SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10Q [ X ] Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For quarterly period ended APRIL 30, 1997 or [ ] Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 Commission file number 1-8551 Hovnanian Enterprises, Inc. (Exact name of registrant as specified in its charter) Delaware 22-1851059 (State or other jurisdiction or (I.R.S. Employer incorporation or organization) Identification No.) l0 Highway 35, P.O. Box 500, Red Bank, N. J. 07701 (Address of principle executive offices) 908-747-7800 (Registrant's telephone number, including area code) Same (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Sections l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 14,516,977 Class A Common Shares and 7,796,974 Class B Common Shares were outstanding as of June 6, 1997. HOVNANIAN ENTERPRISES, INC. FORM 10Q INDEX PAGE NUMBER PART I. Financial Information Item l. Consolidated Financial Statements: Consolidated Balance Sheets at April 30, 1997 (unaudited) and October 31, 1996 3 Consolidated Statements of Income for the three and six months ended April 30, 1997 and 1996 (unaudited) 5 Consolidated Statements of Stockholders' Equity for the six months ended April 30, 1997 (unaudited) 6 Consolidated Statements of Cash Flows for the six months ended April 30, 1997 and 1996 (unaudited) 7 Notes to Consolidated Financial Statements (unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. Other Information Item 4. Submission of Matters to a Vote of Security Holders Item 6(a). Exhibit 10(a) - Fourth Amendment to Credit Agreement dated May 1997 among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., Certain Subsidiaries Thereof, P N C Bank N.A., Chase Manhattan Bank, Corestates Bank N.A., NationsBank N.A., First National Bank of Boston, Bank of America Illinois, First National Bank of Chicago, Comerica Bank, and Credit Lyonnais. Item 6(b). Exhibit 27 - Financial Data Schedules Item 6(c). No reports on Form 8K have been filed during the quarter for which this report is filed. Signatures 20 <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) <CAPTION> April 30, October 31, ASSETS 1997 1996 ----------- ----------- <S> <C> <C> Homebuilding: Cash and cash equivalents....................... $ 7,924 $ 16,535 ----------- ----------- Inventories - At cost, not in excess of fair value: Sold and unsold homes and lots under development.................................. 375,222 314,630 Land and land options held for future development or sale......................... 62,081 61,677 ----------- ----------- Total Inventories........................... 437,303 376,307 ----------- ----------- Receivables, deposits, and notes................ 32,712 26,442 ----------- ----------- Property, plant, and equipment - net............ 18,422 18,251 ----------- ----------- Prepaid expenses and other assets............... 44,043 31,939 ----------- ----------- Total Homebuilding.......................... 540,404 469,474 ----------- ----------- Financial Services: Cash and cash equivalents....................... 575 4,196 Mortgage loans held for sale.................... 20,232 57,812 Other assets.................................... 1,886 3,217 ----------- ----------- Total Financial Services.................... 22,693 65,225 ----------- ----------- Investment Properties: Held for sale: Rental property - net......................... 34,273 Land and improvements......................... 11,574 Other assets.................................. 413 Held for investment: Rental property - net......................... 11,438 51,892 Land, improvements and land option............ 13,502 Other assets.................................. 2,945 3,292 ----------- ----------- Total Investment Properties................. 60,643 68,686 ----------- ----------- Collateralized Mortgage Financing: Collateral for bonds payable.................... 8,946 9,478 Other assets.................................... 382 576 ----------- ----------- Total Collateralized Mortgage Financing..... 9,328 10,054 ----------- ----------- Income Taxes Receivable - Including deferred tax benefits........................................ 20,834 672 ----------- ----------- Total Assets...................................... $653,902 $614,111 =========== =========== See notes to consolidated financial statements. </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) <CAPTION> April 30, October 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 ----------- ----------- <S> <C> <C> Homebuilding: Nonrecourse land mortgages........................ $ 26,710 $ 25,151 Accounts payable and other liabilities............ 30,148 45,146 Customers' deposits............................... 24,099 12,371 Nonrecourse mortgages secured by operating properties...................................... 3,875 3,918 ----------- ----------- Total Homebuilding............................ 84,832 86,586 ----------- ----------- Financial Services: Accounts payable and other liabilities............ 1,001 1,631 Mortgage warehouse line of credit................. 17,930 55,196 ----------- ----------- Total Financial Services...................... 18,931 56,827 ----------- ----------- Investment Properties: Accounts payable and other liabilities............ 651 721 Nonrecourse mortgages secured by rental property.. 30,846 31,071 ----------- ----------- Total Investment Properties................... 31,497 31,792 ----------- ----------- Collateralized Mortgage Financing: Accounts payable and other liabilities............ 26 11 Bonds collateralized by mortgages receivable...... 8,550 9,231 ----------- ----------- Total Collateralized Mortgage Financing....... 8,576 9,242 ----------- ----------- Notes Payable: Revolving credit agreement........................ 142,700 30,000 Subordinated notes................................ 190,000 200,000 Accrued interest.................................. 6,186 6,042 ----------- ----------- Total Notes Payable........................... 338,886 236,042 ----------- ----------- Total Liabilities............................. 482,722 420,489 ----------- ----------- Stockholders' Equity: Preferred Stock,$.01 par value-authorized 100,000 shares; none issued Common Stock,Class A,$.01 par value-authorized 87,000,000 shares; issued 15,581,193 shares (including 596,574 shares held in Treasury)..... 156 155 Common Stock,Class B,$.01 par value-authorized 13,000,000 shares; issued 8,147,608 shares (including 345,874 shares held in Treasury)..... 81 82 Paid in Capital................................... 33,935 33,935 Retained Earnings................................. 143,833 164,749 Treasury Stock - at cost.......................... (6,825) (5,299) ----------- ----------- Total Stockholders' Equity.................... 171,180 193,622 ----------- ----------- Total Liabilities and Stockholders' Equity.......... $653,902 $614,111 =========== =========== See notes to consolidated financial statements. </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Per Share Data) <CAPTION> Three Months Ended Six Months Ended April 30, April 30, ------------------- ------------------- 1997 1996 1997 1996 --------- --------- --------- --------- <S> <C> <C> <C> <C> Revenues: Homebuilding: Sale of homes...................... $136,235 $143,504 $251,350 $252,074 Land sales and other revenues...... 2,895 4,505 3,855 6,436 --------- --------- --------- --------- Total Homebuilding............... 139,130 148,009 255,205 258,510 Financial Services................... 1,928 2,018 3,786 3,668 Investment Properties................ 2,261 2,009 4,488 6,550 Collateralized Mortgage Financing.... 207 428 400 875 --------- --------- --------- --------- Total Revenues................... 143,526 152,464 263,879 269,603 --------- --------- --------- --------- Expenses: Homebuilding: Cost of sales...................... 117,695 123,141 217,912 217,223 Selling, general and administrative 11,821 11,835 21,717 20,060 Inventory impairment loss.......... 13,475 13,475 --------- --------- --------- --------- Total Homebuilding............... 142,991 134,976 253,104 237,283 --------- --------- --------- --------- Financial Services................... 2,408 2,431 4,800 4,781 --------- --------- --------- --------- Investment Properties: Operations......................... 1,642 1,703 3,204 3,417 Provision for impairment loss...... 14,446 14,446 --------- --------- --------- --------- Total Investment Properties...... 16,088 1,703 17,650 3,417 --------- --------- --------- --------- Collateralized Mortgage Financing.... 224 446 471 921 --------- --------- --------- --------- Corporate General and Administration. 3,283 3,553 6,877 7,196 --------- --------- --------- --------- Interest............................. 8,016 6,796 13,508 12,396 --------- --------- --------- --------- Other Operations..................... 443 976 1,251 1,710 --------- --------- --------- --------- Total Expenses................... 173,453 150,881 297,661 267,704 --------- --------- --------- --------- Income (Loss) Before Income Taxes...... (29,927) 1,583 (33,782) 1,899 --------- --------- --------- --------- State and Federal Income Taxes: State................................ (123) 296 242 836 Federal.............................. (10,662) 39 (13,108) (685) --------- --------- --------- --------- Total Taxes........................ (10,785) 335 (12,866) 151 --------- --------- --------- --------- Net Income (Loss)...................... $(19,142) $ 1,248 $(20,916) $ 1,748 ========= ========= ========= ========= Earnings (Loss) Per Common Share....... $ (0.83) $ 0.05 $ (0.91) $ 0.08 ========= ========= ========= ========= See notes to consolidated financial statements. </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars In Thousands) <CAPTION> A Common Stock B Common Stock ------------------- ------------------- Shares Shares Issued and Issued and Paid-In Retained Treasury Outstanding Amount Outstanding Amount Capital Earnings Stock Total ----------- ------ ----------- ------ ------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> 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.... 99,971 1 (99,971) (1) Net Income................ (20,916) (20,916) Treasury stock purchases.. (250,700) (1,526) (1,526) ----------- ------ ----------- ------ ------- -------- -------- -------- Balance, April 30, 1997... 14,984,619 $156 7,801,734 $81 $33,935 $143,833 $(6,825) $171,180 =========== ====== =========== ====== ======= ======== ======== ======== See notes to consolidated financial statements. </TABLE> <TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) <CAPTION> Six Months Ended April 30, --------------------- 1997 1996 ---------- ---------- <S> <C> <C> Cash Flows From Operating Activities: Net Income (Loss)................................... $ (20,916) $ 1,748 Adjustments to reconcile net income to net cash used in operating activities: Depreciation.................................... 2,928 2,488 Loss on sale and retirement of property and assets.................................... (92) (1,952) Deferred income taxes........................... (8,784) 2,466 Impairment losses............................... 27,921 Decrease (increase) in assets: Escrow cash................................... 2,619 (2,675) Receivables, prepaids and other assets........ (17,335) (16,858) Mortgage notes receivable..................... 38,028 17,121 Inventories................................... (74,471) (46,275) Increase (decrease) in liabilities: State and Federal income taxes................ (11,378) (3,429) Customers' deposits........................... 11,952 6,335 Interest and other accrued liabilities........ (1,265) (7,266) Post development completion costs............. (4,213) (126) Accounts payable.............................. (10,271) (14,215) ---------- ---------- Net cash used in operating activities....... (65,277) (62,638) ---------- ---------- Cash Flows From Investing Activities: Proceeds from sale of property and assets........... 2,238 Purchase of property................................ (1,580) (3,195) Investment in and advances to unconsolidated affiliates........................................ 49 3,642 Investment in income producing properties........... (7,647) (823) ---------- ---------- Net cash provided by (used) in investing activities................................ (9,178) 1,862 ---------- ---------- Cash Flows From Financing Activities: Proceeds from mortgages and notes................... 485,153 559,398 Principal payments on mortgages and notes........... (409,123) (508,521) Principal payments on subordinated debt............. (10,000) Investment in mortgage notes receivable............. 535 1,694 Purchase of treasury stock..............................(1,526) ---------- ---------- Net cash provided by financing activities... 65,039 52,571 ---------- ---------- Net Decrease In Cash.................................. (9,416) (8,205) Cash Balance, Beginning Of Period..................... 15,323 11,914 ---------- ---------- Cash Balance, End Of Period.......................... $ 5,907 $ 3,709 ========== ========== See notes to consolidated financial statements. </TABLE> HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED 1. The consolidated financial statements, except for the October 31, 1996 consolidated balance sheets, have been prepared without audit. In the opinion of management, all adjustments for interim periods presented have been made, which include only normal recurring accruals and deferrals necessary for a fair presentation of consolidated financial position, results of operations, and changes in cash flows. Results for the interim periods are not necessarily indicative of the results which might be expected for a full year. 2. Certain expenses which had been previously reported as selling, general and administration were reclassified to cost of sales. These costs include sales commissions, buyer concessions, the amortization of prepaid selling expenses, property taxes and condominium association subsidies. The amount reclassified for the three and six months ended April 30, 1997 was $7,625,000 and $13,412,000, respectively. In addition, the revenues and expenses of the Company's title division have been reclassified out of homebuilding and other operations, respectively, into the financial services section of the consolidated statements of income. The amount of title revenues and expenses reclassified for the three months ended April 30, 1997 was $689,000 and $662,000, respectively, and for the six months ended April 30, 1996 was $1,218,000 and $1,198,000, respectively. 3. Interest costs incurred, expensed and capitalized were: Three Months Ended Six Months Ended April 30, April 30, ------------------- ------------------- 1997 1996 1997 1996 -------- -------- -------- -------- (Dollars in Thousands) Interest Incurred (1): Residential (3)........... $ 7,108 $ 7,587 $ 13,692 $ 14,672 Commercial(4)............. 1,296 1,391 2,613 2,901 -------- -------- -------- -------- Total Incurred.......... $ 8,404 $ 8,978 $ 16,305 $ 17,573 ======== ======== ======== ======== Interest Expensed: Residential (3)........... $ 6,720 $ 5,405 $ 10,895 $ 9,495 Commercial (4)............ 1,296 1,391 2,613 2,901 -------- -------- -------- -------- Total Expensed......... $ 8,016 $ 6,796 $ 13,508 $ 12,396 ======== ======== ======== ======== Interest Capitalized at Beginning of Period....... $ 41,551 $ 39,030 $ 39,152 $ 36,182 Plus Interest Incurred...... 8,404 8,978 16,305 17,573 Less Interest Expensed...... 8,016 6,796 13,508 12,396 Less Charges to Reserves.... 92 104 102 251 Less Impairment Adjustments. 945 945 -------- -------- -------- -------- Interest Capitalized at End of Period............. $ 40,902 $ 41,108 $ 40,902 $ 41,108 ======== ======== ======== ======== Interest Capitalized at End of Period (5): Residential(3)............ $ 33,772 $ 34,610 $ 33,772 $ 34,610 Commercial(2)............. 7,130 6,498 7,130 6,498 -------- -------- -------- -------- Total Capitalized....... $ 40,902 $ 41,108 $ 40,902 $ 41,108 ======== ======== ======== ======== (1) Does not include interest incurred by the Company's mortgage and finance subsidiaries. (2) Does not include a reduction for depreciation. (3) Represents acquisition interest for construction, land and development costs which is charged to interest expense when homes are delivered. (4) Represents interest allocated to or incurred on long term debt for investment properties and charged to interest expense. (5) Commercial interest includes $831,000 reported at October 31, 1996 as capitalized residential interest. This reclassification is a result of the transfer of land and related capitalized interest from homebuilding to investment properties. 4. Homebuilding accumulated depreciation at April 30, 1997 and October 31, 1996 amounted to $16,456,000 and $14,970,000, respectively. Rental property accumulated depreciation at April 30, 1997 and October 31, 1996 amounted to $12,242,000 and $11,108,000, respectively. 5. In accordance with FAS 121, the Company records impairment losses on inventories related to communities under development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. As of April 30, 1997 inventory with a carrying amount of $27,510,000 was written down to its fair value. The total amount of this writedown was $8,714,000. This is principally attributed to a $5,364,000 writedown of the Company's investment in Florida communities. This writedown is based upon management's decision to reduce its investment in Florida by accelerating sales through the reduction of sales prices and offering pricing concessions. The remainder of the writedown is attributable to one community in New Jersey and one in Pennsylvania. The FAS 121 calculations were based on the Company's evaluation of the expected revenue less costs to complete including interest and selling costs. In addition, the Company also recorded a $4,761,000 write-off of certain residential land options including approval, engineering and capitalized interest costs for two properties in New Jersey and one in Pennsylvania. The Company has decided to exit from the investment properties business. As a result, all commercial properties will no longer be held for use, but will be held for sale. This resulted in FAS 121 impairment losses on certain investment properties. The impairment losses are a result of the properties carrying amounts exceeding their fair value less selling costs. As of April 30, 1997, properties with a carrying amount of $33,820,000 were written down to their fair value. The total amount of this writedown was $12,690,000. The Company also recorded a $1,756,000 write-off of a commercial land option including approval, engineering and capitalized interest costs. The writedowns and write-offs for the quarter ended April 30, 1997 are attributable to commercial properties in both New Jersey and Florida. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY The Company's uses for cash during the six months ended April 30, 1997 were for operating expenses, seasonal increases in housing inventories, construction, income taxes, interest, the reduction of subordinated notes, and the repurchase of common stock. The Company provided for its cash requirements from the revolving credit facility, land purchase notes, and from housing and other revenues. The Company believes that these sources of cash are sufficient to finance its working capital requirements and other needs. In December 1996 the Board of Directors authorized a stock repurchase program to purchase up to 2 million shares of Class A Common Stock. As of June 6, 1997, 723,100 shares were repurchased under this program. The Company's bank borrowings are made pursuant to a revolving credit agreement (the "Agreement") that provides a revolving credit line of up to $245,000,000 (the "Revolving Credit Facility") through March 2000. Interest is payable monthly and at various rates of either prime plus 1/8% or Libor plus 1.625%. The Company recently extended the Agreement one year and believes that it will be able either to extend the Agreement beyond March 2000 or negotiate a replacement facility, but there can be no assurance of such extension or replacement facility. The Company currently is in compliance and intends to maintain compliance with its covenants under the Agreement. As of April 30, 1997, borrowings under the Agreement were $142,700,000. The aggregate principal amount of subordinated indebtedness issued by the Company and outstanding as of April 30, 1997 was $190,000,000. During the six months ended April 30, 1997, the Company reduced its subordinated debt by $10,000,000. Annual sinking fund payments of $10,000,000 and $20,000,000 are required in April 2000 and 2001, respectively, with additional payments of $60,000,000 and $100,000,000 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 April 30, 1997, the aggregate principal amount of all such borrowings was $26,480,000. The book value of the Company's residential inventories, rental condominiums, and commercial properties completed and under development amounted to the following: April 30, October 31, 1997 1996 ------------ ------------ Residential real estate inventory.......... $437,303,000 $376,307,000 Residential rental property................ 11,438,000 12,190,000 ------------ ------------ Total Residential Real Estate............ 448,741,000 388,497,000 Commercial properties...................... 45,847,000 53,204,000 ------------ ------------ Combined Total........................... $494,588,000 $441,701,000 ============ ============ Total residential real estate increased $60,244,000 during the six months ended April 30, 1997 primarily as a result of an inventory increase of $81,614,000, which was partially offset by the reallocation of land and approval costs to commercial properties (see below), the writedown of certain communities under development or land held for sale, and the write-off of optioned parcels of land and related approval, engineering and capitalized interest costs. See "Notes to Consolidated Financial Statements - Note 5." The increase in residential real estate inventory was primarily due to the Company's seasonal increase in construction activities for deliveries later this year. Substantially all residential homes under construction or completed and included in real estate inventory at April 30, 1997 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 in the Company's active selling communities under development (including Poland): (1) (2) Homes Contracted Remaining Commun- Approved Deliv- Not Home Sites ities Lots ered Delivered Available ------- -------- ------ ---------- ---------- April 30, 1997........ 80 14,342 4,858 2,047 7,437 October 31, 1996...... 85 12,942 4,613 1,479 6,850 (1) Includes 68 and 274 lots under option at April 30, 1997 and October 31, 1996, respectively. (2) Of the total home lots available, 509 and 528 were under construction or complete (including 120 and 106 models and sales offices), 1,948 and 1,762 were under option, and 1,210 and 1,280 were financed through purchase money mortgages at April 30, 1997 and October 31, 1996, respectively. In addition, at April 30, 1997 and October 31, 1996, respectively, in substantially completed or suspended communities, the Company owned or had under option 558 and 448 home lots. The Company also controls a supply of land primarily through options for future development. This land is consistent with anticipated home building requirements in its housing markets. At April 30, 1997 the Company controlled such land to build 9,552 proposed homes, compared to 13,083 homes at October 31, 1996. The following table summarizes the Company's started or completed unsold homes in active, substantially complete and suspended communities: April 30, October 31, 1997 1996 ----------------------- ----------------------- Unsold Unsold Homes Models Total Homes Models Total ------ ------ ----- ------ ------ ----- Northeast Region.... 247 78 325 242 71 313 North Carolina...... 57 -- 57 68 -- 68 Florida............. 213 7 220 51 10 61 Virginia............ 13 9 22 18 3 21 California.......... 36 24 60 67 24 91 Poland.............. 9 2 11 2 2 4 ------ ------ ----- ------ ------ ----- Total 575 120 695 448 110 558 ====== ====== ===== ====== ====== ===== The Company's commercial properties represent investments in commercial and retail facilities completed or under development (see "Investment Properties" under "Results of Operations"). At April 30, 1997, the Company had long-term non-recourse financing aggregating $30,846,000 on six commercial facilities, a decrease from October 31, 1996, due to $225,000 in principal amortization. The decrease in commercial properties of $7,357,000 is primarily the result of the writedown of certain facilities and land held for sale to fair value and the write-off of an optioned parcel of land and related approval, engineering and capitalized interest costs totaling $14,446,000. The writedowns and write-off were partially offset by the reallocation of land and approval costs on a multi- use parcel of land. As a result of the reallocation, $7,143,000 was added to investment properties under development from homebuilding land held for future development. See "Notes to Consolidated Financial Statements - Note 5." Collateral Mortgage Financing - collateral for bonds payable consist of collateralized mortgages receivable which are pledged against non-recourse collateralized mortgage obligations. Financial Services - mortgage loans held for sale consist of residential mortgages receivable of which $19,519,000 and $57,095,000 at April 30, 1997 and October 31, 1996, respectively, are being temporarily warehoused and awaiting sale in the secondary mortgage market. The balance of such mortgages is being held as an investment by the Company. The Company may incur risk with respect to mortgages that are delinquent, but only to the extent the losses are not covered by mortgage insurance or resale value of the house. Historically, the Company has incurred minimal credit losses. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 1997 COMPARED TO THE THREE AND SIX MONTHS ENDED APRIL 30, 1996 The Company's operations consist primarily of residential housing development and sales in its Northeast Region (comprising of New Jersey, southern New York State and eastern Pennsylvania), North Carolina, southeastern Florida, northern Virginia, southwestern California and Poland. In addition, the Company develops and operates commercial properties as long-term investments in New Jersey, and, to a lesser extent, Florida, but is exiting this business (see "Investment Properties" below). At October 31, 1996, the Company reclassified certain expenses previously reported as selling, general and administration to cost of sales. These costs include sales commissions, buyer concessions, the amortization of prepaid selling expenses, property taxes and condominium association subsidies. The amount of reclassifications for the three and six months ended April 30, 1997 was $7,625,000 and $13,412,000, respectively. In addition, the Company reclassified its title revenues previously reported as other homebuilding revenues to financial services revenues, and title expenses from other operation expenses to financial service expenses. The amount of title revenues and expenses reclassified for the three months ended April 30, 1996 was $689,000 and $662,000, respectively, and for the six months ended April 30, 1996 was $1,218,000 and $1,198,000, respectively. Historically, the Company's first six months of the year has produced substantially fewer deliveries than the last six months. This was true in fiscal 1996 when the Company delivered 33% of its homes during the first six months. Management believes this will be true for fiscal 1997. During the past few years the Company has been able to produce a profit on this lower volume. That is not the case in fiscal 1997. Although the Company's Northeast Region and North Carolina Division produced profits, compared to the six months ended April 30, 1996, profits were lower due to decreased gross margins. These profits were offset by increased losses in Florida and Virginia due to fewer homes delivered, losses from its other operations, writedown of certain assets to their fair values, and the write-off of four options and related approval, engineering and capitalized interest costs. See "Notes to Consolidated Financial Statements - Note 5." Due to the writedowns and write-offs, management does not believe the Company will be profitable in fiscal 1997. Management feels operating profits before these adjustments will approximate fiscal 1996 results. Important indicators of the future results of the Company are recently signed contracts and home contract backlog for future deliveries. The Company's sales contracts and homes in contract (using base sales prices) by market area is set forth below: Sales Contracts for the Six Months Ended Contract Backlog April 30, as of April 30, ----------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- (Dollars in Thousands) Northeast Region: Dollars............. $211,384 $203,361 $286,424 $253,043 Homes............... 1,099 1,122 1,401 1,325 North Carolina: Dollars............. $ 67,494 $ 62,730 $ 62,851 $ 60,703 Homes............... 366 380 333 361 Florida: Dollars............. $ 31,107 $ 60,318 $ 39,276 $ 60,103 Homes............... 185 404 222 398 Virginia: Dollars............. $ 7,757 $ 9,284 $ 5,764 $ 8,881 Homes............... 37 47 27 42 California: Dollars............. $ 38,651 $ 27,705 $ 16,317 $ 18,143 Homes............... 191 149 85 95 Poland: Dollars............. $ 2,075 - $ 3,088 - Homes............... 28 - 42 - Totals: Dollars............. $358,468 $363,398 $413,720 $400,873 Homes............... 1,906 2,102 2,110 2,221 Reduced sales contracts and below average return on investment in the Florida Division have resulted in Management's decision to decrease the Company's investment in this division by approximately $25.0 million. As a result, certain communities were written down due to reduced sales prices and increased buyer concessions to accelerate sales. In addition, other idle property was written down since it will be offered for sale and not developed. See "Notes to Consolidated Financial Statements - Note 5." Total Revenues: Revenues for the three months ended April 30, 1997 decreased $8.9 million or 5.9%, compared to the same period last year. This was a result of decreased revenues from sale of homes of $7.3 million, a $1.6 million decrease in land sales and other homebuilding revenues, a $0.1 million decrease in financial services revenues, and a $0.2 million decrease in collateralized mortgage financing revenues. These decreases were partially offset by a $0.3 million increase in investment properties revenues. Revenues for the six months ended April 30, 1997 decreased $5.7 million or 2.1%, compared to the same period last year. This was a result of decreased revenues from the sale of homes of $0.7 million, a $2.6 million decrease in land sales and other homebuilding revenues, a $2.0 million decrease in investment properties revenues, and a $0.5 million decrease in collateralized mortgage financing revenues. These decreases were partially offset by a $0.1 million increase in financial services revenues. Homebuilding: Revenues from the sale of homes decreased $7.3 million or 5.1% during the three months ended April 30, 1997, and decreased $0.7 million or 0.3% during the six months ended April 30, 1997 compared to the same periods last year. Revenues from sales of homes are recorded at the time each home is delivered and title and possession have been transferred to the buyer. Information on homes delivered by market area is set forth below: Three Months Ended Six Months Ended April 30, April 30, ------------------- ------------------ 1997 1996 1997 1996 --------- -------- -------- -------- (Dollars in Thousands) Northeast Region: Housing Revenues..... $ 70,678 $ 81,950 $134,118 $137,315 Homes Delivered...... 345 402 675 682 North Carolina: Housing Revenues..... $ 26,341 $ 24,445 $ 48,383 $ 45,507 Homes Delivered...... 139 148 266 272 Florida: Housing Revenues..... $ 17,042 $ 20,890 $ 30,870 $ 38,768 Homes Delivered...... 101 132 180 249 Virginia: Housing Revenues..... $ 3,018 $ 3,200 $ 6,425 $ 7,597 Homes Delivered...... 16 12 34 33 California: Housing Revenues..... $ 18,489 $ 13,019 $ 30,822 $ 22,887 Homes Delivered...... 95 69 152 121 Poland: Housing Revenues..... $ 667 -- $ 732 -- Homes Delivered...... 10 11 Totals: Housing Revenues..... $136,235 $143,504 $251,350 $252,074 Homes Delivered...... 706 763 1,318 1,357 The decreased number of homes delivered for the three and six months ended April 30, 1997, compared to the prior year, was primarily due to the decreases in the Company's Northeast Region and Florida offset somewhat by increases in California. Due to the timing of the opening of new communities in the Northeast Region, fewer homes were delivered during the three months ended April 30, 1997. In Florida, the Company entered the year with a lower backlog of sales contracts at November 1, 1996 than at November 1, 1995. A lower backlog coupled with significantly fewer Florida sales contracts due to a highly competitive market resulted in fewer deliveries. During the three months ended April 30, 1997 the Company has written down certain residential communities, and written off certain residential land options including approval, engineering and capitalized interest costs. The writedowns and write-offs amounted to $13,475,000. In Florida the Company's return on investment has been unsatisfactory. As a result, the Company has decided to reduce its investment in Florida by $25.0 million. To do so on an accelerated basis, it has reduced prices and offered pricing concessions in all Florida residential communities. The Company has 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. Also in the Northeast the Company has decided to sell an optioned property instead of developing a community. 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. See "Notes to Consolidated Financial Statements - Note 5." The Northeast Region also wrote off three option properties and related approval, engineering and capitalized interest costs. In two cases the Company decided to drop the option due to environmental problems. The third option was dropped because the community's proforma profitability did not produce an adequate return on investment commensurate with the risk. Cost of sales include expenses for housing and land and lot sales. A breakout of such expenses for housing sales and housing gross margin is set forth below: Three Months Ended Six Months Ended April 30, April 30, ------------------- ------------------- 1997 1996 1997 1996 -------- -------- -------- -------- (Dollars in Thousands) Sale of Homes................ $136,235 $143,504 $251,350 $252,074 Cost of Sales................ 116,522 120,222 216,305 213,300 -------- -------- -------- -------- Housing Gross Margin......... $ 19,731 $ 23,282 $ 35,045 $ 38,774 ======== ======== ======== ======== Gross Margin Percentage...... 14.4% 16.2% 13.9% 15.4% Cost of Sales expenses as a percentage of home sales revenues are presented below: Three Months Ended Six Months Ended April 30, April 30, ------------------- ------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Sale of Homes................ 100.0% 100.0% 100.0% 100.0% -------- -------- -------- -------- Cost of Sales: Housing, land & development costs.... 76.9% 74.7% 76.9% 75.2% Commissions............ 2.0% 1.6% 2.0% 1.7% Financing concessions.. 0.9% 1.0% 0.9% 1.0% Overheads.............. 5.8% 6.5% 6.3% 6.7% -------- -------- -------- -------- Total Cost of Sales.......... 85.6% 83.8% 86.1% 84.6% -------- -------- -------- -------- Gross Margin................. 14.4% 16.2% 13.9% 15.4% ======== ======== ======== ======== 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 communities and of home types delivered, consolidated quarterly gross margin will fluctuate up or down and may not be representative of the consolidated gross margin for the year. In addition, gross margin percentages are higher in the Northeast Region compared to the Company's other markets. For the three and six months ended April 30, 1997 the Company's gross margin decreased 1.8% and 1.5%, respectively, compared to the same periods last year. This can primarily be attributed to lower gross margins in the Northeast Region, Florida, and North Carolina and the change in geographic product mix. The decline in the Northeast Region's gross margin can be principally attributed to fewer deliveries in the Company's higher margined adult and Jersey Shore communities. In Florida, the gross margin is lower due to increased pricing concessions to accelerate sales. North Carolina's lower gross margin is primarily attributed to a change in product mix, increased lot costs and concessions on started unsold homes. The geographic product mix shifted 5.2% and 1.0% to lower margined homes outside the Northeast Region for the three and six months ended April 30, 1997, respectively, compared to the same periods last year. Selling, general, and administrative expenses were unchanged during the three months ended April 30, 1997 and increased $1.7 million during the six months ended April 30, 1997 compared to the same periods last year. As a percentage of home revenues, such expenses increased to 8.7% for the three months ended April 30, 1997 from 8.2% for the prior year three months, and increased to 8.6% for the six months ended April 30, 1997 from 8.0% for the prior year six months. The dollar and percentage increase in selling, general and administrative expenses is principally due to increased general and administrative expenses in the Northeast Region. Land Sales and Other Revenues: Land sales and other revenues consist primarily of land and lot sales. A breakout of land and lot sales is set forth below: Three Months Ended Six Months Ended April 30, April 30, ------------------ ------------------ 1997 1996 1997 1996 -------- -------- -------- -------- Land and Lot Sales................ $ 1,352 $ 3,476 $ 1,896 $ 4,669 Cost of Sales..................... 1,173 2,919 1,607 3,923 -------- -------- -------- -------- Land and Lot Sales Gross Margin... $ 179 $ 557 $ 289 $ 746 ======== ======== ======== ======== Land and lot sales are incidental to the Company's residential housing operations and are expected to continue in the future but may significantly fluctuate up or down. Financial Services Financial services consist primarily of originating mortgages from sales of the Company's homes, and selling such mortgages in the secondary market. In addition, title insurance activities have been reclassified from other housing operations to financial services, as noted above. For the six months ended April 30, 1997 compared to the six months ended April 30, 1996, the loss resulting from financial services decreased by $0.1 million. This was a direct result of the Company's wholly-owned mortgage banking subsidiary originating mortgages at a lower cost, as well as higher interest rate spreads, offset by reduced revenues due to fewer deliveries by the Company's housing operations. Investment Properties Investment Properties consist of rental properties, property management, and gains or losses from the sale of such property. At April 30, 1997, the Company owned and was leasing two office buildings, three office/warehouse facilities, two retail centers, and two senior citizen rental communities in New Jersey. During the first quarter of fiscal 1996 the Company sold a retail center and reported a pretax profit of $1.9 million. Investment Properties expenses do not include interest expense which is reported below under "Interest." During the three months ended April 30, 1997 the Company announced that it is planning an orderly exit from the investment properties business. The Company plans to sell its investment properties (except for the two senior citizen rental communities) which will generate approximately $35.0 million to be redeployed in its residential homebuilding business. Management believes redeployment of this capital will enhance future profitability of the Company. In accordance with FAS 121, the Company reevaluated such properties as held for sale. Since certain investment properties' carrying amounts exceeded the fair value less selling costs, an impairment loss was recorded against the related asset. These writedowns were in New Jersey and Florida. See "Notes to Consolidated Financial Statements - Note 5." In New Jersey the Company also wrote off an option and related approval, engineering and capitalized interest costs. The writedowns and write-offs of investment properties amounted to $14,446,000. Collateralized Mortgage Financing In the years prior to February 29, 1988 the Company pledged mortgage loans originated by its mortgage banking subsidiaries against collateralized mortgage obligations ("CMO's"). Subsequently the Company discontinued its CMO program. As a result, CMO operations are diminishing as pledged loans are decreasing through principal amortization and loan payoffs, and related bonds are reduced. In recent years, as a result of bonds becoming callable, the Company has also sold a portion of its CMO pledged mortgages. Corporate General and Administrative Corporate general and administration expenses includes the operations at the Company's headquarters in Red Bank, New Jersey. Such expenses include the Company's executive offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, and administration of insurance, quality, and safety. Corporate general and administration expenses dropped $0.3 million for both the three and six months ended April 30, 1997 compared to the same periods last year. As a percentage of total revenues such expenses were approximately 2.6% and 2.7% for the three and six months ended April 30, 1997 and 1996, respectively. Interest Interest expense includes housing, land and lot, and rental properties interest. Interest expense is broken down as follows: Three Months Ended Six Months Ended April 30, April 30, ------------------ ------------------ 1997 1996 1997 1996 -------- -------- -------- -------- Sale of Homes.............. $ 6,586 $ 5,149 $10,658 $ 9,199 Land and Lot Sales......... 134 256 237 296 Rental Properties.......... 1,296 1,391 2,613 2,901 -------- -------- -------- -------- Total...................... $ 8,016 $ 6,796 $13,508 $12,396 ======== ======== ======== ======== Housing interest as a percentage of sale of homes revenues amounted to 4.8% and 4.2% for the three and six months ended April 30, 1997, respectively, and 3.6% and 3.6% for the three and six months ended April 30, 1996, respectively. The increase in the percentage for the three and six months ended April 30, 1997 was primarily the result of the Company discontinuing the capitalization of interest on communities in planning which are not under active development. As a result, interest expense increased $1.0 million in these periods. Other Operations Other operations consist primarily of miscellaneous residential housing operations expenses, amortization of prepaid subordinated note issuance expenses and corporate owned life insurance loan interest. The Company's title operation expenses have been reclassified to financial services. Total Taxes Total tax credits for the three and six months ended April 30, 1997 were $10.8 million and $12.9 million, respectively. 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. Inflation Inflation has a long-term effect on the Company because increasing costs of land, materials and labor result in increasing sale prices of its homes. In general, these price increases have been commensurate with the general rate of inflation in the Company's housing market and have not had a significant adverse effect on the sale of the Company's homes. A significant risk faced by the housing industry generally is that rising house costs, including land and interest costs, will substantially outpace increases in the income of potential purchasers. In recent years, in the price ranges in which it sells homes, the Company has not found this risk to be a significant problem. Inflation has a lesser short-term effect on the Company because the Company generally negotiates fixed price contracts with its subcontractors and material suppliers for the construction of its homes. These prices usually are applicable for a specified number of residential buildings or for a time period of between four to twelve months. Construction costs for residential buildings represent approximately 51% of the Company's total costs and expenses. Item 4. Submission to Matters to a Vote of Security Holders The Company held its annual stockholders meeting on April 15, 1997 at 10:30 a.m. in the Board Room of the American Stock Exchange, 13th floor, 86 Trinity Place, New York, New York. The following matters were votes at the meeting: . Election of all Directors to hold office until the next Annual Meeting of Stockholders. The elected Directors were: .. Kevork S. Hovnanian .. Ara K. Hovnanian .. Paul W. Buchanan .. Arthur Greenbaum .. Desmond P. McDonald .. Peter S. Reinhart .. John J. Schimpf .. J. Larry Sorsby .. Stephen D. Weinroth . Ratification of selection of Ernst & Young, LLP as certified independent accountants for fiscal year ending October 31, 1997. .. Votes For 12,781,331 .. Votes Against 44,234 .. Abstain 77,771 . Approval of amendments to the Company's Cash Bonus Plan. .. Votes For 12,489,547 .. Votes Against 354,070 .. Abstain 59,719 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOVNANIAN ENTERPRISES, INC. (Registrant) DATE: June 13, 1997 /S/KEVORK S. HOVNANIAN Kevork S. Hovnanian, Chairman of the Board and Chief Executive Officer DATE: June 13, 1997 /S/PAUL W. BUCHANAN Paul W. Buchanan, Senior Vice President Corporate Controller