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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
( )ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the eight months ended OCTOBER 31, 1994
( X )TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from March 1, 1994 to October 31, 1994
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)
908-747-7800
(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 ( X ).
As of the close of business on January 13, 1995, there were outstanding
14,814,530 shares of the Registrant's Class A Common Stock and 8,207,198
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 January 13, 1995 was
$56,237,000. (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 in March 1995 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............................ 18
4 Submission of Matters to a Vote of
Security Holders........................... 18
Executive Officers of the Registrant......... 18
PART II
5 Market for the Registrant's Common Equity
and Related Stockholder Matters............ 19
6 Selected Financial Data...................... 19
7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 21
8 Financial Statements and Supplementary
Data....................................... 36
9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................. 36
PART III
10 Directors and Executive Officers of the
Registrant................................. 37
Executive Officers of the Registrant......... 37
11 Executive Compensation....................... 38
12 Security Ownership of Certain Beneficial
Owners and Management...................... 38
13 Certain Relationships and Related
Transactions............................... 38
PART IV
14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K....................... 39
SIGNATURES................................... 42
PART I
ITEMS 1 AND 2 - BUSINESS AND PROPERTIES
The Company primarily designs, constructs and markets multi-family
attached condominium apartments and townhouses and single family detached
homes in planned residential developments in its Northeast Region (comprised
primarily of New Jersey and eastern Pennsylvania), in southeastern Florida, in
metro Washington, D. C., in North Carolina, and very recently in southwestern
California. The Company markets its homes to first time buyers and to first
and second time move-up buyers and concentrates on the moderately priced
segment of the housing market. The Company has diversified its business, on a
limited scale, through mortgage banking, title insurance activities and the
development and ownership of commercial properties, primarily in New Jersey,
and, to a lesser extent, in Florida.
The Company employed approximately 1,200 full-time associates as of
December 31, 1994. The Company was incorporated in New Jersey in 1967 and was
reincorporated in Delaware in 1982.
RESIDENTIAL DEVELOPMENT ACTIVITIES
The Company's 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. By using standardized designs and materials and by
rigorous control of subcontracting costs, the Company attempts to keep selling
prices moderate.
The Company attempts to reduce the effect of certain risks inherent in
the housing industry through the following policies and procedures:
- The Company acquires land for future development principally through the
use of land options which need not be exercised before the completion of the
regulatory approval process. The Company structures these options in most
cases with flexible takedown schedules rather than with an obligation to
takedown the entire parcel upon approval. Additionally, the Company purchases
improved lots in certain markets by acquiring a small number of improved lots
with an option on additional lots. This allows the Company to minimize the
economic costs and risks of carrying a large land inventory, while maintaining
its ability to commence new developments during favorable market periods.
- In an attempt to reduce its land acquisition costs, the Company monitors
housing industry cycles and seeks to acquire land options near the cyclical
trough of specific geographic housing cycles.
- The Company generally begins construction on a residential multi-family
building only after entering into contracts for the sale of at least 75% of
the homes in that building. Single family detached homes 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.
- The Company finances all construction, land acquisition and operations
through equity, long term debt, its revolving credit facility or cash flow.
This eliminates the need of obtaining specific community construction
financing, which is especially important at a time when obtaining such
community financing is difficult.
- Through its presence in multiple geographic markets, the Company's goal is
to reduce the effects that housing industry cycles, seasonality and local
conditions in any one area may have on its business.
The Company concentrates on a segment of the housing market consisting of
moderately priced, multi-family attached condominium apartments and
townhouses, which are marketed primarily to first time buyers, as well as
moderately priced townhouses with garages and single family detached homes,
which are marketed primarily to first and second time move-up buyers. In
recent years, the Company has diversified its product mix to include more
detached single family homes and larger townhouses with garages designed for
the move-up buyer. Current base prices for the Company's homes in contract
backlog at October 31, 1994 (exclusive of upgrades and options) range from
$39,000 to $610,000 in its Northeast Region, from $105,000 to $197,500 in
Florida, from $80,000 to $338,000 in metro Washington, D. C., from $79,000 to
$345,000 in North Carolina, and from $190,000 to $226,000 in California.
Closings generally occur and are reflected in revenues from four to twelve
months after sales contracts are signed.
Information on homes delivered in the Company's market areas is set forth
below:
Twelve Eight
Months Months Twelve Months Ended
Ended Ended ---------------------------------
October October February February February
31, 1994 31, 1994 28, 1994 28, 1993, 29, 1992
-------- -------- --------- --------- --------
(Housing Revenue in Thousands)
Northeast Region(1):
Housing Revenues...$457,986 $223,582 $389,577 $311,347 $216,274
Homes Delivered.... 2,845 1,403 2,527 2,226 1,582
Average Price......$160,979 $159,360 $154,165 $139,868 $136,709
North Carolina:
Housing Revenues...$110,868 $ 78,465 $ 72,639 $ 59,399 $ 45,698
Homes Delivered.... 808 558 580 517 420
Average Price......$137,213 $140,618 $125,239 $114,892 $108,805
Florida:
Housing Revenues...$ 58,879 $ 37,076 $ 48,780 $ 19,900 $ 20,512
Homes Delivered.... 445 265 405 184 282
Average Price......$132,312 $139,909 $120,444 $108,152 $ 72,738
Metro Washington D.C.:
Housing Revenues...$ 40,738 $ 25,236 $ 44,783 $ 3,327 --
Homes Delivered.... 223 137 288 28 --
Average Price......$183,130 $184,204 $155,497 $118,821 --
California:
Housing Revenues...$ 736 $ 736 -- -- --
Homes Delivered.... 4 4 -- -- --
Average Price......$184,000 $184,000 -- -- --
Other:
Housing Revenues...$ 1,663 $ 1,227 $ 1,710 $ 3,333 $ 9,271
Homes Delivered.... 27 20 28 44 99
Average Price......$ 61,593 $ 61,350 $ 61,071 $ 75,750 $ 93,646
Combined Total:
Housing Revenues...$670,870 $366,322 $557,489 $397,306 $291,755
Homes Delivered.... 4,352 2,387 3,828 2,999 2,383
Average Price......$154,152 $153,465 $145,634 $132,480 $122,432
(1) Excludes suspended operations in New York which are included with
New Hampshire in "Other" below.
Information on homes delivered by product type is set forth below:
Twelve Eight
Months Months Twelve Months Ended
Ended Ended ----------------------------
October October February February February
31, 1994 31, 1994 28, 1994 28, 1993 29, 1992
-------- -------- -------- -------- --------
(Housing Revenues in Thousands)
First Time Buyer Product(1)
Housing Revenues.........$ 97,663 $ 47,787 $154,518 $137,613 $121,247
Homes Delivered.......... 962 475 1,310 1,226 1,225
Percentage of Housing
Revenues................ 15% 13% 28% 35% 42%
Move-Up Buyer Product(2)
Housing Revenues.........$573,207 $318,535 $402,971 $259,693 $170,508
Homes Delivered.......... 3,390 1,912 2,518 1,773 1,158
Percentage of Housing
Revenues................ 85% 87% 72% 65% 58%
(1) First time buyer product consists of all of the Company's
multi-family attached home products other than townhouses with
garages.
(2) Move-up buyer product consists of single family detached homes and
townhouses with garages. Included in this group are low priced single
family detached homes in North Carolina which may be purchased by first
time buyers.
Beginning in April 1994 sales contracts began to slow down in all the
Company's markets. This slowdown was primarily attributed to increased home
mortgage interest rates and increased competition. By October 1994 sales in
the Northeast Region, improved partially due to an increase in the number of
active selling communities. Metro Washington D. C. and Florida continued to
be slow. North Carolina sales returned to prior year levels.
Because of continued weak economic conditions in the southern New
Hampshire market, the Company elected to suspend activities in that market in
1990. The Company decided to liquidate all existing homes by deep discount
and auction sales. At October 31, 1994, 31 homes remain in southern New
Hampshire of which 6 are under contract of sale. The Company plans to
liquidate the remaining 25 homes through a bulk sale. The Company has written
these homes down to net realizable value.
In anticipation of future losses resulting from the sale of certain
inventory primarily in New Hampshire, New York, and Pennsylvania, the Company
established reserves during the current eight months to reduce the book value
of such inventory to their estimated net realizable value. The book value of
all residential real estate inventory has been adjusted to reflect estimated
net realizable value. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations - Homebuilding."
As of October 31, 1994, the following table summarizes the Company's
active communities under development:
(1) (2)
Contracted Remaining
Commun- Approved Homes Not Home Sites
ities Lots Closed Closed Available
------- -------- ------ ---------- ----------
Northeast Region...... 44 10,017 3,263 1,286 5,468
North Carolina........ 32 3,126 975 231 1,920
Florida............... 14 2,367 812 214 1,341
Metro Washington D.C.. 11 1,057 248 42 767
California............ 5 466 4 21 441
------- -------- ------ ---------- ---------
Total 106 17,033 5,302 1,794 9,937
======= ======== ====== ========== =========
(1) Includes 88 lots under option.
(2) Of the total home sites available, 612 were under construction or
completed (including 99 models and sales offices) and 2,554 were under
option.
In addition, in substantially completed or suspended developments, the
Company had 34 homes under construction or completed including 13 homes which
are in contract. The Company also owned 296 lots without construction (two in
contract) and has 299 lots under option (one in contract) in these
substantially completed or suspended developments.
BACKLOG
Sales of the Company's residential 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 the Company) is
unobtainable within the period specified in the contract. This contingency
period typically is four to eight weeks following the date of execution.
At October 31, 1994 and February 28, 1994, the Company had a backlog of
signed contracts for 1,810 homes and 1,926 homes, respectively, with sales
values aggregating $310,455,000 and $278,127,000, respectively. New sales
contracts for the eight months ended October 31, 1994 decreased to
$369,137,000 from $429,745,000 for the same period last year. Substantially
all of the Company's backlog at October 31, 1994 is expected to be completed
and closed within the next twelve months. At December 31, 1994 and 1993, the
Company's backlog of signed contracts was 1,868 homes and 2,502 homes,
respectively, with sales values aggregating $323,925,000 and $367,781,000,
respectively.
RESIDENTIAL LAND INVENTORY
It is the Company's 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, 1994, 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....... 43 10,049 $190,203 $21,472
Owned.............. 5 891 21,853
-------- ----------- -----------
Total........... 48 10,940 43,325
-------- ----------- -----------
North Carolina:
Under Option....... 3 223 $ 7,697 144
-------- ----------- -----------
Florida:
Owned.............. 3 992 2,663
-------- ----------- -----------
Metro Washington, D.C.:
Under Option........ 4 493 $14,830 450
-------- ----------- -----------
California:
Under Option........ 1 48 $ 1,056 221
-------- ----------- -----------
Totals:
Under Option........ 51 10,813 22,287
Owned............... 8 1,883 24,516
-------- ----------- ------------
Combined Total........ 59 12,696 $46,803
======== =========== ============
(1) Properties under option also includes costs incurred on properties not
under option but which are under investigation. For properties under option,
the Company paid, as of October 31, 1994, option fees and deposits aggregating
approximately $7,557,000. As of October 31, 1994, the Company spent an
additional $14,730,000 in non-recoverable predevelopment costs on such
properties.
(2) The book value of $46,803,000, plus the land parcel described below of
$10,133,000, and other land inventory costs of $643,000, totals $57,579,000
which is identified on the balance sheet as "Inventories - land, land options,
and cost of projects in planning."
In its Northeast Region, the Company's objective is to control a supply
of land sufficient to meet anticipated building requirements for at least
three to four years. At October 31, 1994, the Company had one additional land
parcel under option in its Northeast Region with total fees, deposits and non-
recoverable predevelopment costs amounting to $10,133,000. Since this land is
more appropriate for the development of expensive homes, the Company is
currently attempting to sell these lots to other developers and individuals.
In the future, some of these lots may be developed by the Company.
In North Carolina and metro Washington, D.C., some land historically has
been acquired from land developers on a lot takedown basis. Under a typical
agreement with the lot developer, the Company purchases 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 metro Washington, D.C., the Company is
optioning parcels of unimproved land for development.
In Florida, the Company is focusing its development efforts primarily in
the southeast. Emphasis is principally on building single family detached
homes. The Company satisfies its land requirements primarily through a
takedown program of developed lots in existing subdivisions. As a result of
its decision to concentrate in the southeast, the Company is attempting to
sell all its land in other locations, including the parcels of owned land
included in the table on the previous page.
In California, the Company has focused its development efforts in the
southwest region. Here the emphasis is on affordable housing and will consist
of single family attached and detached homes. Where possible the Company
plans to option developed lots with twenty or fewer homes to be taken down at
one time. With a dwindling supply in California of developed lots, some land
parcels will be optioned which will require development activities. Such
option fees could range up to 10% of the land value.
In addition to the reserves discussed above under "Residential
Development Activities," the Company has established reserves to reduce the
book value of certain undeveloped land in Florida to its estimated net
realizable value. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations - Housing
Operations."
CUSTOMER FINANCING
At the Company's 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 the Company's customers 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 Eatontown, New Jersey and operates branch offices
in Raleigh, North Carolina; Fairfax, Virginia; and West Palm Beach, Florida.
Additionally, KHM originates loans in Pennsylvania.
KHM's principal sources of revenues are: (i) net gains from the sale of
loans; (ii) revenues from the sale of the rights to service loans; and (iii)
interest income earned on mortgage loans during the period they are held by
KHM prior to their sale to investors.
KHM is approved by the Government National Mortgage Association ("GNMA")
as a seller-servicer of Federal Housing Administration ("FHA") and Veterans
Administration ("VA") loans. A portion of the conventional loans originated
by KHM (i.e., loans other than those insured by FHA or guaranteed by VA)
qualify for inclusion in loan guarantee programs sponsored by the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"). KHM arranges for fixed and adjustable rate,
conventional, privately insured mortgages, FHA-insured or VA-guaranteed
mortgages, and mortgages funded by revenue bond programs of states and
municipalities.
KHM is a delegated underwriter under the FHA Direct Endorsement and VA
Automatic programs in accordance with criteria established by such agencies.
Additionally, KHM has delegated underwriting authority from FNMA and FHLMC.
As a delegated underwriter, KHM may underwrite and close mortgage loans under
programs sponsored by these agencies without their prior approval, which
expedites the loan origination process.
KHM, like other mortgage bankers, customarily sells nearly all of the
loans that 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.
RENTAL PROPERTY DEVELOPMENT ACTIVITIES AND LAND INVENTORY
The Company diversified its 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. The Company has
concentrated primarily on the construction of single-story office/warehouses
and retail strip centers. The Company's objectives are to create recurring
revenues from the rental and/or sale of its developed properties and to
achieve appreciation in the value of its properties over the long-term. The
Company expects to limit its future commercial development activities.
In connection with the development of its commercial properties, the
Company would, when possible, purchase or enter into options to purchase all
sites subject to obtaining applicable zoning and required utilities.
Generally, the Company will seek anchor tenants and other lessees for its
projects before construction begins. In some situations, on land already
owned by the Company, the Company may build office/warehouse buildings on
speculation, but only to a limited degree. Following the construction and
lease-up of new buildings, the Company intends to perform all functions
relating to the management and operation of the buildings.
The Company has completed or acquired and placed into operation the
following commercial properties:
October 31, 1994 October
Square Feet Percent 31, 1994
Location Total Leased Leased Book Value
-------- ------ ------- ------- -----------
North Brunswick, NJ:
Retail center............. 53,042 51,542 97% $ 4,741,000
Office/warehouse building. 86,155 75,581 88% 6,511,000
Office/warehouse building. 84,811 66,826 79% 7,204,000
Piscataway Township, NJ:
Retail center............. 97,520 97,520 100% 10,734,000
Allaire, NJ:
Retail Center............. 116,196 102,424 88% 8,053,000
Franklin Township, NJ:
Retail Center............. 138,364 138,364 100% (1)
West Palm Beach, FL:
Office Building........... 43,290 39,294 91% 4,445,000
Jacksonville, FL - Phase I:
Office/warehouse building. 42,456 36,158 85% 3,154,000
Office building........... 35,689 26,939 75% 2,666,000
------- -------- ----- -----------
Total.................. 697,523 634,648 91% $47,508,000
======= ======== ===== ===========
(1) Property is held in a partnership 50% owned by the Company. The
Company's investment in this partnership of $3,994,000 is included
in the balance sheet under "Investment In and Advances To
Unconsolidated Affiliates and Joint Ventures."
(2) Includes 13,538 square feet leased to the Company's Florida
Division.
The Company had one residential rental property at October 31, 1994
consisting of a low income senior citizen community. This community consists
of 96 condominium apartments and is fully leased. By building these homes the
Company expects to qualify for federal tax credits amounting to approximately
$6,000,000 over the next ten years. At October 31, 1994, the net book value
of this community was $6,187,000.
The Company has the ability to obtain long-term financing on its
commercial properties after each property is substantially leased. At October
31, 1994, the North Brunswick, NJ retail center and Piscataway, NJ retail
center had non-recourse financing amounting to $5,924,000 and $11,617,000,
respectively.
At October 31, 1994, the Company owned two additional parcels of
commercial land in New Jersey. The Company is currently seeking opportunities
to develop and lease, or convert these parcels into residential usage. To
further enhance the marketability of one of these parcels, the Company is
seeking to have a portion of the parcel rezoned for residential use. On the
second parcel in Newark, NJ adjacent to its University Heights residential
development, the Company is currently planning a 112,000 square foot retail
center. Construction will not begin until an anchor tenant is secured. The
Company has secured a federal government urban development grant amounting to
$3,928,000 to partially defray the cost of developing the facility. At
October 31, 1994 the Company had spent $1,341,000 in site preparation costs.
At completion the total cost, net of the grant, is estimated to be $9,500,000.
In addition, the Company owns one parcel of commercial land in
Jacksonville, Florida. On a portion of this parcel the Company has
constructed 78,145 square feet of office/warehouse and office buildings. The
Company will build additional buildings on this parcel after existing space is
leased. The book value of the remaining land at October 31, 1994 amounted to
$3,505,000.
CERTAIN OPERATING POLICIES AND PROCEDURES
Land Acquisition, Planning and Development. Before entering into a
contract to acquire land, the Company completes extensive comparative studies
and analyses which assist the Company in evaluating the economic feasibility
of such land acquisition. The Company generally follows a policy of acquiring
options to purchase land for future community developments. The Company
attempts 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 of land acquisition may
somewhat raise the price of land that the Company acquires, but significantly
reduces risk. Further, this policy generally allows the Company to obtain
necessary development approvals before acquisition of the land, thereby
enhancing the value of the options and the land eventually acquired.
The Company's option and purchase agreements are typically subject to
numerous conditions, including, but not limited to, the Company's ability to
obtain necessary governmental approvals for the proposed community.
Generally, the deposit on the agreement will be returned to the Company if all
approvals are not obtained, although predevelopment costs may not be
recoverable. By paying an additional, nonrefundable deposit, the Company has
the right to extend a significant number of its options for varying periods of
time. In all instances, the Company has the right to cancel any of its land
option agreements by forfeiture of the Company's deposit on the agreement. In
such instances, the Company generally is not able to recover any
predevelopment costs.
The Company's development activities include site planning and
engineering, obtaining environmental and other regulatory approvals and
constructing roads, sewer, water and drainage facilities, and for the
Company's residential developments, recreational facilities and other
amenities. These activities are performed by the Company's staff, together
with independent architects, consultants and contractors. The Company's staff
also carries out long-term planning of communities.
Design. The Company's residential communities are generally located in
suburban areas near major highways. The communities are designed as
neighborhoods that fit existing land characteristics. The Company strives 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 and tot lots are
included.
Construction. The Company designs and supervises the development and
building of its communities. Its homes are constructed according to
standardized prototypes which are designed and engineered to provide
innovative product design while attempting to minimize costs of construction.
The Company employs 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. The Company
rigorously controls costs through the use of a computerized monitoring system.
Because of the risks involved in speculative building, the Company's general
policy is to construct a residential multi-family building only after signing
contracts for the sale of at least 75% of the homes in that building. Single
family detached homes are usually constructed after the signing of a contract
and mortgage approval has been obtained.
Materials and Subcontractors. The Company attempts to maintain efficient
operations by utilizing standardized materials available from a variety of
sources. In addition, the Company contracts with numerous subcontractors
representing all building trades in connection with the construction of its
homes. In recent years, the Company has experienced no material construction
delays due to shortages of materials or labor. The Company cannot predict,
however, the extent to which shortages in necessary materials or labor may
occur in the future.
Marketing and Sales. The Company's residential communities are sold
principally through on-site sales offices. In order to respond to its
customers' needs and trends in housing design, the Company relies upon its
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. The Company makes use of newspaper, radio,
magazine, billboard, video and direct mail advertising, special promotional
events, illustrated brochures, full-sized and scale model homes in its
comprehensive marketing program. For the eight months ended October 31, 1994,
the Company's advertising expenditures totaled $6,368,000.
Customer Service and Quality Control. The Company's customer service
department participates in pre-closing quality control inspection as well as
responding to post-closing customer needs. Prior to closing, each home is
inspected by customer service personnel and any necessary completion work is
undertaken by the Company. The Company believes that the participation of
customer service personnel during and after construction reduces post-closing
repair costs. In some of its markets the Company is also 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. The Company sells its homes to customers who
generally finance their purchases through mortgages. During the eight months
ended October 31, 1994, approximately 29% of the Company's customers obtained
mortgages originated by the Company's wholly-owned mortgage banking
subsidiary, with a substantial portion of the Company's remaining customers
obtaining mortgages from various independent lending institutions. Mortgages
originated by the Company's wholly-owned mortgage banking subsidiary are sold
in the secondary market.
Financing arrangements with independent lending institutions are at
prevailing rates and on terms in accordance with the lending institutions
policies. Mortgages offered by the Company's subsidiary are on terms similar
to those offered by independent lending institutions. There are no assurances
that mortgage financing will remain readily available to the Company's
customers at affordable rates.
COMPETITION
The Company's residential business is highly competitive. The Company
competes in each of the geographic areas in which it operates with numerous
real estate developers, ranging from small local builders to larger regional
and national builders and developers, some of which have greater sales and
financial resources than the Company. Resales of housing and the availability
of rental housing provide additional competition. The Company competes
primarily on the basis of reputation, price, location, design, quality,
service and amenities.
Competition in commercial real estate is considerable. The Company
competes in the acquisition of properties for development and in the leasing
of space with many other realty and general contracting concerns, both local
and national, many of which have greater resources than the Company. To the
extent the level of vacant office space in the metropolitan or suburban areas
in which the Company's commercial properties are located increases, the
Company would not proceed with the development of such properties and, with
respect to existing developments, the Company's ability to increase rental
rates and/or maintain its occupancy levels could be adversely affected.
REGULATION AND ENVIRONMENTAL MATTERS
General. The Company is 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, the Company is subject to registration and
filing requirements in connection with the construction, advertisement and
sale of its communities in certain states and localities in which it operates
even if all necessary government approvals have been obtained. The Company
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 it operates. Generally, such moratoriums
relate to insufficient water or sewerage facilities or inadequate road
capacity.
Environmental. The Company is 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 the Company 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 the
Company's 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 the Company owns land or land options required the
Company 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, the Company must sell these homes at a loss. The Company
attempts 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.
Conclusion. Despite the Company's past ability to obtain necessary
permits and approvals for its communities, it can be anticipated that
increasingly stringent requirements will be imposed on developers and
homebuilders in the future. Although the Company 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 the Company.
In addition, the continued effectiveness of permits already granted or
approvals already obtained is dependent upon many factors, some of which are
beyond the Company's control, such as changes in policies, rules and
regulations and their interpretation and application.
Company Offices. The Company owns its corporate headquarters, a four-
story, 24,000 square feet office building located in Red Bank, New Jersey, a
43,290 square feet office building located in West Palm Beach, Florida of
which 13,538 square feet house the Florida divisional office, a 17,450 square
feet office building located in Winston Salem, North Carolina, and 17,225
square feet in a Middletown, New Jersey condominium office building which
houses two subsidiary operations. The Company leases office space consisting
of 51,000 square feet in various New Jersey locations, 8,000 square feet in
Trevose, Pennsylvania, 12,000 square feet in Fairfax, Virginia, 13,000 square
feet in various North Carolina locations, 3,400 square feet in Broward County,
Florida, and 16,000 square feet in southwestern California.
ITEM 3 - LEGAL PROCEEDINGS
During fiscal 1989, the Company became aware that a certain fire-
retardant plywood commonly used in the roof construction of multi-family homes
may contain a product defect causing accelerated deterioration of the plywood.
The Company has determined that such plywood was used principally in 33 of its
communities containing approximately 11,750 homes.
Common areas, including roofs, in each of the Company's multi-family
condominium developments are governed and controlled by homeowners'
associations for each development, rather than by individual homeowners.
Certain of the 33 homeowners' associations in the affected developments have
asserted claims against the Company. As of October 31, 1994, the Company had
entered separate agreements with 31 of the 33 associations (the "Settling
Associations"), covering 10,850 homes. In December 1994, the Company entered
into a settlement agreement with the two remaining associations on
substantially the same terms as the earlier settlements.
In August 1989 the Company brought suit in an action entitled K.
Hovnanian at Bernards I, Inc., et al. v. Hoover Treated Wood Products, Inc.,
et al. (No. L-11822-89) in the Superior Court, Law Division, Middlesex County,
New Jersey against the plywood material manufacturers, treaters, suppliers and
others (the "Defendants") to determine the proper responsibility for damages,
to protect its interests and to recover its damages.
In November 1992 the Company and the Settling Associations entered into a
settlement agreement with most of the Defendants. Based upon the settlement
monies received, the use of the Settling Associations' roof shingle reserves,
and the actual expenditures in performing the repairs, the Company believes
the repair costs will not require it to set aside future reserves for such
roof repairs.
In addition, the Company is involved from time to time in litigation
arising in the ordinary course of business, none of which is expected to have
a material adverse effect on the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the two months ended October 31, 1994 (the period since the latest
quarterly report on Form 10Q of the Company was filed), 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. The
Company's Class A Common Stock is traded on the American Stock Exchange and
was held by approximately 1,200 shareholders of record at January 13, 1995.
Prior to the Company's recapitalization in September 1992 the Company's Common
Stock was also traded on the American Stock Exchange. (See "Notes to
Consolidated Financial Statements - Note 13" for additional explanation on
recapitalization.) There is no established public trading market for the
Company's Class B Common Stock, which was held by approximately 1,000
shareholders of record at January 13, 1995. The high and low sales prices for
the Company's Class A Common Stock were as follows for each fiscal quarter
during the eight months ended October 31, 1994 and the years ended February
28, 1994 and 1993:
Class A Common Stock
---------------------------------------------- Common Stock
Oct 31, 1994 Feb 28, 1994 Feb 28, 1993 Feb 28, 1993
------------- -------------- -------------- ---------------
Quarter High Low High Low High Low High Low
- - ------- ------ ----- ------ ------ ------ ------ ------ ------
First..... $13.88 $9.88 $12.38 $10.50 -- -- $14.25 $ 9.25
Second.... $11.38 $7.75 $14.13 $10.63 -- -- $12.38 $ 8.13
Third(1).. $ 8.63 $5.75 $18.13 $13.25 $11.25 $ 8.50 $10.75 $ 9.13
Fourth.... -- -- $16.00 $13.00 $13.13 $10.63 -- --
(1) For eight months ended October 31, 1994 this period represents the two
months September and October 1994.
Certain debt instruments to which the Company is a party contain
restrictions on the payment of cash dividends. As a result of the most
restrictive of these provisions, approximately $28,661,000 was free of such
restrictions at October 31, 1994. The Company has never paid dividends nor
does it currently intend to pay dividends.
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data for the Company
and its consolidated subsidiaries 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.
Twelve Eight
Months Months Twelve Months Ended
Ended Ended ---------------------------------------------------
Summary Consolidated October October February February February February February
Income Statement Data 31, 1994 31, 1994 28, 1994 28, 1993 29, 1992 28, 1991 28, 1990
- - --------------------- -------- -------- -------- -------- -------- -------- --------
(Unaudited) (In Thousands Except Per Share Data)
Revenues................ $704,443 $386,585 $587,010 $429,315 $318,527 $275,428 $410,409
Expenses................ 687,912 402,090 557,859 414,790 316,633 296,610 371,193
Income (loss) before
income taxes,
extraordinary loss and
cumulative effect of
change in accounting
for income taxes...... 16,531 (15,505) 29,151 14,525 1,894 (21,182) 39,216
State and Federal income
taxes................. 5,054 (5,075) 9,229 4,735 299 (5,937) 17,428
Extraordinary loss...... -- -- (1,277) -- -- -- --
Cumulative effect of
change in accounting
for income taxes...... -- -- -- -- 883 -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 11,477 $(10,430) $ 18,645 $ 9,790 $ 2,478 $(15,245) $ 21,788
======== ======== ======== ======== ======== ======== ========
Earnings per common
share:
Income (loss) before
extraordinary loss
and cumulative
effect of change in
accounting for
income taxes........ $ .50 $ (.46) $ .87 $ .43 $ .07 $ (.74) $ 1.05
Extraordinary loss.... -- -- (.05) -- -- -- --
Cumulative effect of
change in account-
ing for income taxes -- -- -- -- .04 -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)..... $ .50 $ (.46) $ .82 $ .43 $ .11 $ (.74) $ 1.05
======== ======== ======== ======== ======== ======== ========
Weighted average number
of common shares
outstanding........... 22,906 22,906 22,821 22,775 21,988 20,695 20,834
Summary Consolidated October February February February February February
Balance Sheet Data 31, 1994 28, 1994 28, 1993 29, 1992 28, 1991 28, 1990
- - -------------------- -------- -------- -------- -------- -------- --------
(In Thousands)
Total assets............ $612,925 $539,602 $465,029 $399,455 $437,930 $457,567
Mortgages, and notes
payable............... $167,179 $ 68,244 $ 66,699 $105,071 $158,836 $121,420
Bonds collateralized by
mortgages receivable.. $ 20,815 $ 30,343 $ 39,914 $ 49,879 $ 55,456 $ 60,677
Participating senior
subordinated debent-
ures and subordinated
notes................. $200,000 $200,000 $152,157 $ 67,723 $ 71,559 $ 81,794
Stockholders' equity.... $162,130 $171,001 $151,937 $141,989 $125,421 $140,666
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The Company's cash uses during the eight months ended October 31,1994
were for operating expenses, seasonal increases in housing inventories,
construction of commercial facilities, income taxes and interest. The Company
provided for its cash requirements from outside borrowings, the revolving
credit facility, and land purchase notes, as well as from housing and other
revenues. The Company believes that these sources of cash are sufficient to
finance its working capital requirements and other needs.
The Company's bank borrowings are made pursuant to a revolving credit
agreement (the "Agreement") which provides a revolving credit line of up to
$225,000,000 through March 1997. Interest is payable monthly and at various
rates of either prime plus 1/2% or Libor plus 2%. The Company believes that
it will be able either to extend the Agreement beyond March 1997 or negotiate
a replacement facility, but there can be no assurance of such extension or
replacement facility. The Company currently is in compliance and intends to
maintain compliance with its covenants under the Agreement. As of October 31,
1994, $99,200,000 of indebtedness was outstanding under the Agreement.
The aggregate principal amount of subordinated indebtedness issued by the
Company and outstanding as of October 31, 1994 was $200,000,000. Annual
sinking fund payments of $20,000,000 are required in April 2001 and 2002 with
additional payments of $60,000,000 and $100,000,000 due in April 2002 and June
2005.
The Company's mortgage banking subsidiary borrows under a bank
warehousing arrangement. Other finance subsidiaries formerly borrowed from a
multi-builder owned financial corporation and a builder owned financial
corporation to finance mortgage backed securities but in fiscal 1988 decided
to cease further borrowing from multi-builder and builder owned financial
corporations. These non-recourse borrowings have been generally secured by
mortgage loans originated by one of the Company's subsidiaries. As of October
31, 1994, the aggregate outstanding principal amount of such borrowings was
$41,369,000.
The book value of the Company's inventories, rental condominiums, and
commercial properties completed and under development amounted to the
following:
October 31, February 28,
1994 1994
------------ ------------
Residential real estate inventory....... $386,540,000 $278,738,000
Residential rental property............. 8,158,000 8,411,000
------------ ------------
Total residential real estate....... 394,698,000 287,149,000
Commercial properties................... 63,321,000 68,240,000
------------ ------------
Combined Total...................... $458,019,000 $355,389,000
============ ============
Total residential real estate increased $107,549,000 from February 28,
1994 to October 31, 1994 as a result of an inventory increase of $107,802,000
and a residential rental property decrease of $253,000. The increase in
residential real estate inventory was primarily due to the Company's increase
in construction activities for increased deliveries next year, expansion
within its existing markets, and expansion into the California market.
Residential homes under construction or completed and included in residential
real estate inventory at October 31, 1994 are expected to be closed during the
next twelve months. The Company's residential rental property decreased
during the eight months ended October 31, 1994 due to the Company's continued
liquidation of New Hampshire rentals.
The following table summarizes housing lots included in the Company's
total residential real estate:
Total Contracted Remaining
Home Not Lots
Lots Closed Available
------- ---------- ---------
October 31, 1994:
Owned.......................... 11,302 1,721 9,581
Optioned....................... 13,754 89 13,665
-------- ---------- ---------
Total 25,056 1,810 23,246
======== ========== =========
February 28, 1994:
Owned.......................... 8,255 1,643 6,612
Optioned....................... 12,898 283 12,615
-------- ---------- ---------
Total 21,153 1,926 19,227
======== ========== =========
The Company's commercial properties represent long-term investments in
commercial and retail facilities completed or under development (see
"Investment Properties" under "Results of Operations"). When individual
facilities are completed and substantially leased, the Company will have the
ability to obtain long-term financing on such properties. At October 31, 1994
the Company had long-term non-recourse financing aggregating $17,541,000 on
two commercial facilities, a decrease of $934,000 from February 28, 1994, due
to principal amortization and the payoff of one loan.
RESULTS OF OPERATIONS - GENERAL
The Company's operations consist primarily of residential housing
development and sales in its Northeast Region (comprised primarily of New
Jersey and eastern Pennsylvania), in southeastern Florida, North Carolina,
metro Washington D. C. (northern Virginia), and in southwestern California.
Operations in California began for the first time during the eight months
ended October 31, 1994. In addition, the Company develops and operates
commercial properties as long-term investments in New Jersey, and, to a lesser
extent, Florida.
On May 10, 1994, the Board of Directors of the Company adopted a
resolution providing that the date for the year end of the fiscal year of the
Company be changed from the last day of February to October 31. The reports
covering the three month periods ended May 31, 1994 and August 31, 1994 were
filed on Form 10-Q. The report covering the eight month transition period of
March 1, 1994 through October 31, 1994 is included in this Form 10-K.
Thereafter, the Company will file reports as of January 31, April 30, July 31,
and October 31. The Company has included unaudited comparative statements of
income for the years ended October 31, 1994 and 1993 as part of its financial
statements. In addition, included in "Notes to Consolidated Financial
Statements - Note 2", the Company has presented unaudited income statement
data for the eight months ended October 31, 1993. To adequately address the
Results of Operations, the Company has split the discussion into two sections:
one covering the unaudited years ended October 31, 1994 and 1993 and one
covering the eight month transition period ended October 31, 1994 and the
years ended February 28(29), 1994, 1993, and 1992.
During the years ended February 28(29), 1994, 1993, and 1992, the
Company's Northeast Region, North Carolina Division and metro Washington D. C.
Division produced operating profits. These profits have been reduced by net
losses from its other operations and the establishment of reserves to reduce
the book value of certain residential inventories to their estimated net
realizable value. During the eight month periods ended October 31, 1994 and
1993 the Company's operations have resulted in net losses. For the eight
months ended October 31, 1994 the loss primarily resulted from a provision to
reduce certain inventory to net realizable value, lower gross margins, and
higher selling, general, and administrative expenses due to the expensing of
such costs over fewer average monthly home deliveries during the eight month
transition period ended October 31, 1994 compared to the average monthly home
deliveries over twelve months. On an October 31 twelve month basis, the above
comments as of February 28 would apply.
RESULTS OF OPERATIONS - Twelve Months Ended October 31, 1994 and 1993
The Company has presented unaudited statements of income for the twelve
months ended October 31, 1994 and 1993. Below is management's discussion and
analysis of the results of operations for these comparative years.
Total Revenues
Compared to the year ended October 31, 1993, total revenues for the year
ended October 31, 1994 increased $208.6 million, or 42.1%, due to a $201.5
million housing revenue increase, a $3.3 million increase in land sales and
other homebuilding revenues, a $3.0 million increase in investment properties
revenues, a $1.7 million increase in financial services revenues, and a $0.9
million decrease in collateralized mortgage financing revenues.
Homebuilding
Housing revenues for the year ended October 31, 1994 increased $201.5
million, or 42.9%, compared to the year ended October 31, 1993. 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:
Twelve Months Ended
-------------------
October October
31, 1994 31, 1993
--------- ---------
(Dollars in Thousands)
Northeast Region(1):
Housing Revenues................... $457,986 $334,424
Homes Delivered.................... 2,845 2,358
North Carolina:
Housing Revenues................... $110,868 $ 63,183
Homes Delivered.................... 808 528
Florida:
Housing Revenues................... $ 58,879 $ 37,201
Homes Delivered.................... 445 314
Metro Washington, D. C.:
Housing Revenues................... $ 40,738 $ 32,608
Homes Delivered.................... 223 230
California:
Housing Revenues.................... $ 736 --
Homes Delivered..................... 4 --
Other:
Housing Revenues.................... $ 1,663 $ 1,993
Homes Delivered..................... 27 31
Totals:
Housing Revenues.................... $670,870 $469,409
Homes Delivered..................... 4,352 3,461
(1) Excludes suspended operations in New York which are included with New
Hampshire in "Other".
The increase in housing revenues was the result of increases in home
deliveries and average sales prices. Increased deliveries are primarily the
result of opening up more communities for sale during this period. The
increased average sales prices are primarily the result of diversifying the
Company's product mix in the Northeast Region to include more detached single
family homes and larger townhouses with garages designed for the move-up
buyer. Also, average sales prices have increased in Florida because
substantially all of its new communities offer detached single family homes.
At October 31, 1994 and 1993 the Company had a backlog of signed
contracts for 1,810 and 2,622 homes with sales values aggregating $310,455,000
and $387,570,000, respectively. Except for California, all of the Company's
markets reported backlog decreases of between 29% and 42% from October 31,
1993 to October 31, 1994 primarily due to decreases in sales resulting from
higher homebuyer mortgage interest rates and increased competition.
The Company has established reserves to reduce certain residential
inventories to their estimated net realizable values including costs to carry
and dispose. These reserves were established primarily because of lower
property values due to economic downturns or a change in the marketing
strategy to liquidate a particular property. The established reserves are
reduced for carrying costs (i.e., property taxes, interest, etc.) incurred and
upon property sale. During the year ended October 31, 1994, the Company
established additional reserves of $6.4 million. The reserves established
during the year ended Occtober 31, 1994 are primarily attributable to three
communities, one each in New York, New Hampshire, and Pennsylvania. In New
York, the reserve is an addition to prior years' reserves due to reduced
sales prices, buyers' concessions, and an extended sellout period. In New
Hampshire, the reserve is also an addition to prior years' reserves due to
reduced sales prices in anticipation of a bulk sale of the remaining homes.
In Pennsylvania, the reserve is due to reduced sales prices and an extended
sellout period. (See "Notes to Consolidated Financial Statements - Note 11"
for an additional explanation of reserves.)
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:
Twelve Months Ended
---------------------
October October
31, 1994 31, 1993
--------- ---------
Sale of Homes......................... $670,870 $469,409
Cost of Sales......................... 531,757 362,436
--------- ---------
Housing Gross Margin.................. $139,113 $106,973
========= =========
Gross Margin Percentage............... 20.7% 22.8%
========= =========
During the year ended October 31, 1994 the Company incurred $3.0 million
for warranty repair work primarily to remedy a Northeast Region roof design
problem. Excluding this item the gross margin for October 31, 1994 is 21.2%.
The remaining decrease in the gross margin was primarily due to the following
reasons:
. Material costs have increased during the above periods as
demand increased for such materials.
. A change in product mix with an additional 4.0% of home sales coming
from North Carolina and Florida where gross margins are traditionally
lower.
. Increase in such costs as a percentage of North Carolina and Florida
housing revenues. The North Carolina market is very competitive
which keeps prices and margins down. In Florida, the increase
is caused by higher developed lot costs.
Selling and general administrative expenses increased $15.9 million
during the year ended October 31, 1994 compared to the prior year. As a
percentage of housing revenues such expenses decreased to 11.4% for October
31, 1994 from 12.5% for the prior year. The dollar increase is due primarily
to increased home sales and delivery activities and a 34% increase in
homebuilding associates from October 31, 1993 to October 31, 1994 due to
anticipated growth in the near future. The percentage decrease is due to the
increased home delivery volume.
Land Sales and Other Revenues
Land sales and other revenues consist primarily of land and lot sales,
title insurance activities, interest income, contract deposit forfeitures, and
during the eight months ended October 31, 1994, California housing management
operations.
A breakout of land and lot sales is set forth below:
Twelve Months Ended
---------------------
October October
31, 1994 31, 1993
--------- ---------
Land and Lot Sales.................... $ 5,079 $ 3,821
Cost of Sales......................... 4,123 3,187
--------- ---------
Land and Lot Sales Gross Margin....... $ 956 $ 634
========= =========
Land and lot sales are incidental to the Company's residential housing
operations and are expected to continue in the future but may significantly
fluctuate up or down.
During the year ended October 31, 1994 the Company purchased a home
building and management company in California for $0.8 million. Although no
new management contracts are being obtained, the existing contracts resulted
in $1.7 million of revenues. Included in Other Operations (see below) are
expenses associated with the California homebuilding management operations,
homebuilding startup, and amortization of substantially all of the acquisition
price of management contracts of $0.8 million.
Financial Services
Financial services consists primarily of originating mortgages from sales
of the Company's homes, and selling such mortgages in the secondary market.
Approximatley 30% and 20% of the Company's homebuyers obtained mortgages
originated by the Company's wholly-owned mortgage banking subsidiaries during
the years ended October 31, 1994 and 1993, respectively. For the year ended
October 31, 1994 a loss was incurred primarily due to expansion costs into
other Company housing markets and reduced interest rate spreads, due to
increased competition. Most servicing rights on new mortgages originated by
the Company will be sold as the loans are closed.
Investment Properties
Investment Properties consist of rental properties, property management,
and gains or losses from sale of such property. At October 31, 1994, the
Company owned and was leasing two office buildings, three office/warehouse
facilities, three retail centers, and a senior citizen rental community in New
Jersey. Investment properties revenues have increased due to the completion
and leasing of additional commercial properties, the acquisition of a retail
center in May 1993, and the addition of the senior rentals in the early part
of the year ended October 31, 1994. During the years ended October 31, 1994
and 1993 such expenses included a $0.8 million loss from the sale of a mini-
storage facility and an office/warehouse facility and a $0.5 million gain from
the sale of a retail center, respectively.
Collateralized Mortgage Financing
In the years prior to February 29, 1988 the Company pledged mortgage
loans originated by its mortgage banking subsidiaries against collateralized
mortgage obligations ("CMO's"). Subsequently the Company discontinued its CMO
program. As a result, CMO operations are diminishing as pledged loans are
decreasing through principal amortization and loan payoffs, and related bonds
are reduced. In recent years, the Company has sold CMO pledged mortgages.
The cost of such sales and the writeoff of unamortized issuance expenses has
resulted in losses.
Corporate General and Administrative
Corporate general and administration expenses includes the operations at
the Company's headquarters in Red Bank, New Jersey. As a percentage of total
revenues such expenses were 1.9% and 1.9% for the years ended October 31, 1994
and 1993, respectively. Such expenses includes the Company's long term
improvement initiatives of total quality, process redesign, and training.
Such initiatives resulted in additional expenses for the year ended October
31, 1994 over 1993 amounting to $1.5 million. Without this increase corporate
expenses would have decreased .02% for the year ended October 31, 1994,
compared to the previous year.
Interest
Interest expense includes housing, land and lot, and rental properties
interest. Interest expense is broken down as follows:
Twelve Months Ended
---------------------
October October
31, 1994 31, 1993
--------- ---------
Sale of Homes......................... $ 19,559 $ 15,650
Land and Lot Sales.................... 837 794
Rental Properties..................... 4,963 5,141
--------- ---------
Total................................. $ 25,359 $ 21,585
========= =========
Housing interest as a percentage of housing revenues amounted to 3.0% and 3.3%
for the years ended October 31, 1994 and 1993, respectively. The decline of
interest as a percentage of housing revenues is primarily attributable to
reinvestment of Company profits and better inventory management.
Other Operations
Other operations consisted primarily of title insurance activities,
miscellaneous residential housing operations expenses, amortization of prepaid
subordinated note issuance expenses, corporate owned life insurance loan
interest, and California housing management operations (see "Land Sales and
Other Revenues" above). During the year ended October 31, 1994 other expenses
included California homebuilding management expenses and amortization of
purchased management contracts amounting to $2.5 million, the writeoff of a
$1.0 million receivable resulting from the reversal of a legal judgment, and
$0.4 million loss from the sale of a 49% interest in a condominium management
company.
Total Taxes
Total taxes as a percentage of income before income taxes amounted to
30.6% and 34.1% for the years ended October 31, 1994 and 1993, respectively.
Deferred federal and state income tax assets primarily represents the deferred
tax benefits arising from temporary differences between book and tax income
which will be recognized in future years. (See "Notes to Consolidated
Financial Statements - Note 10" for an additional explanation of taxes.)
Extraordinary Loss
In July 1993, the Company redeemed all of its outstanding 12 1/4%
Subordinated Notes due 1998 at a price of 102% of par. The principal amount
redeemed was $50,000,000 and the redemption resulted in an extraordinary loss
of $1,277,000 net of income taxes of $658,000.
RESULTS OF OPERATIONS - Eight Months Ended October 31, 1994 and Twelve Months
Ended February 28(29), 1994, 1993, and 1992
Where the description of operations and resulting changes is similar to
the year ended October 31, 1994 reference will be made to the above discussion
and analysis.
Total Revenues
Compared to the same prior period revenues changed as follows:
Eight
Months Twelve Months Ended
Ended ------------------------
October February February
31, 1994 28, 1994 28, 1993
---------- ---------- ----------
Homebuilding:
Sale of homes.................... $113,381 $160,183 $105,551
Land sales and other revenues.... 2,454 (6,231) 6,914
Financial Services................. 819 2,203 367
Investment Properties.............. 1,054 2,415 (822)
Collateralized Mortgage Financing.. (519) (875) (1,222)
---------- ---------- ----------
Total Change.................. $117,189 $157,695 $110,788
========== ========== ==========
Homebuilding
Compared to the same prior period, housing revenues increased $113.4
million or 44.8% for the eight months ended October 31, 1994, and $160.2
million or 40.3%, and $105.6 million or 36.2%, for the year ended February 28,
1994 and 1993, respectively. 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:
Eight
Months Twelve Months Ended
Ended --------------------------------
October February February February
31, 1994 28, 1994 28, 1993 29, 1992
--------- --------- --------- --------
(Dollars in Thousands)
Northeast Region(1):
Housing Revenues...... $223,582 $389,577 $311,347 $216,274
Homes Delivered....... 1,403 2,527 2,226 1,582
North Carolina:
Housing Revenues...... $ 78,465 $ 72,639 $ 59,399 $ 45,698
Homes Delivered....... 558 580 517 420
Florida:
Housing Revenues...... $ 37,076 $ 48,780 $ 19,900 $ 20,512
Homes Delivered....... 265 405 184 282
Metro Washington, D. C.:
Housing Revenues...... $ 25,236 $ 44,783 $ 3,327 --
Homes Delivered....... 137 288 28 --
California:
Housing Revenues...... $ 736 -- -- --
Homes Delivered....... 4 -- -- --
Other:
Housing Revenues...... $ 1,227 $ 1,710 $ 3,333 $ 9,271
Homes Delivered....... 20 28 44 99
Totals:
Housing Revenues...... $366,322 $557,489 $397,306 $291,755
Homes Delivered...... 2,387 3,828 2,999 2,383
(1) Excludes suspended operations in New York which are included with New
Hampshire in "Other".
The increase in housing revenue was the result of an increase in home
deliveries and average sales prices. Increased deliveries are primarily the
result of opening up more communities for sale during this period and
expanding into eastern Pennsylvania and metro Washington, D. C. The increased
average sales prices are primarily the result of diversifying the Company's
product mix in the Northeast Region to include more detached single family
homes and larger townhouses with garages designed for the move-up buyer.
Also, average sales prices have increased in Florida because substantially all
its new communities offer detached single family homes.
The Company's contract backlog using base sales prices by market area is
set forth below:
October February February
31, 1994 28, 1994 28, 1993
---------- ----------- ------------
(Dollars in Thousands)
Northeast Region:
Total Contract Backlog..........$227,719 $173,430 $130,095
Number of Homes................. 1,284 1,182 885
North Carolina:
Total Contract Backlog..........$ 39,719 $ 55,620 $ 26,630
Number of Homes................. 240 402 221
Florida:
Total Contract Backlog..........$ 30,283 $ 37,837 $ 28,461
Number of Homes................. 215 278 234
Metro Washington, D. C.:
Total Contract Backlog..........$ 7,933 $ 10,377 $ 14,088
Number of Homes................. 43 50 101
California:
Total Contract Backlog..........$ 4,405 -- --
Number of Homes................. 21 -- --
Other:
Total Contract Backlog..........$ 396 $ 863 $ 477
Number of Homes................. 7 14 8
Totals:
Total Contract Backlog..........$310,455 $278,127 $199,751
Number of Homes................. 1,810 1,926 1,449
The Company has established reserves to reduce certain residential
inventories to their estimated net realizable values including costs to carry
and dispose. These reserves were established primarily because of lower
property values due to economic downturns or a change in the marketing
strategy to liquidate a particular property. The established reserves are
reduced for carrying costs (i.e., property taxes, interest, etc.) incurred or
losses incurred upon property sale. During the eight months ended October 31,
1994 and the year ended February 28, 1993, the Company established additional
reserves of $6.4 million and $3.1 million, respectively. The October 31, 1994
reserve is primarily attributable to the same reasons noted in the previous
homebuilding section. The February 28, 1993 reserve was substantially
attributable to two Florida developments where sales prices were reduced to
accelerate their sellout. At October 31, 1994 and February 28, 1994,
remaining reserves of $10.7 million and $9.6 million, respectively, reduced
residential inventories. (See "Notes to Consolidated Financial Statements -
Note 1" for an additional explanation of reserves.)
Cost of sales include expenses for housing and land and lot sales. A
breakout of such expenses for housing sales and housing gross margin is set
forth below:
Eight
Months Twelve Months Ended
Ended ------------------------------
October February February February
31, 1994 28, 1994 28, 1993 29, 1992
-------- -------- -------- --------
(Dollars in Thousands)
Sale of Homes.................... $366,322 $557,489 $397,306 $291,755
Cost of Sales.................... 296,308 434,653 306,707 230,235
-------- -------- -------- --------
Housing Gross Margin............. $ 70,014 $122,836 $ 90,599 $ 61,520
======== ======== ======== ========
Gross Margin Percentage.......... 19.1% 22.0% 22.8% 21.1%
======== ======== ======== ========
During the eight months ended October 31, 1994 the Company incurred $2.7
million for warranty repair work primarily to remedy a Northeast Region roof
design problem. Excluding this item the gross margin for the eight months
ended October 31, 1994 is 19.9%. For the eight months ended October 31, 1993
the gross margin was 21.2%. The decline in gross margin for the Company
occurred for the following reasons:
. The percentage of housing revenues coming from the Northeast Region
where margins are greater, have decreased. At February 28, 1993,
when the margins were highest, the Northeast Region revenues were
78.4% of the total. The percentage dropped to 61.0% for the
eight months ended October 31, 1994.
. Increase in such costs as a percentage of North Carolina and
Florida housing revenues. The North Carolina market is very
competitive which keeps prices and margins down. In Florida, the
increase is caused by higher developed lot costs.
. Material costs have increased sharply during the above
periods as demand increased for such materials.
. The Company has added value to its homes while not obtaining
equivalent increases in its home sale price because of competitive
pressures.
Selling, general and administrative expenses increased $9.5 million
during the eight months ended October 31, 1994 and $16.9 million and $10.4
million during the years ended February 28, 1994 and 1993, respectively,
compared to the similar prior period. The increase during the eight months
ended October 31, 1994 is due primarily to increased home sales and delivery
activities. As a percentage of housing revenues, such expenses decreased to
13.9% for the eight months ended October 31, 1994 from 15.6% for the similar
prior period. The increase for the years ended February 28, 1994 and 1993 was
primarily due to increased selling expenses resulting from increased new sales
contracts, home deliveries and the opening of the metro Washington, D.C.
division. As a percentage of housing revenues, such expenses decreased to
11.5% for the year ended February 28, 1994 from 11.9% for the year ended
February 28, 1993, and from 12.7% for the year ended February 29, 1992. The
eight months ended October 28, 1994 increase as a percentage of housing
revenues from the year ended February 28, 1994 is primarily attributable to a
34% increase in homebuilding associates due to anticipated growth in the near
future and the expensing of such costs over fewer average monthly home
deliveries during the eight month transition period ended October 31, 1994
compared to the average monthly home deliveries over twelve months.
Land Sales and Other Revenues
A breakout of land and lot sales is set forth below:
Eight
Months Year Ended
Ended ----------------------------
October February February February
31, 1994 28, 1994 28, 1993 29, 1992
-------- -------- -------- --------
(Dollars in Thousands)
Land and Lot Sales................. $ 2,812 $ 4,188 $ 10,946 $ 3,220
Cost of Sales...................... 2,643 3,158 8,564 2,243
-------- -------- -------- --------
Land and Lot Sales
Gross Margin..................... $ 169 $ 1,030 $ 2,382 $ 977
======== ======== ======== ========
Comments noted in the previous land sales and other section also apply
here. In addition, the California amounts are the same for the eight and
twelve months ended October 31, 1994.
Financial Services
Comments noted in the previous financial services section also apply
here. Approximately 29%, 27%, 26%, and 32% of the Company's homebuyers
obtained mortgages originated by the Company's wholly-owned mortgage banking
subsidiaries during the eight months ended October 31, 1994 and the years
ended February 28(29), 1994, 1993, and 1992, respectively
Investment Properties
Comments noted in the previous investment property section also apply
here. The gain reported in the previous section from the sale of a retail
center occurred during the year ended February 28, 1994.
Collateralized Mortgage Financing
Comments noted in the previous collateralized mortgage financing section
also apply here.
Corporate General and Administration
Corporate general and administration expenses includes the operations at
the Company's headquarters in Red Bank, New Jersey. As a percentage of total
revenues such expenses were 2.6% and 2.5% for the eight months ended October
31, 1994 and 1993, respectively, and 1.8%, 1.9%, and 2.0% for the years ended
February 28(29), 1994, 1993, and 1992, respectively. The increase for the
eight months ended October 31, 1994 over 1993 was due primarily to the
Company's long term improvement initiatives of total quality, process
redesign, and training. Such initiatives resulted in additional expenses for
the eight months ended October 1994 over 1993 amounting to $1.3 million. For
the twelve months ended February 28(29), 1994, 1993, and 1992 such expenses as
a percentage of revenues decreased due to increased revenues.
Interest
Interest expense includes housing, land and lot, and rental properties
interest (see "Notes to Consolidated Financial Statements - Note 7" for a
breakdown). Housing interest as a percentage of housing revenues amounted to
3.1% and 3.5% for the eight months ended October 31, 1994 and 1993,
respectively, and 3.1%, 3.9%, and 5.3% for the years ended February 28(29),
1994, 1993, and 1992, respectively. The decline of interest as a percentage
of housing revenues is primarily attributable to increased inventory turnover,
reduced average interest rates, and reinvestment of Company profits.
Other Operations
Comments noted in the previous other operations section also apply here.
Information on specific other expenses are the same for the eight and twelve
months ended October 31, 1994.
Total Taxes
Total net tax benefits as a percentage of the loss before income taxes
amounted to 32.7% and 29.3% for the eight months ended October 31, 1994 and
1993, respectively. Total taxes as a percentage of income before income taxes
amounted to 31.7%, 32.5%, and 15.8% for the years ended February 28(29), 1994,
1993, and 1992, respectively. The Company applied for and received a refund
of federal income taxes for the year ended February 29, 1992 based on a loss
carryback amounting to approximately $1.6 million. Comments on income taxes
in the previous total taxes section also apply here.
Cummulative Effect of Change in Accounting for Income Taxes
The Company elected to adopt early application of Statement of Financial
Accounting Standards No 109 - "Accounting for Income Taxes" ("FAS 109").
Among other things, FAS 109 changes the method of recognizing deferred tax
assets. Deferred tax assets are recognized for temporary differences that
will result in deductible amounts in future years and for carryforwards. A
valuation allowance is recognized if it is more likely than not that some
portion of the deferred asset will not be recognized. The effect of initially
applying FAS 109 in the year ended February 29, 1992, resulted in recording
additional deferred tax assets and increasing net income by $0.9 million.
INFLATION
Inflation has a long-term effect on the Company because increasing costs
of land, materials and labor result in increasing sales prices of its homes.
In general, these price increases have been commensurate with the general rate
of inflation in the Company's housing markets and have not had a significant
adverse effect on the sale of the Company's 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
it sells homes, the Company has not found this risk to be a significant
problem.
Inflation has a lesser short-term effect on the Company because the
Company generally negotiates fixed price contracts with its subcontractors and
material suppliers for the construction of its homes. These prices usually
are applicable for a specified number of residential buildings or for a time
period of between four to twelve months. Construction costs for residential
buildings represent approximately 51% of the Company's total costs and
expenses.
Item 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 eight months ended October 31, 1994 and the years ended
February 28, 1994 and 1993 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 the Company's definitive proxy statement to be filed pursuant to
Regulation l4A, in connection with the Company's annual meeting of
shareholders to be held in March 1995, which will involve the election of
directors.
Executive Officers of the Registrant
The executive officers of the Company 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 71 Chairman of the Board, Chief l967
Executive Officer, and Director
of the Company.
Ara K. Hovnanian 37 President and Director of l979
the Company.
Paul W. Buchanan 44 Senior Vice President-Corporate l981
Controller and Director of the
Company.
Timothy P. Mason 54 Senior Vice President-Adminis- 1975
tration/Secretary and Director
of the Company.
Peter S. Reinhart 44 Senior Vice President and General 1978
Counsel and Director of the
Company.
John J. Schimpf 45 Executive Vice President and 1981
Director of the Company.
J. Larry Sorsby 39 Senior Vice President-Finance/ 1988
Treasurer
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 President
of the Company from 1967 to April 1988.
Mr. A. Hovnanian was appointed President in April 1988, after serving as
Executive Vice President from March 1983. 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 was appointed Senior Vice President-Corporate Controller in
May l990, after serving as Vice President-Corporate Controller from March
1983. Mr. Buchanan was elected a Director of the Company in March l982.
Mr. Mason was appointed Senior Vice President of Administration/
Secretary of the Company in March 1991, after serving as Vice President -
Administration/Treasurer and Secretary of the Company since March l982. Mr.
Mason was elected a Director of the Company in 1980.
Mr. Reinhart was appointed Senior Vice President and General Counsel in
April 1985 after serving as Vice President and Chief Legal Counsel since March
l983. Mr. Reinhart was elected a Director of the Company in December l98l.
Mr. Schimpf was appointed Executive Vice President of the Company in
April 1988 after serving as Senior Vice President from April 1985. Mr.
Schimpf was elected a Director of the Company in June 1986.
Mr. Sorsby was appointed Senior Vice President-Finance/Treasurer of the
Company in March 1991, after serving as Vice President/Finance of the Company
since September l988.
Item 11 - EXECUTIVE COMPENSATION
The information called for by Item ll is incorporated herein by reference
to the Company's definitive proxy statement to be filed pursuant to Regulation
l4A, in connection with the Company's annual meeting of shareholders to be
held in March 1995, 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 the Company's definitive proxy statement to be filed pursuant to Regulation
l4A, in connection with the Company's annual meeting of shareholders to be
held in March l995, 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 the Company's definitive proxy statement to be filed pursuant to Regulation
l4A, in connection with the Company's annual meeting of shareholders to be
held in March 1995, 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
Independent Auditors' Report..................................... F-2
Consolidated Balance Sheets at October 31, 1994 and
February 28, 1994............................................. F-3
Consolidated Statements of Income for the eight months ended
October 31, 1994 and the years ended February 28, 1994,
February 28, 1993, and February 29, 1992...................... F-5
Consolidated Statements of Stockholders' Equity for the
eight months ended October 31, 1994 and the years ended
February 28, 1994, February 28, 1993, and February 29,
1992.......................................................... F-6
Consolidated Statements of Cash Flows for the eight months
ended October 31, 1994 and the years ended February 28,
1994, February 28, 1993, and February 29, 1992................ F-7
Unaudited Consolidated Statements of Income for the years
ended October 31, 1994 and 1993............................... F-8
Notes to Consolidated Financial Statements....................... F-9
Financial Statement Schedules:
VIII Valuation and Qualifying Accounts.......................... F-23
X Supplementary Income Statement Information................. F-24
XI Real Estate and Accumulated Depreciation................... F-25
All other schedules are either not applicable to the Company 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.(8)
3(c) Bylaws of the Registrant.(8)
4(a) Specimen Class A Common Stock Certificate.(8)
4(b) Specimen Class B Common Stock Certificate.(8)
4(c) Indenture dated as of April 29, 1992, relating to 11 1/4%
Subordinated Notes between the Registrant and First Fidelity Bank,
including form of 11 1/4% Subordinated Notes due April 15,
2002.(2)
4(d) 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)
10(a) Credit Agreement dated July 30, 1993 among K. Hovnanian
Enterprises, Inc., Hovnanian Enterprises, Inc., certain
Subsidiaries Thereof, Midlantic National Bank, Chemical
Bank, United Jersey Bank/Central, N.A., and NBD Bank, N.A.(7)
10(b) Amendment to Credit Agreement among K. Hovnanian Enterprises,
Inc., Hovnanian Enterprises, Inc., Certain Subsidiaries Thereof,
Midlantic National Bank, Chemical Bank, United Jersey Bank, NBD
Bank, N.A., PNC Bank, National Association, Meridian Bank, Nations
Bank of Virginia, N.A., First National Bank of Boston, and
Continental Bank.
10(c) Description of Management Bonus Arrangements.(8)
10(d) Description of Savings and Investment Retirement Plan.(1)
10(e) Stock Option Plan.(6)
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)
22 Subsidiaries of the Registrant.
(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 the Proxy Statement dated June 15,
1990.
(7) Incorporated by reference to an Exhibit to Quarterly Report on
Form 10-Q for the quarter ended August 31, 1993, of the
Registrant.
(8) Incorporated by reference to Exhibits to Annual Report on Form 10-
K for the year ended February 28, 1994 of the Registrant.
(9) Incorporated by reference to an Exhibit to Quarterly Report on
Form 10-Q for the quarter ended August 31, 1994, of the
Registrant.
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the two months
ended October 31, 1994 (the period since the latest quarterly report on Form
10-Q of the Company was filed).
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 and
Chief Executive Officer
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 1/27/95
Kevork S. Hovnanian and Director Date
/S/ARA K. HOVNANIAN President and Director 1/27/95
Ara K. Hovnanian Date
/S/PAUL W. BUCHANAN Senior Vice President 1/27/95
Paul W. Buchanan Corporate Controller and Date
Director
/S/TIMOTHY P. MASON Senior Vice President- 1/27/95
Timothy P. Mason Administration/Secretary Date
and Director
/S/PETER S. REINHART Senior Vice President and 1/27/95
Peter S. Reinhart General Counsel and Director Date
/S/JOHN J. SCHIMPF Executive Vice President 1/27/95
John J. Schimpf and Director Date
/S/J. LARRY SORSBY Senior Vice President/ 1/27/95
J. Larry Sorsby Finance and Treasurer Date
HOVNANIAN ENTERPRISES, INC.
Index to Consolidated Financial Statements
Page
Financial Statements:
Independent Auditors' Report................................... F-2
Consolidated Balance Sheets as of October 31, 1994, and
February 28, 1994.............................................. F-3
Consolidated Statements of Income for the Eight Months Ended
October 31, 1994,and the Years Ended February 28, 1994,
February 28, 1993 and February 29, 1992........................ F-5
Consolidated Statements of Stockholders' Equity for the
Eight Months Ended October 31, 1994, and the Years Ended
February 28, 1994, February 28, 1993 and February 29,
1992........................................................... F-6
Consolidated Statements of Cash Flows for the Eight Months
Ended October 31, 1994, and the Years Ended February 28,
1994, February 28, 1993 and February 29, 1992.................. F-7
Unaudited Consolidated Statements of Income for the Years
Ended October 31, 1994 and 1993................................ F-8
Notes to Consolidated Financial Statements..................... F-9
Financial Statement Schedules:
VIII Valuation and Qualifying Accounts......................... F-21
X Supplementary Income Statement Information................ F-22
XI Real Estate and Accumulated Depreciation.................. F-23
All other schedules have been omitted because the required information of such
other 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.
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors of
Hovnanian Enterprises, Inc.
We have audited the consolidated balance sheets of Hovnanian Enterprises, Inc.
and subsidiaries as of October 31, 1994 and February 28, 1994, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the eight month period ended October 31, 1994 and for each of the
years in the three year period ended February 28, 1994 and the schedules
listed in the accompanying index. These financial statements and the
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based upon 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 and
schedules are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements and schedules. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement and schedule 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 financial position of Hovnanian
Enterprises, Inc. and subsidiaries as of October 31, 1994 and February 28,
1994, and the results of their operations and their cash flows for the eight
month period ended October 31, 1994 and for each of the years in the three
year period ended February 28, 1994, and the schedules listed in the
accompanying index in conformity with generally accepted accounting
principles. Further, it is our opinion that the schedules referred to above
present fairly the information set forth therein.
/S/ Kenneth Leventhal and Company
New York, New York
December 23, 1994
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
October 31, February 28,
ASSETS 1994 1994
------------ ------------
Homebuilding:
Cash and cash equivalents(Note 5).................... $ 17,299 $27,233
------------ ------------
Inventories - At cost, not in excess of net
realizable value (Notes 7 and 11):
Sold and unsold homes and lots under
development....................................... 328,961 194,307
Land and land options held for future
development or sale.............................. 57,579 84,431
------------ ------------
Total Inventories................................ 386,540 278,738
------------ ------------
Receivables, deposits, and notes (Notes 6 and 12).... 25,778 28,062
------------ ------------
Property, plant, and equipment - net (Note 4)........ 11,437 9,414
------------ ------------
Prepaid expenses and other assets.................... 26,757 27,711
------------ ------------
Total Homebuilding............................... 467,811 371,158
------------ ------------
Financial Services:
Cash................................................. 138 861
Mortgage loans held for sale.(Note 6)................ 29,459 50,305
Other assets......................................... 1,451 1,856
------------ ------------
Total Financial Services......................... 31,048 53,022
------------ ------------
Investment Properties:
Rental property - net (Note 4)....................... 56,181 61,960
Property under development or held for future
development........................................ 15,298 14,691
Investment in and advances to unconsolidated
joint venture...................................... 3,994 3,296
Other assets......................................... 3,231 2,427
------------ ------------
Total Investment Properties...................... 78,704 82,374
------------ ------------
Collateralized Mortgage Financing:
Collateral for bonds payable (Note 6)................ 21,275 30,755
Other assets......................................... 1,404 2,293
------------ ------------
Total Collateralized Mortgage Financing.......... 22,679 33,048
------------ ------------
Income Taxes Receivable - Including deferred tax
benefits (Note 10)................................... 12,683
------------ ------------
Total Assets........................................... $612,925 $539,602
============ ============
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
October 31, February 28,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1994
------------ ------------
Homebuilding:
Nonrecourse land mortgages (Note 7).......................... $ 26,938 $ 7,494
Accounts payable and other liabilities....................... 42,586 44,836
Customers' deposits (Note 5)................................. 12,138 11,717
Nonrecourse mortgage secured by operating property (Note 7).. 2,946 2,972
------------ ------------
Total Homebuilding....................................... 84,608 67,019
------------ ------------
Financial Services:
Accounts payable and other liabilities....................... 772 1,046
Mortgage warehouse line of credit (Note 6)................... 20,554 39,307
------------ ------------
Total Financial Services................................. 21,326 40,353
------------ ------------
Investment Properties:
Accounts payable and other liabilities....................... 1,731 1,796
Nonrecourse mortgages secured by rental property (Note 7).... 17,541 18,475
------------ ------------
Total Investment Properties.............................. 19,272 20,271
------------ ------------
Collateralized Mortgage Financing:
Accounts payable and other liabilities....................... 15 17
Bonds collateralized by mortgages receivable (Note 6)........ 20,815 30,343
------------ ------------
Total Collateralized Mortgage Financing.................. 20,830 30,360
------------ ------------
Notes Payable:
Revolving credit agreement (Note 7).......................... 99,200
Subordinated notes (Note 8).................................. 200,000 200,000
Accrued interest............................................. 5,559 7,660
------------ ------------
Total Notes Payable...................................... 304,759 207,660
------------ ------------
Income Taxes Payable (Note 10).................................. 2,938
------------ ------------
Total Liabilities........................................ 450,795 368,601
------------ ------------
Commitments and Contingent Liabilities (Notes 5 and 14)
Stockholders' Equity (Note 15):
Preferred Stock,$.01 par value-authorized 100,000 shares;
none issued
Common Stock,Class A,$.01 par value-authorized
87,000,000 shares; issued 15,076,173 shares
(including 345,874 shares held in Treasury)................ 149 147
Common Stock,Class B,$.01 par value-authorized
13,000,000 shares; issued 8,637,628 shares
(including 345,874 shares held in Treasury)................ 88 88
Paid in Capital.............................................. 33,858 32,301
Retained Earnings (Note 8)................................... 133,334 143,764
Treasury Stock - at cost..................................... (5,299) (5,299)
------------ ------------
Total Stockholders' Equity............................... 162,130 171,001
------------ ------------
Total Liabilities and Stockholders' Equity...................... $612,925 $539,602
============ ============
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
Eight
Months Twelve Months Ended
Ended ------------------------------
October February February February
31, 1994 28, 1994 28, 1993 29, 1992
--------- --------- --------- ---------
(Note 1)
Revenues:
Homebuilding:
Sale of homes.............................. $366,322 $557,489 $397,306 $291,755
Land sales and other revenues.............. 7,493 9,969 16,200 9,286
--------- --------- --------- ---------
Total Homebuilding....................... 373,815 567,458 413,506 301,041
Financial Services........................... 4,347 6,890 4,687 4,320
Investment Properties........................ 6,396 9,024 6,609 7,431
Collateralized Mortgage Financing............ 2,027 3,638 4,513 5,735
--------- --------- --------- ---------
Total Revenues........................... 386,585 587,010 429,315 318,527
--------- --------- --------- ---------
Expenses:
Homebuilding:
Cost of sales.............................. 298,951 437,811 315,271 232,478
Selling, general and administrative........ 51,041 64,282 47,350 36,913
Provision to reduce inventory to estimated
net realizable value.(Note 11)........... 6,357 3,100
--------- --------- --------- ---------
Total Homebuilding....................... 356,349 502,093 365,721 269,391
Financial Services........................... 5,543 6,420 3,934 3,341
Investment Properties........................ 5,206 5,797 5,599 6,337
Collateralized Mortgage Financing............ 2,379 4,284 4,985 5,438
Corporate General and Administration(Note 3). 10,133 10,678 8,382 6,301
Interest..................................... 15,313 22,530 22,269 22,457
Other operations............................. 7,167 4,174 3,900 3,368
Provision for loan writedown (Note 12)....... 1,883
--------- --------- --------- ---------
Total Expenses............................ 402,090 557,859 414,790 316,633
--------- --------- --------- ---------
Income(Loss) Before Income Taxes, Extraordinary
Loss and Cumulative Effect of Change in
Accounting.................................... (15,505) 29,151 14,525 1,894
--------- --------- --------- ---------
State and Federal Income Taxes:
State (Note 8)................................ 1,118 903 1,599 578
Federal (Note 8).............................. (6,193) 8,326 3,136 (279)
--------- --------- --------- ---------
Total Taxes................................ (5,075) 9,229 4,735 299
--------- --------- --------- ---------
(10,430) 19,922 9,790 1,595
Extraordinary Loss from Extinguishment of Debt,
Net of Income Taxes (Note 8)................. (1,277)
Cumulative Effect of Change in Accounting
for Income Taxes (Note 1).................... 883
--------- --------- --------- ---------
Net Income (Loss).............................. $(10,430) $ 18,645 $ 9,790 $ 2,478
========= ========= ========= =========
Earnings Per Common Share (Note 1):
Income (loss) before extraordinary loss and
cumulative effect of change in accounting.. ($0.46) $ 0.87 $ 0.43 $ 0.07
Extraordinary loss........................... (0.05)
Cumulative effect of changes in accounting... 0.04
--------- --------- --------- ---------
Net Income (Loss).............................. ($0.46) $ 0.82 $ 0.43 $ 0.11
========= ========= ========= =========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Common Stock A Common Stock B Common Stock
----------------------- ---------------------- ----------------------
Shares Shares Shares
Issued and Issued and Issued and Paid-In Retained Treasury
Outstanding Amount Outstanding Amount Outstanding Amount Capital Earnings Stock Total
------------ --------- ----------- --------- ----------- --------- -------- -------- -------- --------
Balance, February 28, 1991.. 20,695,182 $214 $17,655 $112,851 ($5,299) $125,421
Issuance of common stock.... 2,000,000 20 13,753 13,773
Sale of common stock under
employee stock option plan. 60,449 317 317
Net income 2,478 2,478
------------ --------- ----------- --------- ----------- --------- -------- -------- -------- ---------
Balance, February 29, 1992. 22,755,631 234 31,725 115,32 (5,299) 141,989
Sale of common stock under
employee stock option plan. 28,000 1 157 158
Conversion of common stock to
Class A and Class B..... (22,783,631) (235) 11,391,815 $118 11,391,815 $117
Conversion of Class B to
Class A common stock... 1,928,981 19 (1,928,981) (19)
Treasury stock purchases.. (41) (41)
Retirements............... (1)
Net Income................ 9,790 9,790
------------ --------- ----------- --------- ----------- --------- -------- -------- -------- --------
Balance, February 28, 1993. 0 0 13,320,754 137 9,462,793 98 31,882 125,119 (5,299) 151,937
------------ --------- ----------- --------- ----------- --------- -------- -------- -------- --------
Sale of common stock under
employee stock option plan. 29,250 29,250 419 419
Conversion of common stock
to Class A and Class B.
Conversion of Class B to
Class A common stock.... 1,011,587 10 (1,011,581) (10)
Treasury stock purchases..
Retirements...............
Net Income................ 18,645 18,645
------------ --------- ----------- --------- ----------- --------- -------- -------- -------- --------
Balance, February 28, 1994. 0 0 14,361,591 147 8,480,462 88 32,301 143,764 (5,299) 171,001
Issuance of Class A Common
Stock.................. 180,000 2 1,557 1,559
Conversion of Class B to
Class A common stock.... 188,708 (188,708)
Net Loss.................. (10,430) (10,430)
------------ --------- ----------- --------- ----------- --------- -------- -------- -------- --------
Balance, October 31, 1994. 0 0 14,730,299 $149 8,291,754 $88 $33,858 $133,334 ($5,299) $162,130
============ ========= =========== ========= =========== ========= ======== ======== ======== ========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Eight
Months Twelve Months Ended
Ended ---------------------------------
October February February February
31, 1994 28, 1994 28,1993 29, 1992
---------- --------- --------- --------
Cash Flows From Operating Activities:
Net Income (Loss).............................. $(10,430) $18,645 $9,790 $2,478
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation............................... 2,508 3,035 2,924 2,888
Loss (gain) on sale and retirement of
property and assets...................... 623 244 (282) (1,375)
Writedown of loan from sale of subsidiary.. 1,883
Deferred income taxes...................... (960) (1,573) (195) 391
Loss from unconsolidated affiliates........ 8 269
Provision to reduce inventory to net
realizable value......................... 6,357 3,100
Decrease (increase) in assets:
Escrow cash.............................. 1,986 1,811 (3,249) (72)
Receivables, prepaids and other assets... 4,530 (6,006) (22,296) 533
Mortgage notes receivable................ 20,362 (22,043) (15,755) 5,251
Inventories.............................. (113,745) (35,347) (38,476) 12,635
Increase (decrease) in liabilities:
State and Federal income taxes........... (14,661) 6,140 4,978 2,296
Customers' deposits...................... 455 3,974 455 2,043
Interest and other accrued liabilities... (6,701) (3,308) 15,073 676
Post development completion costs........ (1,041) 3,166 (3,665) 3,389
Accounts payable......................... 3,016 7,289 2,882 (660)
Amortization of debenture discounts...... 3 24 31
Net cash provided by (used in) --------- ---------- ---------- --------
operating activities................... (107,701) (22,079) (44,423) 30,504
Cash Flows From Investing Activities: --------- ---------- ---------- --------
Proceeds from sale of property and assets...... 5,292 2,114 3,327 13,309
Proceeds from sale of subsidiaries............. (95)
Investment in property and assets.............. (6,636) (1,464) (3,198) (13,017)
Purchase of property........................... (3,214) (3,130) (3,571) (716)
Investment in and advances to unconsolidated
affiliates................................... (298) 204 204 (2,914)
Investment in income producing properties...... 4,133 (16,597) (1,796) 17,593
Investment in loans from sale of subsidiaries.. 50 (86) (2,761)
Net cash provided by (used in) --------- ---------- ---------- --------
investing activities................... (723) (18,823) (5,120) 11,399
Cash Flows From Financing Activities: --------- ---------- ---------- --------
Proceeds from mortgages and notes.............. 473,621 552,640 255,340 183,344
Proceeds from subordinated debt................ 100,000 100,000
Principal payments on mortgages and notes...... (384,218) (557,531) (303,677) (242,686)
Principal payments on subordinated debt........ (52,160) (15,590) (3,867)
Investment in mortgage notes receivable........ 10,284 10,597 11,240 7,240
Proceeds from sale of stock.................... 419 157 14,090
Net cash provided by (used in) --------- ---------- ---------- --------
financing activities................... 99,687 53,965 47,470 (41,879)
--------- ---------- ---------- --------
Net Increase (Decrease) In Cash.................. (8,737) 13,063 (2,073) 24
Cash Balance, Beginning Of Period................ 23,274 10,211 12,284 12,260
--------- ---------- ---------- --------
Cash Balance, End Of Period...................... $14,537 $23,274 $10,211 $12,284
Supplemental Disclosures Of Cash Flow: ========= ========== ========== ========
Cash paid (received) during the year for:
Interest (net of amount capitalized)......... $17,380 $25,173 $19,546 $22,302
Income Taxes................................. 10,574 3,867 (48) (3,271)
--------- ---------- ---------- --------
$27,954 $29,040 $19,498 $19,031
See notes to consolidated financial statements. ========= ========== ========== ========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
Twelve Months Ended
--------------------
October October
31, 1994 31, 1993
--------- ---------
(Unaudited) (Unaudited)
Revenues:
Homebuilding:
Sale of homes.............................. $670,870 $469,409
Land sales and other revenues.............. 12,422 9,128
--------- ---------
Total Homebuilding....................... 683,292 478,537
Financial Services........................... 7,709 5,972
Investment Properties........................ 10,323 7,295
Collateralized Mortgage Financing............ 3,119 4,035
--------- ---------
Total Revenues........................... 704,443 495,839
--------- ---------
Expenses:
Homebuilding:
Cost of sales.............................. 535,880 365,623
Selling, general and administrative........ 76,349 58,518
Provision to reduce inventory to estimated
net realizable value..................... 6,357 3,100
--------- ---------
Total Homebuilding....................... 618,586 427,241
Financial Services........................... 7,993 5,594
Investment Properties........................ 7,302 6,126
Collateralized Mortgage Financing............ 3,756 4,489
Corporate General and Administration......... 13,558 9,546
Interest..................................... 25,359 21,585
Other operations............................. 9,475 3,556
Provision for loan writedown................. 1,883
--------- ---------
Total Expenses........................... 687,912 478,137
--------- ---------
Income Before Income Taxes and Extraordinary
Loss......................................... 16,531 17,702
--------- ---------
State and Federal Income Taxes:
State........................................ 1,037 2,020
Federal...................................... 4,017 4,008
--------- ---------
Total Taxes................................ 5,054 6,028
--------- ---------
11,477 11,674
Extraordinary Loss from Extinguishment of Debt,
Net of Income Taxes.......................... (1,277)
--------- ---------
Net Income..................................... $ 11,477 $ 10,397
========= =========
Earnings Per Common Share:
Income before extraordinary loss and
cumulative effect of change in accounting.. $ 0.50 $ 0.51
Extraordinary loss........................... (0.05)
--------- ---------
Net Income..................................... $ 0.50 $ 0.46
========= =========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS FOR THE EIGHT MONTHS ENDED OCTOBER 31, 1994 AND THE TWELVE MONTHS
ENDED FEBRUARY 28(29), 1994, 1993, AND 1992
1. SUMMARY OF ACCOUNTING POLICIES
Year End Change - On May 10, 1994, the Board of Directors of the Company
adopted a resolution providing that the date for the end of the fiscal year of
the Company be changed from the last day of February to October 31. The
report covering the three month periods ended May 31, 1994 and August 31, 1994
was filed on Form 10-Q. The report covering the eight month transition period
of March 1 through October 31, 1994 is included in this Form 10-K.
Thereafter, the Company will file reports as of January 31, April 30, July 31,
and October 31.
Operations - The Company, a Delaware Corporation, principally develops
housing communities in New Jersey, Pennsylvania, Florida, North Carolina,
Virginia, and California. In addition, the Company develops and operates
income producing properties.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company and all wholly-owned or
majority owned subsidiaries after elimination of all significant intercompany
balances and transactions. The Company's investments in joint ventures in
which the Company's interest is 50% or less are accounted for by the equity
method of accounting.
Reformat of Financial Statements - The financial statements for prior
years have been conformed to the format used at October 31, 1994.
The Company reports income taxes in accordance with Statement of
Financial Accounting No. 109 ("FAS 109"), "Accounting For Income Taxes".
Among other things, FAS 109 changes the method of recognizing deferred tax
assets. Deferred tax assets are recognized for temporary differences that
will result in deductible amounts in future years and for carryforwards. A
valuation allowance is recognized if it is more likely than not that some
portion of the deferred asset will not be recognized. The effect of initially
applying FAS 109 in fiscal 1992 resulted in recording additional deferred tax
assets and increasing net income by $883,000, or $.04 per common share.
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 - Cash includes cash deposited in checking accounts, overnight
repurchase agreements, certificates of deposit, Treasury bills and government
money market funds.
Inventories - Inventories are recorded at the lower of cost or net
realizable value. Net realizable value is defined as the estimated proceeds
upon disposition less all future costs to complete and expected costs to sell.
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 are amortized based upon the number of
homes to be constructed in each housing community utilizing a relative sales
value allocation method.
Interest costs related to properties in progress are capitalized during
the construction period and charged to 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 the Company determines it will not exercise the option.
Property - Various condominium homes, not yet under contract of sale, are
rented under short-term leases. Such homes are reclassified from inventory
and depreciated after a reasonable selling period not to exceed one year.
Rental operations of the Company arise from these incidental rentals and from
rental of commercial properties.
Post Development Completion Costs - In those instances where a
development is substantially completed and sold and the Company has additional
construction work to be incurred, an estimated liability is provided to cover
the cost of such work.
Deferred Income Tax - Deferred income taxes or income tax banefits are
provided for temporary differences between amounts recorded for financial
reporting and for income tax purposes.
Depreciation - The straight-line method is used for both financial and
tax reporting purposes for all assets except office furniture and equipment
which are depreciated using the declining balance method over their estimated
useful lives.
Prepaid Expenses - Prepaid expenses which relate to specific housing
communities are amortized to costs of sales as the applicable inventories are
sold.
Per Share Calculations - Per share amounts are calculated on a weighted
average basis and reflect the recapitalization described in Note 15.
2. UNAUDITED ADDITIONAL INCOME STATEMENT INFORMATION
The Company's management prepared income statement information based on
an eight month period ended October 31, 1993 and the twelve months ended
October 31, 1994 and 1993. In the opinion of management all adjustments for
these periods have been made, which include only normal recurring accruals and
deferrals necessary for a fair presentation of consolidated income
information. For the eight months ended October 31, 1993 total revenues were
$269,396,000, total expenses were $272,112,000, total income taxes were
($797,000), extraordinary loss was $1,277,000, and net loss was $3,196,000.
Loss per share amounted to $.14. For the twelve months ended October 31, 1994
interest incurred amounted to $21,844,000 and $5,192,000 and interest expensed
amounted to $20,396,000 and $4,963,000 for residential and commercial
operations, respectively. Capitalized interest at October 31, 1993 was
$27,925,000 and interest charged to reserves and sales of assets was $299,000
and $355,000, respectively, for the twelve months ended October 31, 1994.
3. CORPORATE INITIATIVES
The Company has embarked on long term improvement initiatives of total
quality, process redesign, and training. Included in Corporate General and
Administration is $1,964,000 and $853,000 for the eight months ended October
31, 1994 and the year ended February 28, 1994, respectively.
4. PROPERTY
Homebuilding property, plant, and equipment consists of land, land
improvements, buildings, building improvements, furniture and equipment used
by the Company and its subsidiaries to conduct day to day business.
Homebuilding Accumulated depreciation related to these assets at October 31,
1994 and February 28, 1994 amounted to $11,854,000 and $10,925,000,
respectively. Rental property consists of rental condominiums, two office
buildings, three office warehouse facilities, three retail shopping centers,
and a senior citizen rental community in New Jersey. The Company anticipates
the condominiums located in New Hampshire will be liquidated through a bulk
sale. Accumulated depreciation on rental property at October 31, 1994 and
February 28, 1994 amounted to $7,781,000 and $7,156,000, respectively.
5. ESCROW CASH
Escrow cash amounting to $3,057,000 and $5,043,000 at October 31, 1994
and February 28, 1994, respectively, primarily represents customers' deposits
which are restricted from use by the Company. The Company is able to release
escrow cash by pledging letters of credit. At October 31, 1994 and February
28, 1994, $4,558,000 and $6,453,000 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
The Company's wholly-owned mortgage banking subsidiary originates
mortgage loans, primarily from the sale of the Company's homes. Such mortgage
loans are sold in the secondary mortgage market or prior to February 28, 1987
pledged against collateralized mortgage obligations ("CMO's"). At October 31,
1994 and February 28, 1994, respectively, $23,460,000 and $43,502,000 of such
mortgages were pledged against the Company's mortgage warehouse line (see
"Notes to Consolidated Financial Statements - Note 7"). The Company may incur
risk with respect to mortgages that are delinquent and not pledged against
CMO's, but only to the extent the losses are not covered by mortgage insurance
or resale value of the home. Historically, the Company has 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, 1994.
In connection with certain bulk sales of condominium homes, land sales,
and the sale of certain subsidiaries, the Company made loans. At October 31,
1994 and February 28, 1994, the outstanding balance of such loans amounted to
$3,146,000 and $3,808,000, respectively, with interest rates at October 31,
1994 ranging up to 10.5%.
7. MORTGAGES AND NOTES PAYABLE
Substantially all of the nonrecourse land mortgages are short-term
borrowings. Nonrecourse mortgages secured by operating and rental property
are installment obligations having annual principal maturities in the
following years ending October 31, of approximately $180,000 in 1995, $198,000
in 1996, $218,000 in 1997, $239,000 in 1998, and $19,652,000 after 1998.
The Company has a Revolving Credit Agreement ("Agreement") with a group
of banks which provides up to $225,000,000 through March 1997. Interest is
payable monthly and at various rates of either prime plus 1/2% or LIBOR plus
2%. In addition, the Company pays 3/8% per annum on the weighted average
unused portion of the line. The Company believes that it will be able either
to extend the Agreement beyond March 1997 or negotiate a replacement facility,
but there can be no assurance of such extension or replacement facility.
Interest costs incurred, expensed and capitalized were:
(6)
Eight
Months Twelve Months Ended
Ended ----------------------------
October February February February
31, 1994 28, 1994 28, 1993 29, 1992
-------- -------- -------- --------
(Dollars in Thousands)
Interest incurred (1):
Residential(3)................. $15,145 $20,830 $15,990 $13,701
Commercial(4).................. 3,289 5,138 6,165 6,762
------- ------- ------- -------
Total incurred................. $18,434 $25,968 $22,155 $20,463
======= ======= ======= =======
Interest expensed:
Residential(3)................. $12,118 $17,622 $16,460 $15,900
Commercial(4).................. 3,195 4,908 5,809 6,557
------- ------- ------- -------
Total expensed................. $15,313 $22,530 $22,269 $22,457
======= ======= ======= =======
Interest capitalized at
beginning of year.............. $26,443 $23,366 $24,062 $27,427
Plus: Interest incurred......... 18,434 25,968 22,155 20,463
Less: Interest expensed......... 15,313 22,530 22,269 22,457
Less: Charged to reserves....... 261 361 583 1,371
Less: Sale of assets............ 355 - - -
------- ------- ------- -------
Interest capitalized at
end of year.................... $28,948 $26,443 $23,365 $24,062
======= ======= ======= =======
Interest capitalized at
end of year (5):
Residential(3)................. $22,975 $20,209 $15,727 $16,780
Commercial(2).................. 5,973 6,234 7,638 7,282
------- ------- ------- -------
Total interest
capitalized................... $28,948 $26,443 $23,365 $24,062
======= ======= ======= =======
(1) Data does not include interest incurred by the Company's 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 cost of sales.
(4) Represents interest charged to rental operations.
(5) Capitalized residential interest at February 28, 1994 includes $1,635,000
reported at February 28, 1993 as capitalized commercial interest. This
reclassification was the result of the transfer of two parcels of land
from commercial due to a change in the intended use to residential
housing.
(6) For the unaudited twelve months ended October 31, 1994 see Note 2.
Average interest rates and average balances outstanding for short-term
debt are as follows:
October February February February
31, 1994 28, 1994 28, 1993 29, 1992
-------- -------- -------- --------
(Dollars In Thousands)
Average outstanding
borrowings................. $ 72,204 $ 39,632 $ 32,788 $110,910
Average interest rate during
period(1).................. 7.4% 5.4% 6.2% 8.4%
Average interest rate at end
of period.................. 9.9% -- 6.5% 7.1%
Maximum outstanding at any
month end.................. .$118,455 $ 72,700 $ 68,350 $138,904
(1) Total interest incurred for the eight months or year divided by average
outstanding short term borrowings.
8. SUBORDINATED NOTES
On June 24, 1988, the Company issued $50,000,000 principal amount of 12
1/4% Subordinated Notes due June 15, 1998. In July 1993, the Company redeemed
all of these notes at a price of 102% of par. The redemption resulted in an
extraordinary loss of $1,277,000 net of an income tax benefit of $658,000.
On April 29, 1992, the Company issued $100,000,000 principal amount of 11
1/4% Subordinated Notes due April 15, 2002. Interest is payable semi-
annually. Annual sinking fund payments of $20,000,000 are required to
commence April 15, 2000, and are calculated to retire 40% of the issue prior
to maturity.
On June 7, 1993, the Company issued $100,000,000 principal amount of
9 3/4% Subordinated Notes due June 1, 2005. Interest is payable semiannually.
The notes are redeemable in whole or in part at the Company's 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.
The indentures relating to the subordinated notes and the Revolving
Credit Agreement contain restrictions on the payment of cash dividends. At
October 31, 1994, $28,661,000 of retained earnings were free of such
restrictions.
9. RETIREMENT PLAN
On December 1, 1982, the Company 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 $843,000 for the
eight months ended October 31, 1994 and $788,000, $477,000, and $434,000 for
the years ended February 28, 1994, February 28, 1993, and February 29, 1992,
respectively.
10. INCOME TAXES
Income Taxes payable (receivable) including deferred benefits, consists
of the following:
October February
31, 1994 28, 1994
--------- ---------
(In Thousands)
State income taxes:
Current.................................... $ 298 $ 1,745
Deferred................................... (812) (1,105)
Federal income taxes:
Current.................................... (4,926) 8,288
Deferred................................... (7,243) (5,990)
--------- ---------
Total.................................... $(12,683) $ 2,938
========= =========
Deferred income taxes have been provided (reduced) due to temporary
differences as follows:
Eight
Months Twelve Months Ended
Ended ----------------------------
October February February February
31, 1994 28, 1994 28, 1993 29, 1992
-------- -------- -------- --------
(In Thousands)
Capitalized interest................$ (3) $ (3) $ (16) $ ( 96)
Homeowner association maintenance
reserves.......................... (46) 166 53 (117)
Installment sales................... (431) (493) (578) (592)
Provision to reduce inventory to
net realizable value.............. (287) 1,324 954 2,563
Deferred expenses................... (54) (727) (608) (484)
Depreciation........................ 328 298
Post development completion costs... (127) (1,988)
Net operating losses................ 97 (129)
Other............................... (3) (21)
Low income housing tax credit....... (434)
-------- -------- -------- --------
Benefit (Provision) - total.........$ (960) $(1,573) $ (195) $ 1,274
======== ======== ======== ========
The deferred tax liabilities or assets have been recognized in the
consolidated balance sheets due to temporary differences and loss
carryforwards as follows:
October February
31, 1994 28, 1994
-------- --------
(In Thousands)
Deferred Tax Liabilities:
Deferred interest............ $ 249 $ 252
Installment sales............ 353 784
Accelerated depreciation..... 1,433 1,104
-------- --------
Total...................... 2,035 2,140
-------- --------
Deferred Tax Assets:
Deferred income.............. 358 369
Maintenance guarantee reserves 536 490
Provision to reduce inventory to
net realizable value....... 3,864 3,577
Uniform capitalization of
overhead................... 2,096 2,018
Post development completion
costs........................ 2,115 1,988
Other........................ 687 793
Low income housing tax credit 434
-------- --------
Total...................... 10,090 9,235
-------- --------
Net Deferred Tax Assets........ $(8,055) $(7,095)
======== ========
The effective tax rates varied from the expected rate. The sources of
these differences were as follows:
October February February February
31, 1994 28, 1994 28, 1993 29, 1992
-------- -------- -------- --------
Computed "expected" tax rate...... (35.0%) 35.0% 34.0% 34.0%
State income taxes, net of Federal
income tax benefit.............. 4.7% 1.8% 7.3% 20.1%
Loss carryforward of New Fortis
subsidiary...................... -- (2.1%) (2.6%) (26.5%)
Other............................. (2.4%) (3.0%) (6.2%) (11.8%)
-------- -------- -------- --------
Effective tax rate................ (32.7%) 31.7% 32.5% 15.8%
======== ======== ======== ========
The Company has state net operating loss carryforwards for financial
reporting and tax purposes of $207,000,000 due to expire between the years
October 31, 1995 and October 31, 2009.
11. PROVISION TO REDUCE INVENTORY TO ESTIMATED NET REALIZABLE VALUE
During the eight months ended October 31, 1994 and the year ended
February 28, 1993, the Company provided reserves of $6.4 million and $3.1
million, respectively, to reduce certain residential properties to their
estimated net realizable values. The October 31, 1994 reserve is primarily
attributable to three communities, one each in New York, New Hampshire, and
Pennsylvania. In New York, the reserve is an addition to prior years'
reserves due to reduced sales prices, buyers concessions, and an extended
sellout period. In New Hampshire, the reserve is also an addition to prior
years' reserves due to reduced sales prices in anticipation of a bulk sale of
the remaining homes. In Pennsylvania, the reserve is due to reduced sales
prices and an extended sellout period. The February 28, 1993 reserve was
substantially attributable to two Florida communities where the Company
significantly reduced sales prices. Although all these communities except New
Hampshire have very few standing unsold houses, by reducing sales prices and
offering buyer incentives the Company plans to accelerate their buildout. The
Company believes the rapid liquidation of these properties will enable it to
concentrate on newer and more profitable developments. In addition, in years
prior to February 29, 1992 the Company established similar reserves
attributable to Florida, New Hampshire and New York communities.
During the eight months ended October 31, 1994 and the years ended
February 28(29), 1994, 1993, and 1992, the Company charged $5,209,000,
$4,176,000, $5,245,000, and $7,525,000, respectively, against reserves for
losses realized from the sales of certain homes. In the eight months ended
October 31, 1994 and the years ended February 28(29), 1994, 1993, and 1992,
respectively, these charges consisted of $4,900,000, $3,620,000, $4,459,000,
and $5,678,000 of construction, and operations costs, $89,000, $195,000,
$201,000, and $476,000 of selling, general and administration expenses and
$220,000, $361,000 and $583,000 of interest expenses. At October 31, 1994 and
February 28, 1994, respectively, inventory and residential rental inventory
have been reduced by an allowance of $10,739,000 and $9,591,000 to reflect the
carrying amounts at estimated net realizable value.
12. TRANSACTIONS WITH RELATED PARTIES
The Company's Board of Directors has adopted a general policy providing
that it will not make loans to officers or directors of the Company 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 $2,000,000 at any one time, and that such loans will be made only
with the approval of the members of the Company's Board of Directors who have
no interest in the transaction. At October 31, 1994 and February 28, 1994
related party receivables from officers and directors amounted to $1,677,000
and $1,411,000, respectively. Notwithstanding the policy stated above, the
Board of Directors of the Company concluded that the following transactions
were in the best interests of the Company.
On March 1, 1990, the Company sold all the assets and liabilities of its
wholly-owned engineering subsidiary Najarian and Associates ("N & A") to the
employees of N & A for $3,600,000. One of these employees and former
President of N & A was Tavit O. Najarian, the son-in-law of Mr. K. Hovnanian,
Chairman of the Board and Director of the Company. The sale was approved by
members of the Company's Board of Directors who were not related to Mr.
Najarian. At the closing the Company received a cash payment of $720,000 and
a $2,880,000 note. Originally the note carried an annual interest rate of 10%
and was to amortize over ten years. As long as any portion of the note is
outstanding, the Company receives 25% of the net cash flow. During the year
ended February 29, 1992, N & A began to experience a significant decrease in
business activity. As a result, the note was modified by changing the
interest rate to prime, add accrued interest from September 1, 1991 to
September 1, 1992 to principal and reschedule principal payments over the
balance of the term of the note. As a result of continued financial
difficulties, a committee consisting of independent directors of the Board of
Directors of the Company (the "Committee") engaged an outside consultant to
determine the fair market value of the above note. Based on the consultant's
findings, the Committee recommended a reduction in the note including accrued
interest from $2,983,000 to $1,100,000 at February 28, 1994. This reduction
of the note was charged to operations during the year ended February 28, 1994.
In addition, the Committee recommended a new term of ten years with annual
interest on the note of 5% for the first two years adjusting to prime
thereafter. Amortization would begin in year three with an annual minimum
amount of 5%, ranging up to 30% in year 10, or 85% of cash flow after
interest, whichever is greater. The Committee also recommended a $300,000
discount if the loan was paid in full during the first two years.
The Company provides property management services to various limited
partnerships including two partnerships in which Mr. A. Hovnanian, President
and a Director of the Company, is a general partner, and members of his family
and certain officers and directors of the Company are limited partners. At
October 31, 1994, these partnerships owed the Company $238,000.
On May 10, 1994, the Board of Directors approved the acquisition of the
10% minority interest in certain Florida subsidiaries owned by Paul W. Asfahl,
President of the Company's Florida Division. For his 10% interest, the
Company issued 45,000 shares of Class A Common Stock to Mr. Asfahl.
On August 2, 1994, the Board of Directors approved the acquisition of the
15% minority interest in the New Fortis Corporation owned primarily by Marvin
D. Gentry, President of the New Fortis Corporation. For the 15% interest, the
Company issued 135,000 shares of Class A Common Stock to Mr. Gentry and the
other owners.
13. STOCK OPTION PLAN
The Company has 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.
Stock option transactions are summarized as follows:
October February February February
31, 1994 28, 1994 28, 1993 29, 1992
-------- -------- -------- --------
Options outstanding at beginning
of period................... 938,500 1,004,000 530,500 590,949
Granted.................... -- -- 509,500 --
Exercised.................. -- 58,500 28,000 60,449
Cancelled.................. -- 7,000 8,000 --
-------- --------- -------- --------
Options outstanding at end
of period.................... 938,500 938,500 1,004,000 530,500
======== ========== ========= ========
Options exercisable at end of
period...................... 598,833 598,833 336,500 198,500
Price range of options $3.00- $5.13- $3.00-
exercised................... -- $9.44 $9.44 $9.44
Price range of options $5.13- $5.13- $3.00- $3.00-
outstanding................. $11.50 $11.50 $11.50 $9.44
14. COMMITMENTS AND CONTINGENT LIABILITIES
During fiscal 1989, the Company became aware that certain fire-retardant
plywood commonly used in the roof construction of multi-family homes may
contain a product defect causing accelerated deterioration of the plywood.
The Company has determined that such plywood was used principally in 33 of its
communities containing approximately 11,750 homes.
Common areas, including roofs, in each of the Company's multi-family
condominium developments are governed and controlled by homeowners'
associations for each development, rather than by individual homeowners.
Certain of the 33 homeowners' associations in the affected developments have
asserted claims against the Company. As of October 31, 1994, the Company had
entered separate settlement agreements with 31 of the 33 associations, (the
"Settling Associations") covering 10,850 homes. In December 1994, the Company
entered into a settlement agreement with the two remaining associations on
substantially the same terms as the earlier settlements.
In August 1989 the Company brought suit against the plywood material
manufacturers, treaters, suppliers and others (the "Defendants") to determine
the proper responsibility for damages, to protect its interests and to recover
its damages.
In November 1992, the Company and the Settling Associations entered into
a settlement agreement with most of the Defendants. Based upon the settlement
monies received, the use of the Settling Associations' roof shingle reserves
and the actual expenditures in performing the repairs, the Company believes
the repair costs will not require it to set aside future reserves for such
roof repairs.
In addition, the Company is involved from time to time in litigation
arising in the ordinary course of business, none of which is expected to have
a material adverse effect on the Company.
As of October 31, 1994 and February 28, 1994, respectively, the Company
is obligated under various performance letters of credit amounting to
$6,088,000 and $5,114,000.
15. RECAPITALIZATION
In September 1992, the Company's stockholders approved a Plan of
Recapitalization (the "Recapitalization"). The Recapitalization became
effective September 11, 1992.
On the effective date, each outstanding share of the Company's common
stock, par value $.01 per share, was converted into one-half of a share of
"Class A Common Stock", par value $.01 per share having one vote per share,
and one-half of a share of "Class B Common Stock", par value $.01 per share
having 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. Shareholders may
convert their shares of Class B Common Stock into an equal number of shares of
Class A Common Stock at any time. A holder of Class B Common Stock can wait
until the time of sale and deliver the Class B Common Stock to a broker. The
broker will then present the Class B Common Stock to the Company's transfer
agent, which will issue the purchaser shares of Class A Common Stock.
16. UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION
Summarized quarterly financial information for the eight months ended
October 31, 1994 and the years ended February 28, 1994 and 1993, is as
follows:
Two
Months Three Months Ended
Ended ----------------------
October 31, August 31, May 31,
1994 1994 1994
----------- ---------- ----------
(In Thousands Except Per Share Data)
Revenues........................... $149,215 $138,381 $ 98,989
Expenses........................... $157,333 $141,289 $103,468
Loss before income taxes........... $ (8,118) $ (2,908) $ (4,479)
State and Federal income tax....... $ (3,149) $ (426) $ (1,500)
Net loss........................... $ (4,969) $ (2,482) $ (2,979)
Loss per common share.............. $ (.22) $ (.11) $ (.13)
Weighted average number of
common shares outstanding........ 22,906 22,887 22,849
Three Months Ended
-----------------------------------------
February November August May
28, 1994 30, 1993 31, 1993 31, 1993
-------- -------- -------- ---------
(In Thousands Except Per Share Data)
Revenues........................... $257,691 $143,078 $123,291 $ 62,950
Expenses........................... $241,046 $136,157 $116,093 $ 64,563
Income (loss) before income taxes
and extraordinary loss........... $ 16,645 $ 6,921 $ 7,198 $ (1,613)
State and Federal income tax....... $ 5,277 $ 2,152 $ 2,426 $ (626)
Income (loss) before extraordinary
loss............................ $ 11,368 $ 4,769 $ 4,772 $ (987)
Extraordinary loss from
extinguishment of debt, net
of income taxes.................. $ (1,277)
Net income (loss).................. $ 11,368 $ 4,769 $ 4,772 $ (2,264)
Earnings (loss) per common share:
Income (loss) before
extraordinary loss............. $ .50 $ .21 $ .21 $ (.05)
Extraordinary loss............... $ (.05)
Net income (loss).................. $ .50 $ .21 $ .21 $ (.10)
Weighted average number of
common shares outstanding........ 22,842 22,839 22,818 22,784
Three Months Ended
-----------------------------------------
February November August May
28, 1993 30, 1992 31, 1992 31, 1992
-------- -------- -------- ---------
(In Thousands Except Per Share Data)
Revenues............................ $184,950 $115,594 $ 83,585 $ 45,186
Expenses............................ $172,214 $112,486 $ 82,173 $ 47,917
Income (loss) before income taxes... $ 12,736 $ 3,108 $ 1,412 $ (2,731)
State and Federal income tax........ $ 4,444 $ 1,152 $ 188 $ (1,049)
Net income (loss)................... $ 8,292 $ 1,956 $ 1,224 $ (1,682)
Earnings (loss) per common share.... $ .36 $ .09 $ .05 $ (.07)
Weighted average number of
common shares outstanding......... 22,784 22,779 22,779 22,755
SCHEDULE VIII
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
BALANCE CHARGED TO CHARGED TO BALANCE
FEB. 28, COSTS AND DEDUCTIONS DESCRIP- OTHER DESCRIP- FEB 29,
DESCRIPTION 1991 EXPENSES TION ACCOUNTS TION 1992
- - ------------------- ----------- ----------- ---------- --------- ---------- ---------- -----------
Land and land
development costs $ 5,429,000 $2,906,000 Closings $ 2,523,000
Land, land options
and costs of comm.
in planning 8,200,000 8,200,000
Rental property 9,508,000 4,619,000 Closings 4,889,000
Income producing
property under
development 300,000 300,000
----------- ----------- ---------- ---------- -----------
$23,437,000 $7,525,000 $15,912,000
=========== =========== ========== ========== ===========
BALANCE CHARGED TO CHARGED TO BALANCE
FEB. 29, COSTS AND DEDUCTIONS DESCRIP- OTHER DESCRIP- FEB 28,
DESCRIPTION 1992 EXPENSES TION ACCOUNTS TION 1993
- - ------------------- ----------- ----------- ---------- --------- ---------- ---------- -----------
Land and land
development costs $ 2,523,000 $2,306,000 $2,292,000 Closings $3,899,000 Reclass $ 6,436,000
Land, land options
and costs of comm.
in planning 8,200,000 794,000 1,458,000 Closings (2,690,000) Reclass 4,846,000
Rental property 4,889,000 1,495,000 Closings (1,007,000) Reclass 2,387,000
Income producing
property under
development 300,000 (202,000) Reclass 98,000
----------- ---------- ----------- ----------- -----------
$15,912,000 $3,100,000 $5,245,000 $0 $13,767,000
=========== ========== ========== =========== ===========
BALANCE CHARGED TO CHARGED TO BALANCE
FEB. 28, COSTS AND DEDUCTIONS DESCRIP- OTHER DESCRIP- FEB 28,
DESCRIPTION 1993 EXPENSES TION ACCOUNTS TION 1994
- - ------------------- ----------- ---------- ---------- --------- ---------- ---------- -----------
Land and land
development costs $ 6,436,000 $3,164,000 Closings $2,091,000 Reclass $ 5,363,000
Land, land options
and costs of comm.
in planning 4,846,000 (2,091,000) Reclass 2,755,000
Rental property 2,387,000 1,012,000 Closings 1,375,000
Income producing
property under
development 98,000 98,000
----------- ---------- ---------- ---------- ----------
$13,767,000 $4,176,000 $0 $ 9,591,000
=========== ========== ========== ========== ===========
BALANCE CHARGED TO CHARGED TO BALANCE
FEB. 28, COSTS AND DEDUCTIONS DESCRIP- OTHER DESCRIP- OCT. 31,
DESCRIPTION 1994 EXPENSES TION ACCOUNTS TION 1994
- - ------------------- ----------- ---------- ---------- --------- ---------- ---------- -----------
Land and land
development costs $ 5,363,000 $5,762,000 $3,370,000 Closings $ 7,755,000
Land, land options
and costs of comm.
in planning 2,755,000 1,123,000 Closings 1,632,000
Rental property 1,375,000 595,000 716,000 Closings 1,254,000
Income producing
property under
development 98,000 98,000
----------- ---------- ---------- ---------- -----------
$ 9,591,000 $6,357,000 $5,209,000 $10,739,000
=========== ========== ========== ========== ===========
SCHEDULE X
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
SUPPLEMENTAL INCOME STATEMENT INFORMATION
Charged To Cost And Expenses
----------------------------------------------
October February February February
31, 1994 28, 1994 28, 1993 29, 1992
---------- ---------- ---------- ----------
Advertising..................... $6,368,000 $8,587,000 $5,895,000 $4,776,000
Depreciation.................... $2,508,000 $3,035,000 $2,924,000 $2,888,000
Maintenance guarantee reserves.. $ 669,000 $1,237,000 $2,764,000 $1,257,000
SCHEDULE XI
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
OCTOBER 31, 1994
Gross Amounts (A)(B)(C)(D)
---------------------------
Building/ Tax Accumulated
Description Land Improvements Total Basis Depreciation
- - ------------------------ ----------- ------------ ----------- ----------- ------------
1 Society Hill Florida 0 441,000 441,000 441,000 0
Lake Worth, FL
Condominiums
2.North Brunswick IV 636,000 7,110,000 7,746,000 6,446,000 542,000
North Brunswick, NJ
Flex Building
3 K.Hovnanian Corp.Center 541,000 4,885,000 5,426,000 4,949,000 981,000
West Palm Beach, FL
Office Building
4 Society Hill @ Merimack 0 1,326,000 1,326,000 1,031,000 308,000
Merrimack, NH
Condominiums
5 Hovnanian Corp.Center 1,000,000 4,722,000 5,722,000 5,167,000 981,000
North Brunswick, NJ
Retail
6 Piscataway Retail 1,743,000 10,540,000 12,283,000 11,299,000 1,549,000
Piscataway, NJ
Retail Center
7 Hovnanian Corp. Center 616,000 8,532,000 9,148,000 8,107,000 2,637,000
North Brunswick, NJ
Office/Warehouse
8 Cypress Plaza 678,000 3,385,000 4,063,000 3,629,000 417,000
Jacksonville, FL
Retail Center
9 Lower Saucon 32,000 246,000 278,000 240,000 0
Bethlehem, PA
Condominiums
10 Allaire Shopping Center 1,688,000 6,618,000 8,306,000 8,306,000 253,000
Allaire, NJ
Retail Center
11 Hidden Meadows 544,000 5,748,000 6,292,000 6,062,000 105,000
Ocean Twp, NJ
Condominiums
12 North Brunswick IV 714,000 1,975,000 2,689,000 2,415,000 0
North Brunswick, NJ
Flex Building
13 Miscellaneous 0 269,000 269,000 269,000 8,000
New Jersey
Leasehold Improvements
14 Hovnanian Corp. Center 2,702,000 5,171,000 7,873,000 7,051,000 0
North Brunswick, NJ
Land/Land Improvement
Approval & Flex Building
Under Construction
15 Newark Shopping Center 0 1,342,000 1,342,000 1,342,000 0
Newark, NJ
Land Improvement and
Approval Costs
16 Merrimack Commercial 200,000 100,000 300,000 300,000 0
Merrimack, NH
Land/Land Improve.Costs
17 Cypress Plaza 1,744,000 3,822,000 5,566,000 5,126,000 0
Jacksonville, FL
Land/Land Improve.
and Approval Costs
18 Jensen Beach Club 190,000 0 190,000 190,000 0
Jensen Beach, FL
Land/Land Improve.
and Approval Costs
----------- ------------ ----------- ----------- ------------
$13,028,000 66,232,000 79,260,000 72,370,000 7,781,000
=========== ============ =========== =========== ============
(A) Fiscal Year Construction Completed:
1 - 1985
2 through 3 - 1987
4 through 8 - 1990
9 through 12 - 1993
14 through 18 - not completed
(B) Depreciable Life:
40 years - Depreciation expense was $1,175,000 for the eight months ended
October 31, 1994 and $1,408,000,$1,723,000,and $1,932,000 for the twelve
months ended February 28, 1994 and 1993 and February 29, 1992,
respectively.
(C) Items marked 14 through 18 consist of land improvement, building
construction, and approval costs on land held for future development.
Balance - February 29, 1992 79,851,000
Additions: Improvements 5,314,000
Valuation allowance to reduce inventory
to net realizable value 2,502,000
Deletions: Transfers to inventories (14,633,000)
Cost of rental condominiums sold (5,096,000)
-------------
Balance - February 28, 1993 67,938,000
Additions: Improvements 3,635,000
Transfers from inventories 6,558,000
Acquisitions 8,020,000
Deletions: Transfer to fixed assets (5,140,000)
Cost of rental condominiums sold (1,414,000)
Cost of retail center sold (728,000)
Abandonment of project (202,000)
-------------
Balance - February 28, 1994 $ 83,807,000
Additions: Improvements 2,249,000
Transfers from inventories 145,000
Deletions: Cost of rental condomimiums sold (1,806,000)
Cost of commercial center sold (1,243,000)
Cost of mini storage sold (3,892,000)
-------------
Balance - October 31, 1994 $ 79,260,000
=============
Balance at October 31, 1994 is reported on the consolidated balance sheet as
rental and income producing properties under development.