-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AE4xQ2gBRgOfBjROyYhDylyWB/AG1RhlPRxKZDf9YkN2f2ze/T2dfnUZ8usNxDWs hlQY7HGqao1XusmQsrQC3g== 0000357294-03-000020.txt : 20030912 0000357294-03-000020.hdr.sgml : 20030912 20030912155840 ACCESSION NUMBER: 0000357294-03-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030731 FILED AS OF DATE: 20030912 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOVNANIAN ENTERPRISES INC CENTRAL INDEX KEY: 0000357294 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 221851059 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08551 FILM NUMBER: 03894008 BUSINESS ADDRESS: STREET 1: 10 HWY 35 STREET 2: PO BOX 500 CITY: RED BANK STATE: NJ ZIP: 07701 BUSINESS PHONE: 7327477800 MAIL ADDRESS: STREET 1: 10 HWY 35 PO BOX 500 STREET 2: 10 HWY 35 PO BOX 500 CITY: RED BANK STATE: NJ ZIP: 07701 10-Q 1 f10q703.txt FORM 10-Q QUARTER ENDED 7/31/03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10Q (Mark One) [ X ] Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For quarterly period ended JULY 31, 2003 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 of (I.R.S. Employer Incorporation or Organization) Identification No.) l0 Highway 35, P.O. Box 500, Red Bank, N. J. 07701 (Address of Principal Executive Offices) (Zip Code) 732-747-7800 (Registrant's Telephone Number, Including Area Code) Same (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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. 22,596,588 Class A Common Shares and 7,426,051 Class B Common Shares were outstanding as of September 5, 2003 HOVNANIAN ENTERPRISES, INC. FORM 10Q INDEX PAGE NUMBER PART I. Financial Information Item l. Consolidated Financial Statements: Consolidated Balance Sheets at July 31, 2003 (unaudited) and October 31, 2002 4 Consolidated Statements of Income for the three and nine months ended July 31, 2003 and 2002 (unaudited) 6 Consolidated Statements of Stockholders' Equity for the nine months ended July 31, 2003 (unaudited) 7 Consolidated Statements of Cash Flows for the nine months ended July 31, 2003 and 2002 (unaudited) 8 Notes to Consolidated Financial Statements (unaudited) 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk 36 Item 4. Controls and Procedures 37 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K. 37 (a) Exhibit 3(a) Certificate of Incorporation of the Registrant. (1) Exhibit 3(b) Certificate of Amendment of Certificate of Incorporation of the Registrant. Exhibit 3(c) Restated Bylaws of the Registrant. (3) Exhibit 10(a) Third Amended and Restated Credit Agreement dated June 19, 2003. (2) Exhibit 10(b) First Amendment to First Restated K. Hovnanian Mortgage, Inc. Revolving Credit Agreement dated July 31, 2003. Exhibit 31(a) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. Exhibit 31(b) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. Exhibit 32(a) Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes- Oxley Act of 2002. Exhibit 32(b) Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes- Oxley Act of 2002. (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 Annual Report on Form 10-K for the year ended February 28, 1994 of the Registrant. (3) Incorporated by reference to Exhibits to Registration Statement (No. 333-106761) on Form S-3 of the Registrant. (b) Reports on Form 8-K No reports on Form 8-K have been filed during the quarter for which this report is filed. The following report on Form 8-K has been furnished during the quarter for which this report is filed: On May 23, 2003, the Company furnished a report on Form 8-K, Item 9 (pursuant to Item 12 in accordance with SEC Release 33-8216; 34-47583; IC-25983; March 27, 2003), relating to the Company's press release dated May 28, 2003 relating to its preliminary financial results for the second quarter ended April 30, 2003. Signatures 39 HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands)
July 31, October 31, ASSETS 2003 2002 ----------- ----------- (unaudited) Homebuilding: Cash and cash equivalents..................... $ 110,820 $ 262,675 ----------- ----------- Inventories - At the lower of cost or fair value: Sold and unsold homes and lots under development............................... 1,090,908 803,829 ----------- ----------- Land and land options held for future development or sale....................... 280,706 171,081 ----------- ----------- Consolidated Inventory Not Owned: Specific performance options.............. 72,436 67,183 Variable interest entities................ 93,252 Other options............................. 54,377 39,489 ----------- ----------- Total Consolidated Inventory Not Owned.. 220,065 106,672 ----------- ----------- Total Inventories..................... 1,591,679 1,081,582 ----------- ----------- Receivables, deposits, and notes ............. 45,742 26,276 ----------- ----------- Property, plant, and equipment - net.......... 27,110 19,242 ----------- ----------- Senior residential rental properties - net.... 9,215 9,504 ----------- ----------- Prepaid expenses and other assets............. 93,695 86,582 ----------- ----------- Goodwill and indefinite life intangibles...... 82,283 82,275 ----------- ----------- Definite life intangibles..................... 59,244 ----------- ----------- Total Homebuilding.................... 2,019,788 1,568,136 ----------- ----------- Financial Services: Cash and cash equivalents..................... 8,819 7,315 Mortgage loans held for sale.................. 152,211 91,451 Other assets.................................. 3,119 11,226 ----------- ----------- Total Financial Services.............. 164,149 109,992 ----------- ----------- Income Taxes Receivable - Including deferred tax benefits...................................... 11,717 ----------- ----------- Total Assets.................................... $2,195,654 $1,678,128 =========== =========== See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands Except Per Share Data)
July 31, October 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002 ----------- ----------- (unaudited) Homebuilding: Nonrecourse land mortgages..................... $ 29,173 $ 11,593 Accounts payable and other liabilities......... 211,054 198,290 Customers' deposits............................ 61,263 40,422 Nonrecourse mortgages secured by operating properties................................... 3,177 3,274 Liabilities from inventory not owned........... 116,597 97,983 ----------- ----------- Total Homebuilding......................... 421,264 351,562 ----------- ----------- Financial Services: Accounts payable and other liabilities......... 6,641 4,857 Mortgage warehouse line of credit.............. 137,039 85,498 ----------- ----------- Total Financial Services................... 143,680 90,355 ----------- ----------- Notes Payable: Term loan...................................... 115,000 115,000 Senior notes................................... 387,029 396,390 Senior subordinated notes...................... 300,000 150,000 Accrued interest............................... 17,738 9,555 ----------- ----------- Total Notes Payable........................ 819,767 670,945 ----------- ----------- Income Taxes Payable - Net of deferred tax benefits. 777 ----------- ----------- Total Liabilities.......................... 1,384,711 1,113,639 ----------- ----------- Minority interest from inventory not owned....... 80,137 ----------- ----------- Minority interest from consolidated joint ventures.. 1,860 1,940 ----------- ----------- 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 27,875,001 shares at July 31, 2003 and 27,452,481 shares at October 31, 2002 (including 5,342,599 shares at July 31, 2003 and 4,343,240 shares at October 31, 2002 held in Treasury)................................. 279 275 Common Stock,Class B,$.01 par value (convertible to Class A at time of sale) authorized 13,000,000 shares; issued 7,772,342 shares at July 31, 2003 and 7,788,061 shares at October 31, 2002 (including 345,874 shares at July 31, 2003 and October 31, 2002 held in Treasury)........... 78 78 Paid in Capital................................ 160,479 152,977 Retained Earnings.............................. 613,933 447,802 Deferred Compensation.......................... (21) Treasury Stock - at cost....................... (45,823) (38,562) ----------- ----------- Total Stockholders' Equity................. 728,946 562,549 ----------- ----------- Total Liabilities and Stockholders' Equity....... $2,195,654 $1,678,128 =========== =========== See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Per Share Data) (Unaudited)
Three Months Ended Nine Months Ended July 31, July 31, -------------------- ---------------------- 2003 2002 2003 2002 --------- --------- ---------- ---------- Revenues: Homebuilding: Sale of homes......................$ 830,734 $ 681,329 $2,104,788 $1,656,813 Land sales and other revenues...... 4,441 12,651 16,445 34,564 --------- --------- ---------- ---------- Total Homebuilding............... 835,175 693,980 2,121,233 1,691,377 Financial Services................... 13,642 10,656 35,036 28,319 --------- --------- ---------- ---------- Total Revenues................... 848,817 704,636 2,156,269 1,719,696 --------- --------- ---------- ---------- Expenses: Homebuilding: Cost of sales...................... 621,897 539,676 1,582,294 1,327,685 Selling, general and administrative 66,136 52,882 180,035 138,177 Inventory impairment loss.......... 149 426 1,633 2,755 --------- --------- ---------- ---------- Total Homebuilding............... 688,182 592,984 1,763,962 1,468,617 Financial Services................... 7,635 5,694 19,629 16,156 Corporate General and Administrative. 16,978 12,195 45,026 33,700 Interest............................. 17,204 15,849 44,308 42,353 Other Operations..................... 9,010 3,953 17,972 13,539 Restructuring Charges/Asset Writeoff. 12,000 12,000 --------- --------- ---------- ---------- Total Expenses................... 739,009 642,675 1,890,897 1,586,365 --------- --------- ---------- ---------- Income Before Income Taxes............. 109,808 61,961 265,372 133,331 --------- --------- ---------- ---------- State and Federal Income Taxes: State................................ 5,439 1,679 11,874 5,086 Federal.............................. 35,567 21,095 87,367 44,987 --------- --------- ---------- ---------- Total Taxes........................ 41,006 22,774 99,241 50,073 --------- --------- ---------- ---------- Net Income.............................$ 68,802 $ 39,187 $ 166,131 $ 83,258 ========= ========= ========== ========== Per Share Data: Basic: Income per common share..............$ 2.25 $ 1.27 $ 5.35 $ 2.76 ========= ========= ========== ========== Weighted average number of common shares outstanding................. 30,630 30,877 31,044 30,188 Assuming dilution: Income per common share..............$ 2.11 $ 1.20 $ 5.06 $ 2.61 ========= ========= ========== ========== Weighted average number of common shares outstanding................ 32,543 32,730 32,806 31,922 See notes to consolidated financial statements (unaudited).
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 Deferred Treasury Outstanding Amount Outstanding Amount Capital Earnings Comp Stock Total ----------- ------ ----------- ------ ------- -------- -------- -------- ------ - --- Balance, October 31, 2002 23,109,241 $275 7,442,187 $78 $152,977 $447,802 $ (21) $(38,562) $ 562,549 Shares returned in connnection with prior year acquisition........ (749,359) Sale of common stock under Employee stock option plan.................... 318,660 3 7,421 7,424 Stock bonus plan.......... 88,141 1 81 82 Conversion of Class B to Class A Common Stock.... 15,719 (15,719) Deferred compensation..... 21 21 Treasury stock purchases.. (250,000) (7,261) (7,261) Net Income................ 166,131 166,131 ----------- ------ ----------- ------ ------- -------- -------- -------- --------- Balance, July 31, 2003.... 22,532,402 $279 7,426,468 $78 $160,479 $613,933 $ -- $(45,823) $ 728,946 (Unaudited) =========== ====== =========== ====== ======= ======== ======== ======== ========= See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands - Unaudited)
Nine Months Ended July 31, --------------------- 2003 2002 ---------- ---------- Cash Flows From Operating Activities: Net Income.......................................... $ 166,131 $ 83,258 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation.................................... 4,946 5,003 Amortization of definite life intangibles....... 5,465 - Loss on sale and retirement of property and assets.................................... 44 11,858 Deferred income taxes........................... (6,123) (5,742) Impairment losses............................... 1,633 2,755 Decrease (increase) in assets: Mortgage notes receivable..................... (59,049) 43,162 Receivables, prepaids and other assets........ (14,444) 9,512 Inventories................................... (338,374) (80,489) Increase (decrease) in liabilities: State and Federal income taxes................ 403 5,208 Tax effect from exercise of stock options..... (6,774) (1,074) Customers' deposits........................... 21,352 4,102 Interest and other accrued liabilities........ 14,719 17,960 Post development completion costs............. 1,952 (901) Accounts payable.............................. (11,373) 7,769 ---------- ---------- Net cash (used in) provided by operating activities................................ (219,492) 102,381 ---------- ---------- Cash Flows From Investing Activities: Net Proceeds from sale of property and assets....... 482 611 Purchase of property,equipment and other fixed assets and acquisitions of homebuilding companies. (141,796) (142,860) Distribution from (investment in and advance to) unconsolidated affiliates......................... 1,150 (8,679) ---------- ---------- Net cash (used in) investing activities..... (140,164) (150,928) ---------- ---------- Cash Flows From Financing Activities: Proceeds from mortgages and notes...................1,090,816 1,587,017 Proceeds from senior debt........................... 99,152 Proceeds from senior subordinated debt.............. 150,000 150,000 Principal payments on mortgages and notes..........(1,022,006)(1,603,320) Principal payments on senior debt................... (9,750) (99,747) Purchase of treasury stock.......................... (7,261) (1,089) Proceeds from sale of stock and employee stock plan. 7,506 4,022 ---------- ---------- Net cash provided by financing activities... 209,305 136,035 ---------- ---------- Net (Decrease) Increase In Cash and Cash Equivalents.. (150,351) 87,488 Cash and Cash Equivalents Balance, Beginning Of Period................................. 269,990 16,149 ---------- ---------- Cash and Cash Equivalents Balance, End Of Period.....$ 119,639 $ 103,637 ========== ========== Supplemental Disclosures of Cash Flow Cash paid during the period for: Interest..........................................$ 41,198 $ 39,450 ========== ========== Income taxes......................................$ 104,962 $ 52,777 ========== ========== Supplemental disclosures of noncash operating activities: Consolidated Inventory Not Owned: Specific performance options......................$ 64,743 $ 24,710 Variable interest entities........................ 81,537 Other options..................................... 50,486 ---------- ---------- Total Inventory Not Owned...........................$ 196,766 $ 24,710 ========== ========== See notes to consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments for interim periods presented have been made, which include only normal recurring accruals and deferrals necessary for a fair presentation of consolidated financial position, results of operations, and changes in cash flows. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and these differences could have a significant impact on the financial statements. Results for the interim periods are not necessarily indicative of the results which might be expected for a full year. The balance sheet at October 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. 2. Stock Option Plan - We adopted Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25") and related Interpretations in Accounting for our employee stock options. Under APB No. 25, no compensation expense is recognized because the exercise price of our Company's employee stock options equals the market price of the underlying stock on the date of the grant. Pro forma information regarding net income and earnings per share is to be calculated as if we had accounted for our stock options under the fair value method of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation". The fair value for those options is established at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2003 and 2002 respectively: risk-free interest rate of 4.3% and 4.3%, respectively; dividend yield of zero; volatility factor of the expected market price of our common stock of 0.43 and 0.43, respectively; and a weighted-average expected life of the option of 5.1 and 5.5 years, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of our traded options, and changes in the subjective input assumptions can materially affect the fair value estimate, management believes the existing models do not necessarily provide a reliable measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Our pro forma information follows (dollars in thousands except for earnings per share information): Three Months Ended Nine Months Ended ------------------- ------------------- July July July July 31, 2003 31, 2002 31, 2003 31, 2002 --------- -------- -------- -------- Net income to common shareholders; as reported.........................$ 68,802 $ 39,187 $166,131 $ 83,258 Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of minority interest 539 140 1,515 420 Pro forma net income..................$ 68,263 $ 39,047 $164,616 $ 82,838 ========= ======== ======== ======== Pro forma basic earnings per share....$ 2.23 $ 1.26 $ 5.30 $ 2.74 ========= ======== ======== ======== Basic earnings per share as reported..$ 2.25 $ 1.27 $ 5.35 $ 2.76 ========= ======== ======== ======== Pro forma diluted earnings per share..$ 2.10 $ 1.19 $ 5.02 $ 2.60 ========= ======== ======== ======== Diluted earnings per share as Reported............................$ 2.11 $ 1.20 $ 5.06 $ 2.61 ========= ======== ======== ======== 3. Interest costs incurred, expensed and capitalized were: Three Months Ended Nine Months Ended July 31, July 31, ------------------- ------------------- 2003 2002 2003 2002 -------- -------- -------- -------- (Dollars in Thousands) Interest Capitalized at Beginning of Period.........$ 25,480 $ 24,876 $ 22,159 $ 25,124 Plus Interest Incurred(1)(2).. 17,807 15,746 48,232 42,002 Less Interest Expensed(2)..... 17,204 15,849 44,308 42,353 -------- -------- -------- -------- Interest Capitalized at End of Period (2).......... $ 26,083 $ 24,773 $ 26,083 $ 24,773 ======== ======== ======== ======== (1) Data does not include interest incurred by our mortgage and finance subsidiaries. (2) Represents interest on borrowings for construction, land and development costs which are charged to interest expense when homes are delivered or when land is not under active development. 4. Homebuilding accumulated depreciation at July 31, 2003 and October 31, 2002 amounted to $22.0 million and $18.5 milion, respectively. Senior residential rental property accumulated depreciation at July 31, 2003 and October 31, 2002 amounted to $3.4 million and $3.1 million, respectively. 5. In accordance with Financial Accounting Standards No. 144 ("SFAS 144") "Accounting for the Impairment of or Disposal of Long Lived Assets", we record 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 carrying amounts. In addition, from time to time, we will write off certain residential land options including approval, engineering and capitalized interest costs for land management decided not to purchase. We wrote off such costs amounting to $1.6 million during the nine months ended July 31, 2003. During the nine months ended July 31, 2002 we wrote off such costs in the amount of $1.6 million in Poland, $0.8 million due to the exit of our Mid-South operations, and $0.4 million in other geographical areas. Residential inventory impairment losses and option write-offs are reported in the Consolidated Statements of Income as "Homebuilding- Inventory Impairment Loss." 6. We are involved in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on us. 7. As of July 31, 2003 and October 31, 2002, respectively, we are obligated under various performance letters of credit amounting to $132.9 million and $100.0 million. 8. We have an unsecured Revolving Credit Agreement (the "Agreement") with a group of banks which was amended and restated on June 19, 2003. Pursuant to the agreement, our credit line increased to $590.0 million. The Agreement bears an expiration date of July 2006 and interest is payable monthly and at various rates of either the prime rate plus 0.275% or LIBOR plus 1.75%. In addition, we pay a fee equal to 0.350% per annum on the weighted average unused portion of the line. As of July 31, 2003 and October 31, 2002, there were no borrowings under the Agreement. Our mortgage warehouse line of credit was amended and restated on July 31, 2003. Pursuant to the agreement, our credit line matures in July 2004 and we have the option to borrow up to $200.0 million. Interest is payable monthly at the Federal Funds Rate plus 1.375%. As of July 31, 2003 and October 31, 2002 borrowings were $137.0 million and $85.5 million, respectively. 9. On May 9, 2003, we issued $150 million 7 3/4% Senior Subordinated Notes due 2013. The net proceeds of the note offering were used to repay the current outstanding indebtedness under the Agreement and the remainder for general corporate purposes. During the third quarter ended July 31, 2003 we paid down $9.8 million of our $150 million 10 1/2% Senior Notes due 2007. At July 31, 2003, our long-term debt consisted of: $140.3 million 10 1/2% Senior Notes due 2007, $150 million 9 1/8% Senior Notes due 2009, $100 million 8% Senior Notes due 2012 (aggregating $387 million, net of discount), $150 million 8 7/8% Senior Subordinated Notes due 2012, $150 million 7 3/4% Senior Subordinated Notes due 2013 and a $165 million Term Loan due 2007 which bears interest at either the prime rate plus 1.25% or LIBOR plus 2.5%. As of July 31, 2003 borrowings under the Term Loan were $115 million. 10. Per Share Calculations - Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share" requires the presentation of basic earnings per share and diluted earnings per share. Basic earnings per share is computed using the weighted average number of shares outstanding. Diluted earnings per common share is computed using the basic weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock. 11. Recent Accounting Pronouncements - In April 2002, the Financial Accounting Standards Board issued (SFAS) No. 145, "Reported Gains and Losses from Extinguishment of Debt", which rescinded SFAS No. 4, No. 44, and No. 64 and amended SFAS No. 13. The new standard addresses the income statement classification of gains or losses from the extinguishment of debt and criteria for classification as extraordinary items. We adopted SFAS No. 145 on November 1, 2002. We reclassified a $0.9 million extraordinary loss from extinguishment of debt to other operations and a $0.3 million reduction to State and Federal Income Taxes on our Consolidated Statements of Income to conform to the new presentation. In June 2002, the Financial Accounting Standards Board issued (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring)". SFAS No. 146 requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred as opposed to when the entity commits to an exit plan as prescribed under EITF No. 94-3. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We adopted SFAS No. 146 on January 1, 2003. The initial adoption of SFAS 146 did not have a material effect on the financial position or results of operations of our Company. However, SFAS No. 146 could impact the amount or timing of liabilities to be recognized in the event that we engage in exit or disposal activities in the future. In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor's obligations does not apply to product warranties. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of the initial recognition and initial measurement provisions of FIN 45 did not have a material effect on our financial position or results of operations. Our disclosure of guarantees is included in Note 14 to the consolidated financial statements - unaudited. In December 2002, the Financial Accounting Standards Board issued (SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which amends (SFAS) No. 123. The new standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the affect of the method used on reported results. We have not elected to change to the fair value based method of accounting for stock-based employee compensation. We adopted the disclosure provisions of SFAS No. 148 in our second fiscal quarter ending April 30, 2003. Our disclosure of accounting for stock-based compensation is included in Note 2 to the consolidated financial statements - unaudited. In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities" an interpretation of ARB No. 51 ("FIN 46"). A Variable Interest Entity ("VIE") is created when (i) the equity investment at risk is not sufficient to permit the entity from financing its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a VIE, pursuant to FIN 46, an enterprise that absorbs a majority of the expected losses of the VIE is considered the primary beneficiary and must consolidate the VIE. FIN 46 is effective immediately for VIE's created after January 31, 2003. For VIE's created before January 31, 2003, FIN 46 must be applied at the beginning of the first interim or annual reporting period beginning after June 15, 2003. Based on the provisions of FIN 46, we have concluded that whenever we option land or lots from an entity and pay a non-refundable deposit, a VIE is created under condition (ii) (b) and (c) of the previous paragraph. We have been deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an entity's expected theoretical losses if they occur. For each VIE created we will compute expected losses and residual returns based on the probability of future cash flows as outlined in FIN 46. If we are deemed to be the primary beneficiary of the VIE we will consolidate it on our balance sheet. The fair value of the VIE's inventory will be reported as "Consolidated Inventory Not Owned - Variable Interest Entities". Management believes FIN 46 was not clearly thought out for application in the homebuilding industry for land and lot options. Under FIN 46, we can have an option and put down a small deposit as a percentage of the purchase price and still have to consolidate the entity. Our exposure to loss as a result of our involvement with the VIE is only the deposit, not it's total assets consolidated on the balance sheet. In certain cases we will have to place inventory on our balance sheet the VIE has optioned to other developers. In addition, if the VIE has creditors, it's debt will be placed on our balance sheet even though the creditors have no recourse against our Company. Based on these observations we believe consolidating VIE's based on land and lot option deposits does not reflect the economic realities or risks of owning and developing land. At July 31, 2003 we consolidated nine VIE's created from February 1, 2003 to July 31, 2003 as a result of our option to purchase land or lots from the selling entities. We paid cash or issued letters of credit deposits to these nine VIE's totaling $11.7 million. Our option deposits represent our maximum exposure to loss. The fair value of the property owned by the VIE's was $93.2 million of which $6.2 million was not optioned to our Company. We were able to ascertain that one VIE had third party debt amounting to $1.4 million. Since we could not get the remainder of the selling entities to provide us with any financial information, the fair value of the optioned property less our cash deposits and liabilities from inventory not owned, which totaled $80.1 million, was reported on the balance sheet as Minority Interest. Creditors, if any, of these VIE's have no recourse against our Company. We will continue to secure land and lots using options. Including the deposits with the nine VIE's above, at July 31, 2003 we have total cash and letters of credit deposits amounting to approximately $180.2 million to purchase land and lots with a total purchase price of $2.4 billion. Not all our deposits are with VIE's. The maximum exposure to loss is limited to the deposits although some deposits are refundable at our request or refundable if certain conditions are not met. We are in the process of evaluating all option purchase agreements in effect as of January 31, 2003. Options with VIE's where we are the primary beneficiary will be consolidated by our fiscal year end October 31, 2003. 12. On November 1, 2002 and December 31, 2002 we acquired two Houston homebuilding companies, for an approximate aggregate purchase price of $100 million. On April 9, 2003 we acquired a build-on-your-own- lot homebuilder based in Canton, Ohio. On August 8, 2003, we acquired a homebuilder in Phoenix, Arizona. All of these acquisitions were accounted for as a purchase, with the results of operations of these entities included in our consolidated financial statements as of the date of acquisition. The purchase price was allocated based on estimated fair value at the date of acquisition. As a result, estimated definite life intangible assets of $63.5 million were recorded on the consolidated balance sheet. We expect to amortize the definite life intangibles over their estimated lives. 13. Intangible Assets - As reported on the balance sheet we have goodwill and indefinite life intangibles amounting to $82.3 million and definite life intangibles amounting to $59.2 million. Our intangible assets consist of goodwill, tradenames, architectural designs, and contractual agreements. In accordance with the Financial Accounting Standards No. 142 ("SFAS No. 142") "Goodwill and Other Intangible Assets"; we no longer amortize goodwill or indefinite life intangibles, but instead assess them periodically for impairment. We are amortizing the definite life intangibles over their expected useful life. The amortization expense of $3.2 million and $5.5 million is reported in other operations on our Consolidated Statement of Income for the three and nine months ended July 31, 2003, respectively. No amortization expense was recorded during the three and nine months ended July 31, 2002, respectively. 14. Hovnanian Enterprises, Inc., the parent company (the "Parent"), is the issuer of publicly traded common stock. One of its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc. (the "Subsidiary Issuer"), acts as a finance entity that as of July 31, 2003 had issued and outstanding approximately $300 million senior subordinated notes, $390 million face value senior notes, a term loan with an outstanding balance of $115 million, and a revolving credit agreement with no outstanding balance. The senior subordinated notes, senior notes, the revolving credit agreement, and term loan are fully and unconditionally guaranteed by the Parent. In addition to the Parent, each of the wholly owned subsidiaries of the Parent other than the Subsidiary Issuer (collectively, the "Guarantor Subsidiaries"), with the exception of various subsidiaries formerly engaged in the issuance of collateralized mortgage obligations, a mortgage lending subsidiary, a subsidiary engaged in homebuilding activity in Poland, our title subsidiaries, and joint ventures (collectively the "Non-Guarantor Subsidiaries"), have guaranteed fully and unconditionally, on a joint and several basis, the obligation of the Subsidiary Issuer to pay principal and interest under the senior notes, senior subordinated notes, the term loan and the Agreement. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries we have included the accompanying consolidating condensed financial statements. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. The following consolidating condensed financial information present the results of operations, financial position, and cash flows of (i) the Parent, (ii) the Subsidiary Issuer, (iii) the Guarantor Subsidiaries of the Parent, (iv) the Non-Guarantor Subsidiaries, and (v) the eliminations to arrive at the information for the Parent on a consolidated basis. HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED BALANCE SHEET JULY 31, 2003 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---------- ---------- ASSETS Homebuilding......................$ 26 $ 92,122 $1,904,126 $ 23,514 $ $2,019,788 Financial Services................ 109 164,040 164,149 Income Taxes (Payable) Receivable. (12,316) (1,240) 26,068 (795) 11,717 Investments in and amounts due to and from consolidated subsidiaries.................... 741,236 741,658 (1,009,648) (24,151) (449,095) -------- ---------- ---------- ------------ ---------- ---------- Total Assets......................$728,946 $ 832,540 $ 920,655 $ 162,608 $(449,095) $2,195,654 ======== ========== ========== ============ ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Homebuilding......................$ $ $ 421,200 $ 64 $ $ 421,264 Financial Services................ 143,680 143,680 Notes Payable..................... 819,055 712 819,767 Income Taxes Payable(Receivables) Minority Interest................. 80,137 1,860 81,997 Stockholders' Equity.............. 728,946 13,485 418,606 17,004 (449,095) 728,946 -------- ---------- ---------- ------------ ---------- ---------- Total Liabilities and Stockholders' Equity..........................$728,946 $ 832,540 $ 920,655 $ 162,608 $(449,095) $2,195,654 ======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED BALANCE SHEET OCTOBER 31, 2002 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---------- ---------- Assets Homebuilding.......................$ 1,501 $ 261,107 $1,269,514 $ 36,014 $ $1,568,136 Financial Services................. 111 109,881 109,992 Income Taxes (Payable) Receivable.. Investments in and amounts due to and from consolidated subsidiaries..................... 584,103 432,130 (630,186) (32,376) (353,671) -------- ---------- ---------- ------------ ---------- ---------- Total Assets.......................$585,604 $ 693,237 $ 639,439 $ 113,519 $ (353,671)$1,678,128 ======== ========== ========== ============ ========== ========== Liabilities Homebuilding.......................$ $ 35,736 $ 312,231 $ 3,595 $ $ 351,562 Financial Services................. 90,355 90,355 Notes Payable...................... 661,390 2,345 7,210 670,945 Income Taxes Payable (Receivable).. 23,055 (3,147) (18,184) (947) 777 Minority Interest.................. 1,940 1,940 Stockholders' Equity............... 562,549 (742) 343,047 11,366 (353,671) 562,549 -------- ---------- ---------- ------------ ---------- ---------- Total Liabilities and Stockholders' Equity...........................$585,604 $ 693,237 $ 639,439 $ 113,519 $ (353,671)$1,678,128 ======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS THREE MONTHS ENDED JULY 31, 2003 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---------- ---------- Revenues: Homebuilding.....................$ $ (45)$ 835,191 $ 4 $ 25 $ 835,175 Financial Services............... 2,033 11,609 13,642 Intercompany Charges............. (61,982) 51,085 10,897 Equity In Pretax Income of consolidated Subsidiaries...... 109,808 (109,808) -------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ $109,808 $ (62,027)$ 888,309 $ 11,613 $ (98,886)$ 848,817 -------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... (84,286) 820,362 142 (4,844) 731,374 Financial Services............... 772 7,254 (391) 7,635 -------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. (84,286) 821,134 7,396 (5,235) 739,009 -------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes......... 109,808 22,259 67,175 4,217 (93,651) 109,808 State and Federal Income Taxes..... 41,006 8,420 25,121 1,812 (35,353) 41,006 -------- ---------- ---------- ------------ ---------- ---------- Net Income ....................... $ 68,802 $ 13,839$ 42,054 $ 2,405 $ (58,298)$ 68,802 ======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS THREE MONTHS ENDED JULY 31, 2002 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- Revenues: Homebuilding.....................$ $ 295 $ 693,357 $ 7,807 $ (7,479) $ 693,980 Financial Services............... 2,270 8,386 10,656 Intercompany Charges............. 54,869 (10,326) (44,543) Equity In Pretax Income of Consolidated Subsidiaries...... 61,961 (61,961) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ $61,961 $ 55,164 $ 685,301 $ 16,193 $(113,983) $ 704,636 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 55,164 644,464 322 (62,969) 636,981 Financial Services............... 683 5,266 (255) 5,694 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 55,164 645,147 5,588 (63,224) 642,675 ------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes......... 61,961 40,154 10,605 (50,759) 61,961 State and Federal Income Taxes..... 22,774 (26) 14,971 3,908 (18,853) 22,774 ------- ---------- ---------- ------------ ---------- ---------- Net Income ....................... $39,187 $ 26 $ 25,183 $ 6,697 $ (31,906) $ 39,187 ======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS NINE MONTHS ENDED JULY 31, 2003 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- ---------- ---------- ------------ ---------- ---------- Revenues: Homebuilding.....................$ $ 593 $2,120,611 $ 14 $ 15 $2,121,233 Financial Services................ 5,496 29,540 35,036 Intercompany Charges............. 23,389 62,544 (85,933) Equity In Pretax Income of Consolidated Subsidiaries...... 265,372 (265,372) -------- ---------- ---------- ------------ ---------- ---------- Total Revenues................ $265,372 $ 23,982 $2,188,651 $ 29,554 $ (351,290)$2,156,269 -------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 1,723 1,961,389 361 (92,205) 1,871,268 Financial Services............... 1,907 18,971 (1,249) 19,629 -------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 1,723 1,963,296 19,332 (93,454) 1,890,897 -------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes......... 265,372 22,259 225,355 10,222 (257,836) 265,372 State and Federal Income Taxes..... 99,241 7,791 84,552 4,261 (96,604) 99,241 -------- ---------- ---------- ------------ ---------- ---------- Net Income.........................$166,131 $ 14,468 $ 140,803 $ 5,961 $ (161,232)$ 166,131 ======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS NINE MONTHS ENDED JULY 31, 2002 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated ------- ---------- ---------- ------------ ---------- ---------- Revenues: Homebuilding....................$ $ 565 $1,689,257 $ 20,475 $ (18,920) $1,691,377 Financial Services............... 4,956 23,363 28,319 Intercompany Charges............. 119,275 (3,663) (115,612) Equity In Pretax Income of Consolidated Subsidiaries......133,331 (133,331) ------- ---------- ---------- ------------ ---------- ---------- Total Revenues................$133,331 $119,840 $1,690,550 $ 43,838 $(267,863) $1,719,696 ------- ---------- ---------- ------------ ---------- ---------- Expenses: Homebuilding..................... 119,840 1,588,505 1,981 (140,117) 1,570,209 Financial Services............... 1,768 15,437 (1,049) 16,156 ------- ---------- ---------- ------------ ---------- ---------- Total Expenses................. 119,840 1,590,273 17,418 (141,166) 1,586,365 ------- ---------- ---------- ------------ ---------- ---------- Income Before Income Taxes.........133,331 100,277 26,420 (126,697) 133,331 State and Federal Income Taxes..... 50,073 (180) 37,982 10,058 (47,860) 50,073 ------- ---------- ---------- ------------ ---------- ---------- Net Income.........................$83,258 $ 180 $ 62,295 $ 16,362 $ (78,837) $ 83,258 ======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS NINE MONTHS ENDED JULY 31, 2003 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ ---------- ---------- Cash Flows From Operating Activities: Net Income.........................$166,131 $ 14,468 $ 140,803 $ 5,961 $ (161,232)$ 166,131 Adjustments to reconcile net income to net cash (Used In) Provided By operating activities.......... (2,534) 10,709 (510,053) (44,977) 161,232 (385,623) -------- --------- ---------- ------------ ---------- ---------- Net Cash (Used In) Provided By Operating Activities........... 163,597 25,177 (369,250) (39,016) (219,492) Net Cash (Used In) Provided By Investing Activities............... (7,588) (132,321) (255) (140,164) Net Cash (Used In) Provided By Financing Activities............... (7,261) 140,639 24,990 50,937 209,305 Intercompany Investing and Financing Activities - Net...................(148,743) (309,555) 468,463 (10,165) -------- --------- ---------- ------------ ---------- ---------- Net Increase (Decrease) In Cash and Cash Equivalents................... 5 (143,739) (8,118) 1,501 (150,351) Cash and Cash Equivalents Balance, Beginning of Period................ 10 218,844 43,689 7,447 269,990 -------- --------- ---------- ------------ ---------- ---------- Cash and Cash Equivalents Balance, End of Period......................$ 15 $ 75,105 $ 35,571 $ 8,948 $ $ 119,639 ======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS NINE MONTHS ENDED JULY 31, 2002 (Thousands of Dollars)
Guarantor Non- Subsidiary Subsid- Guarantor Elimin- Consol- Parent Issuer iaries Subsidiaries ations idated -------- --------- ---------- ------------ ---------- ---------- Cash Flows From Operating Activities: Net Income.........................$ 83,258 $ (402) $ 63,190 $ 16,362 $ (79,150) $ 83,258 Adjustments to reconcile net income to net cash (Used In) Provided By operating activities.......... 99,463 11,817 (182,793) 11,486 79,150 19,123 -------- --------- ---------- ------------ ---------- ---------- Net Cash (Used In) Provided By Operating Activities........... 182,721 11,415 (119,603) 27,848 102,381 Net Cash (Used In) Provided By Investing Activities............... (46,087) (1,929) (103,096) 184 (150,928) Net Cash (Used In) Provided By Financing Activities............... (1,089) 264,726 (85,867) (41,735) 136,035 Intercompany Investing and Financing Activities - Net...................(135,545) (188,403) 310,301 13,647 -------- --------- ---------- ------------ ---------- ---------- Net Increase (Decrease) In Cash and Cash Equivalents................... 85,809 1,735 (56) 87,488 Cash and Cash Equivalents Balance, Beginning of Period................ 10 (5,840) 15,616 6,363 16,149 -------- --------- ---------- ------------ ---------- ---------- Cash and Cash Equivalents Balance, End of Period......................$ 10 $ 79,969 $ 17,351 $ 6,307 $ $ 103,637 ======== ========= ========== ============ ========== ==========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES Management believes that the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: Business Combinations - When we make an acquisition of another company, we use the purchase method of accounting in accordance with the Statement of Financial Accounting Standards (SFAS) No. 141 "Business Combinations". Under SFAS No. 141 (for acquisitions subsequent to June 30, 2001) and APB 16 (for acquisitions prior to June 30, 2001) we record as our cost the estimated fair value of the acquired assets less liabilities assumed. Any difference between the cost of an acquired company and the sum of the fair values of tangible assets less liabilities is recorded as goodwill, indefinite or definite life intangibles. The reported income of an acquired company includes the operations of the acquired company from the date of acquisition. Income Recognition from Home and Land Sales - Income from home and land sales are recorded when title is conveyed to the buyer, adequate cash payment has been received and there is no continued involvement. Income Recognition from Mortgage Loans - Profits and losses relating to the sale of mortgage loans are recognized when legal control passes to the buyer and the sales price is collected. 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 discounted future cash flows generated from 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 the Statement of Financial Accounting Standards (SFAS) No. 144 "Accounting for the Impairment of or Disposal of Long- Lived Assets" 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 are allocated based on buildable acres to product types within each community, then amortized equally based upon the number of homes to be constructed in the community. Insurance Deductible Reserves - Our deductible is $150,000 per occurrence for our worker's compensation and general liability insurance. Reserves have been established based upon actuarial analysis of estimated future losses. Interest - Costs related to properties under development are capitalized during the land development and home construction period and expensed along with the associated cost of sales as the related inventories are sold. Costs related to properties not under development are charged to interest expense. Land Options - Costs are capitalized when incurred and either included as part of the purchase price when the land is acquired or charged to operations when we determine we will not exercise the option. In accordance with FIN 46, SFAS 49, SFAS 98, and EITF 97-10 we record specific performance options, options with variable interest entities and other options under Consolidated Inventory Not Owned with the offset to Liabilities from inventory not owned and Minority interest from inventory not owned on our Consolidated Balance Sheets. Intangible Assets - The intangible assets recorded on our balance sheet consist of goodwill, tradenames, architectural designs and contractual agreements with both definite and indefinite lives resulting from company acquisitions. In accordance with the Financial Accounting Standards No. 142 ("SFAS No. 142") " Goodwill and Other Intangible Assets", we no longer amortize goodwill or indefinite life intangibles, but instead assess them periodically for impairment. We are amortizing the definite life intangibles over their expected useful life. Post Development Completion Costs - In those instances where a development is substantially completed and sold and we have additional construction work to be incurred, an estimated liability is provided to cover the cost of such work and is recorded in Accounts Payable and other liabilities in the Consolidated Balance Sheets. CAPITAL RESOURCES AND LIQUIDITY Our cash uses during the nine months ended July 31, 2003 were for operating expenses, increases in housing inventories, construction, income taxes, interest, the repurchase of common stock, and the acquisition of three homebuilders. We provided for our cash requirements from housing and land sales, the revolving credit facility, the issuance of $150 million Senior Subordinated Notes, financial service revenues, and other revenues. We believe that these sources of cash are sufficient to finance our working capital requirements and other needs. On December 31, 2000, our stock repurchase program to purchase up to 4 million shares of Class A Common Stock expired. As of December 31, 2000, 3,391,047 shares had been purchased under this program. On July 3, 2001, our Board of Directors authorized a revision to our stock repurchase program to purchase up to 2 million shares of Class A Common Stock. As of July 31, 2003, 856,319 shares have been purchased under this program of which 250,000 were repurchased during the nine months ended July 31, 2003. Our homebuilding bank borrowings are made pursuant to an amended and restated revolving credit agreement (the "Agreement") that provides a revolving credit line and letter of credit line of $590 million through July 2006. Interest is payable monthly and at various rates of either the prime rate plus 0.275% or Libor plus 1.75%. In addition, we pay a fee equal to 0.350% per annum on the weighted average unused portion of the line. We believe that we will be able either to extend the Agreement beyond July 2006 or negotiate a replacement facility, but there can be no assurance of such extension or replacement facility. We currently are in compliance and intend to maintain compliance with the covenants under the Agreement. Each of our significant subsidiaries except for our financial services subsidiaries is a guarantor under the revolving credit agreement. As of July 31, 2003, there were no borrowings under the Agreement. At July 31, 2003 we had $390.3 million of outstanding senior debt ($387 million, net of discount), comprised of $140.3 million 10 1/2% Senior Notes due 2007, $150 million 9 1/8% Senior Notes due 2009, and $100 million 8% Senior Notes due 2012. At July 31, 2003, we had $300 million outstanding senior subordinated debt comprised of $150 million 8 7/8% Senior Subordinated Notes due 2012, and $150 million 7 3/4% Senior Subordinated Notes due 2013. Each of our significant subsidiaries except for our financial services subsidiaries is a guarantor under the Senior Notes and Senior Subordinated Notes. On January 22, 2002 we issued a $165 million five-year Term Loan. The term loan matures in January 2007, and bears interest at either the prime rate plus 1.25% or Libor plus 2.5%. Each of our significant subsidiaries except for our financial services subsidiaries is a guarantor under the Term Loan. At July 31, 2003, borrowings under the Term Loan were $115 million. Our mortgage banking subsidiary's warehousing agreement was amended and restated on July 31, 2003. Pursuant to the agreement, we may borrow up to $200 million. The agreement bears an expiration date of July 2004 and interest is payable monthly at the Federal Funds Rate plus 1.375%. We believe that we will be able either to extend this agreement beyond July 2004 or negotiate a replacement facility, but there can be no assurance of such extension or replacement facility. As of July 31, 2003, the aggregate principal amount of all such borrowings was $137 million. Total inventory increased $396.7 million during the nine months ended July 31, 2003. This increase excluded the change in Consolidated Inventory Not Owned of $113.4 million consisting of specific performance options and other options that were added to our balance sheet in accordance with SFAS 49, SFAS 98, and EITF 97-10 and Variable Interest Entities in accordance with FIN 46. The $396.7 million increase in inventory was due to increases in inventory levels in all of our housing markets as well as our acquisitions. Excluding the impact from acquisitions of $90.3 million, our Northeast Region increased $117.9 million and California increased $111.9 million, with the balance spread out in our other markets. The increase in our existing markets was primarily the result of seasonality factors and planned future organic growth. Substantially all homes under construction or completed and included in inventory at July 31, 2003 are expected to be closed during the next twelve months. Most inventory completed or under development is financed through our line of credit, term loan, and senior and senior subordinated indebtedness. We usually option property for development prior to acquisition. By optioning property, we are only subject to the loss of an option fee and predevelopment costs if we choose not to exercise the option. As a result, our commitment for major land acquisitions is reduced. The following table summarizes housing lots included in our total residential real estate. The July 31, 2003 numbers excluded lots owned and options in locations that we have ceased development. Active Proposed Active Selling Developable Grand Total Communities Lots Lots Lots ----------- ------- ----------- ----------- July 31, 2003: Northeast Region.. 30 7,091 14,960 22,051 North Carolina.... 71 6,489 799 7,288 Metro D.C......... 36 4,393 10,685 15,078 California........ 37 5,025 10,981 16,006 Texas............. 71 5,587 3,613 9,200 ----------- ------- ---------- ----------- 245 28,585 41,038 69,623 =========== ======= ========== =========== Owned.......... 12,841 4,302 17,143 Optioned....... 15,744 36,736 52,480 ------ ---------- ----------- Total........ 28,585 41,038 69,623 ======= ========= =========== Active Proposed Active Selling Developable Grand Total Communities Lots Lots Lots ----------- ------- ----------- ----------- October 31, 2002: Northeast Region.. 28 5,699 15,700 21,399 North Carolina.... 64 5,186 2,283 7,469 Metro D.C......... 27 3,182 7,394 10,576 California........ 42 5,974 4,457 10,431 Texas............. 35 2,566 1,518 4,084 Other............. -- 29 -- 29 ----------- ------- ---------- ----------- 196 22,636 31,352 53,988 =========== ======= ========== =========== Owned.......... 11,088 2,274 13,362 Optioned....... 11,548 29,078 40,626 ------- ---------- ----------- Total........ 22,636 31,352 53,988 ======= ========== =========== Active selling lots under contract at July 31, 2003 and October 31, 2002 were 5,033 and 3,831, respectively. Such amounts do not include our build on your own lot contracts. The following table summarizes our started or completed unsold homes and models: July 31, October 31, 2003 2002 ----------------------- ----------------------- Unsold Unsold Homes Models Total Homes Models Total ------ ------ ----- ------ ------ ----- Northeast Region.... 90 56 146 73 46 119 North Carolina...... 148 19 167 191 32 223 Metro D.C........... 32 20 52 34 31 65 California.......... 153 91 244 193 65 258 Texas............... 577 72 649 261 31 292 Other............... - - - 2 -- 2 ------ ------ ----- ------ ------ ----- Total 1,000 258 1,258 754 205 959 ====== ====== ===== ====== ====== ===== Financial Services - Mortgage loans held for sale consist of residential mortgages receivable of which $152.1 million and $91.3 million at July 31, 2003 and October 31, 2002, 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 us. We may incur risk with respect to mortgages that are delinquent, but only to the extent the losses are not covered by mortgage insurance or resale value of the house. Historically, we have incurred minimal credit losses. RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2003 COMPARED TO THE THREE AND NINE MONTHS ENDED JULY 31, 2002 Our operations consist primarily of residential housing development and sales in our Northeast Region (New Jersey, southern New York State, eastern Pennsylvania, and Ohio), North Carolina, Metro D. C. (northern Virginia, eastern West Virginia, and Maryland), California, and Texas. In addition, we provide financial services to our homebuilding customers. Total Revenues: Compared to the same prior period, revenues increased as follows: Three Months Ended ------------------------------------------ July 31, July 31, Dollar Percentage 2003 2002 Change Change ------------------------------------------ (Dollars In Thousands) Homebuilding: Sale of homes........ $ 830,734 $ 681,329 $149,405 21.9% Land sales and other revenues........... 4,441 12,651 (8,210) (64.9%) Financial Services... 13,642 10,656 2,986 28.0% ---------- ---------- -------- -------- Total Revenues... $ 848,817 $ 704,636 $144,181 20.5% ========== ========== ======== ======== Nine Months Ended ------------------------------------------ July 31, July 31, Dollar Percentage 2003 2002 Change Change ------------------------------------------ (Dollars In Thousands) Homebuilding: Sale of homes........ $2,104,788 $1,656,813 $447,975 27.0% Land sales and other revenues........... 16,445 34,564 (18,119) (52.4%) Financial Services... 35,036 28,319 6,717 23.7% ---------- --------- -------- -------- Total Revenues... $2,156,269 $1,719,696 $436,573 25.4% ========== ========= ======== ======== Homebuilding: Revenues from the sale of homes increased $149.4 million or 21.9% during the three months ended July 31, 2003, and increased $448 million or 27% during the nine months ended July 31, 2003 compared to the same periods last year. Revenues from the sale 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 Nine Months Ended July 31, July 31, ------------------- --------------------- 2003 2002 2003 2002 --------- -------- ----------- --------- (Dollars in Thousands) Northeast Region(1): Housing Revenues..... $210,039 $177,153 $ 494,957 $ 455,171 Homes Delivered...... 647 570 1,540 1,469 North Carolina: Housing Revenues..... $ 65,399 $ 72,437 $ 173,938 $ 193,902 Homes Delivered...... 365 393 965 1,044 Metro D. C.: Housing Revenues..... $100,184 $110,030 $ 305,927 $ 258,755 Homes Delivered...... 324 386 968 944 California(2): Housing Revenues..... $325,205 $242,631 $ 819,369 $ 535,961 Homes Delivered...... 1,090 926 2,846 2,094 Texas(1): Housing Revenues..... $129,907 $ 65,432 $ 309,336 $ 172,778 Homes Delivered...... 640 286 1,519 746 Other: Housing Revenues..... $ -- $ 13,646 $ 1,261 $ 40,246 Homes Delivered...... -- 86 9 258 Totals: Housing Revenues..... $830,734 $681,329 $2,104,788 $1,656,813 Homes Delivered...... 3,066 2,647 7,847 6,555 (1) July 31, 2003 includes deliveries from our Houston, Texas and Ohio acquisitions beginning on November 1, 2002, January 1, 2003, and April 1, 2003, respectively. (2) July 31, 2002 includes deliveries from our California acquisition beginning on January 10, 2002. The increase in housing revenues was partially due to the acquisition of two homebuilders in Houston, Texas and an Ohio homebuilder for the three and nine months ended July 31, 2003 and a full nine months of deliveries from our acquisition in California for the nine months ended July 31, 2003. In addition, these increases were the result of organic growth in Metro D. C. and California (excluding our California acquisition) and increased average sales prices in most of our markets. Important indicators of our future results are recently signed contracts and home contract backlog for future deliveries. Our sales contracts and homes in contract (using base sales prices) by market area is set forth below: Sales Contracts for the Nine Months Ended Contract Backlog July 31, as of July 31, ------------------------- --------------------- 2003 2002 2003 2002 ----------- --------- --------- --------- (Dollars in Thousands) Northeast Region(2)(4): Dollars.............$ 582,015 $ 423,227 $ 613,884 $ 442,037 Homes............... 1,896 1,478 2,266 1,578 North Carolina: Dollars.............$ 214,700 $ 198,848 $ 128,997 $ 108,502 Homes............... 1,171 1,074 672 564 Metro D.C.(4): Dollars.............$ 422,477 $ 341,919 $ 368,910 $ 292,044 Homes............... 1,229 1,085 1,035 920 California(3): Dollars.............$ 882,976 $ 634,009 $ 359,821 $ 286,876 Homes............... 2,994 2,394 1,103 1,007 Texas(1)(4): Dollars.............$ 338,197 $ 171,409 $ 127,636 $ 69,556 Homes............... 1,722 778 642 295 Other: Dollars.............$ 313 $ 26,861 $ -- $ 6,456 Homes............... 2 172 -- 39 Totals: Dollars.............$2,440,678 $1,796,273 1,599,248 $1,205,471 Homes............... 9,014 6,981 5,718 4,403 (1) July 31, 2003 includes sales contracts signed from our Houston, Texas and Ohio acquisitions beginning November 1, 2002 and January 1, 2003, respectively. (2) July 31, 2003 includes sales contracts signed from our Ohio acquisition beginning April 1, 2003. (3) July 31, 2002 includes sales contracts signed from our California acquisition beginning January 10, 2002. (4) We acquired contract backlog during the nine months ended July 31, 2003 and 2002 of 694 homes valued at $93.8 million and 535 homes valued at $117 million, respectively. During August 2003, we signed an additional 1,085 contracts compared to 782 in the same month last year. 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: Three Months Ended Nine Months Ended July 31, July 31, ------------------- --------------------- 2003 2002 2003 2002 -------- -------- ---------- --------- (Dollars in Thousands) Sale of Homes................ $830,734 $681,329 $2,104,788 $1,656,813 Cost of Sales................ 618,650 530,154 1,572,306 1,303,637 -------- -------- ---------- --------- Housing Gross Margin......... $212,084 $151,175 $ 532,482 $ 353,176 ======== ======== ========== ========== Gross Margin Percentage...... 25.5% 22.2% 25.3% 21.3% Cost of Sales expenses as a percentage of home sales revenues are presented below: Three Months Ended Nine Months Ended July 31, July 31, ------------------- ------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Sale of Homes................ 100.0% 100.0% 100.0% 100.0% -------- -------- -------- -------- Cost of Sales: Housing, land & development costs.... 67.1% 70.7% 67.2% 71.0% Commissions............ 2.0% 2.2% 2.1% 2.2% Financing concessions.. 0.9% 0.9% 0.9% 1.0% Overheads.............. 4.5% 4.0% 4.5% 4.5% -------- -------- -------- -------- Total Cost of Sales.......... 74.5% 77.8% 74.7% 78.7% -------- -------- -------- -------- Gross Margin................. 25.5% 22.2% 25.3% 21.3% ======== ======== ======== ======== We sell a variety of home types in various local communities, each yielding a different gross margin. As a result, depending on the mix of both 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. We achieved higher gross margins during the three and nine months ended July 31, 2003 compared to the same period last year. The consolidated gross margin increased 3.3% and 4.0% for the three and nine months ended July 31, 2003, respectively. These increased margins are the result of higher sales prices and lower costs resulting from our improvement initiatives. Selling, general, and administrative expenses as a percentage of total homebuilding revenues increased to 7.9% for the three months ended July 31, 2003 from 7.6% for the prior year's three months, and increased to 8.5% for the nine months ended July 31, 2003 from 8.2% for the prior year's nine months. Such expenses increased during the three and nine months ended July 31, 2003 by $13.3 million and $41.9 million, repsectively, compared to the same periods last year. The percentage increase for the three and nine months ended July 31, 2003 was due to the modification of our sales associate compensation plan, an increase in administrataive costs associated with opening additional communities, and higher bonus incentives due to higher returns. The dollar increase in selling, general and administrative is primarily due to our 2003 acquisitions as well as a full nine months of expenses from our 2002 California acquisition. 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 Nine Months Ended July 31, July 31, ------------------ ------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Land and Lot Sales.............. $ 3,314 $ 10,587 $ 13,064 $29,127 Cost of Sales................... 3,247 9,522 9,988 24,048 -------- -------- -------- -------- Land and Lot Sales Gross Margin.. 67 1,065 3,076 5,079 Interest Expense................ 153 112 508 760 -------- -------- -------- -------- Land and Lot Sales Profit (Loss) Before Tax.................... $ (86) $ 953 $ 2,568 $ 4,319 ======== ======== ======== ======== Land and lot sales are incidental to our residential housing operations and are expected to continue in the future but may significantly fluctuate up or down. Financial Services Financial services consist primarily of originating mortgages from our homebuyers, selling such mortgages in the secondary market, and title insurance activities. For the three and nine months ended July 31, 2003 financial services provided a $6.0 million and $15.4 million profit before income taxes compared to a profit of $5.0 million and $12.2 million for the same period in 2002. These increases are primarily due to reduced costs, increased mortgage loan amounts, and the addition of a mortgage joint venture from our California acquisition for a full nine months. Corporate General and Administrative Corporate general and administrative expenses include the operations at our headquarters in Red Bank, New Jersey. Such expenses include our executive offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, construction services, and administration of insurance, quality, and safety. As a percentage of total revenues, such expenses increased to 2.0% for the three months ended July 31, 2003 from 1.7% for the prior year's three months and increased to 2.1% for the nine months ended July 31, 2003 from 2.0% for the prior year's nine months. Corporate general and administrative expenses increased $4.8 million and $11.3 million during the three and nine months ended July 31, 2003, respectively, compared to the same periods last year. Increases in corporate general and administrative dollar expenses are primarily attributed to higher employee incentives due to a higher return on equity. Interest Interest expense includes housing and land and lot interest. Interest expense is broken down as follows: Three Months Ended Nine Months Ended July 31, July 31, ------------------ ------------------ 2003 2002 2003 2002 -------- -------- -------- -------- Sale of Homes.............. $ 17,051 $ 15,737 $43,800 $41,593 Land and Lot Sales......... 153 112 508 760 -------- -------- -------- -------- Total...................... $ 17,204 $ 15,849 $44,308 $42,353 ======== ======== ======== ======== Housing interest as a percentage of sale of homes revenues decreased to 2.1% for the three and nine months ended July 31, 2003, respectively, compared to 2.3% and 2.5% for the three and nine months ended July 31, 2002, respectively. These percentage decreases are primarily attributed to a decrease in debt leverage of our Company due to the growth in equity from earnings, and lower interest rates. Other Operations Other operations consist primarily of miscellaneous residential housing operations expenses, senior residential property operations, amortization of senior and senior subordinated note issuance expenses, earnout payments from homebuilding company acquisitions, amortization of consultant's agreement and the right of first refusal agreement from our California acquisition, amortization of definite life intangibles from our acquisitions, minority interest relating to joint ventures, and corporate-owned life insurance loan interest. Recent Accounting Pronouncements In April 2002, the Financial Accounting Standards Board issued (SFAS) No. 145, "Reporting Gains and Losses from Extinguishment of Debt", which rescinded SFAS No. 4, No. 44, and No. 64 and amended SFAS No. 13. The new standard addresses the income statement classification of gains or losses from the extinguishment of debt and criteria for classification as extraordinary items. We adopted SFAS No. 145 on November 1, 2002. We reclassified $0.9 million extraordinary loss from extinguishment of debt to other operations and ($0.3) million to state and Federal Income Taxes on our Consolidated Statements of Income to conform to the new presentation. In June 2002, the Financial Accounting Standards Board issued (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring)". SFAS No. 146 requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred as opposed to when the entity commits to an exit plan as prescribed under EITF No. 94-3. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We adopted SFAS No. 146 January 1, 2003. The initial adoption of SFAS No. 146 did not have an effect on the financial position or results of operations of our Company. However, SFAS No. 146 could impact the amount or timing of liabilities to be recognized in the event that we engage in exit or disposal activities in the future. In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor's obligations does not apply to product warranties. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of the initial recognition and initial measurement provisions of FIN 45 did not have a material effect on our financial position or results of operations. Our disclosure of guarantees is included in Note 14 to the consolidated financial statements - unaudited. In December 2002, the Financial Accounting Standards Board issued (SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which amends (SFAS) No. 123. The new standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the affect of the method used on reported results. We have not elected to change to the fair value based method of accounting for stock-based employee compensation. We adopted the disclosure provisions of SFAS No. 148 in our second fiscal quarter ending April 30, 2003. Our disclosure of accounting for stock-based compensation is included in Note 2 to the consolidated financial statements - unaudited. In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities" an interpretation of ARB No. 51 ("FIN 46"). A Variable Interest Entity ("VIE") is created when (i) the equity investment at risk is not sufficient to permit the entity from financing its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a VIE, pursuant to FIN 46, an enterprise that absorbs a majority of the expected losses of the VIE is considered the primary beneficiary and must consolidate the VIE. FIN 46 is effective immediately for VIE's created after January 31, 2003. For VIE's created before January 31, 2003, FIN 46 must be applied at the beginning of the first interim or annual reporting period beginning after June 15, 2003. Based on the provisions of FIN 46, we have concluded that whenever we option land or lots from an entity and pay a non-refundable deposit, a VIE is created under condition (ii) (b) and (c) of the previous paragraph. We have been deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an entity's expected theoretical losses if they occur. For each VIE created we will compute expected losses and residual returns based on the probability of future cash flows as outlined in FIN 46. If we are deemed to be the primary beneficiary of the VIE we will consolidate it on our balance sheet. The fair value of the VIE's inventory will be reported as "Consolidated Inventory Not Owned - Variable Interest Entities". Management believes FIN 46 was not clearly thought out for application in the homebuilding industry for land and lot options. Under FIN 46, we can have an option and put down a small deposit as a percentage of the purchase price and still have to consolidate the entity. Our exposure to loss as a result of our involvement with the VIE is only the deposit, not it's total assets consolidated on the balance sheet. In certain cases we will have to place inventory on our balance sheet the VIE has optioned to other developers. In addition, if the VIE has creditors, it's debt will be placed on our balance sheet even though the creditors have no recourse against our Company. Based on these observations we believe consolidating VIE's based on land and lot option deposits does not reflect the economic realities or risks of owning and developing land. At July 31, 2003, we consolidated nine VIE's created from February 1, 2003 to July 31, 2003 as a result of our option to purchase land or lots from the selling entities. We paid cash or issued letters of credit deposits to these three VIE's totaling $11.7 million. Our option deposits represent our maximum exposure to loss. The fair value of the property owned by the VIE's was $93.2 million of which $6.2 million was not optioned to our Company. We were able to ascertain that one VIE had third party debt amounting to $1.4 million. Since we could not get the remainder of the selling entities to provide us with any financial information, the fair value of the optioned property less our cash deposits and liabilities from inventory not owned, which totaled $80.1 million, was reported on the balance sheet as Minority interest. Creditors of these VIE's have no recourse against our company. We will continue to secure land and lots using options. Including the deposits with the nine VIE's above, at July 31, 2003 we have total cash and letters of credit deposits amounting to approximately $180.2 million to purchase land and lots with a total purchase price of $2.4 billion. Not all our deposits are with VIE's. The maximum exposure to loss is limited to the deposits although some deposits are refundable at our request or refundable if certain conditions are not met. We are in the process of evaluating all option purchase agreements in effect as of January 31, 2003. Options with VIE's where we are the primary beneficiary will be consolidated by our fiscal year end October 31, 2003. Total Taxes Total taxes as a percentage of income before taxes amounted to approximately 37.3% and 36.8% for the three months ended July 31, 2003 and 2002, respectively, and 37.4% and 37.6% for the nine months ended July 31, 2003 and 2002, 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 as an offset against future taxable income. If for some reason the combination of future years income (or loss) combined with the reversal of the timing differences results in a loss, such losses can be carried back to prior years to recover the deferred tax assets. As a result, management is confident such deferred tax assets are recoverable regardless of future income. Inflation Inflation has a long-term effect on us because increasing costs of land, materials, and labor result in increasing sale prices of our homes. In general, these price increases have been commensurate with the general rate of inflation in our housing markets and have not had a significant adverse effect on the sale of our homes. A significant 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 our homes sell, we have not found this risk to be a significant problem. Inflation has a lesser short-term effect on us because we generally negotiate fixed price contracts with our subcontractors and material suppliers for the construction of our homes. These prices usually are applicable for a specified number of residential buildings or for a time period of between four to twelve months. Construction costs for residential buildings represent approximately 57% of our homebuilding cost of sales. Mergers and Acquisitions On January 10, 2002, we acquired a California homebuilder for a total purchase price of $196.5 million, of which $151.6 million was paid in cash and 2,208,738 shares of our Class A Common Stock were issued. At the date of acquisition we also paid off approximately $88.0 million of their third party debt. During the second quarter ended April 30, 2003 we exercised the right to retire at no cost 750,000 Class A Common Stock shares that were held by the selling principal under the terms of the acquisition. On November 1, 2002 and December 31, 2002 we acquired two Houston homebuilding companies for an approximate aggregate purchase price of $100.0 million. On April 9, 2003 we acquired a build-on-your- own lot homebuilder in Ohio, and on August 8, 2003 we acquired a homebuilder in Phoenix, Arizona. Safe Harbor Statement All statements in this Form 10-Q that are not historical facts should be considered as "Forward-Looking Statements" within the meaning of the Private Securities Litigation Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward looking statements. Although we believe that our plans, intentions and expectations reflected in, or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions, or expectations will be achieved. Such risks, uncertainties and other factors include, but are not limited to: . Changes in general and local economic and business conditions . Weather conditions . Changes in market conditions . Changes in home prices and sales activity in the California, New Jersey, Texas, North Carolina, Virginia, and Maryland markets . Government regulation, including regulations concerning development of land, the homebuilding process, and the environment . Fluctuations in interest rates and the availability of mortgage financing . Shortages in and price fluctuations of raw materials and labor . The availability and cost of suitable land and improved lots . Levels of competition . Availability of financing to the Company . Utility shortages and outages or rate fluctuations . Geopolitical risks, terrorist acts and other acts of war These risks, uncertainties, and other factors are described in detail in Item 1 and 2 Business and Properties in our Form 10-K for the year ended October 31, 2002. Quantitative and Qualitative Disclosures About Market Risk. The primary market risk facing us is interest rate risk on our long term debt. In connection with our mortgage operations, mortgage loans held for sale and the associated mortgage warehouse line of credit are subject to interest rate risk; however, such obligations reprice frequently and are short-term in duration. In addition, we hedge the interest rate risk on mortgage loans by obtaining forward commitments from private investors. Accordingly the risk from mortgage loans is not material. We do not hedge interest rate risk other than on mortgage loans using financial instruments. We are also subject to foreign currency risk but this risk is not material. The following table sets forth as of July 31, 2003, our long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value ("FMV").
As of July 31, 2003 ------------------------------------------------------------- Expected Maturity Rate ---------------------- FMV @ 2003 2004 2005 2006 2007 2008 Thereafter Total 7/31/03 ------- ------- ------ ------ -------- -------- ---------- -------- -------- (Dollars in Thousands) Long Term Debt(1): Fixed Rate...... $ 29,241 $ 75 $ 81 $ 88 $140,346 $ 104 $ 550,200 $720,135 $755,935 Average interest rate.......... 6.75% 8.38% 8.38% 8.38% 10.50% 8.38% 8.48% 8.80% -- Variable rate... -- -- -- -- $115,000 -- -- $115,000 $115,000 Average interest rate.......... -- -- -- -- (2) -- -- -- -- (1) Does not include bonds collateralized by mortgages receivable. (2) LIBOR plus 2.5%
Item 4. CONTROLS AND PROCEDURES The company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the company's reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the company's management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The company's management, with the participation of the company's chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of the company's disclosure controls and procedures as of July 31, 2003. Based upon that evaluation and subject to the foregoing, the company's chief executive officer and chief financial officer concluded that the design and operation of the company's disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective to accomplish their objectives. In addition, there was no change in the company's internal control over financial reporting that occurred during the quarter ended July 31, 2003 that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. PART II. Other Information Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit 3(a) Certificate of Incorporation of the Registrant. (1) Exhibit 3(b) Certificate of Amendment of Certificate of Incorporation of the Registrant. Exhibit 3(c) Restated Bylaws of the Registrant. (3) Exhibit 10(a) Third Amended and Restated Credit Agreement dated June 19, 2003. (2) Exhibit 10(b) First Amendment to First Restated K. Hovnanian Mortgage, Inc. Revolving Credit Agreement dated July 31, 2003. Exhibit 31(a) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. Exhibit 31(b) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. Exhibit 32(a) Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. Exhibit 32(b) Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. (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 Annual Report on Form 10-K for the year ended February 28, 1994 of the Registrant. (3) Incorporated by reference to Exhibits to Registration Statement (No. 333-106761) on Form S-3 of the Registrant. (b) Reports on Form 8-K No reports on Form 8-K have been filed during the quarter for which this report is filed. The following report on Form 8-K has been furnished during the quarter for which this report is filed: On May 23, 2003, the Company furnished a report on Form 8-K, Item 9 (pursuant to Item 12 in accordance with SEC Release 33-8216; 34-47583; IC-25983; March 27, 2003), relating to the Company's press release dated May 28, 2003 relating to its preliminary financial results for the second quarter ended April 30, 2003. 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: September 12, 2003 /S/J. LARRY SORSBY J. Larry Sorsby, Executive Vice President and Chief Financial Officer DATE: September 12, 2003 /S/PAUL W. BUCHANAN Paul W. Buchanan, Senior Vice President Corporate Controller Exhibit 31(a) CERTIFICATIONS I, Ara K. Hovnanian, President & Chief Executive Officer of Hovnanian Enterprises, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hovnanian Enterprises, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the cast of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 12, 2003 /S/ARA K. HOVNNAIAN Ara K. Hovnanian President and Chief Executive Officer Exhibit 31(b) CERTIFICATIONS I, J. Larry Sorsby, Executive Vice President & Chief Financial Officer of Hovnanian Enterprises, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hovnanian Enterprises, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 12, 2003 /S/J. LARRY SORSBY J. Larry Sorsby Executive Vice President and Chief Financial Officer Exhibit 32(a) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Hovnanian Enterprises, Inc. (the "Company") on Form 10-Q for the period ended July 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ara K. Hovnanian, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: September 12, 2003 /S/ARA K. HOVNANIAN Ara K. Hovnanian President and Chief Executive Officer Exhibit 32(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Hovnanian Enterprises, Inc. (the "Company") on Form 10-Q for the period ended July 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, J. Larry Sorsby, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: September 12, 2003 /S/J. LARRY SORSBY J. Larry Sorsby Executive Vice President and Chief Financial Officer EX-3 4 amendcertincorp.txt CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF HOVNANIAN ENTERPRISES, INC. CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF HOVNANIAN ENTERPRISES, INC. It is hereby certified that: 1. The name of the corporation (hereinafter called the "Corporation") is Hovnanian Enterprises, Inc. 2. The Certificate of Incorporation of the Corporation is hereby amended by (a) deleting paragraph FOURTH thereof in its entirety and substituting in lieu thereof the following new paragraph FOURTH: FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 100,100,000, of which 87,000,000 shares shall be Class A Common Stock having a par value of one cent ($0.01) per share, 13,000,000 shares shall be Class B Common Stock having a par value of one cent ($0.01) per share and 100,000 shares shall be Preferred Stock having a par value of one cent ($0.01) per share. At the close of business on the effective date of this amendment (the "Effective Date"), and without any further action on the part of the Corporation or its stockholders, each whole share of the Corporation's Common Stock, $0.01 par value (the "Old Common Stock"), then issued (including shares held in the treasury of the Corporation) shall automatically be reclassified, changed and converted into one-half (1/2) fully paid and nonassessable share of Class A Common Stock and one-half (1/2) fully paid and nonassessable share of Class B Common Stock (a "New Stock Unit"). No fractional shares of Class A Common Stock or Class B Common Stock will be issued or established. Instead, holders of certificates evidencing an odd number of shares of Old Common Stock will have the right to receive (i) a number of New Stock Units equal to the number of shares of Old Common Stock will have the right to receive (i) a number of New Stock Units equal to the number of shares of Old Common Stock minus one and (ii) cash in respect of a single New Stock Unit in an amount equal to the greater of (a) the average closing price of a share of Old Common Stock on the American Stock Exchange for the fifteen trading days immediately preceding the Effective Date and (b) the closing price of a share of Old Common Stock on the American Stock Exchange on the trading day immediately preceding the Effective Date. As soon as practicable after the Effective Date, the Corporation's transfer agent shall mail to each record holder of Class A Common Stock and Class B Common Stock a letter of transmittal. New certificates representing shares of Class A Common Stock and Class B Common Stock and, if applicable, checks in lieu of fractional shares will be issued to the record holders of Class A Common Stock and Class B Common Stock upon delivery of a properly executed letter of transmittal accompanied by certificates representing shares of Old Common Stock. (a) Common Stock. The Powers, preferences, limitations and relative rights of the Class A Common Stock and Class B Common Stock shall be as follows: (1) Voting Rights and Powers. Except as otherwise specifically provided in this Certificate of Incorporation or as otherwise required by law, with respect to all matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent, the holders of the outstanding shares of Class A Common Stock and the holders of the outstanding shares of Class B Common Stock shall vote together without regard to class, and every holder of the outstanding shares of Class A Common Stock shall be entitled to cast thereon one (1) vote in person or by proxy for each share of Class A Common Stock held in his name, and every holder of the outstanding shares of Class B Common Stock shall be entitled to cast thereon ten (10) votes in person or by proxy for each share of Class B Common Stock held in his name; provided, however, that each share of Class B Common Stock held of record by a person who, to the extent of the Corporation's knowledge, is a broker or dealer in securities, a clearing house, a bank, trust company, savings and loan association or other financial institution, or who is a voting trustee or a nominee of any of the foregoing, or who otherwise holds shares of record as a nominee of the beneficial owner of such shares (all such shares being referred to herein as being held in nominee name) shall be entitled to only one vote per share held; and provided, further, however, that the holder of any such share held in nominee name shall be entitled, notwithstanding the limitation of the foregoing proviso, to the number of votes to which such holder otherwise would be entitled at any meeting of stockholders of the Corporation, to the extent such holder shall establish to the satisfaction of the Corporation that such share of Class B Common Stock has been held continuously since the date of issuance for the benefit or account of the same named beneficial owner of such shares (as defined in Paragraph (4)(E) hereof) or any Permitted Transferee thereof (as defined in Paragraph (4)(A) hereof). A beneficial owner of shares of Class B Common Stock whose shares are held in nominee name and who wishes to cast the number of votes provided by the first sentence of this paragraph shall comply with the following procedure to effect a determination by the Corporation of his entitlement to such number of votes: if such record holder is a broker or dealer in securities, a clearing house, a bank, trust company, savings and loan association or other financial institution, or a voting trustee or a nominee of any of the foregoing, such record holder shall file with the transfer agent for the Class B Common Stock a certificate on a form which will be mailed to such holder by such transfer agent on request, certifying, as to the shares identified by such holder, the information specified in the second proviso of this Paragraph (1); if such record holder is a nominee of a beneficial owner not included in the categories mentioned in the preceding clause, such record holder shall file with the transfer agent for the Class B Common Stock an affidavit to the same effect as the certificate specified in the preceding clause. Any certificate or affidavit filed for purposes of this Paragraph (1) only if received by the transfer agent not less than 3 nor more than 20 business days prior to the date of the meeting at which the holder desires to exercise such voting rights or the last day by which such holder may give consent in writing to stockholder action in lieu of a meeting. If such certificate or affidavit is not timely filed or shall not establish to the satisfaction of the Corporation the facts stated therein, then such shares of Class B Common Stock shall be entitled to one vote per share. The Corporation shall use its best efforts, if the Corporation believes such a certificate or affidavit does not establish to the Corporation's satisfaction the facts stated therein, to mail to the person filing such certificate or affidavit a notice to such effect within seven business days after the receipt by the transfer agent of any such certificate or affidavit. Any determination of which shares of Class B Common Stock shall be entitled to more than one vote per share shall be made by the Board of Directors or any duly appointed committee of the Board of Directors. The Board of Directors is expressly authorized to adopt and apply such rules, procedures and policies, by the adoption of By-law provisions or otherwise, as it may deem appropriate or convenient to carry out, clarify and apply the provisions of this Paragraph (1) relating to the determination of which shares of Class B Common Stock shall be entitled to more than one vote per share. Any determination made pursuant to such rules, procedures or policies shall be final. (2) Dividends; Distributions Upon Dissolution. (A) Subject to the rights of the holders of any outstanding Preferred Stock, and subject to any other provisions of the Certificate of Incorporation, holders of Class A Common Stock and Class B Common Stock shall be entitled to receive such dividends and other distributions (including stock splits or divisions of stock) in cash, stock or property of the Corporation as may be declared thereon by the Board of Directors from time to time out of assets or funds of the Corporation legally available therefor, provided that in the case of special cash dividends or distributions or dividends or distributions payable in Preferred Stock, holders of Class A Common Stock and Class B Common Stock shall be entitled to share ratably as a single class, and provided, further, that in the case of regular cash dividends, no such dividend shall be declared or paid on one class of Common Stock unless a cash dividend is simultaneously declared and paid on the other class of Common Stock, and any such dividend will be paid on the Class A Common Stock in an amount per share of Class A Common Stock equal to 110% of the amount of such dividend paid on each share of Class B Common Stock (rounded down, if necessary, to the nearest one-hundredth of a cent), and provided, further, that in the case of dividends or other distributions payable in stock of the Corporation other than Preferred Stock, including distributions pursuant to stock splits or divisions of stock of the Corporation other than Preferred Stock, which occur after the Effective Date, only shares of Class A Common Stock shall be distributed with respect to Class A Common Stock and only shares of Class B Common Stock in an amount per share equal to the amount per share paid with respect to the Class A Common Stock shall be distributed with respect to Class B Common Stock, and provided, further, that neither class of Common Stock may be combined or reclassified (including any reclassification in connection with a consolidation or merger in which the Corporation is the continuing corporation) unless the other class of Common Stock is likewise combined or reclassified, and that, in the case of any such combination or reclassification of Class A Common Stock, the shares of Class B Common Stock shall also be combined or reclassified so that the number of issued shares of Class B Common Stock immediately following such shall bear the same relationship to the number of issued shares immediately prior to such combination or reclassification as the number of issued shares of Class A Common Stock immediately following such combination or reclassification bears to the number of issued shares of Class A Common Stock immediately prior to such combination or reclassification. (B) In the event the Corporation shall be liquidated (either partially or completely), dissolved or wound up, whether voluntarily or involuntarily, the holders of the Class A Common Stock and the Class B Common Stock shall be entitled to share ratably as a single class in the net assets of the Corporation available to the holders of Common Stock; that is, an equal amount of net assets shall be distributed in respect of each share of Class A Common Stock and Class B Common Stock. (3) Conversion of Class B Common Stock into Class A Common Stock. (A) Each share of Class B Common Stock may at any time or from time to time, at the option of the holder thereof, be converted into one (1) fully paid and nonassessable share of Class A Common Stock. Such conversion right shall be exercised by the surrender to the Corporation, or a duly appointed and acting transfer or exchange agent, of the certificate representing such share of Class B Common Stock to be converted at any time during normal business hours at the principal executive offices of the Corporation (to the attention of the Secretary of the Corporation), or if an agent for the transfer or exchange of shares of Class B Common Stock is then duly appointed and acting (said agent being referred to in this Article FOURTH as the "Class B Transfer Agent") then at the designated office of the Class B Transfer Agent, accompanied by a written notice of the election by the holder thereof to convert and (if so required by the Corporation or the Class B Transfer Agent) by such other instruments of transfer as the Corporation or the Class B Transfer Agent may deem appropriate, in each case duly executed by such holder or his duly authorized attorney and accompanied by payment of the amount of any Transfer Tax required pursuant to Paragraph (3) (D) below. (B) As promptly as practicable after the surrender for conversion of a certificate representing share of Class B Common Stock in the manner provided in Paragraph (3)(A) above, including the payment in cash of any Transfer Tax required by the provisions of Paragraph (3)(D) below, the Corporation shall deliver or cause to be delivered at the principal executive office of the Corporation or the designated office of the Class B Transfer Agent to the holder so surrendering such certificate for conversion, or upon the written order of the holder of such certificate, a certificate or certificates representing the number of full shares of Class A Common Stock issuable upon such conversion, issued in such name or names as such holder may direct. If the notice of conversion delivered by a holder of shares of Class B Common Stock specifies that less than all of such shares are to be converted into shares of Class A Common Stock, the Corporation shall deliver or cause to be delivered, in accordance with the provisions of the preceding sentence, a new certificate or certificates evidencing the remaining shares of Class B Common Stock, issued in such name or names as such holder may direct. Any conversion of shares of Class B Common Stock into shares of Class A Common Stock shall be deemed to have been made immediately prior to the close of business on the date of the surrender for conversion of the certificate representing shares of Class B Common Stock, accompanied by the requisite notice of conversion, other instruments of transfer and payment of Transfer Taxes, and all rights of the holder of such shares of Class B Common Stock, as such holder, shall cease at such time and the person or persons in whose name or names the certificate or certificates representing the shares of Class A Common Stock are to be issued shall be treated for all purposes at such time as having become the record holder or holders of the shares of Class A Common Stock into which such shares of Class B Common Stock are converted; provided, however, that in the event any such surrender of shares of Class B Common Stock for conversion is made on any date when the stock transfer records of the Corporation shall be closed, the person or persons in whose name or names the certificate or certificates representing shares of Class A Common Stock are to be issued upon such conversion will become the record holder or holders of the shares of Class A Common Stock for all purposes immediately prior to the close of business on the next succeeding day on which such stock transfer records are open. (C) The Corporation will at all times reserve and keep available, solely for the purpose of issuance upon conversion of shares of Class B Common Stock, such number of shares of Class A Common Stock as shall be issuable upon the conversion of all such outstanding shares; provided, however, that nothing contained herein shall be construed to preclude the Corporation from satisfying its obligations in respect of the conversion of shares of Class B Common Stock by delivery of purchased shares of Class A Common Stock which are held in the treasury of the Corporation. If any shares of Class A Common Stock required to be reserved for purposes of conversion hereunder require registration with or approval of any governmental authority under any federal or state law before such shares of Class A Common stock may be issued upon conversion, the Corporation shall use its best efforts to cause such shares to be duly registered or approved for issuance as expeditiously as practicable. The Corporation will endeavor to list the shares of Class A Common Stock required to be delivered upon conversion prior to such delivery upon each national securities exchange, if any, upon which the shares of Class A Common Stock are listed at the time of such delivery. All shares of Class A Common Stock which shall be issued upon conversion of the Class B Common Stock will, upon issuance, be fully paid and nonassessable and not subject to any preemptive rights. (D) The issuance of certificates for shares of Class A Common Stock upon conversion of shares of Class B Common Stock, and the issuance of certificates for remaining shares of Class B Common Stock upon conversion of less than all of the shares represented by any certificate, shall be made without charge to the stockholder for any stock transfer tax or stamp tax or other similar tax ("Transfer Tax") in respect of the conversion of shares of Class B Common Stock into Class A Common Stock or the issuance or exchange of stock certificates in respect thereof; provided, however, that, if any certificate for shares of Class A Common Stock is to be issued in a name other than that of the record holder of the share or shares of Class B Common Stock converted, the person or persons requesting the issuance thereof shall pay to the Corporation the amount of any Transfer Tax which may be payable in respect of any such transfer, exchange or issuance or shall establish to the satisfaction of the Corporation that such tax has been paid or is not payable. (E) All issued shares of Class B Common Stock shall be deemed, without further action on the part of any person, to be immediately and automatically converted into shares of Class A Common Stock, on the terms provided by Paragraph (3)(A) through (3)(D) above, and stock certificates formerly representing shares of Class B Common Stock shall thereupon and thereafter be deemed to represent a like number of shares of Class A Common Stock until surrendered for certificates explicitly representing shares of Class A Common Stock in each of the instances set forth below: (i) All of the shares of Class B Common Stock shall be automatically so converted into shares of Class A Common Stock if and when on any record date for determining the stockholders entitled to participate in any dividend or distribution on the Common Stock of the Corporation, or any annual or special meeting of stockholders or action of common stockholders by written consent, the number of issued and outstanding shares of Class B Common Stock is less than five percent (5%) of the aggregate number of shares of Class A Common Stock and Class B Common Stock then outstanding. (ii) All of the shares of Class B Common Stock shall be automatically so converted into shares of Class A Common Stock, as of a record date set by the Board of Directors for such purpose, in the event that the Board of Directors, by resolution adopted by the affirmative vote of a majority of the members thereof, shall determine that there has been a material adverse change in the liquidity of the market for, or the marketability of, the then outstanding shares of Class A Common Stock due to a delisting of the Class A Common Stock from a national securities exchange or the cessation of the quotation of bids for the Class A Common Stock in any quotation system operated by an association of securities dealers, or due to requirements of federal or state law applicable to trading in the Class A Common Stock, attributable to the existence of the Class A Common Stock and Class B Common Stock. In the event that all issued shares of Class B Common Stock shall be converted into shares of Class A Common Stock in accordance with this Paragraph (3)(E), the Class B Common Stock shall automatically be cancelled and shall no longer be authorized for issuance. (F) Except as provided in Paragraph (3) (E) above, shares of Class B Common Stock that are converted into shares of Class A Common Stock shall be restored to the status of authorized but unissued shares of Class B Common Stock and may again be issued by the Corporation as permitted in accordance with the terms of the Certificate of Incorporation. (4) Restrictions on Transfer of the Class B Common Stock. (A) The record owner of shares of Class B Common Stock (hereinafter referred to as a "Class B Stockholder") may transfer the shares of Class B Common Stock of such Class B Stockholder, whether by sale, assignment, gift or otherwise, only to a Permitted Transferee of such Class B Stockholder and no Class B Stockholder may otherwise transfer any interest in any shares of Class B Common Stock and the Corporation shall not register any other attempted transfer of ownership of shares of Class B Common Stock. For purposes of the Certificate of Incorporation: (i) A "Permitted Transferee" shall be, if the Class B Stockholder is an individual, (A) the estate or any legatee, heir or distributee upon death of the Class B Stockholder; (B) the spouse or former spouse of the class B Stockholder; (C) any parent or grandparent and any lineal descendant (including any adopted child) of any parent or grandparent of the Class B Stockholder or of such Class B Stockholder's spouse; (D) any guardian or custodian (including a custodian for purposes of the Uniform Gift to Minors Act or Uniform Transfers to Minors Act) for, or any executor, administrator, conservator or other legal representative of, the Class B Stockholder or any Permitted Transferee thereof; (E) the trustee of a trust (including a voting trust), and any savings or retirement account, such as an individual retirement account for purposes of federal income tax laws, whether or not involving a trust, principally for the benefit of such Class B Stockholder and/or any Permitted Transferee thereof, including any trust in respect of which such Class B Stockholder or any Permitted Transferee thereof has any general or special testamentary power of appointment or general or special non-testamentary power of appointment limited to any Permitted Transferee or Permitted Transferees thereof; (F) any organization contributions to which are deductible for federal income, estate or gift tax purposes (hereinafter referred to as a "Charitable Organization") established by such Class B Stockholder and/or any Permitted Transferee or Permitted Transferees thereof; (G) any corporation, partnership or other business entity if substantially all the beneficial ownership thereof is held by the Class B Stockholder and/or any Permitted Transferee or Permitted Transferees thereof; provided, however, that if the Class B Stockholder who made such transfer, and all Permitted Transferees thereof, cease, for whatever reason, to hold substantially all of the beneficial ownership of such corporation, partnership or other business entity, then any and all shares of Class B Common Stock owned by such corporation, partnership or other business entity shall be deemed to be converted automatically, without further action by or on behalf of any person, into shares of Class A Common Stock as provided by Paragraphs (3) (A) through (3) (D) above and such corporation, partnership or other business entity shall no longer be a Class B Stockholder, and (H) the corporation. (ii) A "Permitted Transferee" shall be, if the Class B Stockholder is a corporation, partnership or other business entity, (A) any employee benefit plan, or trust thereunder or therefor, sponsored by the class B Stockholder; (B) the trustee of a trust (including any voting or liquidating trust) principally for the benefit of such Class B Stockholder and/or any Permitted Transferee or Permitted Transferees thereof; (C) any Charitable Organization established by such Class B Stockholder and/or any Permitted Transferee or Permitted Transferees thereof; (D) any corporation, partnership or other business entity which, directly or indirectly, is in control of, is controlled by or is under common control with such Class B Stockholder and/or any Permitted Transferee or Permitted Transferees thereof; (E) the stockholders of the corporation, partners of the partnership or other owners of equity interests in any other business entity who receives such shares, by way of dividend or distribution (upon dissolution, liquidation or otherwise), provided that such transfer will not result in beneficial ownership of such shares by persons who did not have substantially all of the beneficial ownership of such corporation, partnership or business entity prior to the time such corporation, partnership or business entity that acquired beneficial ownership of such shares of Class B Common Stock (other than by any such person who is a Permitted Transferee of a stockholder, partner or other owner of equity interests in the business entity who continued to have such beneficial ownership of the corporation, partnership or other business entity), and such shares of Class B Common Stock are distributed to such persons substantially pro rata to their interests in such corporation, partnership or other business entity; (F) any successor thereto by operation of law pursuant to a merger, consolidation or similar transaction; and (G) the Corporation. (iii) A "Permitted Transferee" shall be, if the Class B Stockholder is any person who holds shares of Class B Common Stock for the beneficial ownership of another (including any broker or dealer in securities, any clearing house, any bank, trust company, savings and loan association or other financial institution, any other nominee, any trustee, any savings plan or account or related trust, such as an individual retirement account principally for the benefit of any individual or any employee benefit plan, or trust thereunder or therefor, of any corporation, partnership or other business entity, including any employee stock ownership, investment, option, bonus, purchase or incentive plan of the Corporation), (A) the person or persons for whose benefit the Class B Stockholder holds such shares of Class B Common Stock (the "beneficiary"), (B) any person who would be a Permitted Transferee of the beneficiary if the beneficiary were a Class B Stockholder or (C) if the Class B Stockholder is an employee benefit plan, or trust thereunder or therefor, any person who is a participant in such plan, provided such transfer is made in accordance with such plan. Notwithstanding anything to the contrary set forth herein, any holder of Class B Common Stock may pledge his shares of Class B Common Stock to a pledgee pursuant to a bona fide pledge of such shares as collateral security for indebtedness due to the pledgee, provided that such shares may not be transferred to or registered in the name of the pledgee unless such pledgee is a Permitted Transferee. In the event of foreclosure or other similar action by the pledgee, such pledged shares of Class B Common Stock shall be deemed to be converted automatically, without any act or deed on the part of the Corporation or any other person, into shares of Class A Common Stock as provided in Paragraphs (3)(A) through (3)(D) above, unless within five business days after such foreclosure or similar event such pledged shares are returned to the pledgor or transferred to a Permitted Transferee of the pledgor. Notwithstanding anything to the contrary set forth herein, the foregoing provisions of this Paragraph (4) (A) shall not be deemed to restrict or prevent any transfer of shares of Class B Common Stock by operation of law upon incompetence, death, dissolution or bankruptcy of any Class B Stockholder or any provision of law providing for, or judicial order of, forfeiture, seizure or impoundment. (B) Any transfer of any interest in shares of Class B Common Stock made in violation of Paragraph (4) (A) shall result, without further action on the part of any person, in the automatic conversion of such shares of Class B Common Stock into shares of Class A Common Stock, in accordance with the provisions of Section 3 above. (C) The Corporation and the Class B Transfer Agent may, as a condition to the transfer or the registration of any transfer of shares of Class B Common Stock permitted by Paragraph (4) (A) above, require the furnishing of such affidavits or other proof as they deem necessary to establish that the transferee is a Permitted Transferee. Should any such transferor wish to contest any decision by the Corporation as to whether such transferee is a Permitted Transferee, the final determination shall be made by the Board of Directors of the Corporation, in its sole and absolute discretion. (D) The Corporation shall note on the certificates for shares of Class B Common Stock the restrictions on transfer and registration of transfer imposed by the provisions of this Section 4. (E) For purposes of Article FOURTH, the term "beneficial ownership" in respect of shares of Class B Common Stock shall mean possession of the power and authority, either singly or jointly with another, to vote or dispose of or to direct the voting or disposition of such shares, other than in a fiduciary capacity, and the term "beneficial owner" in respect of shares of Class B Common Stock shall mean the person or persons who possess such power and authority. "Beneficial ownership" for purposes of clause (i)(G) Paragraph (4) (A) above shall mean the power to control a corporation, partnership or other business entity and to receive the economic benefits of its enterprise. Unless otherwise approved by the Board of Directors, a Class B Stockholder and the Permitted Transferees thereof shall be deemed to have "substantially all" of the beneficial ownership of a corporation, partnership or other business entity for purposes of clause (i)(G) of Paragraph (4) (A) only if they have beneficial ownership of at least 90% of each class of ownership interest therein. The Board of Directors is expressly authorized to adopt and apply such rules, procedures and policies, by the adoption of By-law provisions or otherwise, as it may deem appropriate or convenient to carry out, clarify and apply the provisions of Paragraph (4) (A) through (4) (C) above and this Paragraph (4) (E) relating to the determination of who is the beneficial owner of any shares of Class B Common Stock and what constitutes beneficial ownership of "substantially all" of a trust, corporation, partnership or other business entity. (5) Merger; Consolidation. In the event of a merger or consolidation to which the Corporation is a party (whether or not the Corporation is the surviving corporation), each share of Class A Common Stock and Class B Common Stock shall receive the same per share consideration pursuant to such merger or consolidation. Nothing contained in this Paragraph (5) shall limit or restrict any conversion of shares of Class B Common Stock into shares of Class A Common Stock permitted by Section 4 above. (6) Other Rights. Except as otherwise required by the General Corporation Law of the State of Delaware or as otherwise provided in the Certificate of Incorporation, each share of Class A Common Stock and each share of Class B Common Stock shall have identical powers, preferences and rights. (b) Preferred Stock. The Board of Directors of the Corporation is hereby authorized to issue, from time to time, shares of Preferred Stock in series and to fix the number of shares in each series and the designations, powers, preferences and relative, participating, optional or other special rights thereof and the qualifications, limitations, or restrictions thereon, including, without limitation, any of the following: (i) provisions relating to voting rights of each share in such series, including multiple or fractional votes per share; (ii) provisions relating to the call or redemption thereof, including, without limitation, the times and prices for such calls or redemptions and provisions relating to sinking funds therefor and the retirement thereof, if any; (iii) provisions relating to the right to receive dividends, including, without limitation, participation in dividends with shares of any other class or series of capital stock of the Corporation and/or preferential dividends, the rate of such dividends, whether such dividends shall be cumulative or noncumulative and the conditions on which such dividends shall be accrued and paid, and any preferential rights thereto or rights in relation to dividends payable on any other classes or series of stock of the Corporation; (iv) the rights thereof upon the dissolution of, or upon any distribution of the assets of, the Corporation; and (v) provisions relating to the conversion thereof into, or the exchange thereof for, shares of any class or any other series of the same class of stock of the Corporation or exchange for any other security of the corporation or any other company. and (b) deleting paragraph SEVENTH thereof in its entirety and substituting in lieu thereof the following new paragraph SEVENTH: SEVENTH: Election of Directors need not be by written ballot unless the By-laws of the Corporation so provide. At any time when any shares of Class B Common Stock are outstanding, thirty-three and one-third percent (33-1/3%) of the Directors of the Corporation, as fixed from time to time in accordance with the By- laws of the Corporation, shall be independent Directors. In the event that thirty-three and one-third percent (33-1/3%) of the number of Directors is not a whole number, the number of Directors who shall be independent Directors shall be rounded up to the nearest whole number. For purposes of this Article SEVENTH, the term "independent Director" means a Director who is neither (i) an officer of the Corporation or of any entity which, directly or indirectly, is in control of, is controlled by or is under common control with the Corporation nor (ii) a record or beneficial owner (as determined in accordance with Paragraph (a) (4) (E) of Article FOURTH hereof) of five percent (5%) or more of the aggregate number of outstanding shares of the Corporation's Class A Common Stock and Class B Common Stock. 3. The amendment of the Certificate of Incorporation of the Corporation herein certified was duly adopted, pursuant to the provisions of Section 242 of the General Corporation Law of the State of Delaware, by the Board of Directors of the Corporation on June 19, 1992. 4. The amendment of the Certificate of Incorporation of the Corporation herein certified was duly adopted, pursuant to the provisions of Section 242 of the General Corporation Law of the State of Delaware, by the Stockholders of the Corporation on September 11, 1992. Signed on September 11, 1992 /S/PETER S. REINHART Title: Peter S. Reinhart Senior Vice President & General Counsel Attest: /S/TIMOTHY P. MASON Timothy P. Mason Secretary EX-10 5 khovmtge1stamend73103.txt AMENDMENT TO 1ST RESTATED CREDIT AGREEMENT K HOVNANIAN MORTGAGE FIRST AMENDMENT TO FIRST RESTATED REVOLVING CREDIT AGREEMENT This FIRST AMENDMENT TO FIRST RESTATED REVOLVING CREDIT AGREEMENT (this "Amendment") is dated as of July 31, 2003 and is among K. HOVNANIAN MORTGAGE, INC., a New Jersey corporation, and K. HOVNANIAN AMERICAN MORTGAGE, L.L.C., a New Jersey limited liability company (collectively, the "Borrowers"), GUARANTY BANK, BANK OF AMERICA, N.A., BANK ONE, NA, COMERICA BANK, NATIONAL CITY BANK OF KENTUCKY, a national banking association , and U.S. BANK NATIONAL ASSOCIATION (together with any successors and assigns thereof, hereinafter referred to individually as a "Lender" and collectively as the "Existing Lenders"), COLONIAL BANK and WASHINGTON MUTUAL BANK, FA (together with any successors and assigns thereof, hereinafter referred to individually as a "Supplemental Lender" and collectively as the "Supplemental Lenders") and GUARANTY BANK, a federal savings bank, as Agent for the Lenders under the Credit Agreement (the "Agent"). RECITALS The Borrowers, the Agent and the Existing Lenders are parties to a certain First Restated Revolving Credit Agreement dated as of March 7, 2003 (the "Credit Agreement"), pursuant to which the Existing Lenders have agreed to provide a revolving credit facility to Borrowers on the terms and conditions set forth in the Credit Agreement. Any capitalized term not expressly defined herein shall have the meaning ascribed to such term in the Credit Agreement. The parties hereto desire to modify the Commitments and certain other provisions of the Credit Agreement. NOW, THEREFORE, the parties hereto agree as follows: 1. Definitions. The following definitions in Article I of the Credit Agreement are hereby amended in their entirety to read as follows: "`Aggregate Commitment' means, as of any date, the aggregate of the Lenders' then current Commitments under this Agreement, as reduced or increased from time to time, but in no event shall the Aggregate Commitment exceed $200,000,000 without the approval of the Borrowers, the Agent and all of the Lenders." "`Swingline Amount' means $7,000,000." "`Termination Date' means July 29, 2004 or any earlier date on which the Aggregate Commitment is reduced to zero or otherwise terminated pursuant to the terms hereof." 2. Maximum Loans Available to either Borrower. Section 2.1.1 of the Credit Agreement is hereby amended by deleting the word "and" at the end of subsection (2) thereof, deleting the period and adding the word "and" at the end of subsection (3) thereof, and adding thereafter the following new subsection (4) to read as follows: "(4) the aggregate principal balance then outstanding of all Loans made to either Borrower shall not exceed $198,999,999." 3. Borrowing Base Sublimits by Category. Section 2.1.2 of the Credit Agreement is hereby amended in its entirety to read as follows: "2.1.2 Borrowing Base Sublimits by Category. The maximum amount that can be credited toward the Borrowing Base from certain categories of Eligible Collateral shall be limited so that the Borrowing Base value determined under: (1) clause (ii) of the definition thereof (Eligible Non- Conforming Mortgage Loans) shall not exceed fifteen percent (15%) of the Aggregate Commitment; (2) clause (iii) of the definition thereof (Eligible Jumbo Mortgage Loans) shall not exceed thirty percent (30%) of the Aggregate Commitment; and (3) clause (iv) of the definition thereof (Eligible Oversize Jumbo Mortgage Loans) shall not exceed five percent (5%) of the Aggregate Commitment." 4. Application of Proceeds. Section 8.8 of the Credit Agreement is hereby amended by deleting clause FIFTH thereof and adding the following new clauses FIFTH and SIXTH in place thereof: "FIFTH, to the extent proceeds remain after application under the preceding subparagraphs, to the payment of the Rate Management Obligations secured by the Security Agreement, until such amounts are paid in full; and SIXTH, to the payment to the Borrowers, or to their successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds." 5. Commitment Increases. Section 12.4 of the Credit Agreement is hereby amended in its entirety to read as follows: "12.4 Commitment Increases. 12.4.1 Increases to Aggregate Commitment. The Borrowers shall have the right to increase the Aggregate Commitment by obtaining additional Commitments, either from one or more of the Lenders or another lending institution provided that (A) the Agent has approved the identity of any such new Lender, such approval not to be unreasonably withheld, (B) any such new Lender assumes all of the rights and obligations of a "Lender" hereunder, and (C) the procedure described in Section 12.4.2 has been complied with, provided further that the Aggregate Commitment shall not at any time exceed $200,000,000 without the approval of the Agent and all of the Lenders. 12.4.2 Procedure for Increases and Addition of New Lenders. This Agreement permits certain increases in a Lender's Commitment and the admission of new Lenders providing new Commitments, none of which require any consents or approvals from the other Lenders. Any amendment hereto for such an increase or addition shall be in the form attached hereto as Exhibit "K" and shall only require the written signatures of the Agent, the Borrowers and the Lender(s) being added or increasing their Commitment, subject only to the approval of all Lenders if any such increase would cause the Aggregate Commitment to exceed $200,000,000. In addition, within a reasonable time after the effective date of any increase, the Agent shall, and is hereby authorized and directed to, revise Schedule "2" reflecting such increase and shall distribute such revised Schedule to each of the Lenders and the Borrowers, whereupon such revised Schedule shall replace the old Schedule and become part of this Agreement. On the Business Day following any such increase, all outstanding Fed Funds Advances and Alternate Base Rate Advances shall be reallocated among the Lenders (including any newly added Lenders) in accordance with the Lenders' respective revised Primary Commitment Percentages. Eurodollar Advances shall not be reallocated among the Lenders prior to the expiration of the applicable Interest Period in effect at the time of any such increase." 6. Modifications to Commitments. Each of the Existing Lenders and the Supplemental Lenders, hereby agrees that from and after the date hereof it shall have a Commitment in the amount set forth opposite its name in Column (A) of Schedule 2 attached hereto, resulting in a new Aggregate Commitment of $200,000,000 as of the date hereof, and each of the Supplemental Lenders hereby assumes all of the rights and obligations of a Lender under the Credit Agreement. The Borrower shall execute and deliver to each of the Supplemental Lenders as of the date hereof, a new Note in the form attached to the Credit Agreement as Exhibit A to evidence the new Commitment of such Supplemental Lender. 7. Corrections to Cross References. (a) The reference in Section 2.15 to "Section 2.14" is hereby amended to refer to "Section 2.12". (b) The references in Section 7.2 to "Section 2.11.2" and "Section 2.11.4" are hereby amended to refer to "Section 2.9.2" and "Section 2.9.4, respectively. 8. Schedules. The Credit Agreement is hereby amended by substituting Schedule 2, Commitments and Commitment Percentages, and Schedule 3, List of Approved Investors, to this Amendment for Schedule 2 and Schedule 3, respectively, to the Credit Agreement. 9. Effective Date. This Amendment shall become effective as of the date first above written when and only when Agent shall have received, at Agent's office, (a) a duly executed counterpart of this Amendment, (b) Notes to the Supplemental Lenders described in Section 6 above, (c) a duly executed Consent and Agreement in the form attached hereto, (d) a duly executed certificate of the secretary of each Borrower in form acceptable to Agent, and (e) an opinion of counsel to Borrowers and Parent in form acceptable to Agent. 10. Miscellaneous. (a) All references to the Credit Agreement in the Loan Documents shall be deemed to refer to the Credit Agreement as amended by this Amendment. (b) Borrowers hereby represent and warrant to the Lenders that on the date of execution hereof, both prior to and after giving effect to this Amendment, (i) the representations and warranties of Borrower contained in the Loan Documents are accurate and complete in all respects, and (ii) no Default or Unmatured Default has occurred and is continuing. (c) In all other respects, the Credit Agreement and the other Loan Documents are and remain unmodified and in full force and effect and are hereby ratified and confirmed. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Amendment by signing any such counterpart. (d) Borrowers agree to reimburse the Agent for all reasonable out-of-pocket expenses (including legal fees and expenses) incurred in connection with the preparation, negotiation and consummation of this Amendment. (e) This Amendment may be executed in counterparts which, taken together, shall constitute a single document. This Amendment may be duly executed by facsimile or other electronic transmission THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENT OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. K. HOVNANIAN MORTGAGE, INC. By: Name: Title: K. HOVNANIAN AMERICAN MORTGAGE, L.L.C. By: Name: Title: THE STATE OF NEW JERSEY ) ) COUNTY OF MONMOUTH ) This instrument was acknowledged before me on , 2003, by Kevin C. Hake, Vice President-Finance and Treasurer of K. Hovnanian Mortgage, Inc., a New Jersey corporation, on behalf of said corporation. Notary Public, State of New Jersey (printed name) My Commission Expires: THE STATE OF NEW JERSEY ) ) COUNTY OF MONMOUTH ) This instrument was acknowledged before me on , 2003 by Kevin C. Hake, Vice President-Finance and Treasurer of K. Hovnanian American Mortgage, L.L.C., a New Jersey limited liability company, on behalf of said company. Notary Public, State of New Jersey (printed name) My Commission Expires: GUARANTY BANK, individually and as Agent By: Name: Title: BANK OF AMERICA, N.A. By: Name: Title: BANK ONE, NA By: Name: Title: COLONIAL BANK By: Name: Title: COMERICA BANK By: Name: Title: NATIONAL CITY BANK OF KENTUCKY By: Name: Title: U.S. BANK NATIONAL ASSOCIATION By: Name: Title: WASHINGTON MUTUAL BANK, FA By: Name: Title: CONSENT AND AGREEMENT Hovnanian Enterprises, Inc. hereby consents to the provisions of this Amendment as of the date thereof and the transactions contemplated herein, and hereby ratifies and confirms the Keep-Well Agreement dated as of June 7, 2002 made by it for the benefit of Lender and the Subordination Agreement dated as of June 7, 2002 made by it for the benefit of Lender, and agrees that its obligations and covenants thereunder are unimpaired hereby and shall remain in full force and effect. HOVNANIAN ENTERPRISES, INC. By: Name: Title: SCHEDULE 2 COMMITMENTS AND COMMITMENT PERCENTAGES LENDER (A) COMMITMENT (B) COMMITMENT PERCENTAGE (A Aggregate Commitment) (C) SWINGLINE AMOUNT Guaranty Bank $35,000,000 17.500000% $7,000,000 Bank of America $30,000,000 15.000000% Washington Mutual $29,000,000 14.500000% Bank One $25,000,000 12.500000% US Bank $25,000,000 12.500000% Colonial Bank $24,000,000 12.000000% Comerica $17,000,000 8.500000% National City Bank $15,000,000 7.500000% SCHEDULE "3" LIST OF APPROVED INVESTORS CHASE MANHATTAN MORTGAGE CORPORATION COUNTRYWIDE HOME LOAN, INC. FLAGSTAR BANCORP FEDERAL HOME LOAN MORTGAGE CORPORATION FEDERAL NATIONAL MORTGAGE ASSOCIATION FIRST HORIZON BANCORP FIRST NATIONWIDE MORTGAGE GREENPOINT MORTGAGE CORPORATION GUARANTY RESIDENTIAL LENDING IMPAC FUNDING CORPORATION INDYMAC BANK NATIONAL CITY BANK OHIO SAVINGS BANK RESIDENTIAL FUNDING CORPORATION VALLEY NATIONAL BANK WASHINGTON MUTUAL WELLS FARGO CHASE MANHATTAN FUNDINg COUNTRYWIDE HOME LOAN, INC. IMPAC FUNDING CORPORATION RBNG, INC. RESIDENTIAL FUNDING CORPORATION US BANK CORPORATE TRUST SERVICES 033544 000195 DALLAS 1612922_5.DOC 2 FIRST AMENDMENT TO FIRST RESTATED REVOLVING CREDIT AGREEMENT [K. Hovnanian 033544 000195 DALLAS 1612922_5.DOC FIRST AMENDMENT TO FIRST RESTATED REVOLVING CREDIT AGREEMENT [K. Hovnanian FIRST AMENDMENT TO FIRST RESTATED REVOLVING CREDIT AGREEMENT [K. Hovnanian] 033544 000195 DALLAS 1612922_5.DOC FIRST AMENDMENT TO FIRST RESTATED REVOLVING CREDIT AGREEMENT [K. Hovnanian] EX-31 6 certceofo9503.txt CERTIFICATIONS OF CEO AND CFO Exhibit 31(a) CERTIFICATIONS I, Ara K. Hovnanian, President & Chief Executive Officer of Hovnanian Enterprises, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hovnanian Enterprises, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the cast of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 12, 2003 /S/ARA K. HOVNNAIAN Ara K. Hovnanian President and Chief Executive Officer Exhibit 31(b) CERTIFICATION I, J. Larry Sorsby, Executive Vice President & Chief Financial Officer of Hovnanian Enterprises, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hovnanian Enterprises, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 12, 2003 /S/J. LARRY SORSBY J. Larry Sorsby Executive Vice President and Chief Financial Officer Exhibit 31(a) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Hovnanian Enterprises, Inc. (the "Company") on Form 10-Q for the period ended July 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ara K. Hovnanian, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: September 12, 2003 /S/ARA K. HOVNANIAN Ara K. Hovnanian President and Chief Executive Officer Exhibit 32(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Hovnanian Enterprises, Inc. (the "Company") on Form 10-Q for the period ended July 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, J. Larry Sorsby, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: September 12, 2003 /S/J. LARRY SORSBY J. Larry Sorsby Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----