,233 5,034
Net cash provided by (used in) ---------- ---------- ----------
operating activities.................... 35,479 65,054 (30,708)
---------- ---------- ----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets... 19,094 30,436 14,997
Purchase of property............................ (13,381) (3,135) (3,156)
Acquisition of homebuilding companies........... (12,249)
Investment in and advances to unconsolidated
affiliates.................................... 249 243 195
Investment in income producing properties....... (843) (3,844) (11,099)
Net cash provided by (used in) ---------- ---------- ----------
investing activities.................... (7,130) 23,700 937
---------- ---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes............... 850,320 632,531 1,139,780
Proceeds from senior debt....................... 150,000
Principal payments on mortgages and notes..... (972,265) (668,987) (1,101,969)
Principal payments on subordinated debt......... (46,302) (45,284) (10,000)
Purchase of treasury stock...................... (6,350) (3,399) (7,890)
Proceeds from sale of stock..................... 59 626
Net cash provided by (used in) ---------- ---------- ----------
financing activities.................... (24,538) (84,513) 19,921
---------- ---------- ----------
Net Increase (Decrease) In Cash................... 3,811 4,241 (9,850)
Cash and Cash Equivalent Balance, Beginning
Of Year......................................... 15,554 11,313 21,163
---------- ---------- ----------
Cash and Cash Equivalent Balance, End Of Year..... $ 19,365 $ 15,554 $ 11,313
========== ========== ==========
Supplemental Disclosures Of Cash Flow:
Cash paid during the year for:
Interest (net of amount capitalized).......... $ 23,731 $ 35,315 $ 35,869
========== ========== ==========
Income Taxes.................................. $ 16,257 $ 12,303 $ 6,809
========== ========== ==========
Non-cash Investing and Finance Activities:
Debt assumed on sale of property and assets..... $ 13,530
==========
Stock issued for acquisitions..................... $ 11,250
==========
See notes to consolidated financial statements
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 1999, 1998, AND 1997.
BASIS OF PRESENTATION AND SEGMENT INFORMATION
Basis of Presentation - The accompanying consolidated financial statements
include our accounts and all wholly-owned subsidiaries after elimination of all
significant intercompany balances and transactions.
Segment Information - Statement of Financial Accounting Standards No. 131
("FAS 131") "Disclosures About Segments of an Enterprise and Related
Information" established new standards for segment reporting based on the way
management organizes segments within a company for making operating decisions
and assessing performance. Our financial reporting segments consist of
homebuilding, financial services, collateralized mortgage financing, and
corporate. Our homebuilding operations comprise the most substantial part of
our business, with approximately 97% of consolidated revenues in years ended
October 31, 1999, 1998, and 1997 contributed by the homebuilding operations. We
are a Delaware corporation, currently building and selling homes in more than
110 new home communities in New Jersey, Pennsylvania, New York, Florida, North
Carolina, Virginia, California, Texas and Poland. We offer a wide variety of
homes that are designed to appeal to first time buyers, first and second time
move up buyers, luxury buyers, active adult buyers and empty nesters. Our
financial services operations provide mortgage banking and title services to the
homebuilding operations' customers and third parties. We do not retain or
service the mortgages that we originate but rather, sell the mortgages and
related servicing rights to investors. Corporate primarily includes the
operations of our corporate office whose primary purpose is to provide
information services, human resources, management reporting, training, cash
management, internal audit, risk management, and administration of process
redesign, quality and safety. Assets, liabilities, revenues and expenses of our
reportable segments are separately included in the consolidated balance sheets
and consolidated statements of operations.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - 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.
Business Combinations - When we make an acquisition of another company, we
use the purchase method of accounting in accordance with Accounting Principal
Board Opinion 16 ("APB 16") "Business Combinations". Under APB 16 we record as
our cost the acquired assets less liabilities assumed. Any difference between
the cost of an acquired company and the sum of the fair values of tangible and
identified intangible assets less liabilities is recorded as goodwill. The
reported income of an acquired company includes the operations of the acquired
company after acquisition, based on the acquisition costs.
Income Recognition - Income from sales is recorded when title is conveyed
to the buyer, subject to the buyer's financial commitment being sufficient to
provide economic substance to the transaction.
Cash and Cash Equivalents - Cash and cash equivalents include cash
deposited in checking accounts, overnight repurchase agreements, certificates of
deposit, Treasury bills and government money market funds with original
maturities of 90 days or less when purchased.
Fair Value of Financial Instruments - The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques as appropriate. Our financial instruments consist of cash
equivalents, mortgages and notes receivable, mortgages and notes payable, and
the senior and subordinated notes payable. Unless otherwise disclosed, the fair
value of financial instruments approximates their recorded values.
Inventories - For inventories of communities under development, a loss is
recorded when events and circumstances indicate impairment and the undiscounted
future cash flows generated are less than the related carrying amounts. The
impairment loss is based on expected revenue, cost to complete including
interest, and selling costs. Inventories and long-lived assets held for sale
are recorded at the lower of cost or fair value less selling costs. Fair value
is defined in Statement of Financial Accounting Standard No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("FAS 121") as the amount at which an asset could be bought or sold in a current
transaction between willing parties, that is, other than in a forced or
liquidation sale. Construction costs are accumulated during the period of
construction and charged to cost of sales under specific identification methods.
Land, land development, and common facility costs in a community are amortized
equally based upon the number of homes to be constructed in each housing
community.
Interest costs related to properties in progress are capitalized during the
construction period and expensed along with the associated cost of sales as the
related inventories are sold (see Note 7).
The cost of land options is capitalized when incurred and either included
as part of the purchase price when the land is acquired or charged to operations
when we determine we will not exercise the option.
Property - Historically, our rental operations arose primarily from rental
of commercial properties. All commercial rental property has been liquidated as
of October 31, 1998. At October 31, 1999 we own two senior residential rental
properties.
Intangible Assets - Any intangible assets acquired by us are amortized on a
straight line basis over its useful life. Goodwill resulting from company
acquisitions during the year ended October 31, 1999 is being amortized over 10
years and reported in the consolidated statements of income as "Other
Operations". During the years ended October 31, 1999, 1998, and 1997, goodwill
amortization amounted to $261,000, $134,000, and $134,000, respectively. The
carrying amount of goodwill is reviewed if facts and circumstances suggest that
it may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on the estimated undiscounted cash flows of the
company acquired over the remaining amortization period, the carrying amount of
the goodwill is reduced by the estimated shortfall of cash flows. In addition,
we assess long-lived assets for impairment under FAS 121. Under those rules,
goodwill associated with assets acquired in a purchase business combination is
included in impairment evaluations when events or circumstances exist that
indicate the carrying amount of those assets may not be recoverable.
Post Development Completion Costs - In those instances where a development
is substantially completed and sold and we have additional construction work to
be incurred, an estimated liability is provided to cover the cost of such work.
Advertising Costs - Advertising costs are treated as period costs and
expensed as incurred. During the years ended October 31, 1999, 1998, and 1997,
advertising costs expensed amounted to $11,995,000, $10,531,000, and
$12,559,000, respectively.
Deferred Income Tax - Deferred income taxes or income tax benefits are
provided for temporary differences between amounts recorded for financial
reporting and for income tax purposes.
Common Stock - Each share of Class A Common Stock entitles its holder to
one vote per share and each share of Class B Common Stock entitles its holder to
ten votes per share. The amount of any regular cash dividend payable on a share
of Class A Common Stock will be an amount equal to 110% of the corresponding
regular cash dividend payable on a share of Class B Common Stock. If a
shareholder desires to sell shares of Class B Common Stock, such stock must be
converted into shares of Class A Common Stock.
On December 10, 1998, our Board of Directors approved an increase in the
stock repurchase plan to purchase up to 3 million shares. The 3 million shares
equals 13.0% of our total and outstanding shares as of December 16, 1996 when
the initial repurchase plan was approved by the Board. As of October 31, 1999,
2,364,400 shares have been repurchased under this program.
Depreciation - The straight-line method is used for both financial and tax
reporting purposes for all assets.
Prepaid Expenses - Prepaid expenses which relate to specific housing
communities (model setup, architectural fees, homeowner warranty, etc.) are
amortized to costs of sales as the applicable inventories are sold. All other
prepaid expenses are amortized over a specific time period or as used and
charged to overhead expense.
Stock Options - Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" establishes a fair value-based method
of accounting for stock-based compensation plans, including stock options.
Registrants may elect to continue accounting for stock option plans under
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees," but are required to provide proforma net income and
earnings per share information "as if" the new fair value approach had been
adopted. We intend to continue accounting for our stock option plan under APB
25. Under APB 25, no compensation expense was recognized because the exercise
price of our employee stock options equals the market price of the underlying
stock on the date of grant (see Note 13).
Per Share Calculations - Statement of Financial Accounting Standards No.
128 ("FAS 128") "Earnings Per Share" requires the presentation of basic earnings
per share and diluted earnings per share, and is effective for annual periods
ending after December 15, 1997. We adopted FAS 128 in the year ended October
31, 1998. Basic earnings per common share is computed using the weighted
average number of shares outstanding and is the same calculation as reported in
prior years. Basic weighted average shares outstanding at October 31, 1999,
1998, and 1997 amounted to 21,404,473 shares, 21,781,105 shares, and 22,409,063
shares, respectively. Diluted earnings per common share has been presented for
prior years and is computed using the weighted average number of shares
outstanding adjusted for the incremental shares attributed to outstanding
options to purchase common stock of 208,000, 235,000, and 97,000 for the years
ended October 31, 1999, 1998, and 1997, respectively.
Accounting Pronouncements Not Yet Adopted - In March 1998, the AICPA issued
SOP-98-1, Accounting For the Costs of Computer Software Developed For or
Obtained For Internal Use. We plan to adopt the SOP on November 1, 1999. The
SOP will require the capitalization of certain costs incurred after the date of
adoption in connection with developing or obtaining software for internal use.
We currently expense such costs as incurred. We have not yet determined the
impact on net income or earnings per share in connection with the adoption of
SOP 98-1.
Reclassifications - Certain amounts in the 1998 and 1997 consolidated
financial statements have been reclassified to conform to the 1999 presentation.
3. CORPORATE INITIATIVES
We have embarked on long term improvement initiatives of total quality,
process redesign, and training. Included in Corporate General and
Administrative is $7,502,000, $3,756,000, and $2,216,000 for the years ended
October 31, 1999, 1998, and 1997, respectively, related to such initiatives.
4. PROPERTY
Homebuilding property, plant, and equipment consists of land, land
improvements, buildings, building improvements, furniture and equipment used to
conduct day to day business. Homebuilding accumulated depreciation related to
these assets at October 31, 1999 and October 31, 1998 amounted to $19,550,000
and $15,088,000, respectively. We owned and held for sale three parcels of
commercial land at October 31, 1998. During the three months ended January 31,
1999 we sold the three land parcels for a total sales price of $20.8 million and
recorded a loss before income taxes of $0.5 million. At October 31, 1999 all
commercial facilities and land (except for one small parcel) have been
liquidated. We are retaining two senior citizen residential rental communities.
Accumulated depreciation on rental property at October 31, 1999 and October 31,
1998 amounted to $2,211,000 and $1,826,000, respectively.
5. ESCROW CASH
We hold escrow cash amounting to $5,578,000 and $4,775,000 at October 31,
1999 and October 31, 1998, respectively, which primarily represents customers'
deposits which are restricted from use by us. We are able to release escrow
cash by pledging letters of credit. At October 31, 1999 and October 31, 1998,
$10,000,000 and $14,000,000 was released from escrow and letters of credit were
pledged, respectively. Escrow cash accounts are substantially invested in
short-term certificates of deposit or time deposits.
6. MORTGAGES AND NOTES RECEIVABLE
Our wholly-owned mortgage banking subsidiary originates mortgage loans,
primarily from the sale of our homes. Such mortgage loans are sold in the
secondary mortgage market, servicing released, or prior to February 28, 1987
pledged against, collateralized mortgage obligations ("CMOs"). At October 31,
1999 and October 31, 1998, respectively, $32,844,000 and $71,002,000 of such
mortgages were pledged against our mortgage warehouse line (see "Notes to
Consolidated Financial Statements - Note 7"). We may incur risk with respect to
mortgages that are delinquent and not pledged against CMOs, but only to the
extent the losses are not covered by mortgage insurance or resale value of the
home. Historically, we have incurred minimal credit losses. The mortgage loans
held for sale are carried at the lower of cost or market value, determined on an
aggregate basis. There was no valuation adjustment at October 31, 1999.
7. MORTGAGES AND NOTES PAYABLE
Substantially all of the nonrecourse land mortgages are short-term
borrowings. Nonrecourse mortgages secured by operating properties are
installment obligations having annual principal maturities in the following
years ending October 31, of approximately $119,000 in 2000, $132,000 in 2001,
$138,000 in 2002, $2,585,000 in 2003, $74,000 in 2004 and $613,000 after 2004.
The interest rates on these obligations range from 7.000% to 8.375%.
We have an unsecured Revolving Credit Agreement ("Agreement") with a group
of banks which provides up to $275,000,000 through July 2002. Interest is
payable monthly and at various rates of either the prime rate or LIBOR plus
1.45%. In addition, we pay a fee equal to .325% per annum on the weighted
average unused portion of the line.
Interest costs incurred, expensed and capitalized were:
Year Ended
----------------------------
October October October
31, 1999 31, 1998 31, 1997
-------- -------- --------
(Dollars in Thousands)
Interest incurred (1):
Residential(3)................. $23,426 $26,675 $29,469
Commercial(4).................. 1,168 2,272 5,308
------- ------- -------
Total incurred................. $24,594 $28,947 $34,777
======= ======= =======
Interest expensed:
Residential(3)................. $29,175 $32,151 $30,467
Commercial(4).................. 1,168 2,272 5,308
------- ------- -------
Total expensed................. $30,343 $34,423 $35,775
======= ======= =======
Interest capitalized at
beginning of year.............. $25,545 $35,950 $39,152
Plus acquired entity interest.... 3,397
Plus interest incurred........... 24,594 28,947 34,777
Less interest expensed........... 30,343 34,423 35,775
Less impairment write-off........ 460 1,220
Less sale of assets.............. 1,227 4,469 984
------- ------- -------
Interest capitalized at
end of year.................... $21,966 $25,545 $35,950
======= ======= =======
Interest capitalized at
end of year:
Residential(3)................. $21,516 $23,868 $29,804
Commercial(2).................. 450 1,677 6,146
------- ------- -------
Total interest
capitalized................... $21,966 $25,545 $35,950
======= ======= =======
1) Data does not include interest incurred by our mortgage and finance
subsidiaries.
(2) Data does not include a reduction for depreciation.
(3) Represents acquisition interest for construction, land and development
costs which is charged to interest expense when land is not under active
development and when homes are delivered.
(4) Represents interest allocated to or incurred on long term debt for
investment properties and charged to interest expense.
Average interest rates and average balances outstanding for short-term debt
are as follows:
October October October
31, 1999 31, 1998 31, 1997
-------- -------- --------
(Dollars In Thousands)
Average outstanding
borrowings................. $ 55,495 $ 98,090 $133,760
Average interest rate during
period..................... 9.2% 8.4% 8.2%
Average interest rate at end
of period(1)............... 7.2% 6.9% 7.8%
Maximum outstanding at any
month end.................. $117,085 $125,325 $184,550
(1) Average interest rate at the end of the period excludes any charges on
unused loan balances.
In addition, we have a secured mortgage loan warehouse agreement with a
group of banks which provides up to $100,000,000 through June 27, 2000.
Interest is payable monthly and at various rates. The interest rate at October
31, 1999 was 6.4%.
8. SENIOR AND SUBORDINATED NOTES
On April 29, 1992, we issued $100,000,000 principal amount of 11 1/4%
Subordinated Notes due April 15, 2002. In October 1998, we redeemed $44,551,000
principal amount at an average price of 101.6% of par. The funds were provided
by the revolving credit agreement and resulted in an extraordinary loss of
$748,000 net of an income tax benefit of $403,000. In June 1999, we redeemed
the remaining $45,449,000 principal amount at an average price of 101.875% of
par. The funds for this redemption were provided by the issuance of Senior
Notes and resulted in an extraordinary loss of $868,000 net of an income tax
benefit of $468,000.
On June 7, 1993, we issued $100,000,000 principal amount of 9 3/4%
Subordinated Notes due June 1, 2005. Interest is payable semi-annually. The
notes are redeemable in whole or in part at our option, initially at 104.875% of
their principal amount on or after June 1, 1999 and reducing to 100% of their
principal amount on or after June 1, 2002.
On May 4, 1999, we issued $150,000,000 principal amount of 9 1/8% Senior
Notes due May 1, 2009. Interest is payable semi-annually. The notes are
redeemable in whole or in part at our option, initially at 104.563% of their
principal amount on or after May 1, 2004 and reducing to 100% of their principal
amount on or after May 1, 2007.
The indentures relating to the Senior and Subordinated Notes and the
Revolving Credit Agreement contain restrictions on the payment of cash
dividends. At October 31, 1999, $35,415,000 of retained earnings were free of
such restrictions.
The fair value of both the Senior Notes and Subordinated Notes is estimated
based on the quoted market prices for the same or similar issues or on the
current rates offered to us for debt of the same remaining maturities. The fair
value of the Senior Notes and Subordinated Notes is estimated at $143,250,000
and $94,500,000, respectively, as of October 31, 1999.
9. RETIREMENT PLAN
In December 1982, we established a defined contribution savings and
investment retirement plan. Under such plan there are no prior service costs.
All associates are eligible to participate in the retirement plan and employer
contributions are based on a percentage of associate contributions. Plan costs
charged to operations amount to $1,976,000, $1,523,000, and $1,520,000 for the
years ended October 31, 1999, 1998, and 1997, respectively.
10. INCOME TAXES
Income Taxes payable (receivable) including deferred benefits, consists of
the following:
October October
31, 1999 31, 1998
--------- ---------
(In Thousands)
State income taxes:
Current.......................... $ 437 $ 2,897
Deferred......................... (758) (1,495)
Federal income taxes:
Current.......................... 4,311 36
Deferred......................... (5,713) (8,769)
--------- ---------
Total.......................... $ (1,723) $ (7,331)
========= =========
The provision for income taxes is composed of the following charges
(benefits):
Year Ended
-----------------------------------
October October October
31, 1999 31, 1998 31, 1997
--------- --------- ---------
(In Thousands)
Current income tax expense:
Federal(1)....................... $ 13,253 $ 9,177 $ (2,381)
State(2)......................... 4,954 3,484 2,051
--------- --------- ---------
18,207 12,661 (330)
--------- --------- ---------
Deferred income tax expense:
Federal.......................... 860 1,989 (4,569)
State............................ 139 88 (255)
--------- --------- ---------
999 2,077 (4,824)
--------- --------- ---------
Total.......................... $ 19,206 $ 14,738 $ (5,154)
========= ========= =========
(1) The current federal income tax expense includes a tax benefit of $468,000
and $403,000 in the years ended October 31, 1999 and 1998, respectively,
relating tothe loss on the redemption of Subordinated Notes that was
reported as an extraordinary item in the "Statement of Operations."
(2) The current state income tax expense is net of the use of state loss
carryforwards amounting to $5,860,000, $8,495,000, and $13,439,000 for the
years ended October 31, 1999, 1998, and 1997.
The deferred tax liabilities or assets have been recognized in the
consolidated balance sheets due to temporary differences as follows:
October October
31, 1999 31, 1998
-------- ---------
(In Thousands)
Deferred tax assets:
Deferred income...................... $ 40 $ 40
Maintenance guarantee reserves....... 711 701
Provision to reduce inventory to
net realizable value............... -- 136
Inventory impairment loss............ 2,545 6,077
Uniform capitalization of overhead... 3,365 2,967
Post development completion costs.... 4,238 1,379
State net operating loss
carryforwards...................... 29,440 27,205
Other................................ 1,378 843
-------- ---------
Total.............................. 41,717 39,348
Valuation allowance(2)............... (29,440) (27,205)
-------- ---------
Deferred tax assets.................. 12,277 12,143
-------- ---------
Deferred tax liabilities:
Deferred interest.................... 31 31
Installment sales.................... 137 137
Accelerated depreciation............. 2,916 1,711
Acquisition goodwill................. 2,722 --
-------- ---------
Total............................... 5,806 1,879
-------- ---------
Net deferred tax assets................ $ 6,471 $ 10,264
======== =========
(3) The net change in the valuation allowance of $2,235,000 results from an
increase in the separate company state net operating losses that may
not be fully utilized.
The effective tax rates varied from the expected rate. The sources of
these differences were as follows:
Year Ended
------------------------------
October October October
31, 1999 31, 1998 31, 1997
-------- -------- --------
Computed "expected" tax rate...... 35.0 % 35.0 % (35.0)%
State income taxes, net of Federal
income tax benefit.............. 6.5 % 6.0 % 11.6 %
Company owned life insurance...... (.1)% (1.6)% (6.2)%
Low income housing tax credit..... (2.8)% (3.4)% (11.2)%
Other............................. .4 % .7 % (1.9)%
-------- -------- --------
Effective tax rate................ 39.0 % 36.7 % (42.7)%
======== ======== ========
We have state net operating loss carryforwards for financial reporting and
tax purposes of $359,000,000 due to expire between the years October 31, 2000
and October 31, 2014.
11. REDUCTION OF INVENTORY TO FAIR VALUE
In accordance with FAS 121, we record impairment losses on inventories
related to communities under development when events and circumstances indicate
that they may be impaired and the undiscounted cashflows estimated to be
generated by those assets are less than their related carrying amounts. As of
October 31, 1998 and 1997, inventory with a carrying amount of $3,077,000 and
$33,143,000, respectively, was written down by $353,000 and $9,258,000,
respectively, to its fair value. This was based on our evaluation of the
expected revenue, cost to complete including interest and selling cost. The
writedown during the year ended October 31, 1998 was attributed to one community
in Florida where homes are being discounted to accelerate sales. The writedowns
during the year ended October 31, 1997 were attributable to numerous communities
in Florida after we decided to reduce our investment in that state and two
communities in New Jersey resulting from a product type change and unforeseen
development costs.
Also in accordance with FAS 121, we record impairment losses on inventories
and long-lived assets held for sale when the related carrying amount exceeds the
fair value less the selling cost. As of October 31, 1999, 1998 and 1997,
inventory and commercial properties with a carrying amount of $4,539,000,
$4,629,000 and $32,008,000, respectively, was written down by $1,801,000,
$2,588,000 and $12,690,000, respectively, to its fair value. The writedowns
during the year ended October 31, 1999 were attributed to one land parcel in
Florida and two residential communities in North Carolina. The Florida land
parcel was written down based on recent purchase offers. The communities were
written down based on our decision to discontinue selling homes and offer the
remaining lots for sale. The writedowns during the year ended October 31, 1998
were attributed to one parcel of land being sold as lots and a commercial retail
center parcel of land which incurred higher land development costs, both in New
Jersey. The writedowns during the year ended October 31, 1997 were attributable
to four residential parcels of land in Florida, one residential parcel of land
in New Jersey, one multi-use commercial parcel of land in New Jersey and two
Florida commercial facilities with expansion land attached to one facility.
During the year ended October 31, 1998, when these commercial facilities were
liquidated, we recovered the carrying value. During the years ended October 31,
1999, 1998 and 1997, we recovered the carrying value or recognized nominal
losses on the land held for sale which was subsequently liquidated.
The total aggregate impairment losses, which are presented in the
consolidated statements of operations, on the inventory held for development and
the land or commercial facilities held for sale were $1,801,000, $2,941,000, and
$21,948,000 for the years ended October 31, 1999, 1998 and 1997, respectively.
On the statement of operations the lines entitled "Homebuilding - Inventory
impairment loss" and "Investment Properties - Provision for impairment loss"
also include writeoffs of options including approval, engineering and
capitalized interest costs. During the year ended October 31, 1999 the
writeoffs amounted to $290,000 and zero, respectively. During the year ended
October 31, 1998, the writeoffs amounted to $2,091,000 and zero, respectively.
During the year ended October 31, 1997, the writeoffs amounted to $4,761,000 and
$1,756,000, respectively. During 1999 we did not exercise an option because the
community's proforma profitability did not produce an adequate return on
investment commensurate with the risk. During 1998, we did not exercise three
residential options because of changes in local market conditions and
difficulties in obtaining government approvals. During 1997, we decided not to
exercise three residential options due to environmental problems or the
property's proforma did not produce an adequate return on investment
commensurate with the risk and one commercial property option because an anchor
tenant with an acceptable credit rating could not be found.
12. TRANSACTIONS WITH RELATED PARTIES
Our Board of Directors has adopted a general policy providing that it will
not make loans to our officers or directors or their relatives at an interest
rate less than the interest rate at the date of the loan on six month U.S.
Treasury Bills, that the aggregate of such loans will not exceed $3,000,000 at
any one time, and that such loans will be made only with the approval of the
members of our Board of Directors who have no interest in the transaction. At
October 31, 1999 and 1998 included in receivables, deposits and notes are
related party receivables from officers and directors amounted to $2,718,000 and
$2,117,000, respectively. Interest income from these loans for October 31,
1999, 1998, and 1997 amounted to $108,000, $97,000, and $100,000, respectively.
We provide property management services to various limited partnerships
including one partnership in which Mr. A. Hovnanian, our Chief Executive
Officer, President and a Director, is a general partner, and members of his
family and certain officers and directors are limited partners. During the
years ended October 31, 1999, 1998, and 1997 we received $80,000, $67,000, and
$76,000, respectively, in fees for such management services. At October 31,
1999 and 1998, no amounts were due us by these partnerships.
13. STOCK PLANS
We have a stock option plan for certain officers and key employees.
Options are granted by a Committee appointed by the Board of Directors. The
exercise price of all stock options must be at least equal to the fair market
value of the underlying shares on the date of the grant. Options granted prior
to May 14, 1998 vest in three equal installments on the first, second and third
anniversaries of the date of the grant. Options granted on or after May 14,
1998 vest in four equal installments on the third, fourth, fifth and sixth
anniversaries of the date of the grant. All options expire ten years after the
date of the grant. In addition, during the years ended October 31, 1999 and
1997 each of the three outside directors of the Company were granted options to
purchase 5,000 shares at the same price and terms as those granted to officers
and key employees. Stock option transactions are summarized as follows:
Weighted Weighted Weighted
Average Average Average
Fair Fair Fair
Value (1) Value (1) Value (1)
And And And
October Exercise October Exercise October Exercise
31, 1999 Price 31, 1998 Price 31, 1997 Price
--------- -------- --------- -------- --------- --------
Options outstanding at
beginning of period. 1,415,000 $8.13 1,336,500 $7.83 1,156,000 $8.04
Granted............ 171,000 $7.87 291,500 $9.09 190,500 $6.47
Exercised.......... 10,000 $5.81 114,667 $5.45
Forfeited.......... 98,333 $9.98 10,000 $5.81
--------- --------- ---------
Options outstanding at
end of period....... 1,576,000 $8.29 1,415,000 $8.13 1,336,500 $7.83
========= ========= =========
Options exercisable at
end of period....... 1,106,666 1,013,166 1,069,333
Price range of options $5.13- $5.13- $5.13-
outstanding......... $11.50 $11.50 $11.50
Weighted-average
remaining contractual
life................ 5.0 yrs. 5.4 yrs. 5.4 yrs.
(1) Fair value of options at grant date approximate exercise price.
Pro forma information regarding net income and earnings per share is
required under the fair value method of Financial Accounting Standards No. 123
("FAS 123") "Accounting for Stock-Based Compensation" and is to be calculated as
if we had accounted for our stock options under the fair value method of FAS
123. The fair value for these options is established at the date of grant using
a Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997: risk- free interest rate of 6.4%, 4.5% and
5.8%, respectively; divided yield of zero; volatility factor of the expected
market price of our common stock of 0.41, 0.46 and 0.47, respectively; and a
weighted-average expected life of the option of 7.7, 7.5 and 7.0 years,
respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options and are not
likely to be representative of the effects on reported net income for future
years, if applicable.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Our pro forma
information follows (in thousands except for earnings per share information):
Year Ended
-----------------------------------
October October October
31, 1999 31, 1998 31, 1997
---------- ---------- -----------
Pro forma net income (loss)............. $ 29,851 $ 25,107 $ (7,131)
========== ========== ===========
Pro forma basic earnings (loss)
per share............................. $ 1.39 $ 1.15 $ (0.32)
========== ========== ===========
Pro forma diluted earnings (loss)
per share............................. $ 1.38 $ 1.14 $ (0.32)
========== ========== ===========
For the year ended October 31, 1999, we modified our bonus plan for certain
associates. A portion of their bonus will be paid by issuing a deferred right
to receive our Class A Common Stock. The number of shares will be calculated by
dividing the portion of the bonus subject to the deferred right award by our
stock price on the date the bonus is earned. 25% of the deferred right award
will vest, and shares will be issued, one year after the year end and then 25% a
year for the next three years. For the year ended October 31, 1999,
approximately 200,000 deferred rights were awarded in lieu of $1,534,000 of
bonus payments.
14. COMMITMENTS AND CONTINGENT LIABILITIES
We are 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 us. We were involved in an action resulting from the non-performance by a
land owner (the "Defendant") to sell real property to us. We entered into a
Settlement Agreement and Mutual Release ("SAMR") relating to this action.
Pursuant to the terms of the SAMR, the Defendant stipulated to a judgement in
our favor in the amount of $3,535,349, which would result in a gain amounting to
approximately $2,500,000. The Defendant also granted us an option to acquire
the real property which was the subject of the action at a specified price in
satisfaction of the judgement. In the event we do not exercise the option, we
may enforce the judgement against such real property and certain other assets of
the Defendant subsequent to June 30, 2000. We have not reflected this
settlement in our financial statements as of October 31, 1999.
As of October 31, 1999 and 1998, respectively, we are obligated under
various performance letters of credit amounting to $4,091,000 and $6,934,000.
(See Note 5)
15. ACQUISITIONS
On August 7, 1999 we acquired the Matzel and Mumford Organization, Inc. ("M &
M"), a New Jersey homebuilder and its related entities. On October 1, 1999 we
acquired the Goodman Family of Builders, L.P. ("Goodman"), a Texas homebuilder
and its related entities. The combined initial purchase price for both
acquisitions was approximately $21,200,000 in cash and 1,845,359 shares of our
Class A Common Stock at a weighted average share price of $7.18, of which
483,302 shares are being held in escrow (and thus not reported as issued and
outstanding at October 31, 1999) for pre-acquisition contingencies. At the
dates of the acquisition we loaned the acquired entities approximately
$85,000,000 to pay off their third party debt. The Goodman Purchase Agreement
provides for an additional contingent payment equal to 75% of the Goodman pretax
profit, as deferred, from October 1, 1999 to December 31, 1999; this contingent
payment is not included in the purchase price above but will be recorded, if
any, to goodwill when the future earnings requirement has been met. In
addition, both the M & M and Goodman acquisitions provide for other payments to
be made generally dependent upon the achievement of certain future operating and
return objectives.
Both acquisitions were accounted for as a purchase with the results of
operations of the acquired entities included in our consolidated financial
statements as of the dates of acquisitions. The purchase prices were allocated
based on estimated fair values at the dates of the acquisitions. An intangible
asset equal to the excess purchase prices over the fair values of net assets
acquired of $16,422,000 is recorded in prepaid expenses and other assets on the
consolidated balance sheet; this amount is being amortized on a straight-line
basis over a period of ten years.
The following unaudited pro forma information presents a summary of our
consolidated results of operations as if the acquisitions had occurred as of
November 1, 1998 and 1997 with pro forma adjustments to give effect to
amortization of goodwill, additional compensation, interest expense on
acquisition debt and certain other adjustments, together with related income tax
effects:
Year Ended October 31,
1999 1998
---------- ----------
(In Thousands Except Per Share)
Total Revenues............................ $1,142,690 $1,180,964
Income Before Extraordinary Item.......... $ 37,020 $ 29,612
Net Income Before Adjusting Inventories to
Fair Value at the Date of Acquisition... $ 36,152 $ 28,864
Basic Earnings Per Share.................. $1.60 $1.25
Diluted Earnings Per Share................ $1.59 $1.23
These proforma results have been prepared for comparative purposes only and
include certain adjustments including additional amortization expense as a
result of goodwill, additional compensation and increased interest expense on
acquisition debt. Cost of sales does not include inventory fair value
adjustments at November 1, 1998 and 1997 which would reduce earnings per share.
They do not purport to be indicative of the results of operations which actually
would have resulted had the combination been in effect on November 1, 1997 and
1998 or of future results of operations of the consolidated entities.
16. UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION
Summarized quarterly financial information for the years ended October 31,
1999 and 1998 is as follows:
Three Months Ended
-----------------------------------------
October July April January
31, 1999 31, 1999 30, 1999 31, 1999
-------- -------- -------- ---------
(In Thousands Except Per Share Data)
Revenues........................... $298,828 $236,671 $209,309 $203,479
Expenses........................... $284,928 $222,601 $196,840 $193,301
Income before income taxes and
extraordinary loss............... $ 13,900 $ 14,070 $ 12,469 $ 10,178
State and Federal income tax....... $ 5,015 $ 5,592 $ 5,017 $ 4,050
Extraordinary loss from extinguish-
ment of debt, net of income taxes $ (868)
Net income......................... $ 8,885 $ 7,610 $ 7,452 $ 6,128
Per Share Data:
Basic:
Income per common share before
extraordinary loss............. $ 0.41 $ 0.40 $ 0.35 $ 0.28
Extraordinary loss............... $ (.04)
Net Income....................... $ 0.41 $ 0.36 $ 0.35 $ 0.28
Weighted average number of
common shares outstanding...... 21,726 20,979 21,266 21,512
Assuming Dilution:
Income per common share
before extraordinary loss...... $ 0.41 $ 0.40 $ 0.35 $ 0.28
Extraordinary loss............... $ (.04)
Net Income....................... $ 0.41 $ 0.36 $ 0.35 $ 0.28
Weighted average number of
common shares outstanding...... 21,902 21,206 21,488 21,725
Three Months Ended
-----------------------------------------
October July April January
31, 1998 31, 1998 30, 1998 31, 1998
-------- -------- -------- ---------
(In Thousands Except Per Share Data)
Revenues........................... $267,542 $248,125 $212,320 $213,960
Expenses........................... $255,268 $235,735 $204,710 $204,942
Income before income taxes and
extraordinary loss............... $ 12,274 $ 12,390 $ 7,610 $ 9,018
State and Federal income tax....... $ 4,762 $ 4,677 $ 2,597 $ 3,105
Extraordinary loss from extinguish-
ment of debt, net of income taxes $ (748)
Net income......................... $ 6,764 $ 7,713 $ 5,013 $ 5,913
Per Share Data:
Basic:
Income per common share before
extraordinary loss............. $ 0.35 $ 0.35 $ 0.23 $ 0.27
Extraordinary loss............... $ (.03)
Net Income....................... $ 0.32 $ 0.35 $ 0.23 $ 0.27
Weighted average number of
common shares outstanding...... 21,661 21,785 21,848 21,834
Assuming Dilution:
Income per common share
before extraordinary loss...... $ 0.34 $ 0.35 $ 0.23 $ 0.27
Extraordinary loss............... $ (.03)
Net Income....................... $ 0.31 $ 0.35 $ 0.23 $ 0.27
Weighted average number of
common shares outstanding...... 21,896 22,018 22,042 21,985
17. FINANCIAL INFORMATION OF SUBSIDIARY ISSUER AND SUBSIDIARY GUARANTORS
Hovnanian Enterprises, Inc., the parent company (the "Parent") 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 October
31, 1999 had issued and outstanding $100,000,000 subordinated notes,
$150,000,000 senior notes and a revolving credit agreement with an outstanding
balance of $70,125,000. The subordinated notes, senior 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 senior notes and revolving credit agreement of the Subsidiary Issuer.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries we have 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
statements and other disclosures concerning the Guarantor Subsidiaries are not
presented.
The following consolidating condensed financial information presents 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
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 1999
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
ASSETS
Homebuilding:
Cash and cash equivalents........$ 47 $ (5,395) $ 22,405 $ 106 $ $ 17,163
Inventories...................... 523,192 3,929 527,121
Receivables, deposits, and notes. 6 7,979 22,690 30,675
Property, plant, and equipment... 17,417 9,046 37 26,500
Prepaid expenses and other assets 14,734 40,537 37 55,308
-------- ---------- ---------- ------------ ---------- ----------
Total Homebuilding............. 53 34,735 617,870 4,109 656,767
-------- ---------- ---------- ------------ ---------- ----------
Financial Services................. (4,807) 41,730 36,923
-------- ---------- ---------- ------------ ---------- ----------
Investment Properties:
Held for sale.................... 665 665
Held for investment.............. 11,539 11,539
-------- ---------- ---------- ------------ ---------- ----------
Total Investment Properties.... 12,204 12,204
-------- ---------- ---------- ------------ ---------- ----------
Collateralized Mortgage Financing.. 5,244 5,244
-------- ---------- ---------- ------------- --------- ----------
Income Taxes Receivables........... (4,303) (374) 8,562 (2,162) 1,723
-------- ---------- ---------- ------------ ---------- ----------
Investments in and amounts due to
and from consolidated
subsidiaries..................... 240,676 304,811 (305,942) 2,252 (241,797)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$236,426 $ 339,172 $ 327,887 $ 51,173 $(241,797) $ 712,861
======== ========== ========== ============ ========== ==========
LIABILITIES
Homebuilding:
Accounts payable and other
liabilities....................$ $ 7,060 $ 65,930 $ 67 $ $ 73,057
Customers' deposits.............. 25,351 296 25,647
Nonrecourse mortgages............ 10,069 10,069
-------- ---------- ---------- ------------ ---------- ----------
Total Homebuilding............. 7,060 101,350 363 108,773
-------- ---------- ---------- ------------ ---------- ----------
Financial Services................. 495 30,757 31,252
Investment Properties.............. 932 932
Collateralized Mortgage Financing.. 3,699 3,699
Notes Payable...................... 331,491 288 331,779
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities.............. 338,551 103,065 34,819 476,435
-------- ---------- ---------- ------------ ---------- ----------
STOCKHOLDERS' EQUITY............... 236,426 621 224,822 16,354 (241,797) 236,426
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$236,426 $ 339,172 $ 327,887 $ 51,173 $(241,797) $ 712,861
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED OCTOBER 31, 1999
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ (159) $ 1,120 $ 922,639 $ 22,767 $ (20,405) $ 925,962
Financial Services............... 3,561 16,678 20,239
Investment Properties............ 2,757 (1,190) 1,567
Collateralized Mortgage Financing 519 519
Intercompany Charges............. 91,695 72 (91,767)
Equity In Pretax Income of
Consolidated Subsidiaries...... 50,776 (50,776)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 50,617 92,815 929,029 39,964 (164,138) 948,287
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 832,314 1,918 (20,720) 813,512
Financial Services............... 2,757 16,866 (428) 19,195
Investment Properties............ 2,732 (960) 1,772
Collateralized Mortgage Financing 504 504
Corporate General and
Administration................. 27,415 1,468 (231) 28,652
Interest......................... 60,922 30,381 316 (61,276) 30,343
Other Operations................. 1,774 1,904 14 3,692
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 90,111 871,556 19,618 (83,615) 897,670
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 50,617 2,704 57,473 20,346 (80,523) 50,617
State and Federal Income Taxes..... 19,674 917 21,453 7,771 (30,141) 19,674
Extraordinary Loss................. (868) (868) 868 (868)
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$30,075 $ 919 $ 36,020 $ 12,575 $ (49,514) $ 30,075
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED OCTOBER 31, 1998
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 1,441 $ 902,952 $ 26,210 $ (19,548) $ 911,055
Financial Services............... 3,817 15,281 19,098
Investment Properties............ 12,180 (1,069) 11,111
Collateralized Mortgage Financing 683 683
Intercompany Charges............. 84,166 3,844 (88,010)
Equity In Pretax Income of
Consolidated Subsidiaries...... 41,292 (41,292)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 41,292 85,607 922,793 42,174 (149,919) 941,947
------- ---------- ---------- ------------ --------- ----------
Expenses:
Homebuilding..................... 833,470 6,219 (19,235) 820,454
Financial Services............... 3,049 14,165 (204) 17,010
Investment Properties............ 5,179 (746) 4,433
Collateralized Mortgage Financing 672 672
Corporate General and
Administration................. 20,388 897 (237) 21,048
Interest......................... 61,972 34,184 515 (62,248) 34,423
Other Operations................. 1,680 921 14 2,615
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 84,040 877,700 21,585 (82,670) 900,655
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 41,292 1,567 45,093 20,589 (67,249) 41,292
State and Federal Income Taxes..... 15,141 (64) 16,315 7,975 (24,226) 15,141
Extraordinary Loss................. (748) (748) 748 (748)
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$25,403 $ 883 $ 28,778 $ 12,614 $ (42,275) $ 25,403
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED OCTOBER 31, 1997
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ $ 895 $ 754,972 $ 14,053 $ (11,130) $ 758,790
Financial Services............... 3,090 7,645 10,735
Investment Properties............ 14,822 (1,065) 13,757
Collateralized Mortgage Financing 854 854
Intercompany Charges............. 77,737 7,346 (85,083)
Equity In Pretax Income of
Consolidated Subsidiaries......(12,124) 12,124
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ (12,124) 78,632 780,230 22,552 (85,154) 748,136
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 717,637 3,331 (10,157) 710,811
Financial Services............... 3,063 8,101 (384) 10,780
Investment Properties............ 21,031 (676) 20,355
Collateralized Mortgage Financing 878 878
Corporate General and
Administration................. 14,671 737 (320) 15,088
Interest......................... 58,870 36,555 157 (59,807) 35,775
Other Operations................. 1,951 608 14 2,573
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 75,492 779,631 12,481 (71,344) 796,260
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes..(12,124) 3,140 599 10,071 (13,810) (12,124)
State and Federal Income Taxes..... (5,154) 367 (830) 4,028 (3,565) (5,154)
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$(6,970) $ 2,773 $ 1,429 $ 6,043 $ (10,245) $ (6,970)
======= ========== ========== ====================== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED OCTOBER 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)..................$ 30,075 $ 919 $ 36,020 $ 12,575 $ (49,514) $ 30,075
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities... 15,774 311 (123,977) 63,782 49,514 5,404
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 45,849 1,230 (87,957) 76,357 35,479
Net Cash Provided by (Used In)
Investing Activities............... (9,478) 1,868 480 (7,130)
Net Cash Provided By(Used In)
Financing Activities............... (6,291) 106,676 (40,326) (84,597) (24,538)
Intercompany Investing and Financing
Activities - Net................... (39,526) (94,163) 128,000 5,689
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... 32 4,265 1,585 (2,071) 3,811
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 $ (5,395) $ 24,608 $ 106 $ 19,365
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED OCTOBER 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)..................$ 25,403 $ 883 $ 28,778 $ 12,614 $ (42,275) $ 25,403
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities... (22,675) 1,708 33,340 (14,997) 42,275 39,651
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 2,728 2,591 62,118 (2,383) 65,054
Net Cash Provided by (Used In)
Investing Activities............... (1,789) 26,090 (601) 23,700
Net Cash Provided By(Used In)
Financing Activities............... (2,773) (71,551) (26,687) 16,498 (84,513)
Intercompany Investing and Financing
Activities - Net................... 49 66,574 (52,355) (14,268)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... 4 (4,175) 9,166 (754) 4,241
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......................$ 14 $ (9,660) $ 23,023 $ 2,177 $ $ 15,554
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED OCTOBER 31, 1997
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income (loss)..................$ (6,970) $ 2,773 $ 1,429 $ 6,043 $ (10,245) $ (6,970)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities... 30,787 (121,105) 56,498 (163) 10,245 (23,738)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 23,817 (118,332) 57,927 5,880 (30,708)
Net Cash Provided by (Used In)
Investing Activities............... (2,327) 3,327 (63) 937
Net Cash Provided By(Used In)
Financing Activities............... (7,890) 55,000 (14,965) (12,224) 19,921
Intercompany Investing and Financing
Activities - Net................... (15,926) 61,423 (50,708) 5,211
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease) In Cash...... 1 (4,236) (4,419) (1,196) (9,850)
Cash and Cash Equivalent Balance,
Beginning of Period................ 9 (1,249) 18,276 4,127 21,163
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalent Balance,
End of Period......................$ 10 $ (5,485) $ 13,857 $ 2,931 $ $ 11,313
======== ========= ========== ============ ========== ==========