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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
( X )ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the twelve months ended OCTOBER 31, 1998
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number: 1-8551
Hovnanian Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-1851059
(State or other jurisdiction of (I.R.S. Employer incorporation
or organization) Identification No.)
10 Highway 35, P.O. Box 500, Red Bank, N.J. 07701
(Address of principal executive offices)
732-747-7800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- -------------------- ------------------------
Class A Common Stock, $.01 par value American Stock Exchange
per share
Securities registered pursuant to Section 12(g) of the Act - None
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. ( X )Yes ( ) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of the close of business on January 7, 1999, there were outstanding
13,830,820 shares of the Registrant's Class A Common Stock and 7,688,600 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 7, 1999 was $71,038,000. (The value
of a share of Class A Common Stock is used as the value for a share of Class B
Common Stock as there is no established market for Class B Common Stock and it
is convertible into Class A Common Stock on a share-for-share basis.)
Documents Incorporated by Reference:
Part III - Those portions of registrant's definitive proxy statement to be filed
pursuant to Regulation l4A in connection with registrant's annual meeting of
shareholders to be held on March 23, 1999 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............................ 16
4 Submission of Matters to a Vote of
Security Holders........................... 16
Executive Officers of the Registrant......... 16
PART II
5 Market for the Registrant's Common Equity
and Related Stockholder Matters............ 16
6 Selected Financial Data...................... 17
7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 19
8 Financial Statements and Supplementary
Data....................................... 34
9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................. 34
PART III
10 Directors and Executive Officers of the
Registrant................................. 35
Executive Officers of the Registrant......... 35
11 Executive Compensation....................... 36
12 Security Ownership of Certain Beneficial
Owners and Management...................... 36
13 Certain Relationships and Related
Transactions............................... 36
PART IV
14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K....................... 37
SIGNATURES................................... 39
PART I
ITEMS 1 AND 2 - BUSINESS AND PROPERTIES
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, southern New York state, and eastern Pennsylvania), southeastern
Florida, North Carolina, northern Virginia, southern California, and Poland.
The Company markets its homes to first time buyers. In addition, the Company
provides financial services (mortgage loans and title insurance) to its
homebuilding customers and third parties. The Company also developed and held
for investment income producing properties but has exited this business.
The Company employed approximately 1,200 full-time associates as of October
31, 1998. 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 cost efficient designs and materials and by
rigorous control of subcontracting costs, the Company attempts to keep costs
low.
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 50% 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, non-recourse purchase money mortgages, long term debt, its
unsecured revolving credit facility or cash flow. This eliminates the need
of obtaining specific community construction financing, which is especially
important at times 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. In addition,
the Company plans to achieve a significant market presence in each of its
markets in order to obtain powers and economies of scale.
- The Company looks to diversify its product line to provide housing to a
broad range of customers. Currently the Company's customers primarily
consist of first-time buyers, first and second time move-up buyers, move
down buyers and active adult buyers.
- The Company offers a wide range of customer options to satisfy
individual customer tastes. In its larger communities the Company has
constructed decoration centers where the customer can better see
customization possibilities for their new home. The Company is also
planning larger regional design centers and expects to open one in New
Jersey and one in California during the next year.
- Through operational excellence the Company attempts to reduce its
housing construction costs. Operational excellence is further discussed
under "Certain Operating Policies and Procedures" below.
The Company offers a broad array of products 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 and to active adult buyers. The Company
also offers detached single family homes and larger townhouses with garages
designed for the move-up buyer and age restricted communities for active adults.
Current base prices for the Company's homes in contract backlog at October 31,
1998 (exclusive of upgrades and options) range from $41,000 to $921,000 in its
Northeast Region, from $157,000 to $352,000 in Florida, from $100,000 to
$413,000 in North Carolina, from $140,000 to $355,000 in Virginia, from $113,000
to $307,000 in California, and from $84,000 to $94,000 in Poland. Closings
generally occur and are typically reflected in revenues from two to twelve
months after sales contracts are signed.
Information on homes delivered by market area is set forth below:
Year Ended
---------------------------------
October October October
31, 1998 31, 1997 31, 1996
--------- -------- --------
(Housing Revenue in Thousands)
Northeast Region:
Housing Revenues........ $595,873 $445,817 $460,931
Homes Delivered......... 2,530 2,128 2,364
Average Price........... $235,522 $209,500 $194,979
North Carolina:
Housing Revenues........ $127,592 $125,242 $123,347
Homes Delivered......... 687 695 738
Average Price........... $185,723 $180,204 $167,137
Florida:
Housing Revenues........ $ 44,168 $ 74,146 $ 99,085
Homes Delivered......... 241 418 632
Average Price........... $183,269 $177,382 $156,780
Virginia:
Housing Revenues........ $ 38,904 $ 14,398 $ 16,749
Homes Delivered......... 152 70 75
Average Price........... $255,947 $205,685 $223,320
California:
Housing Revenues........ $ 82,546 $ 69,252 $ 64,570
Homes Delivered......... 457 365 325
Average Price........... $180,625 $189,731 $198,677
Poland:
Housing Revenues........ $ 6,561 $ 2,952 --
Homes Delivered......... 71 41 --
Average Price........... $ 92,408 $ 72,000 --
Combined Total:
Housing Revenues........ $895,644 $731,807 $764,682
Homes Delivered......... 4,138 3,717 4,134
Average Price........... $216,443 $196,881 $184,974
Information on homes delivered by product type is set forth below:
Year Ended
-----------------------------
October October October
31, 1998 31, 1997 31, 1996
-------- -------- --------
(Housing Revenues in Thousands)
First Time Buyer Product(1)
Housing Revenues............. $ 34,987 $ 52,589 $ 77,682
Homes Delivered.............. 279 407 619
Percentage of Housing
Revenues.................... 4% 7% 10%
Move-Up Buyer Product(2)
Housing Revenues............. $860,657 $679,218 $687,000
Homes Delivered.............. 3,859 3,310 3,515
Percentage of Housing
Revenues.................... 96% 93% 90%
(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.
The Company's net sales contracts increased to $806,247,000 for the year
ended October 31, 1998 from $762,750,000 for the year ended October 31, 1997 or
5.7%, and was the net result of a 4.8% decrease in the number of homes
contracted to 3,877 in 1998 from 4,073 in 1997 and a 11.0% increase in the
average home base sales prices. On a market area and dollar basis, Virginia
achieved the highest increase of 136.6%, followed by the Northeast Region with
an 11.6% increase and North Carolina with a 2.4% increase. The large increase
in Virginia was the result of an acquisition of a small Virginia developer on
May 1, 1998. Net sales contracts decreased in California, Florida and Poland.
In California and Poland, contracts decreased due to fewer homes available for
sale. Florida's decrease was due to the downsizing of the division.
During the year ended October 31, 1998 the Company has written down one
Florida residential community and one New Jersey parcel of land for sale. In
the Florida community, higher discounts are being offered to speed up sales. At
the New Jersey land site, lots are being contracted at prices lower than
anticipated. The result of the above decisions was a reduction in inventory
carrying amounts to fair value, resulting in a $1.9 million impairment loss in
accordance with FAS 121. The Company has also written off three New Jersey
residential land options including approval, engineering and capitalized
interest costs amounting to $2.1 million. The Company did not exercise these
options because of changes in local market conditions and difficulties in
obtaining government approvals. Total writedowns and write-offs of residential
inventories are presented on the consolidated statement of income as "Inventory
impairment loss." See "Notes to Consolidated Financial Statements - Note 10"
for additional explanation.
As of October 31, 1998, the following table summarizes the Company's active
communities under development:
(1) (2)
Contracted Remaining
Commun- Approved Homes Not Home Sites
ities Lots Delivered Delivered Available
------- -------- --------- --------- ----------
Northeast Region...... 31 10,111 3,818 1,126 5,167
North Carolina........ 32 3,740 1,285 232 2,223
Florida............... 4 970 622 73 275
Virginia.............. 11 1,033 250 115 668
California............ 6 1,036 466 119 451
Poland................ - 130 112 7 11
------- -------- --------- --------- ----------
Total 84 17,020 6,553 1,672 8,795
======= ======== ========= ========= ==========
(1) Includes 8 lots under option.
(2) Of the total home sites available, 460 were under construction or
completed (including 54 models and sales offices), 4,570 were under
option, and 330 were financed through purchase money mortgages.
In addition, in substantially completed or suspended developments, the
Company had 11 homes under construction or completed including 8 homes which are
under contract. The Company also had 281 lots without construction (1 under
contract) in these substantially completed or suspended developments.
As of October 31, 1998, the following table summarizes the Company's total
started or completed unsold homes:
Unsold
Homes Models Total
------ ------ -----
Northeast Region.................. 180 16 196
North Carolina.................... 93 - 93
Florida........................... 24 6 30
Virginia.......................... 23 11 34
California........................ 78 21 99
Poland............................ 11 - 11
------ ------ -----
Total 409 54 463
====== ====== =====
BACKLOG
Sales of the Company's United States 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, 1998 and October 31, 1997, the Company had a backlog of
signed contracts for 1,681 homes and 1,872 homes, respectively, with sales
values aggregating $381,816,000 and $374,314,000, respectively. Substantially
all of the Company's backlog at October 31, 1998 is expected to be completed and
closed within the next twelve months. At December 31, 1998 and 1997, the
Company's backlog of signed contracts was 1,584 homes and 1,779 homes,
respectively, with sales values aggregating $359,213,000 and $360,969,000,
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, 1998, 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........ 23 6,217 $ 127,469 $ 16,288
Owned............... 3 359 14,593
-------- ----------- -----------
Total............ 26 6,576 30,881
-------- ----------- -----------
North Carolina:
Under Option........ 8 651 $ 11,610 268
Owned............... 1 82 1,058
-------- ----------- -----------
Total............ 9 733 1,326
-------- ----------- -----------
Florida:
Owned............... 3 1,033 3,923
-------- ----------- -----------
California:
Under Option........ 14 2,136 $ 63,384 6,028
-------- ----------- -----------
Poland:
Owned............... 1 485 1,350
-------- ----------- -----------
Totals:
Under Option........ 45 9,004 22,584
Owned............... 8 1,959 20,924
-------- ----------- -----------
Combined Total........ 53 10,963 $ 43,508
======== =========== ===========
(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, 1998, option fees and deposits aggregating
approximately $11,085,000. As of October 31, 1998, the Company spent an
additional $11,499,000 in non-refundable predevelopment costs on such
properties.
(2) The book value of $43,508,000 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
five years.
In North Carolina and Virginia, 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 Virginia, the Company is currently 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. As a result of its decision to downsize, 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
southern 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 or partially developed lots with no more than fifty to seventy-
five lots to be taken down during any twelve month period. With a dwindling
supplyin California of developed lots, some land parcels will be optioned which
will require the full range of development activities. Option fees range up to
10% of the land value.
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 as well as
unrelated third parties with competitive financing and coordinating and
expediting the loan origination transaction through the steps of loan
application, loan approval and closing. KHM has its headquarters in Red Bank,
New Jersey. It originates loans in New Jersey, New York, Pennsylvania, North
Carolina, Florida, California, South Carolina and Illinois.
KHM'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 also originates conventional loans which are sold to a number of
private investors. 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. Additionally, KHM sells virtually all of the loan servicing
rights to loans it originates. Loans are sold either individually or in pools
to GNMA, FNMA, or FHLMC or against forward commitments to institutional
investors, including banks and savings and loan associations.
KHM plans to grow its mortgage banking operations. Initially, KHM focused
on originating loans from customers who purchase homes from Hovnanian
Enterprises, Inc. affiliates. KHM's objective is to increase the capture rate
of non-cash homebuyers from the 58% rate achieved in fiscal 1998 to 70% over the
next several years. KHM has now expanded to offer its mortgage products and
services to unrelated third parties. During the year ended October 31, 1998,
third party loans amounted to 40% of total mortgage closings.
RENTAL PROPERTY DEVELOPMENT ACTIVITIES AND LAND INVENTORY
The Company had previously 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, but has
exited this business (see "Item 7 - Management's Dicsussion and Analysis of
Financial Condition and Results of Operations").
CERTAIN OPERATING POLICIES AND PROCEDURES
Financial Goals. The Company has been focusing on housing margin
improvement and de-emphasizing revenue growth. Housing margins had declined
from 18.0% for the year ended February 28, 1994 to 15.6% for the year ended
October 31, 1997. To improve its housing margin, the Company is focusing on
increasing associate productivity, reducing overheads and reducing construction
costs by decreasing construction cycle times, designing and building cost
efficient products, and using national and regional contracts. Also the
Company has consolidated its vendor base and centralized purchasing functions
in the Northeast Region. As a result of the combination of these
efforts, the Company's housing margin increased to 17.3% for the year ended
October 31, 1998.
Strategic Initiatives. In order to help improve housing margins the
Company previously introduced three strategic initiatives. These initiatives
are Partners In Excellence, Process Redesign, and Training.
Partners In Excellence (the Company's total quality management initiative)
is intended to focus on improving the way operations are performed. It involves
all Company associates through a systematic, team-oriented approach to
improvement. It increases the Company's profits by streamlining processes and
by reducing errors which cost money. The Company was recognized for its efforts
by receiving the 1997 gold National Housing Quality Award from Professional
Builder and The NAHB Research Center.
Process Redesign is a fundamental rethinking and radical redesign of our
processes to achieve dramatic improvements in performance. The Company's
Process Redesign efforts are currently focused on streamlining and standardizing
all of its key business processes. In addition, the Company is working to
implement a new enterprise wide "Enterprise Resource Package" computer software
system.
Training is designed to provide our associates with the knowledge,
attitudes, skill and habits necessary to succeed at their jobs. The Company's
Training Department regularly conducts training classes in sales, construction,
administrative, and managerial areas. In addition, as Process Redesign develops
new processes, the Training Department is responsible for educating the
Company's associates on the processes, procedures, and operations.
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 50% 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 subcontractors representing
all building trades in connection with the construction of its homes. In recent
years, the Company has experienced no significant 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,
its website, billboard, video and direct mail advertising, special promotional
events, illustrated brochures, full-sized and scale model homes in its
comprehensive marketing program. For the year ended October 31, 1998, the
Company's advertising expenditures totaled $10,531,000.
Customer Service and Quality Control. The Company's associates responsible
for customer service participate in pre-closing quality control inspection as
well as responding to post-closing customer needs. Prior to closing, each home
is inspected and any necessary completion work is undertaken by the Company. 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 year ended October 31,
1998, approximately 58% of the Company's non-cash 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.
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 concerningprotection 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. However, at least one state
agency has issued an Executive Order requiring compliance with the State Plan.
It is unclear what effect this Executive Order may have on the Company's ability
to develop its lands.
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
17,450 square feet office building located in Winston-Salem, North Carolina, and
17,255 square feet in a Middletown, New Jersey condominium office building. The
Company leases office space consisting of 63,691 square feet in various New
Jersey locations, 3,300 square feet in Woodbridge, Virginia, 18,456 square feet
in various North Carolina locations, 15,900 square feet in West Palm Beach,
Florida, and 10,520 square feet in southern California.
ITEM 3 - LEGAL PROCEEDINGS
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 fourth quarter of the year ended October 31, 1998 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 800 shareholders of record at January 7, 1999. There is no
established public trading market for the Company's Class B Common Stock,which
was held by approximately 670 shareholders of record at January 7, 1999. In
order to trade Class B Common Stock, the shares must be converted into Class A
Common Stock on a one-for-one basis. The high and low sales prices for the
Company's Class A Common Stock were as follows for each fiscal quarter during
the years ended October 31, 1998, 1997, and 1996:
Class A Common Stock
------------------------------------------------
Oct. 31, 1998 Oct. 31, 1997 Oct. 31, 1996
-------------- -------------- --------------
Quarter High Low High Low High Low
- ------- ------ ------ ------ ------ ------ ------
First........ $ 9.25 $ 6.50 $7.63 $5.63 $7.75 $6.25
Second....... $11.50 $ 8.56 $7.00 $6.25 $8.25 $6.25
Third........ $11.19 $ 8.50 $7.13 $5.69 $7.25 $5.06
Fourth....... $ 9.88 $ 6.00 $8.13 $6.75 $6.63 $5.50
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 $42,995,000 was free of such
restrictions at October 31, 1998. 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.
Eight Year
Year Ended Months Ended
-------------------------------------- Ende ---------
Summary Consolidated October October October October October February
Income Statement Data 31, 1998 31, 1997 31, 1996 31, 1995 31, 1994 28, 1994
- ------------------------------- -------- -------- -------- -------- -------- --------
(In Thousands Except Per Share Data)
Revenues....................... $941,947 $784,136 $807,464 $777,745 $386,585 $587,010
Expenses....................... 900,655 796,260 782,458 756,091 402,090 557,859
-------- -------- -------- -------- -------- --------
Income(loss) before income
taxes and extraordinary loss. 41,292 (12,124) 25,006 21,654 (15,505) 29,151
State and Federal income taxes. 15,141 (5,154) 7,719 7,526 (5,075) 9,229
Extraordinary loss............. (748) -- -- -- -- (1,277)
-------- -------- -------- -------- -------- --------
Net income (loss).............. $ 25,403 $ (6,970) $ 17,287 $ 14,128 $(10,430) $ 18,645
======== ======== ======== ======== ======== ========
Per Share Data:
Basic::
Income (loss) before
extraordinary loss......... $ 1.20 $ (0.31) $ 0.75 $ 0.61 $ (0.46) $ 0.87
Extraordinary loss........... (0.03) -- -- -- -- (0.05)
-------- -------- -------- -------- -------- --------
Net income (loss)............ $ 1.17 $ (0.31) $ 0.75 $ 0.61 $ (0.46) $ 0.82
======== ======== ======== ======== ======== ========
Weighted average number of
common shares outstanding.. 21,781 22,615 23,037 23,032 22,906 22,821
Assuming Dilution:
Income (loss) before
extraordinary loss......... $ 1.19 $ (0.31) $ 0.75 $ 0.61 $ (0.45) $ 0.86
Extraordinary loss........... (0.03) (0.05)
-------- -------- -------- -------- -------- --------
Net income (loss)............ $ 1.16 $ (0.31) $ 0.75 $ 0.61 $ (0.45) $ 0.81
======== ======== ======== ======== ======== ========
Weighted average number of
common shares outstanding.. 22,016 22,712 23,120 23,079 23,061 23,072
Summary Consolidated October October October October October February
Balance Sheet Data 31, 1998 31, 1997 31, 1996 31, 1995 31, 1994 28, 1994
- ------------------------------- -------- -------- -------- -------- -------- --------
Total assets................... $589,102 $637,082 $614,111 $645,378 $612,925 $539,602
Mortgages and notes payable.... $150,282 $184,519 $145,336 $183,044 $167,179 $ 68,244
Bonds collateralized by
mortgages receivable......... $ 5,652 $ 7,855 $ 9,231 $ 17,880 $ 20,815 $ 30,343
Participating senior
subordinated debentures
and subordinated notes....... $145,449 $190,000 $200,000 $200,000 $200,000 $200,000
Stockholders' equity........... $201,392 $178,762 $193,622 $176,335 $162,130 $171,001
RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
For purposes of computing the ratios of earnings to fixed charges and
earnings to combined fixed charges and preferred dividends, earnings consist of
earnings (loss) from continuing operations before income taxes, minority
interest, extraordinary items and cumulative effect of accounting changes, plus
fixed charges (interest charges and preferred share dividend requirements of
subisidiaries, adjusted to a pretax basis), less interest capitallized, less
preferred share dividend requirements of subsidiaries adjusted to a pretax basis
and less undistributed earnings of affiliates whose debt is not guaranteed by
the Company.
The following table sets forth the ratios of earnings to fixed charges and
earnings to combined fixed charges and preferred dividends for the Company for
the periods indicated:
Eight
Months
Years Ended October 31, Ended
-------------------------------------- October 31 February 28,
1998 1997 1996 1995 1994 1994
-------- -------- -------- -------- ---------- ------------
Ratio of earnings to
fixed charges............. 2.6 (a) 1.6 1.4 (b) 1.8
Ratio of earnings to
combined fixed charges
and preferred stock
dividends................. 2.6 (a) 1.6 1.4 (b) 1.8
(a) No ratio is presented for the year ended October 31, 1997 as the earnings
for such period were insufficient to cover fixed charges by $9,197,000.
(b) No ratio is presented for the eight months ended Octber 31, 1994 as the
earnings for such period were insufficient to cover fixed charges by
$18,803,000.
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 twelve months ended October 31, 1998
were for operating expenses, seasonal increases in housing inventories,
construction, income taxes, interest, the repurchase of common stock, the
redemption of subordinated indebtedness, and the net reduction of the revolving
credit line. The Company provided for its cash requirements from housing and
land sales, the revolving credit facility, the sale of commercial facilities,
financial service fees, and other revenues. The Company believes that these
sources of cash are sufficient to finance its working capital requirements and
other needs.
In December 1998 the Board of Directors increased the stock repurchase
program to purchase up to 3 million shares of Class A Common Stock. This
authorization expires on December 31, 2000. As of October 31, 1998, 1,591,500
shares were repurchased under this program of which 407,100 were repurchased
during the year ended October 31, 1998.
The Company's bank borrowings are made pursuant to a revolving credit
agreement (the "Agreement") which provides a revolving credit line and letter of
credit line of up to $280,000,000 through July 2001. Interest is payable
monthly and at various rates of either the prime rate or Libor plus 1.45%. The
Company believes that it will be able either to extend the Agreement beyond July
2001 or negotiate a replacement facility, but there can be no assurance of such
extension or replacement facility. The Company currently is in compliance and
intends to maintain compliance with its covenants under the Agreement. As of
October 31, 1998, borrowings under the Agreement were $68,000,000.
The aggregate principal amount of subordinated indebtedness issued by the
Company and outstanding as of October 31, 1998 was $145,449,000. During the
year ended October 31, 1998, the Company reduced its subordinated debt by
$44,551,000. See "Results of Operations - Extraordinary Loss." Payments of
$45,449,000 and $100,000,000 are due in April 2002 and June 2005, respectively.
The Company's mortgage banking subsidiary borrows under a bank warehousing
arrangement. Other finance subsidiaries formerly borrowed from a multi-builder
owned financial corporation and a builder owned financial corporation to finance
mortgage backed securities but in fiscal 1988 decided to cease further borrowing
from multi-builder and builder owned financial corporations. These non-recourse
borrowings have been generally secured by mortgage loans originated by one of
the Company's subsidiaries. As of October 31, 1998, the aggregate outstanding
principal amount of such borrowings was $72,318,000.
The book value of the Company's inventories, rental condominiums, and
commercial properties completed and under development amounted to the following:
October 31, October 31,
1998 1997
------------ ------------
Residential real estate inventory....... $375,733,000 $410,393,000
Senior residential rental property...... 10,794,000 11,412,000
------------ ------------
Total residential real estate....... 386,527,000 421,805,000
Commercial properties................... 17,832,000 38,946,000
------------ ------------
Combined Total...................... $404,359,000 $460,751,000
============ ============
Total residential real estate decreased $35,278,000 from October 31, 1997
to October 31, 1998 as a result of an inventory decrease of $34,660,000 and
depreciation of senior residential rental property. The decrease in residential
real estate inventory was primarily due to decreases in the Company's Northeast
Region where fewer deliveries are planned for the first quarter of fiscal year
1999 compared to the same period in fiscal 1998. Residential homes under
construction or completed and included in residential real estate inventory at
October 31, 1998 are expected to be closed during the next twelve months. Most
residential real estate, completed or under development, is financed through the
Company's line of credit and subordinated indebtedness.
The following table summarizes housing lots included in the Company's total
residential real estate:
Total Contracted Remaining
Home Not Lots
Lots Delivered Available
-------- ---------- ---------
October 31, 1998:
Owned.......................... 8,054 1,673 6,381
Optioned....................... 13,668 8 13,660
-------- ---------- ---------
Total........................ 21,722 1,681 20,041
======== ========== =========
October 31, 1997:
Owned.......................... 8,266 1,848 6,418
Optioned....................... 12,159 24 12,135
-------- ---------- ---------
Total........................ 20,425 1,872 18,553
======== ========== =========
The following table summarizes the Company's started or completed unsold
homes in active, substantially completed and suspended communities:
October 31, October 31,
1998 1997
-------------------------- -------------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ------ ------ ------ ------
Northeast Region.... 180 16 196 279 63 342
North Carolina...... 93 -- 93 83 -- 83
Florida............. 24 6 30 47 11 58
Virginia............ 23 11 34 16 10 26
California.......... 78 21 99 60 16 76
Poland.............. 11 -- 11 10 2 12
------ ------ ------ ------ ------ ------
Total 409 54 463 495 102 597
====== ====== ====== ====== ====== ======
Prior to the second quarter of fiscal 1997, the Company's commercial
properties represented long-term investments in commercial and retail facilities
completed or under development. At the end of the second quarter of fiscal
1997, the Company announced it was planning an orderly exit from the business of
owning investment properties. During fiscal 1998, the Company sold all its
remaining commercial facilities which had a book value of $23,920,000 and
outstanding loan balances of $19,241,000 as of October 31, 1997. In addition, a
50% owned partnership sold its retail center. The Company has various parcels
of land approved for commercial development. The Company has contracts on all
such parcels and expects to close substantially all such land sales in the first
quarter of 1999. See "Results of Operations - Investment Properties."
Collateral Mortgage Financing - collateral for bonds payable consists of
collateralized mortgages receivable which are pledged against non-recourse
collateralized mortgage obligations. Financial Services - mortgage loans held
for sale consist of residential mortgages receivable of which $71,002,000 and
$47,660,000 at October 31, 1998 and October 31, 1997, respectively, are being
temporarily warehoused and awaiting sale in the secondary mortgage market. The
balance of mortgage loans held for sale is being held as an investment by the
Company. The Company may incur risk with respect to mortgages that are
delinquent, but only to the extent the losses are not covered by mortgage
insurance or resale value of the house. Historically, the Company has incurred
minimal credit losses.
RESULTS OF OPERATIONS
The Company's operations consist primarily of residential housing
development and sales in its Northeast Region (comprised primarily of New
Jersey, southern New York state, and eastern Pennsylvania), in southeastern
Florida, North Carolina, northern Virginia, southern California, and Poland. In
addition, the Company had developed and operated commercial properties as long-
term investments in New Jersey, and, to a lesser extent, Florida, but has exited
this business (see "Investment Properties" below).
During the years ended October 31, 1998, 1997, and 1996, the Company's
Northeast Region and North Carolina Division housing operations consistently
produced operating profits. The Company's California housing operations
produced profits in 1998 and 1997. In 1998, financial services and the sale of
commercial properties also contributed profits to the Company. These profits
have been reduced by net losses from its other housing divisions, the writedown
of certain residential inventories and commercial properties to their estimated
fair value and the write-off of optioned properties and related approval,
engineering and capitalized interest costs. See "Notes to Consolidated
Financial Statements - Note 10".
Historically, the Company's first two quarters produced the least amount of
deliveries for the year and the fourth quarter produced the most deliveries for
the year, sometimes in excess of 40%. The Company's management has made a
concerted effort to change this trend using new management tools to focus on
delivery evenness and through a new quarterly bonus incentive plan. The
percentage distribution of deliveries for the last three years is as follows:
Quarter Ended
----------------------------------------------------------
January 31 April 30 July 31 October 31 Total
---------- ---------- ---------- ---------- ----------
1998........... 24% 23% 26% 27% 100%
1997........... 16% 19% 25% 40% 100%
1996........... 14% 18% 25% 43% 100%
Total Revenues
Compared to the same prior period, revenues increased (decreased) as
follows:
Year Ended
-----------------------------
October October October
31, 1998 31, 1997 31, 1996
--------- --------- ---------
(Dollars in Thousands)
Homebuilding:
Sale of homes......................$163,837 $(32,875) $ 24,201
Land sales and other revenues...... (11,572) 8,371 3,214
Financial services................... 8,363 (481) 868
Investment properties................ (2,646) 2,838 1,388
Collateralized mortgage financing.... (171) (1,181) 48
--------- --------- ---------
Total change....................$157,811 $(23,328) $ 29,719
========= ========= =========
Percent change.................... 20.1% (2.9%) 3.8%
========= ========= =========
Homebuilding
Compared to the same prior period, housing revenues increased $163.8
million or 22.4% for the year ended October 31, 1998, after decreasing $32.9
million or 4.3% for the year ended October 31, 1997, and increasing $24.2
million or 3.3% for the year ended October 31, 1996. Housing revenues are
recorded at the time each home is delivered and title and possession have been
transferred to the buyer.
Information on homes delivered by market area is set forth below:
Year Ended
---------------------------------
October October October
31, 1998 31, 1997 31, 1996
--------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Housing Revenues............$595,873 $445,817 $460,931
Homes Delivered............. 2,530 2,128 2,364
North Carolina:
Housing Revenues............$127,592 $125,242 $123,347
Homes Delivered............. 687 695 738
Florida:
Housing Revenues............$ 44,168 $ 74,146 $ 99,085
Homes Delivered............. 241 418 632
Virginia:
Housing Revenues............$ 38,904 $ 14,398 $ 16,749
Homes Delivered............. 152 70 75
California:
Housing Revenues............$ 82,546 $ 69,252 $ 64,570
Homes Delivered............. 457 365 325
Poland:
Housing Revenues............$ 6,561 $ 2,952 --
Homes Delivered............. 71 41 --
Totals:
Housing Revenues............$895,644 $731,807 $764,682
Homes Delivered............. 4,138 3,717 4,134
The overall increase in housing revenues is acombination of higher
deliveries and increases in average sales prices. The increase in the number of
homes delivered during the year ended October 31, 1998 is primarily due to the
increased deliveries in the Northeast Region, California and Virginia which was
partially offset by decreased sales in Florida. The increase in the Northeast
was due to the timing of deliveries in fiscal 1997 and the Company's desire to
even out deliveries over the four quarters of fiscal 1998. In California,
deliveries increased due to the opening of additional communities. In Virginia,
deliveries increased due to the acquisition of a small home developer on May 1,
1998. In Florida, deliveries declined since the Company cut back its operations
due to a highly competitive market. 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 and the sale of more decorator and
structural options. In Florida, average sales prices increased as a result of
fewer communities, all of which are higher priced single family developments.
In Virginia, average sales prices increased because there was a higher
percentage of single family detached homes delivered. In North Carolina,
average sales prices did not show a significant change. In California, sales
prices decreased due to a change in product mix to smaller, less expensive
homes.
Unaudited quarterly housing revenues and sales contracts using base sales
prices by market area for the years ending October 31, 1998, 1997, and 1996 are
set forth below:
Quarter Ended
------------------------------------------
October July April January
31, 1998 31, 1998 30, 1998 31, 1998
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region........... $157,882 $162,847 $136,133 $139,011
North Carolina............. 38,997 34,655 28,264 25,676
Florida.................... 11,291 8,111 15,254 9,512
Virginia................... 16,687 11,256 4,843 6,118
California................. 22,980 18,832 17,613 23,121
Poland..................... 2,283 2,199 1,460 619
--------- --------- --------- ---------
Total.................. $250,120 $237,900 $203,567 $204,057
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region........... $114,144 $124,144 $188,082 $ 98,814
North Carolina............. 37,085 33,302 35,990 23,903
Florida.................... 5,385 9,503 8,631 7,802
Virginia................... 11,834 15,265 9,583 3,866
California................. 21,325 25,402 9,535 18,769
Poland..................... 1,758 516 332 1,277
--------- --------- --------- ---------
Total.................. $191,531 $208,132 $252,153 $154,431
========= ========= ========= =========
Quarter Ended
------------------------------------------
October July April January
31, 1997 31, 1997 30, 1997 31, 1997
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region........... $193,513 $118,186 $ 70,678 $ 63,440
North Carolina............. 41,566 35,293 26,341 22,042
Florida.................... 28,951 14,325 17,042 13,828
Virginia................... 5,214 2,759 3,018 3,407
California................. 23,317 15,113 18,489 12,333
Poland..................... 1,212 1,008 667 65
--------- --------- --------- ---------
Total.................. $293,773 $186,684 $136,235 $115,115
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region........... $134,280 $124,860 $118,840 $ 92,544
North Carolina............. 29,409 30,339 35,988 31,506
Florida.................... 11,134 15,296 21,399 9,708
Virginia................... 5,618 3,761 5,279 2,478
California................. 24,255 22,785 22,383 16,268
Poland..................... 2,109 436 468 1,607
--------- --------- --------- ---------
Total.................. $206,805 $197,477 $204,357 $154,111
========= ========= ========= =========
Quarter Ended
------------------------------------------
October July April January
31, 1996 31, 1996 30, 1996 31, 1996
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region........... $210,951 $112,665 $ 81,950 $ 55,365
North Carolina............. 44,334 33,506 24,445 21,062
Florida.................... 38,910 21,407 20,890 17,878
Virginia................... 5,538 3,614 3,200 4,397
California................. 25,747 15,936 13,019 9,868
--------- --------- --------- ---------
Total.................. $325,480 $187,128 $143,504 $108,570
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region........... $149,930 $ 94,933 $147,576 $ 55,785
North Carolina............. 28,973 31,485 43,136 19,594
Florida.................... 13,485 19,668 41,003 19,315
Virginia................... 1,638 2,249 5,821 3,463
California................. 16,419 14,847 19,496 8,209
Poland..................... 1,306 -- -- --
--------- --------- --------- ---------
Total.................. $211,751 $163,182 $257,032 $106,366
========= ========= ========= =========
The Company's contract backlog using base sales prices by market area is
set forth below:
October October October
31, 1998 31, 1997 31, 1996
--------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Total Contract Backlog........$270,753 $266,889 $198,248
Number of Homes............... 1,132 1,287 977
North Carolina:
Total Contract Backlog........$ 48,713 $ 45,879 $ 43,587
Number of Homes............... 235 232 233
Florida:
Total Contract Backlog........$ 14,800 $ 25,315 $ 36,910
Number of Homes............... 73 150 217
Virginia:
Total Contract Backlog........$ 26,083 $ 7,621 $ 4,252
Number of Homes............... 115 27 24
California:
Total Contract Backlog........$ 20,721 $ 25,636 $ 8,073
Number of Homes............... 119 137 46
Poland:
Total Contract Backlog........$ 746 $ 2,974 $ 1,306
Number of Homes............... 7 39 19
Totals:
Total Contract Backlog........$381,816 $374,314 $292,376
Number of Homes............... 1,681 1,872 1,516
The Company has written down or written off certain residential inventories
$4.0 million, $14.0 million and $1.6 million during the years ended October 31,
1998, 1997, and 1996, respectively, to their estimated fair value. See "Notes
to Consolidated Financial Statements - Note 10" for additional explanation.
These writedowns and writeoffs were incurred primarily because of lower property
values due to economic downturns, a change in the marketing strategy to
liquidate a particular property, or the decision not to exercise an option.
During the year ended October 31, 1998, the Company has written down one
Florida residential community and one New Jersey parcel of land for sale. In the
Florida residential community, higher discounts are being offered to speed up
sales. At the New Jersey land site, lots are being contracted at prices lower
than anticipated. The result of the above decisions was a reduction in
inventory carrying amounts to fair value, resulting in a $1.9 million
impairment loss in accordance with FAS 121. The Company has also written off
three New Jersey residential land options including approval, engineering and
capitalized interest costs amounting to $2.1 million. The Company did not
exercise these options because of changes in local market conditions and
difficulties in obtaining government approvals.
During the year ended October 31, 1997, the Company had written down
certain residential communities, and written off certain residential land
options including approval, engineering and capitalized interest costs. In
Florida, the Company's return on investment was unsatisfactory. A a result,
the Company established a goal to reduce its investment in Florida by $25.0
million. To do so on an accelerated basis, it reduced prices and offered
pricing concessions in all Florida residential communities. The Company also
decided to sell all inactive properties in Florida. In the Northeast Region,
the Company changed the product type to be constructed on a parcel of land it
owns. In an active community in the Northeast Region, the Company incurred
unforeseen development costs. Also in the Northeast, the Company decided to
sell an optioned property instead of developing it. The result of the above
decisions was a reduction in fair values below carrying amounts and, in
accordance with FAS 121, the Company recorded an impairment loss on the related
inventories. At October 31, 1997, residential inventories were reduced $9.3
million to reduce such inventories to estimated fair value. The Northeast
Region also wrote off costs associated with three optioned properties and
related approval, engineering and capitalized interest costs amounting to $4.7
million. In two cases, the Company decided not to exercise the option due to
environmental problems. The third option was not exercised because the
community's proforma profitability did not produce an adequate return on
investment commensurate with the risk.
The writedowns of residential inventories during the year ended October 31,
1996 were primarily attributable to one community in New Jersey, a parcel of
land in Florida and one community and a parcel of land in Virginia. In New
Jersey, the writedown was due to the change in use of a parcel of land from
residential to commercial. In Florida, a parcel of idle land was written down
due to a decline in land values. In Virginia, the writedown was primarily due
to reduced sales prices in one community. Also in Virginia, a reserve was
recorded against a parcel of land which the Company was attempting to liquidate
through lot sales.
Cost of sales includes expenses for housing and land and lot sales. A
breakout of such expenses for housing sales and housing gross margin is set
forth below:
Year Ended
---------------------------------
October October October
31, 1998 31, 1997 31, 1996
--------- --------- ---------
(Dollars In Thousands)
Sale of homes.............. $895,644 $731,807 $764,682
Cost of sales.............. 740,871 617,312 638,944
--------- --------- ---------
Housing gross margin....... $154,773 $114,495 $125,738
========= ========= =========
Gross margin percentage.... 17.3% 15.6% 16.4%
========= ========= =========
Cost of sales expenses as a percentage of home sales revenues are presented
below:
Year Ended
---------------------------------
October October October
31, 1998 31, 1997 31, 1996
--------- --------- ---------
(Dollars In Thousands)
Sale of homes.............. 100.0% 100.0% 100.0%
--------- --------- ---------
Cost of sales:
Housing, land and
development costs....... 74.8 76.0 75.5
Commissions.............. 1.9 2.0 1.7
Financing concessions.... 0.7 0.9 1.0
Overheads................ 5.3 5.5 5.4
--------- --------- ---------
Total cost of sales........ 82.7 84.4 83.6
--------- --------- ---------
Gross margin............... 17.3% 15.6% 16.4%
========= ========= =========
The Company sells a variety of home types in various local communities,
each yielding a different gross margin. As a result, depending on the mix of
both the communities and of home types delivered, consolidated gross margin will
fluctuate up or down. During the year ended October 31, 1998, the Company's
gross margin increased 1.7% from the previous year. This can be attributed to
higher gross margins being achieved in each of the Company's markets except
Florida. Higher gross margins are primarily attributed to positive effects from
process redesign and quality programs that reduced the housing and land
development costs, selective price increases or reduced selling incentives in
the Company's stronger markets, and an increased percentage of deliveries from
the better performing communities. In addition, gross margin percentages are
higher in the Northeast Region compared to the Company's other markets. In
1998, the gross margin benefited from a higher percentage of housing revenues
from the Northeast Region amounting to 66.5% in fiscal 1998 compared to 60.9% in
fiscal 1997.
During the year ended October 31, 1997, gross margins decreased in all the
Company's markets compared to the prior year. This decline was primarily caused
by higher housing, land and development costs and commission expenses. 0.3% of
the increase was the result of unforeseen development costs in one community in
the Northeast Region. The balance of the increase in housing, land and
development costs was due to a higher number of communities not obtaining
acceptable housing, land and development cost performance. The increase in
commissions was the result of more co-broker sales and sales associate
incentives to increase sales.
Selling and general administrative expenses as a percentage of homebuilding
revenues decreased to 7.5% for the year ended October 31, 1998 from 8.2% for the
year ended October 31, 1997 which had increased from 7.7% for the year ended
October 31, 1996. The percentage decrease during the year ended October 31,
1998 is due to increased deliveries. The percentage increase during the year
ended October 31, 1997 was due to increased costs while home deliveries
declined. Such expenses increased $5.7 million and $1.8 million for the years
ended October 31, 1998 and 1997, respectively, from the previous year. The
dollar increase is due primarily to increased salary and bonus administration
costs in 1998 and increased advertising and sales center operations in 1997.
Land Sales and Other Revenues
Land sales and other revenues consist primarily of land and lot sales,
interest income, contract deposit forfeitures, cash discounts, national contract
rebates, and corporate owned life insurance benefits.
A breakout of land and lot sales is set forth below:
Year Ended
----------------------------
October October October
31, 1998 31, 1997 31, 1996
-------- -------- --------
(In Thousands)
Land and lot sales................... $ 8,636 $22,855 $13,998
Cost of sales........................ 8,070 17,005 12,548
-------- -------- --------
Land and lot sales gross margin...... $ 566 $ 5,850 $ 1,450
======== ======== ========
Land and lot sales are incidental to the Company's residential housing
operations and are expected to continue in the future but may significantly
fluctuate up or down.
Financial Services
Financial services consists primarily of originating mortgages from the
Company's homebuyers, as well as from third parties, selling such mortgages in
the secondary market, and title insurance activities. During the year ended
October 31, 1998 financial services provided a $2.1 million pretax profit, up
from break even the prior year and up from a pretax profit of $.5 million in
1996. In the market areas served by the Company's wholly-owned mortgage banking
subsidiaries, approximately 58%, 51%, and 51% of the Company's non-cash
homebuyers obtained mortgages originated by these subsidiaries during the years
ended October 31, 1998, 1997, 1996, respectively. The Company's mortgage
banking goals are to improve profitability by increasing the capture rate of its
homebuyers and expanding its business to include originations from unrelated
mortgages. The Company has initiated efforts to originate mortgages from
unrelated third parties and expects these third party loans to increase as a
percentage of the Company's total loan volume over the next few years. During
the year ended October 31, 1998, third party loans amounted to 40% of total
mortgage closings. 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. See "Capital Resources and
Liquidity" for information on the Company's decision to sell its investment
properties. The Company plans to liquidate all properties except for its senior
rentals. At October 31, 1998, all properties had been liquidated except various
parcels of land. These parcels are under contract and are expected to close
during 1999. During the year ended October 31, 1998 one of these contracted
parcels was written down $1.0 million due to increased land development costs.
During the years ended October 31, 1998 and 1997, investment property revenues
included a $6.5 million pretax gain and a $4.9 million pretax gain,
respectively, from the sale of its commercial facilities and land. Investment
properties'expenses do not include interest expense (see "Interest" below).
Collateralized Mortgage Financing
In the years prior to February 29, 1988 the Company pledged mortgage loans
originated by its mortgage banking subsidiaries against collateralized mortgage
obligations ("CMOs"). Subsequently, the Company discontinued its CMO program.
As a result, CMO operations are diminishing as pledged loans are decreasing
through principal amortization and loan payoffs, and related bonds are reduced.
In recent years, as a result of bonds becoming callable, the Company has also
sold a portion of its CMO pledged mortgages.
Corporate General and Administrative
Corporate general and administrative expenses includes the operations at
the Company's headquarters in Red Bank, New Jersey. As a percentage of total
revenues, such expenses were 2.2%, 1.9%, and 1.7% for the years ended October
31, 1998, 1997, and 1996, respectively. In 1998, the increase was primarily
attributed to increased bonus accruals (there were no bonus accruals based on
the Return on Equity incentive program in 1997), increased depreciation from the
amortization of capitalized process redesign costs in prior years and increased
expenditures for long term improvement initiatives. The Company's long term
improvement initiatives include total quality, process redesign (net of
capitalized expenses), and training. Such initiatives resulted in additional
expenses for the years ended October 31, 1998, 1997, and 1996 amounting to $3.8
million, $2.2 million, and $1.6 million, respectively.
Interest
Interest expense includes housing, land and lot, and rental properties
interest. Interest expense is broken down as follows:
Year Ended
-------------------------------
October October October
31, 1998 31, 1997 31, 1996
--------- --------- ---------
(In Thousands)
Sale of homes.................. $ 31,499 $ 29,505 $ 25,992
Land and lot sales............. 652 962 657
Rental properties.............. 2,272 5,308 5,508
--------- --------- ---------
Total.......................... $ 34,423 $ 35,775 $ 32,157
========= ========= =========
Housing interest as a percentage of sale of home revenues amounted to 3.5%,
4.0%, and 3.4% for the years ended October 31, 1998, 1997, and 1996,
respectively. The decrease in the percentage for the year ended October 31,
1998 was primarily due to decreased levels of debt during the year compared to
1997. This decrease was the result of the Company delivering a more even flow
of homes during 1998. The increase in the percentage for the year ended October
31, 1997 was primarily the result of the Company discontinuing the
capitalization of interest on communities in planning which were not under
active development. As a result, interest expense increased approximately $2.8
million for the year ended October 31, 1997.
Other Operations
Other operations consist primarily of miscellaneous residential housing
operations, amortization of subordinated note issuance expenses, and corporate
owned life insurance loan interest.
Total Taxes
Total taxes as a percentage of income before income taxes amounted to 36.7%
and 30.9% for the years ended October 31, 1998 and 1996, respectively. Net tax
benefits as a percentage of the loss before income taxes amounted to 42.5% for
the year ended October 31, 1997. Deferred federal and state income tax assets
primarily represent the deferred tax benefits arising from temporary differences
between book and tax income which will be recognized in future years. (See
"Notes to Consolidated Financial Statements - Note 9" for an additional
explanation of taxes.)
Extraordinary Loss
In October 1998, the Company redeemed $44,551,000 of its outstanding
11 1/4% Subordinated Notes due 2002 at an average price of 101.6% of par
which resulted in an extraordinary loss of $748,000 net of income taxes of
$403,000.
Year 2000 Issues
The Company has assessed and formulated a plan to resolve its information
technology ("IT") and non-IT system year 2000 issues. The Company has
designated a full-time year 2000 project leader, engaged consultants to review
and evaluate its plan, completed the identification of Company IT and non-IT
noncompliant systems and is in the process of evaluating subcontractors' and
suppliers' state of readiness. The Company's plan has prioritized its efforts
on its software systems and computer hardware equipment. The Company has
upgraded, fixed or retired 80% of its noncompliant systems. The Company expects
to have substantially all critical IT software year 2000 capable and tested by
June 30, 1999. All other Company IT and non-IT systems are not considered
critical to Company operations, and if noncapable for year 2000, would only be
an inconvenience. The Company does not anticipate the costs of implementation
of its plan to have a material impact on future earnings and is expected to be
funded through operations.
The Company is concerned about the readiness of its subcontractors and
suppliers. The Company is in the process of communicating with these third
parties. If the Company finds third parties whose lack of readiness as to year
2000 issues would have a substantial impact on the Company's operations, the
Company will look to replace such subcontractors and suppliers. In most cases,
the Company uses more than one subcontractor and supplier so it believes finding
replacements will not be difficult.
The Company believes it is on track to solve its year 2000 issues. It does
not believe it will have material lost revenues due to the year 2000 issues.
Based on the above, it sees no need to develop a worst-case year 2000 scenario.
However, the Company is in the process of developing year 2000 contingency plans
which are approximately 75% complete.
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 55% of the Company's homebuilding cost of sales.
Item 7(A) - Quantitative and Qualitative Disclosures About Market Risk.
The primary market risk facing the Company is interest rate risk on it's
long term debt. In connection with the Company's mortgage operations, mortgage
loans held for sale and the associated mortgage warehouse line of credit are
subject to interest rate risk; however, such obligations reprice frequently and
are short-term in duration and accordingly the risk is not material. The
Company does not hedge interest rate risk using financial instruments. The
Company is also subject to foreign currency risk but this risk is not material.
The following table sets forth as of October 31, 1998, the Company's long term
debt obligations, principal cash flows by scheduled maturity, weighted average
interest rates and estimated fair market value ("FMV").
Year Ended October 31,
-------------------------------------- FMV @
1999 2000 2001 2002 2003 Thereafter Total 10/31/98
------ ------ ------ ------ ------ ---------- ------- ---------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate.......$ 115 $ 119 $ 132 $50,804 $2,581 $100,685 $154,436 $145,186
Average interest
rate........... 7.59% 7.62% 7.60% 10.70% 7.04% 9.74% 10.01% -
Variable Rate....$1,932 $ 600 $ 926 $ 0 $ 0 $ 0 $ 3,458 $ 3,458
Average interest
rate........... 9.22% 8.00% 8.64% - - - 8.85% -
(1) Does not include bonds collateralized by mortgages receivable.
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements of Hovnanian Enterprises, Inc. and its consolidated
subsidiaries are set forth herein beginning on Page F-1.
Item 9 - CHANGES IN OR DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
During the years ended October 31, 1998, 1997, and 1996, 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 on March 23, 1999, 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 75 Chairman of the Board and l967
Director of the Company.
Ara K. Hovnanian 41 Chief Executive Officer, President 1979
and Director of the Company.
Paul W. Buchanan 48 Senior Vice President-Corporate l981
Controller and Director of the
Company.
William L. Carpitella 44 Senior Vice President,
Organizational Development 1997
Peter S. Reinhart 48 Senior Vice President and General 1978
Counsel and Director of the
Company.
John D. Roberts 36 Vice President Process Redesign 1998
J. Larry Sorsby 43 Senior Vice President, Treasurer 1988
and Chief Financial Officer and
Director of the Company
Mr. K. Hovnanian founded the predecessor of the Company in l959 (Hovnanian
Brothers, Inc.) and has served as Chairman of the Board of the Company since its
incorporation in l967. Mr. K. Hovnanian was also Chief Executive Officer of the
Company from 1967 to July 1997.
Mr. A. Hovnanian was appointed President in April 1988, after serving as
Executive Vice President from March 1983. He has also served as Chief Executive
Officer since July 1997. Mr. A. Hovnanian was elected a Director of the Company
in December l98l. Mr. A. Hovnanian is the son of Mr. K. Hovnanian.
Mr. Buchanan has been Senior Vice President-Corporate Controller since May
l990. Mr. Buchanan was elected a Director of the Company in March l982.
Mr. Carpitella joined the Company in September 1997 as Senior Vice
President, Organizational Development. Prior to joining the Company Mr.
Carpitella was Vice President, Human Resources for a division of Pulte Home
Corp. from April 1995 to August 1997. From February 1992 Mr. Carpitella was
Vice President Human Resources for Geo. J. Ball Co.
Mr. Reinhart has been Senior Vice President and General Counsel since April
1985. Mr. Reinhart was elected a Director of the Company in December l98l.
Mr. Roberts joined the Company in January 1998 as Vice President Process
Redesign. Prior to joining the Company Mr. Roberts worked for Deloitte & Touche
Consulting Group ("D & T") from August 1993. At D & T Mr.Roberts was Senior
Consultant until August 1994, then Manager until August 1995 and then Senior
Manager until he joined the Company.
Mr. Sorsby was appointed Senior Vice President, Treasurer and Chief
Financial Officer of the Company in February, 1996 after serving as Senior Vice
President-Finance/Treasurer of the Company since March 1991.
Item 11 - EXECUTIVE COMPENSATION
The information called for by Item ll is incorporated herein by reference
to 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
on March 5, 1999, 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
on March 5, l999, 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
on March 5, 1999, 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, 1998 and 1997......... F-3
Consolidated Statements of Operations for the years ended
October 31, 1998, 1997, and 1996.............................. F-5
Consolidated Statements of Stockholders' Equity for the years
ended October 31, 1998, 1997, and 1996........................ F-6
Consolidated Statements of Cash Flows for the years ended
October 31, 1998, 1997, and 1996.............................. F-7
Notes to Consolidated Financial Statements......................... F-8
Financial Statement Schedules:
XI Real Estate and Accumulated Depreciation................... F-21
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.(6)
3(c) Bylaws of the Registrant.(6)
4(a) Specimen Class A Common Stock Certificate.(6)
4(b) Specimen Class B Common Stock Certificate.(6)
4(c) Indenture dated as of 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) Amended and Restated Credit Agreement dated July 29, 1998 among
K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc.,
certain Subsidiaries Thereof, PNC Bank, National Association,
First Union National Bank, NationsBank, National Association,
First National Bank of Boston, Bank of America National Trust and
Savings Association, The First National Bank of Chicago, Comerica
Bank, Credit Lyonnais New York Branch and Guaranty Federal F.S.B.
10(b) Description of Management Bonus Arrangements.(6)
10(c) Description of Savings and Investment Retirement Plan.(1)
10(d) Stock Option Plan.
10(e) Management Agreement dated August 12, 1983 for the management of
properties by K. Hovnanian Investment Properties, Inc.(1)
10(f) Agreement dated July 8, 1981 between Hovnanian Properties of
Atlantic County, Inc. and Kevork S. Hovnanian.(2)
10(g) Management Agreement dated December 15, 1985, for the management
of properties by K. Hovnanian Investment Properties, Inc.(3)
10(h) Description of Deferred Compensation Plan.(5)
22 Subsidiaries of the Registrant.
23 Consent of Independent Auditors
27 Financial Data Schedules
(1) Incorporated by reference to Exhibits to Registration
Statement (No. 2-85198) on Form S-1 of the Registrant.
(2) Incorporated by reference to Exhibits to Registration Statement
(No. 33-46064) on Form S-3 of the Registrant.
(3) Incorporated by reference to Exhibits to Annual Report on Form 10
-K for the year ended February 28, 1986 of the Registrant.
(4) Incorporated by reference to Exhibits to Registration Statement
(No. 33-61778) on Form S-3 of the Registrant.
(5) Incorporated by reference to Exhibits to Annual Report on Form 10-
K for the year ended February 28, 1990 of the Registrant.
(6) Incorporated by reference to Exhibits to Annual Report on Form 10-
K for the year ended February 28, 1994 of the Registrant.
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
October 31, 1998.
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities
Exchange Act of l934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Hovnanian Enterprises, Inc.
By:
/S/KEVORK S. HOVNANIAN
Kevork S. Hovnanian
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of l934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated
/S/KEVORK S. HOVNANIAN Chairman of The Board 1/15/99
Kevork S. Hovnanian and Director
/S/ARA K. HOVNANIAN Chief Executive Officer, 1/15/99
Ara K. Hovnanian President and Director
/S/PAUL W. BUCHANAN Senior Vice President 1/15/99
Paul W. Buchanan Corporate Controller and
Director
/S/PETER S. REINHART Senior Vice President and 1/15/99
Peter S. Reinhart General Counsel and Director
/S/J. LARRY SORSBY Senior Vice President, 1/15/99
J. Larry Sorsby Treasurer, Chief Financial
Officer and Director
/S/WILLIAM L. CARPITELLA Senior Vice President, 1/15/99
William L. Carpitella Organizational Development
HOVNANIAN ENTERPRISES, INC.
Index to Consolidated Financial Statements
Page
Financial Statements:
Independent Auditors' Report................................... F-2
Consolidated Balance Sheets as of October 31, 1998 and 1997.... F-3
Consolidated Statements of Operations for the Years Ended
October 31, 1998, 1997, and 1996............................... F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended October 31, 1998, 1997, and 1996......................... F-6
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1998, 1997, and 1996............................... F-7
Notes to Consolidated Financial Statements........................ F-8
Financial Statement Schedules:
XI Real Estate and Accumulated Depreciation.................. F-21
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 accompanying consolidated balance sheets of Hovnanian
Enterprises, Inc. and subsidiaries as of October 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended October 31, 1998. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Hovnanian Enterprises, Inc. and subsidiaries at October 31, 1998 and 1997 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended October 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/S/ERNST & YOUNG LLP
Ernst & Young LLP
New York, New York
December 15, 1998
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
October 31, October 31,
ASSETS 1998 1997
------------ ------------
Homebuilding:
Cash and cash equivalents(Note 4)................. $ 13,306 $ 7,952
------------ ------------
Inventories - At cost, not in excess of fair
value (Notes 6 and 10):
Sold and unsold homes and lots under
development.................................... 332,225 363,592
Land and land options held for future
development or sale........................... 43,508 46,801
------------ ------------
Total Inventories............................. 375,733 410,393
------------ ------------
Receivables, deposits, and notes (Notes 5 and 11). 29,490 35,723
------------ ------------
Property, plant, and equipment - net (Note 3)..... 16,831 18,027
------------ ------------
Prepaid expenses and other assets................. 32,650 36,708
------------ ------------
Total Homebuilding............................ 468,010 508,803
------------ ------------
Financial Services:
Cash.............................................. 1,486 2,598
Mortgage loans held for sale (Note 5)............. 71,611 48,382
Other assets...................................... 3,717 2,518
------------ ------------
Total Financial Services...................... 76,814 53,498
------------ ------------
Investment Properties:
Held for sale:
Rental property - net (Notes 3 and 10).......... 23,920
Land and improvements (Notes 3 and 10).......... 17,832 15,026
Other assets.................................... 295 1,397
Held for investment:
Cash............................................ 762 763
Rental property - net (Note 3).................. 10,794 11,412
Other assets.................................... 868 1,072
------------ ------------
Total Investment Properties................... 30,551 53,590
------------ ------------
Collateralized Mortgage Financing:
Collateral for bonds payable (Note 5)............. 5,970 7,999
Other assets...................................... 426 627
------------ ------------
Total Collateralized Mortgage Financing....... 6,396 8,626
------------ ------------
Income Taxes Receivable - Including deferred tax
benefits (Note 9)................................. 7,331 12,565
------------ ------------
Total Assets........................................ $589,102 $637,082
============ ============
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
October 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------ ------------
Homebuilding:
Nonrecourse land mortgages (Note 6)................. $ 11,846 $20,625
Accounts payable and other liabilities.............. 53,765 45,521
Customers' deposits (Note 4)........................ 23,857 22,422
Nonrecourse mortgages secured by operating
properties (Note 6)............................... 3,770 3,830
------------ ------------
Total Homebuilding.............................. 93,238 92,398
------------ ------------
Financial Services:
Accounts payable and other liabilities.............. 2,422 1,522
Mortgage warehouse line of credit (Note 5).......... 66,666 45,823
------------ ------------
Total Financial Services........................ 69,088 47,345
------------ ------------
Investment Properties:
Accounts payable and other liabilities.............. 1,373 502
Nonrecourse mortgages secured by rental property.... 19,241
------------ ------------
Total Investment Properties..................... 1,373 19,743
------------ ------------
Collateralized Mortgage Financing:
Accounts payable and other liabilities.............. 6 10
Bonds collateralized by mortgages receivable(Note 5) 5,652 7,855
------------ ------------
Total Collateralized Mortgage Financing......... 5,658 7,865
------------ ------------
Notes Payable:
Revolving credit agreement (Note 6)................. 68,000 95,000
Subordinated notes (Note 7)......................... 145,449 190,000
Accrued interest.................................... 4,904 5,969
------------ ------------
Total Notes Payable............................. 218,353 290,969
------------ ------------
Total Liabilities............................... 387,710 458,320
------------ ------------
Commitments and Contingent Liabilities (Notes 4 and 13)
Stockholders' Equity (Notes 11 and 12):
Preferred Stock,$.01 par value-authorized 100,000
shares; none issued
Common Stock,Class A,$.01 par value-authorized
87,000,000 shares; issued 15,803,297 shares
(including 1,937,374 shares in 1998 and
1,530,274 shares in 1997 held in Treasury)........ 157 156
Common Stock,Class B,$.01 par value
(convertible to Class A at time of sale)
-authorized 13,000,000 shares; issued
8,040,171 shares (including 345,874 shares
held in Treasury)................................ 80 81
Paid in Capital..................................... 34,561 33,935
Retained Earnings (Note 7).......................... 183,182 157,779
Treasury Stock - at cost............................ (16,588) (13,189)
------------ ------------
Total Stockholders' Equity...................... 201,392 178,762
------------ ------------
Total Liabilities and Stockholders' Equity............ $589,102 $637,082
============ ============
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
Year Ended
-------------------------------
October October October
31, 1998 31, 1997 31, 1996
--------- --------- ---------
Revenues:
Homebuilding:
Sale of homes............................. $895,644 $731,807 $764,682
Land sales and other revenues............. 15,411 26,983 18,612
--------- --------- ---------
Total Homebuilding...................... 911,055 758,790 783,294
Financial Services.......................... 19,098 10,735 11,216
Investment Properties....................... 11,111 13,757 10,919
Collateralized Mortgage Financing........... 683 854 2,035
--------- --------- ---------
Total Revenues.......................... 941,947 784,136 807,464
--------- --------- ---------
Expenses:
Homebuilding:
Cost of sales............................. 748,941 634,317 651,492
Selling, general and administrative....... 68,170 62,475 60,704
Inventory impairment loss (Note 10)....... 3,994 14,019 1,608
--------- --------- ---------
Total Homebuilding...................... 821,105 710,811 713,804
--------- --------- ---------
Financial Services.......................... 17,010 10,780 10,669
--------- --------- ---------
Investment Properties:
Operations................................ 3,395 5,909 6,388
Provision for impairment loss (Note 10)... 1,038 14,446
--------- --------- ---------
Total Investment Properties............. 4,433 20,355 6,388
--------- --------- ---------
Collateralized Mortgage Financing........... 672 878 2,076
--------- --------- ---------
Corporate General and Administration(Note 2) 21,048 15,088 14,002
--------- --------- ---------
Interest.................................... 34,423 35,775 32,157
--------- --------- ---------
Other operations............................ 1,964 2,573 3,362
--------- --------- ---------
Total Expenses.......................... 900,655 796,260 782,458
--------- --------- ---------
Income(Loss) Before Income Taxes and
Extraordinary Loss.......................... 41,292 (12,124) 25,006
--------- --------- ---------
State and Federal Income Taxes:
State (Note 9).............................. 3,572 1,796 1,336
Federal (Note 9)............................ 11,569 (6,950) 6,383
--------- --------- ---------
Total Taxes............................... 15,141 (5,154) 7,719
--------- --------- ---------
Extraordinary Loss From Extinguisement of
Debt, Net of Income Taxes................... (748)
--------- --------- ---------
Net Income (Loss)............................. $ 25,403 $ (6,970) $ 17,287
========= ========= =========
Per Share Data:
Basic:
Income (Loss) Per Common Share Before
Extraordinary Loss...................... $ 1.20 $ (0.31) $ 0.75
Extraordinary Loss........................ (.03)
--------- --------- ---------
Income (Loss)............................. $ 1.17 $ (0.31) $ 0.75
========= ========= =========
Assuming Dilution:
Income (Loss)Per Common Share Before
Extraordinary Loss...................... $ 1.19 $ (0.31) $ 0.75
Extraordinary Loss........................ (.03)
--------- --------- ---------
Income (Loss)............................. $ 1.16 $ (0.31) $ 0.75
========= ========= =========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
A Common Stock B Common Stock
------------------- -------------------
Shares Shares
Issued and Issued and Paid-In Retained Treasury
Outstanding Amount Outstanding Amount Capital Earnings Stock Total
----------- ------ ----------- ------ ------- -------- -------- ---------
Balance, October 31, 1995... 15,038,483 $154 7,998,570 $83 $33,935 $147,462 ($5,299) $176,335
Conversion of Class B to
Class A common stock.... 96,865 1 (96,865) (1)
Net Income.................. 17,287 17,287
----------- ------ ----------- ------ ------- -------- -------- ---------
Balance, October 31, 1996... 15,135,348 155 7,901,705 82 33,935 164,749 (5,299) 193,622
Conversion of Class B to
Class A common stock...... 146,893 1 (146,893) (1)
Treasury stock purchases.... (1,184,400) (7,890) (7,890)
Net Loss.................... (6,970) (6,970)
----------- ------ ----------- ------ ------- -------- --------- ---------
Balance, October 31, 1997... 14,097,841 156 7,754,812 81 33,935 157,779 (13,189) 178,762
Sale of Common Stock Under
Employee Stock Option
Plan...................... 114,667 626 626
Conversion of Class B to
Class A common stock...... 60,515 1 (60,515) (1)
Treasury stock purchases.... (407,100) (3,399) (3,399)
Net Income.................. 25,403 25,403
----------- ------ ----------- ------ ------- -------- --------- ---------
Balance, October 31, 1998... 13,865,923 $157 7,694,297 $80 $34,561 $183,182 ($16,588) $ 201,392
=========== ====== =========== ====== ======= ======== ========= =========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended
----------------------------------
October October October
31, 1998 31, 1997 31, 1996
---------- ---------- ----------
Cash Flows From Operating Activities:
Net Income (Loss)............................... $ 25,403 $ (6,970) $ 17,287
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation................................ 4,293 5,032 5,246
Loss (gain)on sale and retirement of
property and assets....................... (6,189) (4,760) (1,998)
Deferred income taxes....................... 1,987 (4,568) (820)
Impairment losses........................... 5,032 28,465 1,608
Decrease (increase) in assets:
Receivables, prepaids and other assets.... 6,828 (6,830) (4,297)
Mortgage notes receivable................. (19,485) 2,858 (10,966)
Inventories............................... 30,666 (48,105) 26,498
Increase (decrease) in liabilities:
State and Federal income taxes............ 3,248 (7,325) 6,509
Customers' deposits....................... 1,490 10,007 774
Interest and other accrued liabilities.... 2,235 3,726 (3,366)
Post development completion costs......... 4,438 (8,746) 4,062
Accounts payable.......................... 2,233 5,034 (3,681)
Net cash provided by (used in) ---------- ---------- ----------
operating activities.................... 62,179 (32,182) 36,856
---------- ---------- ----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets... 30,436 14,997 10,308
Purchase of property............................ (3,135) (3,156) (5,882)
Investment in and advances to unconsolidated
affiliates.................................... 243 195 3,792
Investment in income producing properties....... (3,844) (11,099) (2,134)
Net cash provided by (used in) ---------- ---------- ----------
investing activities.................... 23,700 937 6,084
---------- ---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes............... 632,531 1,139,780 1,142,106
Principal payments on mortgages and notes..... (668,987) (1,101,969) (1,188,449)
Principal payments on subordinated debt......... (44,551) (10,000)
Investment in mortgage notes receivable......... 2,142 1,474 8,941
Purchase of treasury stock...................... (3,399) (7,890)
Proceeds from sale of stock..................... 626
Net cash provided by (used in) ---------- ---------- ----------
financing activities.................... (81,638) 21,395 (37,402)
---------- ---------- ----------
Net Increase (Decrease) In Cash................... 4,241 (9,850) 5,538
Cash and Cash Equivalent Balance, Beginning
Of Period....................................... 11,313 21,163 15,625
---------- ---------- ----------
Cash and Cash Equivalent Balance, End Of
Period.......................................... $ 15,554 $ 11,313 $ 21,163
========== ========== ==========
Supplemental Disclosures Of Cash Flow:
Cash paid during the year for:
Interest (net of amount capitalized).......... $ 35,315 $ 35,869 $ 32,194
========== ========== ==========
Income Taxes.................................. $ 12,303 $ 6,809 $ 6,875
========== ========== ==========
Non-cash Investing and Finance Activities:
Debt assumed on sale of property and assets..... $ 13,530
==========
See notes to consolidated financial statements
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 1998, 1997, AND 1996.
1. SUMMARY OF ACCOUNTING POLICIES
Operations - The Company, a Delaware Corporation, principally develops
housing communities in New Jersey, Pennsylvania, New York, Florida, North
Carolina, Virginia, California and Poland. In addition, the Company provides
financial services to its homebuilding customers and third parties. The Company
also developed and held for investment income producing properties but has
exited from this business.
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.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates
and these differences could have a significant impact on the financial
statements.
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 with original maturities of less than 90 days at date of
issuance.
Fair Value of Financial Instruments - The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques as appropriate. The Company's financial instruments
consist of cash equivalents, mortgages and notes receivable, mortgages and notes
payable, and the subordinated notes payable. Unless otherwise disclosed, the
fair value of financial instruments approximates their recorded values.
Inventories - For inventories of communities under development, a loss is
recorded when events and circumstances indicate impairment and the undiscounted
future cash flows generated are less than the related carrying amounts. The
impairment loss is based on expected revenue, cost to complete including
interest, and selling costs. Inventories and long-lived assets held for sale
are recorded at the lower of cost or fair value less selling costs. Fair value
is defined in Statement of Financial Accounting Standard No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("FAS 121") as the amount at which an asset could be bought or sold in a current
transaction between willing parties, that is, other than in a forced or
liquidation sale. Construction costs are accumulated during the period of
construction and charged to cost of sales under specific identification methods.
Land, land development, and common facility costs in a community are amortized
equally based upon the number of homes to be constructed in each housing
community.
Interest costs related to properties in progress are capitalized during the
construction period and expensed along with the associated cost of sales as the
related inventories are sold (see Note 6).
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 - Rental operations of the Company arise primarily from rental of
commercial properties. In addition, the Company has, from time to time, rented
under short-term leases condominium homes not yet under contract of sale. Such
homes are reclassified from inventory and depreciated after a reasonable selling
period not to exceed one year.
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 benefits are
provided for temporary differences between amounts recorded for financial
reporting and for income tax purposes.
Common Stock - Each share of Class A Common Stock entitles its holder to
one vote per share and each share of Class B Common Stock entitles its holder
to ten votes per share. The amount of any regular cash dividend payable on a
share of Class A Common Stock will be an amount equal to 110% of the
corresponding regular cash dividend payable on a share of Class B Common
Stock. If a shareholder desires to sell shares of Class B Common Stock,
such stock must be converted into shares of Class A Common Stock.
On December 10, 1998, the Company's Board of Directors approved an increase
in the stock repurchase plan to purchase up to 3 million shares. The 3 million
shares equals 13.0% of the Company's total and outstanding shares as of December
16, 1996 when the initial repurchase plan was approved by the Board. As of
October 31, 1998, 1,591,500 shares have been repurchased under this program.
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 Expense - Prepaid expenses which relate to specific housing
communities (marketing materials, model setup, architectural fees, homeowner
warranty, etc.) are amortized to costs of sales as the applicable inventories
are sold. All other prepaid expenses are amortized over a specific time period
or as used and charged to overhead expense.
Stock Options - Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" establishes a fair value-based method
of accounting for stock-based compensation plans, including stock options.
Registrants may elect to continue accounting for stock option plans under
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees," but are required to provide proforma net income and
earnings per share information "as if" the new fair value approach had been
adopted. The Company intends to continue accounting for its stock option plan
under APB 25. Under APB 25, no compensation expense was recognized because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant (see Note 12).
Per Share Calculations - New Accounting Pronouncement - Statement of
Financial Accounting Standards No. 128 ("FAS 128") "Earnings Per Share" requires
the presentation of basic earnings per share and diluted earnings per share, and
is effective for annual periods ending after December 15, 1997. The Company has
adopted FAS 128 for the year ending October 31, 1998. Basic earnings per common
share is computed using the weighted average number of shares outstanding and is
the same calculation as reported in prior years. Diluted earnings per common
share has been presented for prior years and is computed using the weighted
average number of shares outstanding adjusted for the incremental shares
attributed to outstanding options to purchase common stock of 235,000, 97,000,
and 83,000 for the years ended October 31, 1998, 1997, and 1996, respectively.
New Accounting Pronouncement - Statement of Financial Accounting Standards
No. 131 ("FAS 131") "Disclosures About Segments of an Enterprise and Related
Information" requires disclosure about operating segments and is effective for
fiscal years beginning after December 15, 1997. At October 31, 1998, the
Company has not adopted FAS 131. The Company believes the requirements of FAS
131 is not expected to materially impact the Company.
2. 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 $3,756,000, $2,216,000, and $1,601,000 for the years ended
October 31, 1998, 1997, and 1996, respectively, related to such initiatives.
3. 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, 1998 and October
31, 1997 amounted to $15,088,000 and $15,338,000, respectively. At October 31,
1997, held for sale - rental property consisted of two office buildings, three
office warehouse facilities and one retail shopping center. All held for sale -
rental property was sold during the year ended October 31, 1998 for $33,442,000
resultingin a pretax gain of $6,475,000. In addition at October 31, 1998 and
1997, two senior residential rental properties were classified as held for
investment - rental property. Accumulated depreciation on rental property at
October 31, 1998 and October 31, 1997 amounted to $1,826,000 and $10,450,000,
respectively. The Company owned and held for sale three parcels of commercial
land at October 31, 1998. All three parcels are under contract and are expected
to close during the year ended October 31, 1999 for $20,955,000. During the
year ended October 31, 1998 a 50%-owned partnership also sold its retail center
resulting in the Company recording a pretax gain of $1,418,000.
4. ESCROW CASH
The Company holds escrow cash amounting to $4,775,000 and $3,248,000 at
October 31, 1998 and October 31, 1997, respectively, which 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,
1998 and October 31, 1997, $14,000,000 and $13,500,000 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.
5. 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 servicing released, or prior to February
28, 1987 pledged against, collateralized mortgage obligations ("CMOs"). At
October 31, 1998 and October 31, 1997, respectively, $71,002,000 and $47,660,000
of such mortgages were pledged against, the Company's mortgage warehouse line
(see "Notes to Consolidated Financial Statements - Note 6"). The Company may
incur risk with respect to mortgages that are delinquent and not pledged against
CMOs, but only to the extent the losses are not covered by mortgage insurance or
resale value of the home. Historically, 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, 1998.
6. MORTGAGES AND NOTES PAYABLE
Substantially all of the nonrecourse land mortgages are short-term
borrowings. Nonrecourse mortgages secured by operating properties are
installment obligations having annual principal maturities in the following
years ending October 31, of approximately $115,000 in 1999, $119,000 in 2000,
$132,000 in 2001, $138,000 in 2002, $2,581,000 in 2003, and $685,000 after 2003.
The interest rates on these obligations range from 7.000% to 8.375%.
The Company has an unsecured Revolving Credit Agreement ("Agreement") with
a group of banks which provides up to $280,000,000 through July 2001. Interest
is payable monthly and at various rates of either the prime rate or LIBOR plus
1.45%. In addition, the Company pays .325% per annum on the weighted average
unused portion of the line.
Interest costs incurred, expensed and capitalized were:
Year Ended
----------------------------
October October October
31, 1998 31, 1997 31, 1996
-------- -------- --------
(Dollars in Thousands)
Interest incurred (1):
Residential(3)................. $26,675 $29,469 $30,058
Commercial(4).................. 2,272 5,308 5,493
------- ------- -------
Total incurred................. $28,947 $34,777 $35,551
======= ======= =======
Interest expensed:
Residential(3)................. $32,151 $30,467 $26,649
Commercial(4).................. 2,272 5,308 5,508
------- ------- -------
Total expensed................. $34,423 $35,775 $32,157
======= ======= =======
Interest capitalized at
beginning of year.............. $35,950 $39,152 $36,182
Plus interest incurred........... 28,947 34,777 35,551
Less interest expensed........... 34,423 35,775 32,157
Less impairment adjustments...... -- 275 424
Less property written off........ 460 945 --
Less sale of assets.............. 4,469 984 --
------- ------- -------
Interest capitalized at
end of year.................... $25,545 $35,950 $39,152
======= ======= =======
Interest capitalized at
end of year (5):
Residential(3)................. $23,868 $29,804 $32,669
Commercial(2).................. 1,677 6,146 6,483
------- ------- -------
Total interest
capitalized................... $25,545 $35,950 $39,152
======= ======= =======
(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 interest expense when land is not under active
development and when homes are delivered.
(4) Represents interest allocated to or incurred on long term debt for
investment properties and charged to interest expense.
(5) Commercial interest for October 31, 1997 includes $832,000 reported at
October 31, 1996 as capitalized residential interest. This
reclassification was the result of the transfer of two parcels of
land and related capitalized interest from homebuilding to investment
properties.
Average interest rates and average balances outstanding for short-term debt
are as follows:
October October October
31, 1998 31, 1997 31, 1996
-------- -------- --------
(Dollars In Thousands)
Average outstanding
borrowings................. $ 98,090 $133,760 $127,770
Average interest rate during
period..................... 8.4% 8.2% 8.5%
Average interest rate at end
of period(1)............... 6.9% 7.8% 7.6%
Maximum outstanding at any
month end.................. $125,325 $184,550 $157,125
(1) Average interest rate at the end of the period excludes any charges on
unused loan balances.
7. SUBORDINATED NOTES
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.
In November and December 1996, the Company redeemed $10,000,000 principal amount
at an average price of 100.3% of par. In October 1998, the Company also
redeemed $44,551,000 principal amount at an average price of 101.6% of par. The
funds for this redemption were provided by the Revolving Credit Agreement and
resulted in an extraordinary loss of $748,000 net of an income tax benefit of
$403,000. The remaining principal amount is due April 2002.
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 semi-annually. 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,
1998, $42,995,000 of retained earnings were free of such restrictions.
The fair value of the Subordinated Notes is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities. The combined fair value
of the Subordinated Notes is estimated at $136,329,000 as of October 31, 1998.
8. RETIREMENT PLAN
In December 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 $1,523,000, $1,520,000, and
$1,406,000 for the years ended October 31, 1998, 1997, and 1996, respectively.
9. INCOME TAXES
Income Taxes payable (receivable) including deferred benefits, consists of
the following:
October October
31, 1998 31, 1997
--------- ---------
(In Thousands)
State income taxes:
Current.......................... $ 2,897 $ 1,387
Deferred......................... (1,495) (1,586)
Federal income taxes:
Current.......................... 36 (1,611)
Deferred......................... (8,769) (10,755)
--------- ---------
Total.......................... $ (7,331) $(12,565)
========= =========
The provision for income taxes is composed of the following charges
(benefits):
Year Ended
-----------------------------------
October October October
31, 1998 31, 1997 31, 1996
--------- --------- ---------
(In Thousands)
Current income tax expense:
Federal(1)....................... $ 9,177 $ (2,381) $ 7,205
State............................ 3,484 2,051 1,768
--------- --------- ---------
12,661 (330) 8,973
--------- --------- ---------
Deferred income tax expense:
Federal.......................... 1,989 (4,569) (822)
State............................ 88 (255) (432)
--------- --------- ---------
2,077 (4,824) (1,254)
--------- --------- ---------
Total.......................... $ 14,738 $ (5,154) $ 7,719
========= ========= =========
(1) The current federal income tax expense includes a tax benefit of $403,00
in the year ended October 31, 1998 relating to the loss on the
redemption of Subordinated Notes that was reported as an extraordinary
item in the "Statement of Operations."
The deferred tax liabilities or assets have been recognized in the
consolidated balance sheets due to temporary differences as follows:
October October
31, 1998 31, 1997
-------- ---------
(In Thousands)
Deferred tax assets:
Deferred income...................... $ 40 $ 321
Maintenance guarantee reserves....... 701 481
Provision to reduce inventory to
net realizable value............... 136 95
Inventory impairment loss............ 6,077 8,621
Uniform capitalization of overhead... 2,967 3,972
Post development completion costs.... 1,379 509
State net operating loss
carryforwards...................... 27,205 22,227
Other................................ 843 639
-------- ---------
Total.............................. 39,348 36,865
Valuation allowance(2)............... (27,205) (22,227)
-------- ---------
Deferred tax assets.................. 12,143 14,638
-------- ---------
Deferred tax liabilities:
Deferred interest.................... 31 31
Installment sales.................... 137 208
Accelerated depreciation............. 1,711 2,058
-------- ---------
Total............................... 1,879 2,297
-------- ---------
Net deferred tax assets................ $ 10,264 $ 12,341
======== =========
(2) The net change in the valuation allowance of $4,978,000 results from an
increase in the separate company state net operating losses that may
not be fully utilized.
The effective tax rates varied from the expected rate. The sources
of these differences were as follows:
Year Ended
------------------------------
October October October
31, 1998 31, 1997 31, 1996
-------- -------- --------
Computed "expected" tax rate...... 35.0 % (35.0)% 35.0 %
State income taxes, net of Federal
income tax benefit.............. 6.0 % 11.6 % 3.2 %
Company owned life insurance...... (1.6)% (6.2)% (2.9)%
Low income housing tax credit..... (3.4)% (11.2)% (5.3)%
Other............................. .7 % (1.9)% .9 %
-------- -------- --------
Effective tax rate................ 36.7 % (42.7)% 30.9 %
======== ======== ========
The Company has state net operating loss carryforwards for financial
reporting and tax purposes of $359,000,000 due to expire between the years
October 31, 1999 and October 31, 2013.
10. REDUCTION OF INVENTORY TO FAIR VALUE
In accordance with FAS 121, the Company records impairment losses on
inventories related to communities under development when events and
circumstances indicate that they may be impaired and the undiscounted cashflows
estimated to be generated by those assets are less than their related carrying
amounts. As of October 31, 1998, 1997 and 1996, inventory with a carrying amount
of $3,077,000, $33,143,000 and $2,240,000, respectively, was written down by
$353,000, $9,258,000 and $1,289,000, respectively, to its fair value. This was
based on the Company's evaluation of the expected revenue, cost to complete
including interest and selling cost. The writedown during the year ended
October 31, 1998 was attributed to one community in Florida where homes are
being discounted to accelerate sales. The writedowns during the year ended
October 31, 1997 were attributable to numerous communities in Florida after the
Company decided to reduce its investment in that state and two communities in
New Jersey resulting from a product type change and unforeseen development
costs.
Also in accordance with FAS 121, the Company records impairment losses on
inventories and long-lived assets held for sale when the related carrying amount
exceeds the fair value less the selling cost. As of October 31, 1998, 1997 and
1996, inventory and commercial properties with a carrying amount of $4,629,000,
$32,008,000 and $12,031,000, respectively, was written down by $2,588,000,
$12,690,000 and $3,795,000, respectively, to its fair value. The writedowns
during the year ended October 31, 1998 were attributed to one parcel of land
being sold as lots and a commercial retail center parcel of land which incurred
higher land development costs, both in New Jersey. The writedowns during the
year ended October 31, 1997 were attributable to four residential parcels of
land in Florida, one residential parcel of land in New Jersey, one multi-use
commercial parcel of land in New Jersey and two Florida commercial facilities
with expansion land attached to one facility. During the year ended October 31,
1998, when these commercial facilities were liquidated, the Company recovered
the carrying value. During the years ended October 31, 1998, 1997 and 1996, the
Company recovered the carrying value or recognized nominal losses on the land
held for sale which was subsequently liquidated.
The total aggregate impairment losses, which are presented in the
consolidated statements of operations, on the inventory held for development and
the land or commercial facilities held for sale were $2,941,000, $21,948,000,
and $1,608,000 for the years ended October 31, 1998, 1997 and 1996,
respectively.
On the statement of operations the lines entitled "Homebuilding - Inventory
impairment loss" and "Investment Properties - Provision for impairment loss"
also include writeoffs of options including approval, engineering and
capitalized interest costs. During the year ended October 31, 1998, the
writeoffs amounted to $2,091,000 and zero, respectively. During the year ended
October 31, 1997, the writeoffs amounted to $4,761,000 and $1,756,000,
respectively. During 1998, the Company did not exercise three residential
options because of changes in local market conditions and difficulties in
obtaining government approvals. During 1997, the Company decided not to
exercise three residential options due to environmental problems or the
property's proforma did not produce an adequate return on investment
commensurate with the risk and one commercial property option because an anchor
tenant with an acceptable credit rating could not be found.
11. 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 $3,000,000 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, 1998 and 1997 included in
receivables, deposits and notes are related party receivables from officers and
directors amounted to $2,117,000 and $1,889,000, 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.
The Company provides property management services to various limited
partnerships including one partnership in which Mr. A. Hovnanian, Chief
Executive Officer, 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, 1998, no amounts were due the
Company by these partnerships.
12. 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. Options granted prior
to May 14, 1998 vest in three equal installments on the first, second and third
anniversaries of the date of the grant. Options granted on or after May 14,
1998 vest in four equal installments on the third, fourth, fifth and sixth
anniversaries of the date of the grant. All options expire after ten years
after the date of the grant. In addition, during the year ended October 31,
1997 each of the three outside directors of the Company were granted options to
purchase 5,000 shares at the same price and terms as those granted to officers
and key employees. Stock option transactions are summarized as follows:
Weighted Weighted Weighted
Average Average Average
October Exercise October Exercise October Exercise
31, 1998 Price 31, 1997 Price 31, 1996 Price
--------- -------- --------- -------- --------- --------
Options outstanding at
beginning of period. 1,336,500 $7.83 1,156,000 $8.04 1,176,000 $8.00
Granted.............. 291,500 $9.09 190,500 $6.47
Exercised............ 114,667 $5.45
Forfeited............ 98,333 $9.98 10,000 $5.81 20,000 $5.81
--------- --------- ----------
Options outstanding at
end of period......... 1,415,000 $8.13 1,336,500 $7.83 1,156,000 $8.04
========= ========= ==========
Options exercisable at
end of period....... 1,013,166 1,069,333 996,000
Price range of options $5.13- $5.13- $5.13-
outstanding......... $11.50 $11.50 $11.50
Weighted-average
remaining contractual
life................ 5.4 yrs. 5.4 yrs. 5.8 yrs.
Pro forma information regarding net income and earnings per share is
required under the fair value method of Financial Accounting Standards No. 123
("FAS 123") "Accounting for Stock-Based compensation" and is to be calculated as
if the Company had accounted for its stock options under the fair value method
of FAS 123. The fair value for these options is established at the date of
grant using a Black-Scholes option pricing model with the following weighted-
average assumptions for 1998 and 1997: risk- free interest rate of 4.5% and
5.8%, respectively; divided yield of zero; volatility factor of the expected
market price of the Company's common stock of 0.46 and 0.47, respectively; and a
weighted-average expected life of the option of 7.5 and 7.0 years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective imput assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options and are not
likely to be representative of the effects on reported net income for future
years, if applicable.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
Year Ended
-----------------------------------
October October October
31, 1998 31, 1997 31, 1996(1)
---------- ---------- -----------
Pro forma net income (loss)............. $ 25,107 $ (7,131) $ 17,287
========== ========== ===========
Pro forma basic earnings (loss)
per share............................. $ 1.15 $ (0.32) $ 0.75
========== ========== ===========
Pro forma diluted earnings (loss)
per share............................. $ 1.14 $ (0.32) $ 0.75
========== ========== ===========
(1) No options were granted in 1996, as a result pro forma amounts equal actual
per the income statement.
13. COMMITMENTS AND CONTINGENT LIABILITIES
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, 1998 and 1997, respectively, the Company is obligated
under various performance letters of credit amounting to $6,934,000 and
$6,834,000.
14. UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION
Summarized quarterly financial information for the years ended October 31,
1998, 1997, and 1996 is as follows:
Three Months Ended
-----------------------------------------
October July April January
31, 1998 31, 1998 30, 1998 31, 1998
-------- -------- -------- ---------
(In Thousands Except Per Share Data)
Revenues........................... $267,542 $248,125 $212,320 $213,960
Expenses........................... $255,268 $235,735 $204,710 $204,942
Income before income taxes and
extraordinary loss............... $ 12,274 $ 12,390 $ 7,610 $ 9,018
State and Federal income tax....... $ 4,762 $ 4,677 $ 2,597 $ 3,105
Extraordinary loss from extinguish-
ment of debt, net of income taxes $ (748)
Net income......................... $ 6,764 $ 7,713 $ 5,013 $ 5,913
Per Share Data:
Basic:
Income per common share before
extraordinary loss............. $ 0.35 $ 0.35 $ 0.23 $ 0.27
Extraordinary loss............... $ (.03)
Net Income....................... $ 0.32 $ 0.35 $ 0.23 $ 0.27
Weighted average number of
common shares outstanding...... 21,661 21,785 21,848 21,834
Assuming Dilution:
Income per common share
before extraordinary loss...... $ 0.34 $ 0.35 $ 0.23 $ 0.27
Extraordinary loss............... $ (.03)
Net Income....................... $ 0.31 $ 0.35 $ 0.23 $ 0.27
Weighted average number of
common shares outstanding...... 21,896 22,018 22,042 21,985
Three Months Ended(1)
------------------------------------------
October July April January
31, 1997 31, 1997 30, 1997 31, 1997
-------- -------- -------- ---------
(In Thousands Except Per Share Data)
Revenues........................... $315,150 $205,107 $143,526 $120,353
Expenses........................... $302,494 $196,105 $173,453 $124,208
Income before income taxes and
extraordinary loss............... $ 12,656 $ 9,002 $(29,927) $ (3,855)
State and Federal income tax....... $ 4,930 $ 2,782 $(10,785) $ (2,081)
Net income (loss).................. $ 7,726 $ 6,220 $(19,142) $ (1,774)
Per Share Data:
Basic:
Net income (loss) per common
share.......................... $ 0.35 $ 0.27 $ (0.83) $ (.08)
Weighted average number of
common shares outstanding...... 22,098 22,409 22,925 23,037
Assuming dilution:
Net income (loss) per common
share......................... $ 0.35 $ 0.27 $ (0.83) $ (.08)
Weighted average number of
common shares outstanding...... 22,195 22,485 22,999 23,121
Three Months Ended(1)
-----------------------------------------
October July April January
31, 1996 31, 1996 30, 1996 31, 1996
-------- -------- -------- ---------
(In Thousands Except Per Share Data)
Revenues........................... $342,049 $195,812 $152,464 $117,139
Expenses........................... $323,474 $191,280 $150,881 $116,823
Income before income taxes......... $ 18,575 $ 4,532 $ 1,583 $ 316
State and Federal income tax....... $ 6,146 $ 1,422 $ 335 $ (184)
Net income......................... $ 12,429 $ 3,110 $ 1,248 $ 500
Per Share Data:
Basic:
Net income per common share..... $ 0.54 $ 0.13 $ 0.06 $ 0.02
Weighted average number of
common shares outstanding...... 23,037 23,037 23,037 23,037
Assuming dilution:
Net income per common share..... $ 0.54 $ 0.13 $ 0.06 $ 0.02
Weighted average number of
common shares outstanding...... 23,120 23,115 23,112 23,093
(1) The earnings per share for the years ended October 31, 1997 and 1996 have
been restated as required to comply with FAS 128. For further discussion
of earnings per share and the impact of FAS 128, see Note 1.
SCHEDULE XI
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
OCTOBER 31, 1998
Gross Amounts (A)(B)(C)
---------------------------
Building/ Tax Accumulated
Description Land Improvements Total Basis Depreciation
- --------------------- ----------- ------------ ----------- ----------- ------------
1 Hidden Meadows $ 544,000 $ 5,750,000 $ 6,294,000 $ 6,294,000 $854,000
Ocean Twp, NJ
Senior Rentals
2 Norfolk Village 640,000 5,573,000 6,213,000 6,213,000 618,000
Mahwah, NJ
Senior Rentals
3 Hovnanian Corp. Center 0 9,127,000 9,127,000 12,143,000 0
North Brunswick, NJ
Land/Land Improvement
Approval & Flex Building
Under Construction
4 Land Improvement and
Approval Costs
Merrimack Commercial 75,000 100,000 175,000 300,000 0
Merrimack, NH
Land/Land Improvement
Costs
5 NB Theatre 3,000 5,372,000 5,375,000 8,314,000 0
North Brunswick,NJ
Land/Land
Improvement
6 Allaire 50,000 56,000 106,000 106,000 0
Wall, NJ
Land/Land Improvement
7 Wall Town Center 3,200,000 645,000 2,807,000 4,883,000 0
Wall, NJ
Land/Land Improvement
----------- ------------ ----------- ----------- ------------
$ 4,512,000 $ 26,623,000 $30,097,000 $38,253,000 $1,472,000
=========== ============ =========== =========== ============
(A) Fiscal Year Construction Completed:
1 - 1993
2 - 1995
3 through 7 - not completed
SCHEDULE XI (CONCLUDED)
(B) Depreciable Life:
40 years - Depreciation expense was $446,000 for the year ended
October 31, 1998.
Depreciation expense was $1,854,000 for the year ended October 31, 1997.
Depreciation expense was $2,665,000 for the year ended October 31, 1996.
Depreciation expense was $1,973,000 for the year ended October 31, 1995.
(C) Items marked 4 through 7 consist of land improvement, building
construction, and approval costs on land held for future development.
Balance - October 31, 1995 84,119,000
Additions: Improvements 1,115,000
Deletions: Cost of rental condominiums sold (152,000)
Cost of commercial center sold (8,457,000)
Cost of commercial land sold (114,000)
Cost of inventory sold (9,000)
-------------
Balance - October 31, 1996 76,502,000
Additions: Improvements 193,000
Land purchase and development 11,100,000
Deletions: Transfer to inventory (258,000)
Cost of commercial center sold (12,283,000)
Provision for impairment loss (14,446,000)
-------------
Balance - October 31, 1997 60,808,000
Additions: Land purchase and development 5,466,000
Deletions: Cost of commercial properties sold (33,522,000)
Cost of inventory sold (1,617,000)
Provision for impairment loss (1,038,000)
-------------
Balance - October 31, 1998 $ 30,097,000
=============
Balance at October 31, 1998 is reported on the consolidated balance sheet as
investment properties held for sale and held for investment.